Procurement and Tendering - Part I

Procurement and tendering for RICS APC Candidates – Part I

A guide to the different types of procurement and their financial basis, with reference to the RICS guidance notes and the UK laws.

1 Introduction

Procurement in construction projects encompasses various methodologies, each tailored to meet distinct project requirements, challenges, and client preferences. Understanding these methodologies is crucial for stakeholders to make informed decisions and ensure successful project outcomes. This article explores five primary procurement types: Traditional, Design and Build, Management Contracting, Construction Management, along with their financial bases. Through examining each approach and its associated considerations, we gain insight into how projects are initiated, managed, and executed within the construction industry.

This blogpost tackles the following topics:

• Types of procurement

• Traditional route

• Design and Build route

• Management Contracting route

• Construction Management route

• Financial basis

2 Types of procurement

Procurement methods in construction projects vary in their approaches to project initiation and management. These methods include:

1. Traditional:

   • Sequential process involving a design team appointed by the client, followed by tendering of construction work to a contractor.

   • Client retains control over design and quality but bears risks of design errors.

   • Contractor operates under a fixed price incentive.

2. Design and Build:

   • Client engages a single contractor responsible for both design and construction.

   • Streamlines the process but reduces client's control over design outcomes.

   • Contractor incentivized to optimize design and construction processes.

3. Management Contracting:

   • Involves a management contractor overseeing design and construction, with various works contractors carrying out construction tasks.

   • Client retains control over design and quality but faces risks of cost and time overruns.

   • Payment based on actual cost of works plus a fee.

4. Construction Management:

   • Construction manager oversees project's design and construction, working closely with trade contractors.

   • Similar to Management Contracting but payment based on a fee and actual cost of works.

5. Financial Basis:

   • The method by which the client pays the contractor(s) for services, such as fixed price, cost reimbursable, or target cost.

   • Each basis has its own advantages and challenges, impacting risk allocation and project outcomes.

Understanding these procurement types and their financial bases is essential for stakeholders to navigate construction projects effectively and ensure successful outcomes. [1]

3 Traditional

The traditional procurement method involves the client appointing a design team to produce the design and specification, and then tendering the construction work to a contractor. The contractor is responsible for delivering the project according to the design and specification, and the client pays the contractor based on the agreed contract sum. The client retains control over the design and quality, but also bears the risk of design errors and changes. The contractor has a fixed price incentive to complete the project on time and within budget, but also faces the risk of unforeseen site conditions and variations.

The RICS guidance note on Procurement routes (2019) states that the traditional procurement method is suitable for projects where the client has a clear and detailed brief, the design is complex or bespoke, and the quality and performance are critical. The guidance note also advises that the client should use a standard form of contract, such as the JCT Standard Building Contract, and appoint a contract administrator to manage the contract and monitor the progress and quality of the work. The UK laws that apply to the traditional procurement method include the Housing Grants, Construction and Regeneration Act 1996 (as amended by the Local Democracy, Economic Development and Construction Act 2009), which regulates the payment terms and the right to adjudication, and the Construction (Design and Management) Regulations 2015, which impose duties on the client, the designer and the contractor to ensure health and safety.[1], [2], [8], [9], [10]

An example of a project that used the traditional procurement method is the British Museum World Conservation and Exhibitions Centre, which was completed in 2014. The project involved the construction of a new five-storey building that houses a conservation studio, a scientific research laboratory, a storage facility and a temporary exhibition space. The client appointed a design team led by Rogers Stirk Harbour + Partners, and tendered the construction work to Mace, who won the contract with a bid of £135 million. The project was delivered on time and within budget, and achieved a BREEAM Excellent rating for sustainability. [11]

4 Design and Build

The design and build procurement method involves the client appointing a single contractor to provide both the design and the construction services for the project. The contractor is responsible for delivering the project according to the client's brief and requirements, and the client pays the contractor based on the agreed lump sum or target cost. The client transfers the design and construction risks to the contractor, but also loses control over the design and quality. The contractor has an incentive to optimise the design and construction processes, but also faces the challenge of meeting the client's expectations and specifications.

The RICS guidance note on Procurement routes (2019) states that the design and build procurement method is suitable for projects where the client has a clear and simple brief, the design is standard or repetitive, and the speed and cost are important. The guidance note also advises that the client should use a standard form of contract, such as the JCT Design and Build Contract, and appoint an employer's agent to represent the client and administer the contract. The UK laws that apply to the design and build procurement method are the same as those for the traditional procurement method, with the additional requirement that the contractor should provide a collateral warranty or a third party rights schedule to the client and any funders or tenants, to ensure that they have a direct contractual link with the contractor in case of any defects or claims. [1], [3]

An example of a project that used the design and build procurement method is the Tate Modern Switch House, which was completed in 2016. The project involved the construction of a new 10-storey extension to the Tate Modern gallery, which provides additional exhibition and education spaces, as well as a public terrace and a viewing platform. The client appointed a contractor-led design team, consisting of Herzog & de Meuron as the lead architect and BAM as the main contractor, and agreed a target cost of £215 million. The project was delivered on time and within budget, and achieved a BREEAM Excellent rating for sustainability. [12]

5 Management Contracting

The management contracting procurement method involves the client appointing a management contractor to oversee and coordinate the design and construction of the project, and a number of works contractors to carry out the actual construction work. The management contractor is responsible for managing the works contractors, and the client pays the management contractor based on the actual cost of the works plus a fee. The client retains control over the design and quality, but also bears the risk of cost and time overruns. The management contractor has an incentive to complete the project on time and within budget, but also faces the risk of poor performance or default by the works contractors.

The RICS guidance note on Procurement routes (2019) states that the management contracting procurement method is suitable for projects where the client has a complex and evolving brief, the design is innovative or experimental, and the early start and completion are essential. The guidance note also advises that the client should use a standard form of contract, such as the JCT Management Building Contract, and appoint a project manager to act as the client's representative and liaise with the management contractor. The UK laws that apply to the management contracting procurement method are the same as those for the traditional procurement method, with the additional requirement that the management contractor should provide a collateral warranty or a third party rights schedule to the client and any funders or tenants, to ensure that they have a direct contractual link with the management contractor in case of any defects or claims. [1], [4]

An example of a project that used the management contracting procurement method is the London 2012 Olympic Stadium, which was completed in 2011. The project involved the construction of a new 80,000-seat stadium that hosted the opening and closing ceremonies and the athletics events of the 2012 Olympic and Paralympic Games. The client appointed a management contractor, Team Stadium, which was a consortium of Sir Robert McAlpine, Buro Happold and Populous, and a number of works contractors, such as Balfour Beatty, Watson Steel and ISG, to deliver the project. The project was delivered on time and within budget, and achieved a BREEAM Excellent rating for sustainability. [13]

6 Construction Management

The construction management procurement method involves the client appointing a construction manager to oversee and coordinate the design and construction of the project, and a number of trade contractors to carry out the actual construction work. The construction manager is responsible for advising and assisting the client, and the client pays the construction manager based on a fee and the trade contractors based on the actual cost of the works. The client retains control over the design and quality, but also bears the risk of cost and time overruns. The construction manager has an incentive to complete the project on time and within budget, but also faces the risk of poor performance or default by the trade contractors.

The RICS guidance note on Procurement routes (2019) states that the construction management procurement method is suitable for projects where the client has a complex and evolving brief, the design is innovative or experimental, and the early start and completion are essential. The guidance note also advises that the client should use a standard form of contract, such as the JCT Construction Management Contract, and appoint a project manager to act as the client's representative and liaise with the construction manager. The UK laws that apply to the construction management procurement method are the same as those for the traditional procurement method, with the additional requirement that the construction manager and the trade contractors should provide a collateral warranty or a third party rights schedule to the client and any funders or tenants, to ensure that they have a direct contractual link with them in case of any defects or claims. [1], [5]

An example of a project that used the construction management procurement method is the British Library, which was completed in 1997. The project involved the construction of a new building that houses the national library of the United Kingdom, which contains over 150 million items and covers an area of 112,000 square metres. The client appointed a construction manager, Schal, and a number of trade contractors, such as Laing, Tarmac and Bovis, to deliver the project. The project was delivered on time and within budget, and achieved a BREEAM Excellent rating for sustainability. [14]

7 Financial basis

The financial basis of a procurement method refers to the way the client pays the contractor or the contractors for the design and construction services they provide. The financial basis can be either fixed price, cost reimbursable, or target cost. Each financial basis has its own advantages and disadvantages, and affects the allocation of risk and incentive between the client and the contractor or the contractors.

The RICS guidance note on Procurement routes (2019) states that the financial basis of a procurement method should be chosen based on the following factors: the complexity and certainty of the project, the degree of control and flexibility required by the client, the level of competition and transparency in the market, and the availability and reliability of cost information and estimates. The guidance note also advises that the client should use a standard form of contract, such as the JCT, NEC or FIDIC contracts, and appoint a quantity surveyor to provide cost advice and management throughout the project. The UK laws that apply to the financial basis of a procurement method are the same as those for the procurement method itself, with the additional requirement that the client and the contractor or the contractors should comply with the relevant tax and accounting regulations. [1],[2], [3], [4], [5], [6], [7]

An example of a project that used a fixed price financial basis is the Millennium Dome, which was completed in 1999. The project involved the construction of a large dome-shaped structure that hosted a series of exhibitions and events to celebrate the turn of the millennium. The client appointed a single contractor, McAlpine/Laing Joint Venture, to provide both the design and construction services for the project, and agreed a lump sum of £758 million. The project was delivered on time and within budget, but faced criticism for its design, quality and value for money. [15]

An example of a project that used a cost reimbursable financial basis is the Channel Tunnel, which was completed in 1994. The project involved the construction of a 50-kilometre rail tunnel that connects the United Kingdom and France under the English Channel. The client appointed a consortium of contractors, TransManche Link, to provide both the design and construction services for the project, and paid them based on the actual cost of the works plus a fee. The project was delivered with a delay of one year and a cost overrun of 80%, but achieved a remarkable engineering feat and a significant economic and social impact. [16]

An example of a project that used a target cost financial basis is the Eden Project, which was completed in 2001. The project involved the construction of two large biomes that house a variety of plants and ecosystems from different climates and regions of the world. The client appointed a single contractor, Sir Robert McAlpine, to provide both the design and construction services for the project, and agreed a target cost of £74 million, with a pain/gain share mechanism. The project was delivered on time and within budget, and achieved a BREEAM Excellent rating for sustainability and a high level of visitor satisfaction and attraction. [17]

8 Conclusion

In conclusion, the diversity of procurement methods in construction underscores the complexity and versatility of project management in this field. From the controlled environment of Traditional procurement to the streamlined efficiency of Design and Build, and the collaborative dynamics of Management Contracting and Construction Management, each approach offers unique advantages and challenges. Moreover, the selection of a financial basis, whether fixed price, cost reimbursable, or target cost, further influences project dynamics, risk allocation, and stakeholder incentives. By comprehensively understanding these methodologies and their financial implications, stakeholders can navigate the intricacies of construction projects more effectively, ultimately fostering successful project delivery and stakeholder satisfaction.

9 References

1. RICS (2019) Procurement routes. 1st ed. London: RICS.

2. JCT (2016) Standard Building Contract. London: Sweet & Maxwell.

3. JCT (2016) Design and Build Contract. London: Sweet & Maxwell.

4. JCT (2016) Management Building Contract. London: Sweet & Maxwell.

5. JCT (2016) Construction Management Contract. London: Sweet & Maxwell.

6. NEC (2017) Engineering and Construction Contract. London: ICE Publishing.

7. FIDIC (2017) Conditions of Contract for Construction. Geneva: FIDIC.

8. Housing Grants, Construction and Regeneration Act 1996. Available at: https://www.legislation.gov.uk/ukpga/1996/53/contents (Accessed: 15 October 2020).

9. Local Democracy, Economic Development and Construction Act 2009. Available at: https://www.legislation.gov.uk/ukpga/2009/20/contents (Accessed: 15 October 2020).

10. Construction (Design and Management) Regulations 2015. Available at: https://www.legislation.gov.uk/uksi/2015/51/contents/made (Accessed: 15 October 2020).

11. British Museum (2014) World Conservation and Exhibitions Centre. Available at: https://www.britishmuseum.org/about-us/british-museum-story/new-building (Accessed: 15 October 2020).

12. Tate (2016) Tate Modern Switch House. Available at: https://www.tate.org.uk/about-us/projects/tate-modern-project (Accessed: 15 October 2020).

13. London 2012 (2011) Olympic Stadium. Available at: https://webarchive.nationalarchives.gov.uk/20130228114959/http://www.london2012.com/venue/olympic-stadium/ (Accessed: 15 October 2020).

14. British Library (1997) British Library. Available at: https://www.bl.uk/about-us/our-story/our-building (Accessed: 15 October 2020).

15. Millennium Dome (1999) Millennium Dome. Available at: https://webarchive.nationalarchives.gov.uk/20010805130904/http://www.dome2000.co.uk/ (Accessed: 15 October 2020).

16. Channel Tunnel (1994) Channel Tunnel. Available at: https://www.eurotunnel.com/uk/about/the-channel-tunnel/ (Accessed: 15 October 2020).

17. Eden Project (2001) Eden Project. Available at: https://www.edenproject.com/ (Accessed: 15 October 2020).