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1st August 2021
PROCUREMENT MARKETING SERIES – PROCUREMENT AND CHOICE OF METHODS
PROCUREMENT MARKETING SERIES  – PROCUREMENT AND CHOICE OF METHODS

Choice of Method of Procurement



Although the technical standards which affect the quality, function, fitness for purpose, and safety or environmental protection of a construction project may remain unaltered, the method of procurement of the works will have a significant effect on the construction cost and time, and the quality of the finished project. Procurement method is thus inextricably linked to other sources of risk.



One of the principal aspects of risk management in construction is the appropriateness or otherwise of the choice of construction contract. The specification, the type of project and the intended relationship between the parties should influence this choice, but perhaps the most important aspect of procurement is the degree to which the Employer / Owner can manage its own risks under the chosen construction contract.



Risk Allocation [1]



Given that the procurement method is inextricably linked to other sources of risk, before considering in detail the specific forms of procurement above it is useful to review some general principles of risk allocation and a categorisation of the risks that will need to be managed by the form of procurement eventually selected.



There is nothing intrinsically bad in assuming risk. The challenge is in identifying and quantifying the risk retained and identifying a method of managing it. It is also important to recognise that a risk which is transferred under some circumstances may be retained under others.



There are usually a large number of parties involved in a building or civil engineering project with differing responsibilities: architects, quantity surveyors, civil structural engineers, mechanical and electrical engineers, project managers, main contractors, subcontractors and suppliers. Their different responsibilities inevitably lead to different priorities.



It is in the nature of contracting that the contracting parties will have conflicting interests. Contractors by their nature tend to want to be paid as much as possible for as little risk as possible. Conversely, developers generally want to pay as little as possible and to transfer as much risk as possible.



Within limits, who bears what risk and at what cost is a matter of commercial negotiation and the outcome often depends upon the negotiating strength of the parties. However, even in terms of self-interest, this approach can be overly simplistic. If all the risk is transferred to contractor, and it has priced for those risks, then, if those risks do not materialise, the owner will probably have paid more than was necessary.



How risks are distributed will depend not only upon the method of procurement but also the form of agreement under which the works are procured and the duration of the contract under which the risk is assumed. For example, a risk of an adverse economic shift in the demand for materials may be manageable over three months, but over a period of a few years that risk may be of an entirely different character.



Some risks may result from several factors and be controllable by more than one party. Other risks, in particular financial and political, may not be susceptible to control at all. These latter types of risks are often insurable risks. The management of that risk is borne by the insurer as opposed to contractor or owner and the level of risk is reflected in the insurance premium, which may change over time if the risk changes. However, taken together, the following principles of risk apportionment are generally assumed to be efficient and fair in the industry at the moment:



Risks should be allocated to the party best able to control them, i.e. the party which is best able to forestall the risk or to minimise its effects if it occurs.



Risks should not be allocated to a party which is unable to sustain the consequences if the risk materialises.



Risk allocation should encourage risk management by the party best able to manage the risk. For example, under a management contract the management contractor should shoulder the risk of delay caused by works contractors.



The party that does not assume primary responsibility for risk should nevertheless be motivated to manage the consequence of the risk if it materialises.



7. The standard forms of building contract lay down specific rules for distinguishing the risks assigned by the parties. Those risks stated to be in the control of the owner, and those risks which carry with them the possibility of contractor recovering its costs for disruption or delay.



Risk Categories and Allocation




  • Legal risk

  • Dispute risk

  • Design risk

  • Buildability risk

  • Biddability risk

  • Construction risk

  • Financial risk

  • Political risk

  • Insurable risk



Legal Risk



Legal risks can arise in two ways. On the one hand there is the possibility of a change in the law (or a change in the way the law is interpreted) after contract, which affects the method of building, the acquisition of plant and materials, or the way labour is employed. Changes in the laws affecting the acquisition of materials, plant and labour by, for example, import and export regulations, may come into force during the currency of a contract and can in some cases have significant effects on time and on cost.



The other form of legal risks arises out of a change in the way the courts interpret contracts, legislation and other legal obligations. Unfortunately, however carefully the contractual provisions are drafted, it cannot always be guaranteed that the interpretation of the respective duties of the parties, as set out in the contract agreement, is beyond doubt.



Dispute Risk



Dispute risk is the risk both parties carry that the contract will end up in dispute and that one or the other will suffer an unfavourable outcome. Vast sums of money are spent daily, in building and civil engineering disputes, evaluating before a court, arbitrator or adjudicator the effect of fine distinctions between written words, two-dimensional drawings and three-dimensional site conditions. It is significant that, in the event of a dispute going to trial, because of the difficulties of recovering more than 60% of the costs (and in adjudication, no costs at all) even the winning party could be out of pocket by a significant sum.



Those who recognise the inevitability of uncertainty are perfectly at ease with the proposition that claims are a natural part of the contractual mechanism. But all agree that the goal must be to reduce their frequency, to make their settlement less contentious and to shorten the dispute settlement period.



In the general run of things contractors are optimists and, being so inclined, they often proceed on the assumption that their project will be completed on time, under budget, and without dispute, as if the mere mention of the possibility of delay to completion is viewed as defeatist or even evidence of lack of moral fibre.



Although the parties to a building contract may start off with the best intentions, they all walk a tightrope in trying to get the work completed in the agreed time and as cheaply as possible whilst ensuring that contractor and its subcontractors make a profit.



Design Risk



Design risks arise as a result of the possibility of error in the drawings and in specifications in accordance with which the works are to be constructed.



There are two key concepts that affect the design risk. They are the adoption of the duty to use reasonable skill and care or, on the other hand, warranting that the end product will be fit for purpose. Reasonable skill and care is the duty of care imposed on a professional consultant who provides advice or a service. It is effectively a matter for professional judgment whether in providing that advice or service the consultant has exercised all the skill and care that can reasonably be expected. Only if professional negligence can be proven is the consultant liable for the failure of the end product. If the product is proved unfit for the intended and mutually understood purpose for which it was supplied, then, irrespective of whether the provider of the product has been negligent or not, there will be liability for failure of that product.



Commonly, the cause of problems with professional services includes:




  • misinterpretation of the design;

  • incomplete design information;

  • misunderstanding of the responsibilities of the parties;

  • unclear performance criteria; and

  • interference and change during the design and production information stage.



Increase in design risk can come about in several ways. Increase in detail is usually a direct correlate. The higher the degree of detail design usually employed on complex buildings (as opposed to heavy civil engineering works) generally brings with it a higher risk of failure fully to coordinate the detail and consequential change.



Design risk is also increased whenever work is started before the designer has had a sufficient opportunity to fully ascertain his client’s needs. Preparing a brief is a very specialised task to be undertaken by an experienced person who can treat it with great care. The designer should try to gain a full insight into owners operations, and then give it the fullest possible picture of what is possible and what is not within the parameters of the designer’s brief. In the event that the owner fails to analyse its needs sufficiently, is unable to read drawings, or is unaware of what the designer intends to produce for it, the risk of change with consequent delay to progress and cost and disputes usually follows.



Buildability Risk



“Buildability” is the term given to the ease with which a project design can be turned into a physical reality. Good “Buildability” should make it easy for the contractor to plan the procurement of materials and the moving of the various trades on and off site, and to minimise the possibilities of disruption by external factors.



The designer can have a considerable influence on productivity by considering buildability from the start of its design work. Simplicity, repetition and ensuring that the work of each trade is as continuous and as independent as possible of the work of other trades, can all affect speed. Whenever there is a complicated interface between trades, delay and disruption tend to follow.



Biddability Risk



The risk of biddability is really the risk of misinterpreting what is required to be priced or, to put it another way, the risk of not being able to get to grips with the nature and extent of the work to be priced at the outset of the project. Although it is open to the criticism that it is something of a straitjacket, a contract sum based on a bill of quantities prepared under the rules of the Standard Method of Measurement is a very much more certain basis for price than contractors own quantities produced from a plan and specifications.



It is common experience in the construction industry that a price which expressly excludes anything not specifically mentioned will be different from a price which is deemed to include everything necessary. That is so even if the prices are based on identical plans.



Construction Risk



In the absence of provision for it, the owner cannot unilaterally impose a change of requirements on the contractor. On the other hand, although all the standard forms of building and civil engineering contract contain provision for change, there is an implied term that such a power to direct variations will not be abused to the extent that it changes the very subject-matter of the contract beyond the scope if what was contracted for.



Delays are frequently caused by changes in connection with the site, the need for which are discovered only after work has actually started on site. It would be foolish to suggest that even the most thorough ground investigation could overcome all risk of delay arising out of ground works, but often the difficulties are connected either with soil conditions or obstructions or with services which were either wrongly located on plans or not identified at all. A balance needs to be struck between the substantial cost of an exhaustive site survey and the risk of extra cost and delay arising from an inadequate one.



Financial Risk



An owner makes an investment decision. Whether it is a decision to commission an office building, a factory or a school building, the capital committed could instead be invested in stocks and shares or an interest-bearing bank account. The decision to invest in a building must therefore provide a return on risk that is competitive with the best that the financial markets can provide.



For the contractor the argument is not so straightforward, but it is equally valid. A contractor bidding for the relevant part of a building project is committing resources, labour and capital that have other potential uses. Money may have been borrowed or reserves used to bridge the shortfall between income and expenditure, while profit, if it is made, will arise at some time in the future. When the contractor is borrowing or committing tangible resources, such as labour, a comparison must be made between potential return on the project in contemplation and the potential return in the projects that could otherwise be undertaken.



Financial risks typically encompass adverse changes economic climate, or they can be money-related risks relevant to the specific contract, such as delays in payment or the owner's bankruptcy, liquidation or receivership. Reducing the risk of non-payment by the owner is one of the most important matters to be considered in the preparation of the contractual documents.



A contractor whose tender is well below the average of the body of tenders for a given project is likely either to have made a substantial mistake or to be trying to “buy” the work at little or no profit.



Inflation is a risk that is inherently beyond the control of both parties. Whether the risk is to be borne by contractor or owner in the terms of the contract is largely a question of timing, and the nature of the project in terms of duration and policy.



Political Risk



Political risks are brought about by changes at government level such as those affecting employment laws, and may involve sanctions regarding the use of particular products or methods of building.



Insurable Risk



All standard forms of building contract include a clause which requires either the contractor or the owner or both in their joint names to insure against disaster. In some contracts these are called “specified perils”, in others they may be called “excepted”, or “special risks”, or even “employer’s risks”. In the JCT family of contracts there is provision for the insurance to cover all risks by selection of an alternative to the clauses in the contract.



Scope of Work



The classic description of construction risk covers the elements of time, cost and quality and the conditions under which the construction work is planned to be performed, i.e., “the scope of work”



Ideally the contract clearly defines the scope and the contractor interprets it exactly as the owner, engineer or architect intended it; the contractor bases his bid on this mutual understanding; the job is completed to everyone’s satisfaction. Short of this ideal, however, misunderstanding and the failure to perform according to contract by either or both parties may develop.



[1] With acknowledgement to “Delay and Disruption in Construction Contracts” by Keith Pickavance.

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