Contracts and Commercial Practice – Lecture 4 transcript

Slide 1 This lecture focuses on how construction work is procured, also called procurement.

Slide 2 The overall aim of this unit is to provide an overview of the procurement methods and
traditional procurement processes. We are then going to examine tendering methods,
subcontracting and finally the appointment of consultants.

Slide 3 We will achieve this aim by tackling the objectives in the following order:

1. You will understand what is Procurement and procurement route considerations a client
needs to consider.

2. You will understand the most common Procurement Methods, the traditional form of
procurement process, traditional procurement suitability, the pros and cons of traditional
procurement, design and build process, design and build suitability, the pros and cons of
design and build, management contracting process, management contracting suitability,
construction management process, construction management suitability, the pros and cons
of management procurement.

3. You will understand the most common Tendering Methods in construction, single stage
tendering, two-stage tendering, negotiated tendering and to summarise the different
tendering methods.

4. You will be able to form opinions with regards to why and how contractors use Sub
contractors.

5. You will understand how the Appointment of Consultants process works

Slide 4 Turning to our first topic, procurement and its definitions.

Slide 5 On the screen you have a basic definition of what the term ‘procure’ means. Procurement is
defined as to obtain something with care or effort. Another definition is to ‘buy’ a product
or services. If you think about it, we procure products and services every day of our lives,
and how we do this is based on the nature of what we procure.

Construction projects are no different, but they have specific elements and requirements
that need consideration when choosing the method of procurement. Let’s now look in more
detail at procurement in construction, especially the factors that need consideration when
 Contracts and Commercial Practice – Lecture 4 transcript

choosing the method, and the methods themselves.

Slide 6 The Aqua Group’s Guide to Procurement, Tendering and Contract Administration states that
procurement is the process of acquiring goods and/or services from a supplier or service
provider. It is in essence a simple transaction but today’s construction projects are often
vast in scope, involve several designers, require specialist contractors and take considerable
time to complete. As such, the choice of how we procure goods and services can have
considerable impact on costs, time, and quality. This is known as the procurement triangle,
and will be discussed more in the following slides when we look at selection of procurement
route considerations.

Slide 7 – 8 Let’s now look in more detail at factors related to time, cost and quality as they relate to
procurement route selection. For example, there are 3 factors highlighted on screen.
Please click on each to find out more.

1. Cost certainty.

Cost certainty represents the probability of completing a project within the budget
agreed between clients and contractors before the commencement of construction.
High certainty in costs is one of the top priorities for a client, and so there are a few key
questions that need to be considered. These are:

 Is the budget robust enough for the project?

 Is there a finite sum that cannot be exceeded?
 Are funds available for variations?
 Is there a contingency sum to cover any unforeseen issues?

2. Speed from inception to completion

The speed in which the client requires the building for his/her use is an important factor. For
example, is the client going to use the building as a means of generating revenue (e.g. flats
for rental, restaurant, shop, hotel, etc.), if so the timely completion of the project in order to
generate that revenue might be a key factor for the client when considering his/her
 Contracts and Commercial Practice – Lecture 4 transcript

procurement strategy.

The questions a client should consider here are:

 How quickly do I need the building completed?

 Are there any important commercial dates/periods, that are desirable for
completion (e.g. the opening of a toy shop in the lead up to Christmas).
3. Project complexity

The technical and logistical complexity of a project may also be a factor the client should
consider before deciding upon a procurement route. For example, if a building is simple in
nature, such as a warehouse, this is likely to have a different procurement route to a more
complex project such as a new airport terminal, or a refurbishment of an historic building.
More will be discussed about this later within these notes.

Can you think of three more considerations?

Slide 8 Now that you have had time to consider a few options, you can also click on the remaining
boxes to see definitions of some more considerations:

• Experience of client in construction

Construction projects can be fraught with tensions, problems, delays, cost overruns,
technical and logistical problems, therefore the client’s experience in construction projects
should be considered when selecting a procurement route.

For example, a first-time client is likely to rely more heavily on his design consultants, rather
than an experienced client who has commercial knowledge and awareness that he/she has
collected over the years.

• Type of project

The type of project to be carried out is likely to have an impact on the procurement route
selected. For example, simple functional buildings where aesthetics are not the client’s key
driver are probably most suited to Design and Build procurement. Whilst, a refurbishment of
 Contracts and Commercial Practice – Lecture 4 transcript

an historic building, with the potential for unknown discoveries (e.g. asbestos, structural
integrity, rot, among other things) is likely to be best suited to Traditional procurement.
More will be said about these further into these notes.

• Client’s attitude to risk

This is another key factor that can impact the procurement route selection. For example, if a
client is averse to risk, he may wish to pass that risk to the contractor, Design and Build
would be suitable in this instance.

However, some client’s may wish to and be equipped to deal with that risk, hence
Traditional procurement, may then be a more suitable option.

Slide 9 We will now move on to look at the most common procurement methods.

Slide 10 The most common procurement methods in operation in the construction market include
the following:

 Traditional
 Design & Build
 Management Contracting
 Construction Management
 Measured Term Contracting
 PFI (Private Finance Initiative) which we looked at in lecture 2.

Choice will depend on cost, time and quality factors as discussed in the last section. In
addition choice will depend on who wants to take the cost and design risk - either the client
or contractor.
 Contracts and Commercial Practice – Lecture 4 transcript

Slide 11 Let’s first discuss the traditional procurement process. The first step is for the client to
appoint a design team. By this we mean the Architect, Professional Quantity Surveyor (PQS),
M&E engineer, Quantity Surveyor, and Design Consultant. The design team then go on and
develop the design and draw up the specification. The PQS then measures and prices up the
drawings in order to prepare a Bill of Quantities (BoQ). These drawings and specifications
are typically sent to three contractors to price and submit tenders. The cheapest contractor
is then selected and commonly appointed on a lump-sum contract, however, measurement
contracts and cost reimbursement contracts can also be used. Under a lump sum contract, a
single ‘lump sum’ price for all the works is agreed before the works begin. More information
on lump sum contracts can be found in the CIOB code of estimating practice. The contractor
then builds the project to the drawings and bill of quantities. This is referred to a traditional
procurement. Any variations will therefore need to be instructed.

Within this form of procurement, responsibility and risk for the design lies with the client.
The Main Contractor is responsible for building the project but is not liable for the design.

Slide 11 Activity: For which types of projects are traditional procurements most suitable?

Slide 12 Now that you have had a chance to consider this, take a look at the most common types of
projects that traditional procurements are suitable for:

[Link] where client wants control over design

(e.g. high end residential refurbishment).

2. Buildings of historical importance (e.g. listed buildings, buildings within conservation

areas).

3. Buildings where design is the client’s “key driver” (e.g. Exclusive hotel, shop, and
restaurants).

4. Refurbishment projects, these types of projects are prone to have the potential for
unknown discoveries (e.g. asbestos, rot, structural instability, and the like).
 Contracts and Commercial Practice – Lecture 4 transcript

Slide 13 To finish our discussion of traditional procurement, We will take a look at the pros and cons
of this method.

One of the advantages is that the client has control over design, this makes issuing
Slide 14
variations to the contract simple for the client. Moreover, allowing evolution of the project
and design gives flexibility to the client as the works proceed as making changes to the
design, layout, services and the like are also simple for the client. Such variations are
typically easy to value, as a Bill of Quantities acts almost as a price list for variations and
modifications to the design, quality and quantity of the works.

Slide 14 Can you think of any corresponding disadvantages? Jot down your answers before moving
on to the next screen.

Disadvantages for the client, include Design Risk. This remains with the client, and he/she is
responsible and liable for Design. Therefore, any design clashes, defects, missing items and
errors will be paid for and absorbed by the client.

Another disadvantage is the split responsibility for defects. In the event of defects to the
building, there may be a disagreement between client and contractor as to who caused that
defect. For example, a leaking roof – is it caused by poor design (Client’s responsibility) or is
it caused by poor workmanship (Main Contractor’s responsibility).

Long lead in periods can also be a disadvantage for this form of procurement, as the project
will not go out to tender until the design, specification and bills of quantities are completed.
Depending upon the size and complexity of the project, this could be a considerable period
of time. Therefore, it is important to weigh up both the pros and cons when selecting
traditional procurement
 Contracts and Commercial Practice – Lecture 4 transcript

Slide 15 Let’s now consider design and build procurement.

Design and Build procurement acts as a one stop shop, whereby, the Client employs a
Contractor to design the works and to build the works. The contractor is responsible for
preparing the drawings and specifications, the contractor is responsible for workmanship,
and therefore the contractor is responsible for any defects, whether they be design defects
or workmanship.

Design and Build takes a lot of risk away from the client and transfers these risks to the
Contractor. Whilst Design and Build is a good way for the client to transfer risk to the
Contractor, it is not a suitable procurement route for all types of projects.

Slide 16 Design and Build is typically suitable for functional buildings, these include:

 Warehouses, where function of the building (storage of goods) is more important

than aesthetics (the design and look of the building).
 New Build Flats / Houses – Design and Build is commonly used by Housing
Associations for new build projects. Again, the purpose and function (e.g. affordable
home / dwelling) is the key driver for the client.
 Buildings that are simple in nature, (e.g. workshop, industrial unit, retail outlet).
These buildings are about space and flexibility, they are simple to construct and well
suited to Design and Build.

Slide 17 Let’s consider the pros and cons of design and build procurement.

Slide 18 Advantages of Design and Build include:

1. It’s a one stop shop for client. The client does not need to employ several design
consultants, a Quantity Surveyor and a Contractor.
2. There is cost certainty. Often Design and Build projects are let on a lump sum basis
and this gives piece of mind the client with regards to potential risks of increasing
costs.
3. There is a Contractor is responsible for design. As the Contractor, has designed and
 Contracts and Commercial Practice – Lecture 4 transcript

built the project, he is fully responsible for any resulting defects, whether they be in
design or workmanship.

There is a Contractor is responsible for construction. Any issues or defects relating to

materials and workmanship lie clearly at the door of the contractor. He is responsible for
liability and risk relating to these issues.

Slide 18 However, from the client’s point of view it is difficult to compare tenders from contractors if
an adequate pricing document is not included with the tender documents. The Client has
little control over design unless it is stated in the employers’ requirements (ER’s) as there
needs to be compliance with the Contractors Proposals (CP’s). In addition, there may be
difficulty when valuing changes due to the reasons for the change and type of work needed
to meet the specifications. Thus, as with the traditional form of procurement, it is important
to weigh up both advantages and disadvantages when selecting design and build
procurement.

Slide 19 Now we will consider the process of management contracting.

Within this form of procurement, the Management Contractor is not employed for the
purposes of undertaking any of the works, but solely for managing the process. In effect,
management contracting is a procurement method consisting of 100% subcontracting.

This form of procurement sees the client appoint the Design Team. The client also appoints
a Management Contractor who is responsible for providing management resources to the
project. These include: -Project Managers, Site Managers, Services Managers, Cost
Managers etc. The employer/client pays whatever the management contractor spends, plus
an amount for the management fee.

The Management Contractor employs “works contractors” who carry out the construction
work on site. Also “suppliers” are employed by the Management Contractor to provide
materials and equipment to the site.
 Contracts and Commercial Practice – Lecture 4 transcript

Slide 20 This method of procurement is suitable in the following circumstances:

• Large projects

• Complex projects

• Projects where there is a strong possibility of changes

• Projects where early completion is required - why would the design and build
method be suitable here?
Slide 21 Construction Management is similar to Management Contracting, although one of the key
differences is that with Construction Management, the Employer/Client enters into direct
contracts with the Construction Manager plus all the trade contractors

Slide 22 This form of procurement is suitable for:

 Employers experienced in construction

 Complex projects
 Where the Employer requires an early start on site

Slide 23 We will now consider both the advantages and disadvantages of management contracting
procurement. The advantages are the Client is fully in control of the project. There is early
involvement from Contractor but the Client has control over design. There are also clear
lines of responsibility.

Slide 23 Can you think of any disadvantages of management contracting procurement?

Slide 23 Some disadvantages that you may have thought of are:

Cost certainty is often unknown, the risk of delays lie with client and the cost risks lie with
client. Finally, the Client often requires high levels of experience.

Slide 24 In addition to these forms of procurement, there are a few other as follows:

Measured Term Contracts

Measured Term Contracts are commonly used for repetitive works, often maintenance.
There is typically a time period for which the contract is awarded for the project, possibly,
Contracts and Commercial Practice – Lecture 4 transcript

say 3 years.

During that period the Contractor is responsible for carrying out works as instructed by the
client. The client authorises the tasks on Works orders or instructions, the contractor then
carries out these works and is paid for them based upon a Schedule of Rates.

This type of procurement is often used by Local Authorities and Housing Associations when
carrying out maintenance work for housing stock.

Partnering

Partnering (sometimes referred to as alliancing) is designed to encourage collaborative

working between parties, to encourage enhanced communication, along with trust and
respect between the parties to the contract. It came to prominence following a report by Sir
Michael Latham called ‘Constructing the Team’, and which can be found online.

It aims to build long term relationships in which disputes are avoided, teamwork is
maximised and a spirit of cooperation is fostered.

Typically, clients select their partners based upon competitive bids, although usually a
robust pre-selection process is undertaken to ensure those bidders will be suitable for the
partnership agreement.

Partnering is often carried out by clients who carry out extensive building works, perhaps
large supermarket chains or large commercial landlords. Advantages include trust and
collaboration between the parties.

PFI (Private Finance Initiative)

This form of procurement is regularly used by public bodies and is very common in the
construction of new schools. How it works is, a client perhaps a local authority, procures the
design, build and maintenance of a building from a contractor.

The client agrees to use the new building for a period of time and in doing so leases the
facilities from the contractor. The contractor is responsible for the maintenance of the
building for the agreed period of the agreement (typically 25 years). At the end of that
period, the building ownership is transferred to the client.
 Contracts and Commercial Practice – Lecture 4 transcript

Slide 25 In this next section we will consider the various tendering methods.

Slide 26 There are a number of options with tendering. The options are single stage tendering, two
stage tendering and negotiated tendering. Choices will depend on design risk and how
experienced a client and contractor are at working together.

Slide 27 In the first instance, with single stage tendering, pre-selected contractors are invited to
tender for the construction works. If there is a public body involved, they often have supply
chains and stringent qualification procedures which will be dependent on the global region
you work in. The contractor is then provided with a pricing document (Bill of Quantities,
Schedule of Works, etc and this can be electronic or on paper).The Contractor then prices
and returns that document to the client. The client typically employs a Quantity Surveyor to
analyse the tenders and prepare a report on the most suitable contractor for the project
based not just on cost but also experience.

Slide 28 With regards to two-stage tendering, this form of tendering typically consists of a contractor
pricing Prelims and/or Enabling Works only (Stage One). The successful tenderer is then
invited to carry out those works, whilst the design for the main works is being finalised.
Typically, the contractor will also become involved in the finalising of the design of the main
works.

The contractor is then invited to tender for (stage Two) or he may be invited to negotiate
the second stage works, depending upon the structure of the content and requirements of
the contract. This method can prove to be a big advantage for the contractor, as his
involvement in Stage One, usually gives him a deeper insight into the project than other
tenderers.
 Contracts and Commercial Practice – Lecture 4 transcript

Slide 29 Negotiated tendering is suitable and often used where client and contractor have a good
working relationship and have worked with each other before. A single contractor is invited
to price the works and the contract sum then negotiated before the works commence on
site. This method is suitable when the contractor and client have a really good working
relationship having worked with each other many times before. Typically, the contractor is
invited to price the works and then the contract sum will be negotiated by the two parties.
It can give the client confidence of working with someone they know, which in turn may
make for a shorter tendering duration and reduced costs. Contractors are also involved
early.

This is not common in public procurement, as it does not generally produce best value for
money for the client due to a lack of competitive tendering. In addition, on public projects,
or projects that include a publicly-funded element it may be necessary to advertise
contracts. In the UK, this is a requirement of the Public Contracts Regulations which is
intended to open up public procurement for the EU (see OJEU for more information).
However, regular clients in the private sector commonly employ this method.

In your region, how is tendering generally approached? Can you think of the advantages
and disadvantages of the approach?

Slide 30 Now we are going to consider the topic of subcontracting.

Slide 31 Sub-contracting is very common in the UK construction sector. There are various reasons for
its popularity. These include:

 Specialisms in trades (e.g. Plastering, Piling, Carpentry)

 Overheads reduced – contractors do not need to administer resources required for
trade works
 Labour costs reduced – contractors do not need to employ staff which may not be
fully engaged in the works, this saves on costs when staff are not productive
 Plant costs reduced – no need to maintain, store and service trade related plant, as
usually provided by the subcontractor
 Transfer of risk – Quality - Subcontractor responsible for workmanship
 Contracts and Commercial Practice – Lecture 4 transcript

Slide 32 What is a subcontract? - Often, a main service provider outsources to other

persons/companies specific portions of the work that the main service provider agreed to
provide under a main contract. The agreement between the main contractor and the
persons/companies to which it is outsourcing is called a Subcontract and the process is
known as subcontracting.

Why subcontract? - Main contractors generally subcontract because they require additional
resources for a big job or require specialist expertise.

Slide 33 There are some things to bear in mind when you do sub-contract.

1. Make sure that subcontracting is permissible under the main contract - Sometimes
the main contract will prohibit subcontracting or require notice and approval to do
so. Check those provisions before entering into a subcontract. If the contract is
silent on the permissibility of subcontracting, generally subcontracting is deemed
allowed. However, be mindful of the particular obligations on you, the main
contractor. If they are of a personal nature or it can be shown that the main
contractor was chosen for specific competency or qualifications, then
subcontracting is unlikely to be allowed.
2. Mirror the terms of the main contract - In order to ensure that the main contractor
does not violate the terms of the main contract and that there are no gaps in
performance and deliverables, it is imperative that the subcontracting agreement
mirrors the terms of the main contract. This is especially true for time frames and
liability.

For example, if the main contract requires a deliverable within 30 days, you must ensure
that the subcontract timeline is the same or even shorter to allow for review. The same is
true for liability – if the main contractor can be liable for a certain amount of damages then
the subcontractor should have the same thresholds and caps.

Slide 34 Get indemnified by the subcontractor - The main contractor remains responsible for
performance under the main contract. So, if the subcontractor fails to perform or performs
poorly, the main contractor remains liable to the other party to the main contract for that.

Therefore, it is very important for the main contractor to be indemnified by the

 Contracts and Commercial Practice – Lecture 4 transcript

subcontractor for such failures. This way, the main contractor can protect its interests with
regard to any liability it will have under the main contract in such instances. There should be
a complementary requirement of adequate insurance to cover any payouts on the
indemnity.

Slide 35 Now we are going to consider how consultants are appointed.

Slide 36 Before selecting consultants a client should :

 Ensure they are competent and they can do this by checking qualifications
 Ensure they are insured by checking they have Professional Indemnity insurance for
example. This is important in case of design risk
 Check their experience for example previous projects, previous clients
 References are important here in relation to previous experience
 Are they members of Professional bodies / regulated (CIOB, RIBA, RICS, etc.)

It is important to check this as there is a recourse in case of a complaint.

Slide 37 Before appointing consultants the client should:

 Clarify the Consultant’s brief

 What services will they provide
 What services won’t they provide
 What will they do
 When will they do it
 When/how will they be paid
 Use a formal appointment document ( CIOB, RIBA , RICS )
 It is important there is clarity in case of dispute on either side.

Slide 38 Now we are going to finish with a look at the case study that you can attempt before moving
on to lecture 5.

Please attempt your response and post it on course pages for peer review. Good luck!
 Contracts and Commercial Practice – Lecture 4 transcript

S Well done you have made it to the end we have covered and you have learnt the following:

1. You have learnt to understand what is Procurement and procurement route

considerations a client needs to consider

2. You have learnt to understand the most common Procurement Methods, the traditional
form of procurement process, traditional procurement suitability, the pros and cons of
traditional procurement, design and build process, design and build suitability, the pros and
cons of design and build, management contracting process, management contracting
suitability, construction management process, construction management suitability, the
pros and cons of management procurement.

3. You have learnt to understand the most common Tendering Methods in construction,
single stage tendering, two stage tendering, negotiated tendering and to summarise the
different tendering methods.

4. You have learnt to be able to form opinions with regards to why and how contractors use
Sub contractors.

5. You have learnt to understand how the Appointment of Consultants process works.

Slide 37 That’s concludes this procurement presentation next we will the management of
commercial risks.