Procurement Methods


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Procurement Methods

  2. 2. PROCUREMENT METHODS. Introduction. According to Encarta dictionary 2009, to procure means to acquire something: to obtain something especially by effort. In construction terms, procurement refers to the process of acquiring something. This process of acquiring something has different approaches or methods; hence in the construction sense, procuring a building has different methods to it. When a project is dreamt about by the client, he works towards actualizing it. Apart from funding and providing land for development, the client does not have the requisite skill to actualize his dream. He has to employ the services of those who would do so. The task of designing his dream and its subsequent construction are open to different methods; hence to choose the most appropriate method for his project, he needs professional advice. The method he chooses is dependent on some factors, which in the end should satisfy his need. What is procurement? Procurement is a term used to describe all activities undertaken by the client in seeking to bring about the construction of, or the refurbishment of a building. It is also referred to as method or system which seeks to weigh the pros and cons and the financial constraints which are likely to affect the project so as to select an effective contractual arrangement. The simplest definition, according to Nagy, Kiss and Hornyak (n.d) described Procurement as the merging of activities undertaken by the client to obtain a building. When a client wishes to choose any type of procurement method for realizing his project, his major concerns are:  To finish the project on time  The cost of the project
  3. 3.  Performance or quality in relation to both design and construction of the building. There are four main procurement options, they are as follows: Traditional method Design and Build method Management Contracting method Public-Private Partnership (PPP) method. Traditional This method is as old as the construction industry. The major feature is that the design process is separate from construction. It also requires full documentation before the contractor can be invited to tender for the work. In summary, traditional method simply involves the steps- design, bid and build. Features of the Traditional System. The traditional system is characterized by the following:  Contractor is appointed by competitive tendering  Designs should be fully prepared ahead of time before tendering procedure and actual construction can begin.  The client has control over design. There is no design responsibility on the contractor.  The duration of the project tends to be very long because of the separate sequential process of design and construction.  The construction cost is well known ahead of time and there may be need for adjustment as provided for in the contract.  The client appoints a professional consultant to administer the contract on his behalf and to advice on aspects associated with design, progress and stage payment which must be paid by the client. The structure of the traditional system is shown below:
  4. 4. Source: Naggy et al. (n.d). Analysis. Although the traditional procurement method is very simple to understand by all classes of client, the major problem it has, is that the contract period tends to be more prolonged due to the fact that design process is separate, and determines the commencement of the actual construction. Again the early and vital input of the Builder is not tapped; hence, the product is likely to be deficient in buildability and maintenability aspects.
  5. 5. Design and build. In this method, the contractor is responsible for undertaking both the design and construction of the work in return for a lump sum price. To arrive at a choice of contractor, contractors are required to develop a design (from an initial concept prepared by the consultant appointed to advice the client) to a certain level, prepare a tender figure and submit the whole package which is termed a proposal to be evaluated to meet the satisfaction of the client. A team of consultants will be needed to assess each contractor’s proposal. Evaluation of tenders in this case is usually difficult because the contractors are not working with one design. Tenderers should be informed of the criteria to be used, and whether price is likely to be a prime factor. Features of this method include:  The contractor is often appointed by two-stage tendering i.e. the competitive element and quality is preserved.  The client can introduce changes to the design at the design stage, but once the contract has been awarded to the contractor, he has no direct control over the development of the design detail by the contractor.  A major feature of this procurement method is that design and construction may proceed in parallel, and so the project duration will be shortened.  This procurement method makes no room for appointment of an independent contract administrator. The client works directly with the contractor, or he may appoint an agent to advice him, or act on his behalf.  Valuation and payment matters are solely in the hands of the contractor.  It is an obligation to complete the project within the contract period, however, the client may accept a later date to account for delays resulting from reasons listed in the contract. Analysis. The Design-Build approach gives the client a single point of contact. However, the client commits to the cost of construction, as well as the cost of design, much earlier than with
  6. 6. the traditional approach. Whilst risk is shifted to the contractor, it is important that design liability insurance is maintained to cover that risk. Changes made by the client during design can be expensive, because they affect the whole of the Design-Build contract, rather than just the design team cost. Secondly, although the contract period is shortened, the process of assessing the tenders, and selecting a contractor can be difficult due to the fact that all the tenderers are working with different designs. Management Procurement. This method of procurement is based upon the client appointing a consultant who will prepare project drawings and project specifications. Consequent upon this, a management contractor is then selected by a process of tender and interviews. The management contractor will not carry out construction work. This helps to preserve the management contractor’s independence and reinforces a consultancy relationship with the client. Payment is made to the management contractor on the basis of the cost of the works packages plus the agreed fee. The success of this approach depends on the contractor’s team. Unless the team is drawn from companies which are experienced in this kind of team working, the benefits are not always realized. There is less price certainty at the outset, because construction tends to start ahead of completion of all design stages and at a point when many of the work packages are yet to be tendered for. This often means that adjustments will be made to the design and specification of works packages later in the programme to keep the project within budget. However, the overall process of design and construction tends to be shorter than in either the traditional or design and build methods. Another variant of management contracting is construction management. Construction Management This is similar in concept to Management Contracting. The sub contractors or specialists are contracted directly to the client and the construction manager manages the process
  7. 7. for the client on a simple consultancy basis. Construction Management requires constant involvement of the client, so it is really only suitable for experienced clients. Analysis. This method is characterized by a high level of skillful input since the subcontractors engaged are experts in their various fields. The result is that the construction process is characterized by some level of precision synonymous with manufacturing industry. There is equally minimal supervision and the whole arrangement seem to favour each party. The major challenge in this method is organization, unless the team of contractors are pulled from companies who are used to team working, the whole system may be frustrating. Public-Private Partnership. This procurement method refers to the collaboration between public and private sector in order to achieve financing, management or maintenance of a project or the provision of services. According to Obozuwa (2011), Public–private partnership (PPP) describes a government service or private business venture which is funded and operated through a partnership of government and one or more private sector companies. PPP is, therefore, regarded as a tool for infrastructure development. Public and Private sectors may co-operate in the following sectors: transport, public health, education, safety, waste management, water supply and energy A PPP project is not different from the other procurement forms. It is the financing of the project that is different.
  8. 8. The responsibility of each of the sectors in the realization of a project are as follows: The Private sector : is responsible to provide the whole, or part of the project financing is responsible for the risks that are related to the construction or operation of the project. has long term benefits from the project designs the project (or part of the design) manages and operates or maintains the facility returns the project to the public after the completion of the contract period The Public sector: determines the drawing, technical, operational and financial requirements of the project assesses the proposal of the private sector supports the construction of the project monitors the project and makes sure the private sector conforms with the contract proceeds with payments to the private sector. Models of Public-Private Partnership. PPP agreement may take the following forms: Design-Build (DB) or “Turnkey” contract: in this case, the private sector designs and builds infrastructure according to public sector performance specifications for a fixed price, thereby transferring the risk of cost overruns to the private sector. Management contract: Here, the private sector contracts to manage a Government owned project and manages the marketing and provision of a service. Lease and operate contract: A private operator contracts to lease and assume all management and operation of a government owned facility and associated
  9. 9. services, and may invest further in developing the service and provide the service for a fixed term. Design-Build-Finance-Operate (DBFO): The private sector designs, finances and constructs a new facility. It is then required to operate the within a lease period. The private partner then transfers the new facility to the public sector at the end of the lease period. Build-Operate-Transfer (BOT): A private entity receives the license to finance, design, build and operate a facility for a specified period, after which ownership is transferred back to the public sector. This has been used in telecommunications service contracts. Buy-Build-Operate (BBO): If there is need to revive a public asset, the government can transfer it to a private or quasi-public entity usually under contract that the assets are to be upgraded and operated for a specified period of time. Public control is exercised through the contract at the time of transfer. Build-Own-Operate (BOO): In this case, the private sector finances, builds, owns and operates a facility or service in perpetuity. The public constraints are stated in the original agreement and through on-going regulatory obligations. Build-Own-Operate & Transfer (BOOT): The Private Sector builds, owns, operates a facility for a specified period as agreed in the contract and then transfers to the Public. Operating License: A private operator receives a license or rights to build and operate a public service, usually for a specified term. This is similar to BBO arrangement and is often used in telecommunications and ICT projects. Finance Only: A private entity, usually a financial services company, funds a project directly or uses various mechanisms such as a long-term lease or bond issue.
  10. 10. Advantages. The Public sector gains the advantages the private sector offers such as: ability to design, construct, manage and finance a project. Public money is better used and at difficult economic periods for a government, this method is good. They promote and help the innovation in the public sectors with the transfer of knowledge and new techniques. Better quality infrastructure and better operation throughout the life of the project (maintenance of the project by the private sector) is assured. There is more efficient and more economical maintenance of the project. Reduction of the construction cost and maintenance of the project. Use of private sector in areas where there are ‘weaknesses’ in the public sector such as: lack of expertise and qualified employees, no ability to promote new technoeconomical solutions, lack of efficient and effective use of human resources, lack of sensitivity and knowledge and expertise in the use of available energy sources. Disadvantanges. The use of the project by the private sector is difficult for low income people. However, it has the advantage that only the users pay and not the tax payer. In some cases, there may be in the contract some clauses or provisions which do not favour the public interest but aim at increasing the profit of the private investor, allow monopoly or even allow the private sector to increase the price of a service or a product after completion of the project. Since much of funding the project is done by the private investor, there is every tendency to aim at reducing the cost of a project which might lead to the use of substandard materials and works Generally, the public sector can get cheaper loans than the private sector.
  11. 11. Analysis. The system has been applauded as important tool for improving economic effectiveness, and a mechanism to fill infrastructure deficit (Shwarka and Anigbogu 2012). The system equally lends itself to the intervention of private entity whose sole aim in development participation is more profit oriented than of social growth, for this reason, it is necessary that government should balance its profit motive with social growth. This can be achieved through government monitoring and imposition of compliance with performance standards as a pre-requisite in development participation. Conclusion. There is not just one method of procuring a building. The different methods that are available provide a wide range of options for any promoter to realize his dream. The choice of any method is dependent on the prime concerns of the client, (which are cost, time and quality) and the type of project. Whatever choice of option that is made, must not fail in any of these factors; hence, the client needs guidance and direction so that he has cause to smile when his dream has been actualized. The majority of clients are ignorant and quickly embrace the traditional method as the only procurement option. The quick recourse to this option is due to its simplicity, age and familiarity with the process. The result is that the wrong option is applied to wrong projects, which may lead to problems ranging from waste of resources to dissatisfaction with the final product. The need for professional advice is, therefore necessary to help the clients make the right choice.
  12. 12. References. Naggy, E. Kiss, L. and Hornyak, S. (n.d). Different procurement methods. Obozuwa, D. (2011). PPP as a tool for infrastructure development in Nigeria (1). Shwarka, S and Anigbogu, (2012). The impact of public procurement options on building projects 42nd National Building performance in Nigeria. A paper presented at the conference/General Meeting of the Nigerian Institute of