Procurement has been defined as 'obtaining by purchase, lease or other legal means, plant machinery, equipment, materials, services and works required by an organization'.
Construction procurement maybe defined as the series of processes or activities employed to secure the erection or construction of a predefined 'built structure' (buildings, electrical plants and systems etc.) for an organization. Construction procurement methods have been described as 'both organizing the works and allocating risks to different stakeholders'.
Construction procurement can be a lengthy and complex process involving different stakeholders, specialized technical information, health and safety regulations, security and insurance issues. It always important at an early stage to define the role and legal obligations of the various stakeholders involved in a particular procurement process and to update such obligations as the project progresses.
About £40 billion worth of construction work is delivered to the public sector annually with the government being the industry's largest customer. In recognition of its importance to industry and the vital contribution made to the economy by the construction industry, the government has sought to engage the industry in improving its methods and processes and delivering better value. The latest effort is contained in the Government Construction Strategy report.
The report signalled a desire to employ more innovative and effective procurement processes in the construction sector with the aim of deriving the best value from the supply chain.
The Government Construction Strategy action plan indicated thus:
- Investigation of alternative forms of procurement and contractual arrangement that offer better value and affordability
- Demonstration of the effectiveness of these alternatives through trial projects.
This has been acted on by the creation of the Procurement/ Lean Client Task group as one of the groups in the Cabinet Office Efficiency and Reform Group (ERG) Construction Task Groups. In January 2012 the task group published a report to inform on the steps it has recommended to improve the procurement process. The report outlines three new procurement methods that would underpin the drive for better value and affordability. The report also suggests particular contract forms to be used for each of the new procurement methods.
The Task group has stressed that the new methods are an evolution of current best practices in the industry as against being a revolution of industry procurement. The new methods are expected to continue the government drive for more cost effective and quality construction projects. It is expected that by ensuring a faster selection of partners the new methods will reduce the time and amount spent on complex procurement processes.
All three methods are to be tested in 2012 in capital projects that would be identified by the Government Construction Board (GCB). The evaluation of this pilot project would be carried out by the ERG Task group in conjunction with the commissioning department and the supply chain. The task group report informs that in proposing the new methods, emphasis has been on 'securing maximum appropriate and effective capital costs reductions' however due regard was also given to not damaging the lifecycle costs of operation.
The three 'wise' methods
The common features of the new procurement method are:
- Early Contractor Involvement
The three methods require the following:
- The client provides clear definition of the functional outcome desired from a series of similar forthcoming projects, including specific requirements where required i.e. carbon reduction, use of apprentices etc.
- The Client identifies typical costs to deliver such outcomes based on available data, benchmarking and cost planning work. This will enable the client set a realistic yet challenging cost ceiling, with the expectation being that the cost ceiling would be achieved/ bettered and costs would be further reduced over the series of projects
- Engagement with the supply chain embraces the principles of Early Contractor Involvement and high level of supply chain integration
- The Completion of the capital phase occurs at the point that the specified output performance is achieved on the completion of the works.
Method 1 – Cost Led Procurement
In this method of procurement the client sets a challenging but realistic cost ceiling and engages one or more supply chain teams in a framework agreement. The team's selection is based primarily on ability to work collaboratively to deliver below the cost ceiling in the first project and to achieve further reductions in the subsequent projects forming part of the client's series of projects.
In the subsequent competitions (after the first one), the supply chain are expected to be engaged early with the client team to develop bids that drive further cost reduction based on their experience from the previous project and innovation.
The important criterion is that one of the teams in framework must show capability to meet/better the costs ceiling. Where this is in place, selection is based on the relative attractiveness of the commercial and physical proposition offered by the team.
Where the cost ceiling (scheme price) cannot be matched or bettered by the teams in the framework, the project must be offered to suppliers outside the framework. Where the scheme price cannot be met, the project should not proceed; it is therefore important for the client to set a realistic costs ceiling.
Method 2 – Integrated Project Insurance
In this method of procurement the client holds a competition to appoint members of an integrated project team based on elements such as competence, track record etc. The team that is chosen works together to present a preferred solution with cost savings against existing costs benchmarks. This 'solution' goes through a rigorous third party verification process to maintain good value in the project and to ensure that a balanced commercial position has been struck. The unique aspect of this method is that a single insurance policy will cover all the risks associated with the project. Thus, a single policy would cover all insurance policies that in other projects are held by the client, contractor and the supply chain. Also, the policy would cover the top slice of commercial risks covering any cost overruns in the project above and beyond the pain-share threshold set in the contract and apportioned between the client and the contractor and its supply chain. This would save about 2.5% on the costs of insurance to the different teams. Approximately 2.5% is is also estimated as the cost of insuring the top slice of commercial risk, thus this method of procurement is insurance cost neutral.
One of its major advantage is that it removes the need for adversarial and blame culture as excessive costs overrun is covered by insurance and all that is required for payment where such overruns occur, is evidence of loss rather than the assignment of blame.
It is expected that to secure the insurance for a project, the team would have to produce a credible proposal validated by an independent expert assurer.
Method 3 – Two Stage Open Book
Under this model, the client invites suppliers on a framework agreement to bid for a project on the basis of an outline brief and costs benchmark. The bidders (contractor-consultant teams) are chosen at the first stage based on capacity, capability, stability etc. The winning team then produces a proposal on the basis of open book cost that meets the client's stated outcomes and costs benchmark. The model also employs independent expert stage-gate reviews to ensure appropriate definition of scope, outcomes risks etc. with clear recommendations to the client and the contractor where improvements are required.
Contract Forms for the Model
A group of experts drawn from the legal sector and the Royal Institution of Chartered Surveyors (RICS) concluded that the following forms of contract were suitable for the proposed models:
- Cost-Led Procurement – NEC 3 Option C
- Integrated Project Finance – PPC 2000
- Two Stage Open Book – JCT Constructing Excellence.
These recommended allocations will be reviewed after the trial projects.
Additionally the working group made the following general recommendations on the contracts:
"No amendments to the contract processes and procedures, nor to the risk allocation within the basic form;
No changes to payment periods unless improving/shortening cash flows in line with the Fair Payment Initiatives;
The approach to liquidated damages, retentions, liabilities and performance guarantees should be consistent across all pilots, with preference for no liquidated damages or retentions throughout the supply chain and no general liability caps or PCG /performance bonds. These were simply considered poor value for money especially in a collaboratively procured and developed programme environment with strong due diligence and independent verification to mitigate risks."