Types of Procurement Routes in the Construction Industry - Assignment Example

A number of definitions have been put forth to explain what procurement is all about. Often it has been defined from a military point of view but theconstruction concept of procurement has also been factored in some definitions. Regardless of the point of view, the basic idea of procurement is the purchasing of goods or services for a government, company or organization. Procurement is often a lengthy process that is controlled by a myriad of rules emanating from both the organizational and legal quarters. These regulations have to be followed in the process otherwise the whole process of procurement becomes null and void. This process follows a number of steps but depending on the urgency of the required goods or services, some organizations may choose to make their procurement routes less lengthy and less tedious. Conventionally, procurement entails everything that is done within the complete acquisition of goods and services i.e. from preparation and dispensation of a requisition form through to the receipt of goods or services and the approval of the invoice for payment (White, 1996: pp. 242-3). Procurement often follows ten major steps: planning for purchase of goods or services, determination of the specific standards desired in the goods and services, development of finer specifications on the goods and services, doing extensive research on possible suppliers and selecting one supplier, conducting value analysis, determining the financing of the purchase e.g. whether to take a loan or use money in the company's bank account, negotiating the price, making the purchase, administration of the supply contract, controlling inventories and stores to guard against diversion and finally, the eventual disposals if any. Generally, the process is lengthy because of need for quality goods and/or services from competitive suppliers at competitive prices. The rules governing the process need to be followed strictly because the process o procurement has been identified as the key and major gateway for embezzlement and misappropriation of company funds and other corrupt deals. Each industry has its own procurement regulations and the whole process of procurement is structured to fit the nature of the industry's operations. For example, if an industry requires goods and services to be delivered urgently, then the process is likely to be made short. Taking the construction industry as our working example, this paper seeks to highlight the process of procurement in this industry with special emphasis on the particular types of procurement routes in the construction industry. The construction industry deals with the provision of a number of goods and services. It deals with the building of new structures such as schools, churches, factories, apartments, houses, offices, factories, roads and even bridges. Apart from building of the aforementioned structures, the industry also engages in preparation of the building or construction site, modification and annexing of existing structures and the maintenance and repair of the already existing structures. Therefore, the constructors are usually contracted to carry out any of the activities. The contract may involve the design alone, the design and building or even the management of the construction process carried out by other constructors. The way of contracting these constructors to carry out any of the services may be termed as routes of procurement. There are three main routes of procurement: Traditional Procurement also called conventional procurement, Design and Build Procurement and Management Procurement. Traditional Procurement also called conventional procurement is a very common procurement route for most small and medium sized projects such as the construction of a school. The client in this kind of procurement route first contracts consultant(s). The consultant(s) design and lay down all the exact specifications on how the construction is supposed to be carried out. After the consultants have completed their job, the client then proceeds to contract a separate contractor who will do the actual construction as specified in the design either single handily or by sub contracting other contractors who will do the actual onsite construction. In this procurement route, the client usually invites bids from a number of contractors and the one with the lowest bid is awarded the contract (Marsh, 2002: pp.242-3). Traditional procurement route has disadvantages. The major Disadvantage of the traditional procurement route is the fact that both the consultants and the contractors bear limited long term liability for how the building performs after they finish their jobs of designing and building it respectively. Secondly, it becomes absolutely difficult to exploit the full range of skills and experience of the consultants and contractors involved in the project because usually there is a time limit in which the consultant has to finish the design and the contractor on the other hand will only build based on the specifications of the design whether the specifications in the design are popular or not. Thirdly, there is more emphasis on the initial costs other than the lifetime cost. The client pays specific focus on lowest bidder and forgets about the quality of the construction which may cost the client more in future. This problem is compounded by the fact that the contractor and the consultant don't take fulltime responsibility for the future performance of the building. Further, this route poses a potential cause for adversarial client- contractor/consultant relationship with a higher risk of delay and cost. Actually, almost 70% of the traditional contracts end up over budget. This risk exposure multiplies if the designing phase is rushed; setting unreasonable time targets for the contractors and if there happens to be incomplete tender documents. Therefore, this procurements is time consuming which means that if it is rushed, things are bound to go bad. This time consumption happens to be another disadvantage of the traditional procurement route. However, this procurement route is the best option for a client who is looking for a less exposure to the risk of failure of designs, overspending and delays. The lowest bidder gets the contract in traditional procurement route. Currently in the UK, contractors are desperate for contracts in that they end up making lowest bids (so as to be given contracts) that cannot give them meaningful profit (Richardson & Bill, 2008). The traditional procurement route often attaches more focus on the initial cost than the lifetime costs. However, the Design and Build Procurement has focus on the best quality product which satisfies the needs of the client, fits in his budget and has greater value now and in future. Lifetime costs are considered from the onset of the project. Therefore, Design and Build is concerned more on the value of the building than the initial cost (Beard, et al, 2001: pp.57-59). This route has many variants but most common practice is where the client undertakes the initial hypothetical design work and then thereafter transfers it to the design and build contractor who takes full responsibility for the design and construction work. The contractor hires the consultants and sub-contractors for the design element and actual onsite construction work respectively. This kind of procurement route finds greater applicability in most simple buildings or standardized ones such as sports halls. It should be noted that the contract may be extended to include the operation and maintenance of the building. This approach is often appropriate for all kinds of clients including those that are inexperienced and for complex buildings or projects where the main objective is the project's functionality. Design and Build is faster than the traditional procurement route. This is because the traditional approach relies on steps most of which are very slow e.g. the creation of a bill of quantities among other lengthy, tedious and time consuming steps. As stated earlier, Design and Build approach is applied in complex buildings which require extensive standard components and this is why the main contractor takes the responsibility for both the design and construction of the building. This approach is also the best because it enables the client to fast track the building and thus be able to have the price certainty. Almost 70% of the traditional procurement contracts end up being over budget as compared to a minimal 20-30 % of the Design and Build procurement contracts. Therefore, if a client is in need of cost certainty then design and build procurement is the ultimate solution for this kind of client. However, this approach is not suitable in case of very complex buildings and where the client brief has to be developed. Design and Build Procurement route requires that the lead contractor takes full responsibility for both the design and construction of the building. In any case the main contractor can either use own in-house designers or he can take the option of hiring separate consultants who will handle the design component of the project. He may also hire subcontractors to do the construction job. The design and construction is completed by the main contractor often at a fixed price. Since the main contractor works for a fixed price, sometimes the tendering process of consultants to make the designs may be expensive for the main contractor. Based on this, the design and build procurement route carries more risk for the contractor than the traditional one (Constructing Excellence, 2004). Design and Build Procurement has remained popular for the last 15 years according to research. The popularity continues to increase. The popularity is a result of the clients regarding this approach as a timely value provider. In other words, clients prefer Design and Build procurement because it is able to offer them real value for their money. Contractors on the other hand like it because this approach provides an opportunity for them to exercise their managerial abilities represented by the coordination of design and construction (Ellis & Bell, 2004). The main advantages of Design and Build procurement route includes the opportunity it provides to the contractor because he is free to determine the procurement strategy especially that involving the building services. This provision is important in imparting quality and competence to the project. Secondly, the contractor has the discretion of instilling procurement strategy which is an amalgamation of all best practices e.g. selecting of partners or sub- contractors based on a price mechanism and quality specification both of which are predetermined. Finally, options for break up of the project into smaller manageable schedules or packages which can then be assigned to subcontractors are only limited to the contractor's abilities and willingness (Marsh, 2002: pp.214-5). Management Procurement on the other hand is a procurement route used in the construction industry. Just as the name suggests, this procurement is management oriented and may be divided into two main classes; The Management Contracting procurement route and the Construction Management procurement route. In Management contracting, professionalism is the basis for contractor appointment. Once appointed the contractor then goes ahead to appoint the suppliers, designers and the construction works contractors. These three groups of partners are under the management contractor and he is the one who pays them. The management contractor is reimbursed lump sum amounts of money as payment for his managerial services together with funds to cater for the cost of the building. The main advantage of this approach is that the client is able to influence most issues about the project such as the appointment of any party within the building services and supply chain without taking any risk. This means that the management contractor is the sole individual exposed to the risk but yet the client's wishes, suggestions and influence are factored in the management of the project. Further, the management contractor and the designer can be appointed at the same time. This cuts down on time significantly making the approach to be relatively time efficient. However, just like the risk is passed on to the management contractor from the client, the management contractor also passes on the risk to the works contractor often through onerous conditions in the contract. Therefore, only the works contractor is exposed to substantial risk as opposed to the client and the management contractor (Marsh, 2002: pp.214-5). Construction management involves the engagement of a construction manager to manage the suppliers, designers and contractors who have already been appointed by the client. This approach has lacked favour from most clients for quite some time now but recently, some clients have started to adopt this kind of procurement route. This approach rode higher in the 80's when it was considered to be associated with the best managed and ample financed projects such as the Broadgate Tower designed by award winning architects from Chicago and developed by the British land. It has however gained recent adoption purely on the speed and flexibility grounds (Langdon & Rawlinson, 2006). Advantages of Construction management Overall project Acceleration Has an ability for enhanced incorporation of change into the original design hence its flexibility Some elements of design e.g. fittings and fixtures in hotels may be objectively delayed till a later date without affecting the overall project program Involves competent and specialized designers and contractors in the project thus affording ultimate value for the client; Entails a less adversarial culture of problem-solving in the project management process Minimisation of impacts of change and other disruptions through a hands-on management of design and construction processes The client has control of both the tendering and contractual schedules Disadvantages of Construction management Design co-ordination risk and increased likelihood of design change Lack of cost certainty until all the packages of works are released to contractors. Higher client's exposure to risk associated to the misgivings of the construction manager and the construction team and incomplete and uncoordinated designs Increased client's administration role Construction Manager and professional team have limited liability; In fact, they only owe duty of care liability. Effective client's decision-making is a must owing to the client's central managerial position. Failure of such timely decisions may have adverse effects on the overall project. In conclusion, one cannot categorically choose one procurement route and say that it is the best. The choice is made depending on the nature of the project, the specifications of the client, the clients willing influence on the project, the degree of risk acceptable by the contractor and the client, the time limit for the project, complexity of the project among other considerations. However, it has been noted that the management oriented procurement routes are gaining more popularity of late because apart from the project, the client may be too busy to accept additional management role hence the need to hire a manager to carry out the management of the project on behalf of the client. References White, Robert. The Outsourcing Manual. Gower Publishing, Ltd., 1996 pp 236-7 Marsh, Christopher. Building Services Procurement Taylor & Francis Publishers, 2002 pp.242-3 Richardson, Sarah & Bill, Tom "Contractors Resort to 'Zero-Profit' Bidding" UK Building Magazine 12 December 2008. Retrieved on 12 December 2008 from http://www.building.co.uk/story.aspsectioncode=29&storycode=3129724&c=1 Jeffrey Beard, Michael C. Loulakis, & Edward C. Wundram Design-build: Planning Through Development. Washington DC: McGraw-Hill Professional, 2001 pp. 54-59 Constructing Excellence Procurement Constructing Excellence UK 15/3/2004 retrieved on 12 December 2008 from www.constructingexcellence.org.uk Ellis, Robert and Bell, Malcolm: Suitability of Different Design and Build Configurations for Procurement (COBRA, 2004), Leeds Metropolitan University. Marsh, Christopher Building Services Procurement. Taylor& Francis Publishers, 2002 pp.214-5 Langdon Davis & Rawlinson Simon "Construction management" UK Building Magazine 1st September, 2006 retrieved on 12 December 2008 from http://www.building.co.uk/story.aspsectioncode=29&storycode=3129724&c=1 Thanks for the appreciation. Well, the reference at the end of the paragraph means that the idea in that particular paragraph is not my original idea i.e. I have got it from the book/journal/article cited and only used my words to explain it. So the whole paragraph represents only one idea got from the cited material. I usually don't quote directly or use the exact words used in the text. I only pick the idea and expound on it. Thanks and welcome. Read More