Procurement Method in Construction

7/21/2019 Procurement Method in Construction

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Procurement Methods in Construction

April 14, 2015

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Table of Contents

1. Introduction....................................................................................................................3

1.1. Procurement methods in Saudi Arabia.................................................................3

1.2. Procurement framework........................................................................................5

Figure 1.1 General procurement strategy and framework Al!"a#mi $

%c&affer, 2004'...............................................................................................................(

2. Design uild !inance and "#erate..............................................................................(

Figure 2.1. )*e +F- %odel Aou!akr, 2013'.............................................../

Figure 2.2. Adantages and disadantages of t*e +F- model packman,

2002'................................................................................................................................

$. Partnering relationshi#...............................................................................................10

%. &ffects of Cost risk on method of #rocurement ........................................................11

Figure 4.1. rocurement met*ods and cost risks %ila##o $ "ook, 2014'......12

'. Conclusions...................................................................................................................13

(eferences.........................................................................................................................15

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1. INTRODUCTION

rocurement in construction refers to t*e met*ods used to otain funding, goods, and

serices, for construction actiities. roect owners suc* as t*e goernments and priate

enterprises *ae finite funds, euipment, laour, and ot*er resources at t*eir disposal. )*e

limitation acts as a constraint for completing infrastructure, social deelopment, or deelopment

proects. "ence, t*e goernment uses different procurement met*ods, y inoling priate

enterprises to participate in t*e proect. riate enterprises inest in t*e proect, deploy t*eir

resources and e6pertise, and complete t*e proect as per t*e reuirement. 7n return, t*ey otain

reimursement, and if t*e goernment *as sufficient funds, it raises a tender in w*ic* different

contractors participate as per t*e contract terms. eeral types of procurement met*ods are

aailale. )*ese include custom uild, design and uild, design uild finance and operate,

emerging cost contracts, lump sum contract, partnering, and many ot*ers As*wort*, 2011'. )*is

paper e6amines important types of procurement met*ods. )*e paper also discusses ot*er

important terms related to procurement, costs, and risks.

1.1. Procurement methods in Saudi Arabia

audi Araia and t*e %iddle 8ast *ae seen a ery large amount of construction actiity.

A numer of world famous and iconic uildings suc* as t*e Al *ur 9*alifa, 9ingdom )ower,

+iamond )ower, %akka* &lock :oyal )ower, and many infrastructure deelopment proects

*ae een constructed in t*e kingdom. 7n 2014, audi Araia *as planned construction proects

wort* more t*an ;/5 illion audi Ga#ette, 2014'.


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t*e met*ods used are planned design, engineering procurement and construction agreements

8&', and uild only agreements =aweed, 2004'.

>esser restrictions are placed on audi contractors, and t*ese include capital reuirement,

owning euipment, rela6ation for t*e numer ualified engineers directly employed, and so on.

7nternational contractors must otain a foreign inestment license? t*ey must form different

corporate structures suc* as )emporary &ommercial :egistrations, >>&s, or =oint tock

&ompany. &ontractors are placed different grades suc* as Grade A, Grade , and so on up to

Grade +. Grade A is at t*e *ig*est leel, and Grade + is at t*e lowest. -t*er classifications

include &lass 7, &lass 77, &lass 77, &lass 7@, and &lass @. )*ese grades are ased on t*e si#e and

numer of proects completed, numer of full time workers employed, and certifications

otained y t*e contractors suc* as 7- 001, 7- 14001, and -"A 1001, etc. Anot*er ery

important aspect of procurement met*od is t*e proect financing. 7nternational anks and

financial institutions offer financing to construction proects y using conentional financing

proects. >ocal audi anks mandate t*at *aria compliant financing met*ods for priate sector

proect Al!"a#mi, 200'.

ome e6amples of procurement met*ods for pulic and priate sector proects are

discussed as follows. )*e Aldara "ospital proect wort* A: 404 million was initiated t*roug* a

oint enture etween BA8 goernment and a Greek contractor. )*e 9ing 9*alid 7nternational

Airport, )erminal 5 proect wort* A: 1.5 illion was completed as a oint enture etween t*e

audi goernment and a )urkis* contractor. =edda* &ornic*e, a mega proect wort* A: 1,/3

illion was taken up as a oint enture etween Amias :eal 8state Group and t*e B9 ased

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>amar 7nestment and :eal 8state +eelopment &ompany. )*e 9ing Fa*ad %edical &ity

"ospital proect wort* A: 522 million was taken up as a partners*ip enture etween B9

ased +rake $ cull and "atoor >eig*ton pecon. )*e Ara 9udai +eelopment proect wit*

A: 13 illion was awarded to t*e audi inladin Group on a design and uild asis "usein,

2014'. A large numer of smaller proects use similar procurement met*ods.

1.2. Procurement framewor

)*is section proides a rief discussion aout t*e procurement framework. )*e

framework is applicale to all met*ods of procurement, w*ic* will e discussed in t*e ne6t

sections. )*e procurement strategy is closely aligned wit* t*e proect oecties and framework.

)*e procurement strategy *as four steps, w*ere a numer of actiities are carried out. )*e steps

are initiated in t*e ealuation and definition p*ases of a proect. )*e four steps are data

gat*ering, preliminary screening, procurement options analysis, and t*e recommended deliery

model and procurement met*od Al!"a#mi $ %c&affer, 2004'. )*e following figure illustrates

t*e procurement strategy and framework for all types of proects.


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Figure 1.1 General procurement strategy and framework (Al-Hazmi & Mcaffer!

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2. D!SI"N #UI$D %INANC! AND OP!RAT!

)*e design!uild!finance!operate +F-' model, also called t*e pulic priate

partners*ip ' model, or t*e ulic Finance 7nitiatie F7', is one of t*e procurement

met*ods used y t*e goernment. 7n t*is model, t*e goernment is t*e proect owner and it floats

a contract initing priate firms to participate in t*e proect. )*e goernment may proide part of

t*e funds y using special purpose e*icles, or onds, funds, and t*roug* lotteries. )*e priate

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party funds eit*er t*e w*ole amount or t*e alance? it designs t*e proect, uilds it as per t*e

specifications, and t*en operates t*e completed infrastructure for a fi6ed amount of time. +uring

t*e time w*en it operates t*e infrastructure, t*e priate party earns income from t*e proect, to

recoup its inestment. After t*e fi6ed tenure e6pires, t*e proect reerts to t*e goernment. B9

uses t*is model e6tensiely and some e6amples of proects are t*e &*unnel )unnel >ink, t*e

>ondon Bnderground system, many C" proects to uild *ospitals, toll roads on t*e *ig*ways,

toke on )rent sc*ools, lackurn "ospital, and many ot*ers Aou!akr, 2013'. )*e following

image illustrates t*e manner in w*ic* t*e +F- model works.

Figure ".1. 'e )F* Model (A+ou-+akr! "#1,%

)*e +F- model starts wit* a contract etween t*e priate party and t*e pulic sector.

)*e terms of t*e contract can ary, ut t*ey generally indicate t*at t*e risk in designing t*e

proect as per t*e reuirement, constructing t*e facility, and operating it, rests wit* t*e priate

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2002'. ome of t*e enefits and possile risks t*at emerge from suc* met*ods are illustrated in

t*e following figure.

Figure ".". Adantages and disadantages of t'e )F* model (packman!

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&ommunity erices, s*ould consider t*is met*od of procurement, after carefully studying t*e

proect reuirements.

&. PARTN!RIN" R!$ATIONS'IP

atterning relations*ip, partnering, or alliance, is anot*er procurement met*od used in

construction proects. )*e met*od indicates a collaoratie approac* w*ere two or more parties

collaorate to design finance, construct, and operate a pulic or priate proect.


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commercial comple6 construction proect, t*e partners may decide to otain a s*are in t*e

income otained from selling or leasing t*e space. 7n addition, eac* partner is gien a certain

amount of t*e real estate, w*ic* *e can sell or lease. 7n ot*er cases, a partners*ip firm is formed,

and t*e partners otain euity, eual to t*e inestment :oe $ =enkins, 2003'.

eeral adantages and disadantages are eident in t*is type of procurement met*od.

)*e adantages are t*at t*ere is a pooling of resources, and eac* party contriutes in t*e form of

funds, design and proect management e6pertise. )*e proect *as fle6iility, in terms of proect

scope, features, design c*anges, procurement met*ods, and ot*er aspects. )*e main

disadantages are t*at t*e w*ole proect depends on trust and close relations*ip etween t*e

partners. 7f t*ere is fallout etween t*e partners, or if one partner ecomes insolent, t*e proect

will come to a standstill. Bnless t*e contract terms are clear, liailities of a partner are transferred

to t*e proect. )*is means t*at if a partner goes insolent, t*en t*e creditors can claim a transfer

of t*e partners*ip in t*e proect. artners*ip proects can deelop a lenient attitude and censure,

penalties in case a partner delays e6ecuting t*e assigned responsiilities are not enforced. )*e

met*od is not cost efficient since t*ere is no competition for t*e serices offered. A partner can

inflate t*e costs and ot*er partners often accept t*e inflated prices. )*is can proe detrimental in

t*e end 8&7, 2014'.

(. !%%!CTS O% COST RIS) ON *!T'OD O% PROCUR!*!NT

-t*er t*an t*e tec*nical and functional aspects of a proect, one of t*e constraints is t*e

proect cost, and t*e risk t*at it places on t*e procurement met*od. &onstruction proects face a

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numer of risks and t*ese include design risks, construction cost and uality risks, risks to

sc*edule, and risks of operating and maintaining t*e facility. 8ac* type of procurement *as its

own risk, and cost is a maor factor in determining t*e risk. 7f t*e contractor underestimates t*e

costs, t*en t*ere is a maor cost risk, and unless t*e contract allows for cost escalations, t*e

contractor ears t*e risk As*wort*, 2011'. )*e following figure indicates t*e different types of

costs risks t*at eac* procurement met*od faces.

Figure $.1. /rocurement met'ods and cost risks (Milazzo & Hook! "#1$%

)*e main reason for adopting a procurement met*od is to ring in e6ternal e6pertise into

t*e proect. :isk transfer is an added enefit, and t*e proect owner s*ould not force a *ig* cost

risk proect on a contractor, since suc* practices end up in failure. From t*e figure, it is clear t*at

t*e least cost risk appears in t*e alliance type of procurement met*od, since eac* partner s*ares

t*e risk. )*erefore, eac* partner is tasked wit* t*e successful completion of t*e proect. )*e

*ig*est risk is seen in t*e type of procurement, since t*e priate partner assumes t*e maor

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cost risk, w*ile t*e proect owner, typically t*e soereign, can remain on t*e sidelines. )*e

enefits from proects are rewarded solely to t*e priate partner, along wit* t*e risk. "ence,

t*e financial iaility and appetite for risk ecome t*e main determinants in proects

%asterman, 200('.

7n design and construct proects, t*e contractor ears all t*e risks. +epending on t*e

contract conditions, t*e proect owner may agree to coer certain risks suc* as increase in

material costs and ot*er factors. "oweer, t*e final offer from t*e contractor ecomes inding

and *e ears all t*e risks. 7n construct only met*ods, t*e proect owner and contractors s*are

some of t*e risks, for t*e completion sc*edule. Generally, t*e contractor *as to ear t*e risks of

laour and euipment costs. )*e proect owner ears t*e risks of material costs, or c*anges in

regulations. 7n construction management met*od, t*e contractor ears all t*e risks, w*ile t*e

proect owner is e6posed to some latent risks. "oweer, in managing contractor procurement

met*od, t*e contractor ears all t*e risks &*itkara, 2005'.

An important determinant of costs risks is t*e proect duration, and t*e inolement of

su contractors. >arge proects wit* duration of more t*an a year face *ig*er cost risks. )*e main

contractor w*o ids for t*e proect, su contracts t*e work to smaller contractors. 7n suc* an

arrangement, ot* t*e contractors s*are t*e reenue. "oweer, t*e su contractor *as less

argaining power, and if often suee#ed to offer etter margins, and t*e cost risks for t*e main

contractor are *ig* As*wort*, 2011'.

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+. CONC$USIONS

)*e paper e6tensiely discussed important construction met*ods, and t*e cost risk effects

on different met*ods. +F- proects are popular in 8urope and ot*er areas, w*ere t*e

goernments do not *ae sufficient funds and resources to take up pulic sector proects. )*e

priate partner assumes all t*e risks and responsiilities for design funding, and construction,

w*ile otain returns from operating t*e facility. )*e ot*er types of procurement met*ods suc* as

partners*ip would reuire sustantial outlay from t*e oroug* in terms of funding, and skilled

resources. "ence, t*e +F- met*od of procurement is recommended for -ld &ross oroug*

&ouncil, +epartment of &ommunity erices, since t*e oroug* does not *ae to otain funding

from t*e goernment, and all t*e e6pertise if proided y t*e partner. "oweer, t*e oroug*

must carefully define t*e reuirements, estimate t*e udget, identity t*e rig*t type of partner, and

ascertain t*e urden placed on t*e community.

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R!%!R!NC!S

Aou!akr, A, 2013.Managing Disasters through Public-Private Partnerships. Bniersity ressE

Georgetown, B9.

A+7, 2014.Illustrative Examples of PPP in the EU. Accessed 13 Coemer 2014 from

*ttpEwww.adi.orgworking!

paper201105134531.financial.instruments.ppp.infrastructural.de.euillustratie.e6amp

les.of.ppp.in.t*e.eu

Al!"a#mi. ). A. $ %c&affer, :., 2000. roect procurement system selection model.Journal Of

Construction Engineering and Management, 12( 3', pp. 1/(!14.

Al!"a#mi, ). A., 200.Proect procurement s!stem selection model "#ith particular reference to

$audi %rabia&. +octoral )*esis, >oug*oroug* Bniersity, B9.

As*wort*, A., 2011. Contractual Procedures in the Construction Industr!. BC7)8&E Cew

Dealand.

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ygalle, >. 8., =a*re, % and ward, A., 2010. artnering relations*ips in constructionE A

literature reiew.Journal of Purchasing ' $uppl! Management, 1(, pp. 23253.

&*itkara, 9. 9., 2005.Proect Management - Planning( $cheduling and Controlling. %cGraw

"illE >ondon.

8&7, 2014.)ong-term partnering* %chieving continuous improvement and value - %n ECI

handboo+. Accessed 12 Coemer 2014 from www.ciria.org

"usein, A., 2014. Construction and proects in $audi %rabia* overvie#. &onstruction and

proects %ulti!urisdictional Guide 201314, :iyad*.

=aweed, %. :., 2004.%n Implementation Model for Design-,uild "D-,& Proect Deliver! $!stem.

+issertation for %asters in cience, 9ing Fa*d Bniersity of etroleum and %inerals,

+*a*ran, audi Araia.

%asterman, =. ondon.

%ila##o, A. $ "ook, :., 2014.,uilding and Construction Procurement uide Principles and

Options. Australian rocurement and &onstruction &ouncil, Adelaide.

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:oe, . $ =enkins, =., 2003.Partnering and %lliancing in Construction proects. weet $

%a6well >tdE >ondon.

audi Ga#ette, 2014. Construction proects #orth ./012bn in $audi %rabia during 3456.

Accessed 12 Coemer 2014 from

*ttpEenglis*.alaraiya.netenusinessproperty20141111+uai!plans!(!mln!7-!

as!it!steps!up!tourism!pus*.*tml

packman, %., 2002. ulic!priate partners*ipsE lessons from t*e ritis* approac*.Economic

$!stems, 2(3', pp. 23301.

D*eng, =. :. $ >ewis, %.A., 200. )*e dynamics of contractual and relational goernanceE

8idence from long!term pulic!priate procurement arrangements.Journal of

Purchasing and $uppl! Management. 141', pp. 43!54.

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Procurement Method in Construction