Procurement methods in Construction/ types of contracts

What is procurement means to the construction industry?

Meaning of Procurement in everyday language is the action of acquiring or obtaining process of any kind of service or commodity. When its come to the construction industry acquiring or obtaining strategy is a time-consuming and costly process. Therefor different type of contract processes are there as procurement methods in the construction industry. So basically, all these types of contracts are introduced as procurement methods in construction.

In summary,

Procurement methods in construction industry = type of contract systems used for the execution of projects.

There are several categories of procurement methods in the construction industry. A proper type of contract (procurement method) will choose based on the client’s requirement at the planning stage of the project. 

So what is the process of choosing a proper procurement method or contract type?

Whenever, A client wants to construct, renovate or develop a property, he or she (Client) appointing a professional representative to consult the work. In industry, This team is introducing as the project management team. Mostly, This team may contain an architect, quantity surveyor & Engineer.

First of all, this team has to understand the client’s requirements thoroughly before planing the project.

Mainly they should focus on below requirements

• the full intention of the development
• Project requirement
• Expected quality
• And appropriate time frame (to complete the project)
• Budget (building cost & running cost)

Based on the above requirements and intentions, the project management team has to choose and finalise the procurement methods (a type of contract) to execute the project.

Furthermore, this procurement method should help to reach clients main expectations, such as not increasing project cost, build within the expected construction time(and many more). Before moving on to procurement methods in construction, we should discuss the factors to be considered when deciding a procurement method or contract type.

What are the factors deciding, what procurement method or contract type to follow,

Below are the key factors (to choose suitable procurement method for a construction project),

• Speed or time
• Budget
• Expected quality
• Specific project constraints
• Risk
• Asset ownership
• Financing

Below, we have described factors, and requirements (with examples) should consider before finalising procurement method.

• Speed or time

Example- The ABC Fashion retail company has taken a building for its new outlet shop. They have signed an agreement with the building owner, and they want to do particular modification to the building before commencing the operations. However, time is a critical thing here because they already started the paying rental for building. Still, the building does not make any revenue at the period of modification. in these kinds of situations, the client should follow a fast track procurement method to complete works immediately. 

• Budget

Budget or cost is a primary concern for all the clients. As an example- A person wants to build a house. He or she has carefully made some savings and wants to build the house within the money have, and do not want to exceed the budget. In this kind of situations, the procurement method selected should ensure there will no any budget exceeding.

• Expected quality

In some projects, the client wants to fulfil the maximum expected quality. As an example- A client seeks to build a hotel. Furthermore, they want to build it with high-end finishes. The client has checked and selected all finishes, and they do not want to deviate any of it. In these kinds of situations, the procurement root chosen should ensure the client’s aspect of quality.

• Specific project constraints

Project requirements and restraints can make significant role when deciding the procurement root. When the government become a client restriction can come in. So procurement root should be very transparent for government projects. 

• Risk

Risks involved in the projects can affect certain procurement roots. As an example- Inexperienced person wants to build a house. So he or she can face significant difficulties to understand the nature of the construction industry. Contractors may take advantage of the situation. So he or she can choose a procurement method reducing these type of risks. 

• Asset ownership

As we discussed in the budget factor asset ownership can affect some procurement roots. When a client does not have the ownership of the property and still wants to develop the property, a good procurement root should select according to the situation. 

• Financing

As an example- A project is funded by a bank. Bank will assess the project progress and cashflow from time to time (cause they want to assure those fundings allocated by the bank utterly spent for the construction of the project). So they might be forced client to use transparent procurement root. 

---

What are the two types of procurement methods/ contracts in the construction industry?

Mainly all procurement methods in construction can divide into two main categories

• Traditional methods of procurement/ contracts
• Alternative methods of procurements/ contracts

Traditional procurement methods in construction

The First approach of the traditional procurement methods(types of contracts) is the employer himself is appointing a project management team for work. So the contractor’s only task in the traditional procurement will be the execution of the project (and handling the subcontractors & suppliers). Most of the projects which are going to follow the traditional procurement method will use the competitive tendering process for selecting a suitable contractor for carrying out the works. We can identify three types of procurement in the industry under traditional methods,

Lump-sum contracts

In lump sum Contracts or fixed-price contracts, the contractor is evaluating the value of work as per the documents available. Mainly these documents can be specifications and the drawings. In pre-tender stage Contractor evaluates the cost to execute the project (based on the above documents such as drawings, specifications, schedules, tender instruction and the clarification received for the raised queries). Read more or check below video,

Re- measurable contracts

Re-measurable/remeasurement contract is the most popular type of contracts used in the earlier construction industry. Nevertheless, still, large construction organisations are using this procurement method to appoint subcontractors for works such as painting, plastering and many more. In this method, payments will be made based on the actual work done (by the client). Compare to other procurement methods, the client’s risk is high in this method (and the contractor’s risk is minimal). Read more

Cost reimbursement/ Cost plus

The final value of the project will be agreed upon based on these documents. Furthermore, the client will pay the contractor’s actual cost plus an incentive or profit as agreed. This procurement root(Cost reimbursement/ Cost plus) mainly uses for the projects, which clients want to finish with the expected quality. Because the cost is already accepted, and the contractor does not wish to propose cheap alternative materials to maximise his profit. Read more or check the below video,

Video Explanation- by YouiLearn about traditional types of contracts(procurement roots)

For better understanding Check this Video by- Chartered QS Manoj Herath
MBA (Const. & Real Est., PG Dip. in PM, MRICS, MAIQS, CQS, BSc. (Hons.) QS

Subscribe to his youtube channel- YouiLearn

This video examine the traditional procurement methods in construction (types of contracts) in detail and discuss the differences between sequential and accelerated methods of the same

Alternative procurement methods in construction

Alternative methods(types of contracts) are there to reduce the time involving to prepare complete specifications and tender documents. These methods allow commencing to work quickly. Alternative approaches are allowing the contractor to involve in the design of the project, which is more beneficial to the employer. (Contractor can propose value engineering options & new construction methods). Below mentioned are the various types of alternative procurement methods that use in the construction industry.

Design & build

In design and build procurement root, the design will develop by the contractor by themself (as per client,s requirements). Once the contractor makes the design, the client will revive the design and ask the contractor to make the necessary adjustment as per their aspects. Finally, the cost will agree on the construction and execution of the project. The main advantage of design and build procurement root is that the client should not want to appoint a design consultant for the project.

Management Contracting

This procurement root (Management Contracting) is mainly using in complex projects. There will be few management contractors appointed according to the scale of the project, and the project will divide into several packages. Moreover, all the subcontractors will be managed and supervised by management contractors. So the client will only communicate with the management contractors, and the client’s risk will be transferred to management contractors.