Procurement and Tendering - Part II

Procurement and tendering for RICS APC candidates – Part II

A brief overview of different procurement routes and their implications for UK laws and RICS guidance notes

1 Introduction

Procurement is a critical aspect of construction project management, as it determines the contractual and financial relationships between the various parties involved. The selection of an appropriate procurement route has far-reaching implications on project costs, timelines, risk allocation, and overall success. This blog post delves into five key procurement methods widely employed in the construction industry: lump sum, re-measured, cost reimbursable, target cost, and management contracts. By examining the advantages, disadvantages, and suitable applications of each approach, construction professionals can make informed choices aligned with project requirements and client objectives. Real-life case studies further illustrate the practical implementation of these procurement strategies, providing valuable insights for effective project delivery.

This blogpost tackles the following procurement routes

• Lump sum

• Re-measured

• Cost Reimbursable

• Target cost

• Management contracts

2 Lump sum procurement route

Lump sum procurement route is a traditional method of contracting, where the contractor agrees to deliver a project for a fixed price, based on a complete set of drawings and specifications provided by the client or their consultants. The contractor bears the risk of any cost overruns, unless there are variations or changes in the scope of work.

Some of the advantages of lump sum procurement route are:

• It provides certainty of cost and time for the client, as the contractor is responsible for delivering the project within the agreed budget and schedule.

• It encourages the contractor to work efficiently and minimise waste, as any savings in cost or time will increase their profit margin.

• It reduces the administrative burden for the client, as they do not have to monitor or pay for the actual costs incurred by the contractor.

Some of the disadvantages of lump sum procurement route are:

• It requires a high level of design and specification detail before tendering, which can delay the start of the project and increase the design costs.

• It limits the flexibility and innovation of the contractor, as they have to follow the predetermined design and specification, and any changes or variations will incur additional costs and time.

• It transfers the risk of unforeseen site conditions, inflation, and market fluctuations to the contractor, which can result in claims and disputes if the contractor encounters difficulties or losses. [1]

Lump sum procurement route is suitable for projects that have a clear and well-defined scope, design, and specification, and where the client wants to have a fixed price and time certainty. However, it is not suitable for projects that have a complex or uncertain scope, design, or specification, or where the client wants to have more flexibility and involvement in the project.

Lump sum procurement route is governed by the UK laws and the RICS guidance notes on procurement and tendering. Some of the relevant laws and guidance notes are:

• The Housing Grants, Construction and Regeneration Act 1996, which sets out the statutory framework for payment, adjudication, and suspension of works in construction contracts. [3]

• The Scheme for Construction Contracts (England and Wales) Regulations 1998, which provides the default rules for payment, adjudication, and suspension of works in construction contracts, in case the parties do not agree on their own terms. [4]

• The Construction (Design and Management) Regulations 2015, which sets out the health and safety duties and responsibilities of the client, the principal designer, the principal contractor, and the contractors in construction projects. [5]

• The RICS guidance note on procurement and tendering, which provides best practice advice on the selection of procurement routes, the preparation of tender documents, the evaluation of tenders, and the award of contracts. [1]

• The RICS guidance note on contracts in use, which provides an overview of the main types of construction contracts used in the UK, such as the JCT, NEC, FIDIC, and ICE contracts, and their key features and differences.

A real-life example of a project that used lump sum procurement route is the London 2012 Olympic Stadium, which was awarded to a consortium of contractors led by Sir Robert McAlpine for a fixed price of £496 million, based on a detailed design and specification provided by the Olympic Delivery Authority. [6]

3 Re-measured procurement route

Re-measured procurement route is a variation of the lump sum procurement route, where the contractor agrees to deliver a project for a fixed price per unit of work, based on a provisional set of drawings and specifications provided by the client or their consultants. The contractor is paid according to the actual quantity of work done, measured by the client or their representatives, at the agreed rates.

Some of the advantages of re-measured procurement route are:

• It allows the client to start the project earlier, as the design and specification do not have to be fully completed before tendering.

• It allows the client to make changes or variations in the scope of work during the project, as the contractor is paid for the actual quantity of work done, not for the original estimate.

• It reduces the risk of cost overruns for the contractor, as they are paid for the actual quantity of work done, not for the original estimate.

Some of the disadvantages of re-measured procurement route are:

• It does not provide certainty of cost and time for the client, as the final cost and duration of the project depend on the actual quantity of work done, which may differ from the original estimate.

• It increases the administrative burden for the client, as they have to measure and verify the actual quantity of work done by the contractor, and pay for the actual costs incurred by the contractor.

• It creates the potential for disputes and claims between the client and the contractor, if there are disagreements over the measurement or valuation of the work done, or the interpretation of the drawings and specifications. [1]

Re-measured procurement route is suitable for projects that have a simple and repetitive scope, design, and specification, and where the client wants to have more flexibility and control over the project. However, it is not suitable for projects that have a complex or unique scope, design, or specification, or where the client wants to have a fixed price and time certainty.

Re-measured procurement route is governed by the same UK laws and RICS guidance notes as the lump sum procurement route, with some modifications to reflect the different payment and measurement methods.

A real-life example of a project that used re-measured procurement route is the Crossrail project, which is a major railway infrastructure project in London and the South East of England, which involves the construction of new tunnels, stations, and tracks. The project is divided into several contracts, some of which are awarded on a re-measured basis, where the contractor is paid for the actual quantity of work done, measured by the client or their representatives, at the agreed rates. [7]

4 Cost reimbursable procurement route

Cost reimbursable procurement route is a method of contracting, where the contractor agrees to deliver a project for the actual cost of the work done, plus a fee for their overheads and profit, based on a general outline of the scope of work provided by the client or their consultants. The contractor is paid according to the actual costs incurred by the contractor, verified by the client or their representatives, plus the agreed fee.

Some of the advantages of cost reimbursable procurement route are:

• It allows the client to start the project earlier, as the design and specification do not have to be fully completed before tendering.

• It allows the client to make changes or variations in the scope of work during the project, as the contractor is paid for the actual cost of the work done, not for a fixed price.

• It encourages the collaboration and innovation of the contractor, as they have more freedom and flexibility to propose and implement the best solutions for the project.

Some of the disadvantages of cost reimbursable procurement route are:

• It does not provide certainty of cost and time for the client, as the final cost and duration of the project depend on the actual cost and performance of the contractor, which may vary from the original estimate.

• It increases the administrative burden for the client, as they have to monitor and verify the actual costs incurred by the contractor, and pay for the actual costs incurred by the contractor, plus the agreed fee.

• It transfers the risk of cost overruns to the client, as they have to pay for the actual cost of the work done, not for a fixed price. [1]

Cost reimbursable procurement route is suitable for projects that have a complex or uncertain scope, design, or specification, and where the client wants to have more flexibility and involvement in the project. However, it is not suitable for projects that have a clear and well-defined scope, design, and specification, or where the client wants to have a fixed price and time certainty.

Cost reimbursable procurement route is governed by the same UK laws and RICS guidance notes as the lump sum procurement route, with some modifications to reflect the different payment and fee methods.

A real-life example of a project that used cost reimbursable procurement route is the Eden Project, which is a visitor attraction and educational charity in Cornwall, England, which consists of two large biomes that house thousands of plant species from different climates and environments. The project was awarded to a consortium of contractors led by Sir Robert McAlpine on a cost reimbursable basis, where the contractor was paid for the actual cost of the work done, plus a fee for their overheads and profit, based on a general outline of the scope of work provided by the client. [8]

5 Target cost procurement route

Target cost procurement route is a variation of the cost reimbursable procurement route, where the contractor agrees to deliver a project for the actual cost of the work done, plus a fee for their overheads and profit, based on a general outline of the scope of work provided by the client or their consultants. However, unlike the cost reimbursable procurement route, the contractor and the client also agree on a target cost for the project, which is an estimate of the expected cost of the work done, based on the available information. The contractor and the client then share the risk and reward of any cost savings or overruns, according to a pre-agreed formula.

Some of the advantages of target cost procurement route are:

• It combines the flexibility and innovation of the cost reimbursable procurement route, with the incentive and motivation of the lump sum procurement route, as the contractor and the client both benefit from delivering the project below the target cost, or suffer from delivering the project above the target cost.

• It encourages the collaboration and trust between the contractor and the client, as they have to work together to achieve the best outcome for the project, and share the risk and reward of the project performance.

• It reduces the potential for disputes and claims between the contractor and the client, as they have a common interest and goal in delivering the project within the target cost.

Some of the disadvantages of target cost procurement route are:

• It does not provide certainty of cost and time for the client, as the final cost and duration of the project depend on the actual cost and performance of the contractor, which may vary from the target cost.

• It increases the administrative burden for the client, as they have to monitor and verify the actual costs incurred by the contractor, and pay for the actual costs incurred by the contractor, plus the agreed fee, and the share of the cost savings or overruns.

• It requires a high level of transparency and openness between the contractor and the client, as they have to share the information and data on the cost and performance of the project, and agree on the measurement and valuation of the work done. [1]

Target cost procurement route is suitable for projects that have a complex or uncertain scope, design, or specification, and where the client and the contractor want to have a collaborative and incentivised relationship. However, it is not suitable for projects that have a simple and repetitive scope, design, or specification, or where the client and the contractor want to have a competitive and adversarial relationship.

Target cost procurement route is governed by the same UK laws and RICS guidance notes as the cost reimbursable procurement route, with some modifications to reflect the different target cost and risk and reward methods.

A real-life example of a project that used target cost procurement route is the Heathrow Terminal 5 project, which is a major airport expansion project in London, England, which involved the construction of a new terminal building, a satellite building, a railway station, and a car park. The project was awarded to a consortium of contractors led by Balfour Beatty on a target cost basis, where the contractor was paid for the actual cost of the work done, plus a fee for their overheads and profit, based on a general outline of the scope of work provided by the client. The contractor and the client also agreed on a target cost of £3.3 billion for the project, and shared the risk and reward of any cost savings or overruns, according to a pre-agreed formula. [9]

6 Management contracts procurement route

Management contracts procurement route is a method of contracting, where the client appoints a management contractor to manage and coordinate the design and construction of the project, using a number of works contractors, who are contracted directly by the client. The management contractor is paid a fee for their services, based on a percentage of the cost of the works, or a lump sum, or a combination of both. The management contractor does not perform any of the design or construction work themselves, but acts as the agent of the client.

Some of the advantages of management contracts procurement route are:

• It allows the client to start the project earlier, as the design and construction can proceed in parallel, and the works contractors can be appointed as the design develops.

• It allows the client to have more flexibility and control over the design and specification of the project, as they can select and appoint the works contractors, and make changes or variations in the scope of work during the project.

• It allows the client to benefit from the expertise and experience of the management contractor, who can advise and assist the client on the best solutions for the project, and manage and coordinate the works contractors.

Some of the disadvantages of management contracts procurement route are:

• It does not provide certainty of cost and time for the client, as the final cost and duration of the project depend on the actual cost and performance of the works contractors, which may vary from the original estimate.

• It increases the administrative burden for the client, as they have to monitor and verify the actual costs incurred by the works contractors, and pay for the actual costs incurred by the works contractors, plus the fee of the management contractor.

• It transfers the risk of cost overruns and delays to the client, as they have to pay for the actual cost and performance of the works contractors, not for a fixed price or a target cost. [1]

Management contracts procurement route is suitable for projects that have a complex or uncertain scope, design, or specification, and where the client wants to have more flexibility and involvement in the project. However, it is not suitable for projects that have a clear and well-defined scope, design, and specification, or where the client wants to have a fixed price or a target cost.

Management contracts procurement route is governed by the same UK laws and RICS guidance notes as the lump sum procurement route, with some modifications to reflect the different role and fee of the management contractor.

A real-life example of a project that used management contracts procurement route is the British Library project, which is a national library and cultural centre in London, England, which involved the construction of a new building, a storage facility, and a conservation centre. The project was awarded to a management contractor, who was paid a fee for their services, based on a percentage of the cost of the works, or a lump sum, or a combination of both. The management contractor did not perform any of the design or construction work themselves, but acted as the agent of the client, and managed and coordinated the works contractors, who were contracted directly by the client. [10]

7 Conclusion

In the dynamic landscape of construction projects, selecting the appropriate procurement route is a pivotal decision that sets the stage for success or failure. Whether opting for the cost certainty of lump sum contracts, the flexibility of cost reimbursable approaches, or the collaborative incentives of target cost arrangements, a thorough understanding of each method's strengths and limitations is paramount. By leveraging the guidance provided by RICS and adhering to relevant UK laws and regulations, construction professionals can navigate the complexities of procurement with confidence. Ultimately, the judicious selection and implementation of procurement strategies, coupled with effective risk management and stakeholder collaboration, pave the way for successful project outcomes that meet client expectations while fostering industry growth and innovation.

8 References

1. RICS (2019). Procurement and tendering. 1st ed. London: RICS.

2. RICS (2018). Contracts in use. 4th ed. London: RICS.

3. HM Government (1996). Housing Grants, Construction and Regeneration Act 1996. London: The Stationery Office.

4. HM Government (1998). The Scheme for Construction Contracts (England and Wales) Regulations 1998. London: The Stationery Office.

5. HM Government (2015). The Construction (Design and Management) Regulations 2015. London: The Stationery Office.

6. Olympic Delivery Authority (2007). Olympic Stadium Construction Contract Awarded. [online] Available at: https://webarchive.nationalarchives.gov.uk/20110606002204/http://www.london2012.com/news/media-releases/2007/03/olympic-stadium-construction-contract-awarded.php [Accessed 20 May 2021].

7. Crossrail (2021). Contracts Awarded. [online] Available at: https://www.crossrail.co.uk/construction/contracts-awarded [Accessed 20 May 2021].

8. Eden Project (2021). Our Story. [online] Available at: https://www.edenproject.com/learn/for-everyone/our-story [Accessed 20 May 2021].

9. Heathrow (2021). Terminal 5. [online] Available at: https://www.heathrow.com/company/heathrow-2-0/our-plan/infrastructure/terminal-5 [Accessed 20 May 2021].

10. British Library (2021). Our History. [online] Available at: https://www.bl.uk/about-us/our-history [Accessed 20 May 2021].