RICS-SBE/XX/XX/S006/R02

Revised on: 24-05-2019

Procurement and Tendering

(Introduction; Procurement Routes; PPP)

Authored By:
Triveni Prasad Nanda
Assistant Professor
What is procurement?

Procurement is the acquisition of goods, services or works

from an outside external source. It is favourable that the
goods, services or works are appropriate and that they are
procured at the best possible cost to meet the needs of the
purchaser in terms of quality and quantity, time, and location.
Corporations and public bodies often define processes
intended to promote fair and open competition for their
business while minimizing exposure to fraud and collusion.
Considerations of procurement

► Speed
► Cost

► Quality

► Specific Project Constraints

► Risk

► Asset Ownership

► Financing
Procurement steps

► Identification of Need
► Supplier Identification

► Supplier Communication

► Negotiation

► Supplier Liaison

► Logistics Management

► Tender notification
Framework of Construction Procurement Process

1. Processes during pre-construction stage (pre-contract)

2. Processes during construction stage (post contract)
Procurement process

Purchase Order
► A purchase order is a binding
contract between the construction
organization and the supplying
organization. It serves as an offer
to the supplying organization that
is accepted once the supplier signs
the actual purchase order.
 Procurement Plan

► The sourcing plan for an awarded contract must be explicit and

complete. Several key elements must be considered for the materials,
equipment, and subcontracting sourcing, and an equipment plan
should be included.
Receipt of engineering drawings and contract
specifications

Generate list of prequalified subcontractors and

approved suppliers

1. Prepare Subcontractor package. 2. Establish Contract

terms and conditions. 3. Prepare supplier bid package
Procurement Plan

Schedule pre bid meeting with subcontractors

and suppliers

Receive and evaluate bid package

Award contract and negotiate

Issue contract or purchase contract order

STRATEGY OF PROCUREMENT

FACTORS INFLUENCING SELECTION OF PROCUREMENT STRATEGY

• Key objectives and constraints of the project

• Key risks that may arise during the delivery of the project and how those risks might best be dealt
with
• Level of complexity of the project. In order to meet the client’s objective of achieving value for
money
• Factors that drive value for money
• Procurement route/structure of contract
• Key objectives and constraints of the project
• Key risks that may arise during the delivery of the project and how those risks might best be dealt
with
• Level of complexity of the project. In order to meet the client’s objective of achieving value for
money
• Factors that drive value for money
• Procurement route/structure of contract
STRATEGY OF PROCUREMENT

FACTORS INFLUENCING SELECTION OF PROCUREMENT STRATEGY

• Identify relative importance of client’s primary objectives & his attitude towards associated risk.
Understanding:
• How much he is capable and willing to spend?
• What quality he is seeking?
• What time he wants the project to be completed?

FACTORS UNDERPINING CLIENTS’ BIZ AND FINANCIAL STRUCTURE:

• Funding-total funds and readiness as per contractual payment obligations
• Time-to complete. Also milestones
• Performance-functional perf of final product incl standards of quality
• Capital versus operational costs-balance between capital and running costs
• Risk-likely impact of risk on client organization associated with time, cost and function.
• Type of project. Green field versus brownfield?
Types of procurement in Construction Industry

There are four main procurement options, they are as follows:

► Traditional method

► Design and Build method

► Management Contracting method

► Construction Management

Public-Private Partnership (PPP) method.

Traditional Method of Procurement

► This method is as old as the construction industry. The major feature is that
the design process is separate from construction.
► Requires full documentation before the contractor can be invited to tender

for the work.

► In summary, traditional method simply involves the steps-

► design, bid and build.

Features of the Traditional System

► The traditional system is characterized by the following:

► Contractor is appointed by competitive tendering

► Designs should be fully prepared ahead of time before tendering

procedure and actual construction can begin.

► The client has control over design. There is no design responsibility on
the contractor.
► The duration of the project tends to be very long because of the separate

sequential process of design and construction.

► The construction cost is well known ahead of time and there may be

need for adjustment as provided for in the contract.

► The client appoints a professional consultant to administer the contract

on his behalf and to advice on aspects associated with design, progress

and stage payment which must be paid by the client.
► Although the traditional procurement method is very simple to understand
by all classes of client, the major problem it has, is that the contract period
tends to be more prolonged since the design process is separate and
determines the commencement of the actual construction.
► Again the early and vital input of the Builder is not tapped; hence, the

product is likely to be deficient in buildability and maintainability

aspects.
Design and Build

► In this method, the contractor is responsible for undertaking both the

design and construction of the work in return for a lump sum price.
► To arrive at a choice of contractor, contractors are required to develop a

design (from an initial concept prepared by the consultant appointed to

advice the client) to a certain level, prepare a tender figure and submit
the whole package which is termed a proposal to be evaluated to meet
the satisfaction of the client. A team of consultants will be needed to
assess each contractor’s proposal. Evaluation of tenders in this case is
usually difficult because the contractors are not working with one design.
Tenderers should be informed of the criteria to be used, and whether
price is likely to be a prime factor.
Features of Design and Build

► Features of this method include:

► The contractor is often appointed by two-stage tendering i.e. the competitive

element and quality is preserved.

► The client can introduce changes to the design at the design stage, but once
the contract has been awarded to the contractor, he has no direct control over
the development of the design detail by the contractor.
► A major feature of this procurement method is that design and construction may
proceed in parallel, and so the project duration will be shortened.
► This procurement method makes no room for appointment of an independent
contract administrator. The client works directly with the contractor, or he may
appoint an agent to advice him, or act on his behalf.
► Valuation and payment matters are solely in the hands of the contractor.

► It is an obligation to complete the project within the contract period, however,

the client may accept a later date to account for delays resulting from reasons
listed in the contract.
► The Design-Build approach gives the client a single point of contact.
However, the client commits to the cost of construction, as well as the
cost of design, much earlier than with the traditional approach. Whilst risk
is shifted to the contractor, it is important that design liability insurance is
maintained to cover that risk. Changes made by the client during design
can be expensive, because they affect the whole of the Design-Build
contract, rather than just the design team cost.
► Secondly, although the contract period is shortened, the process of

assessing the tenders, and selecting a contractor can be difficult due to the
fact that all the tenderers are working with different designs.
Pros of Design and Build procurement

► Client must deal with one firm and reduces the need to commit resources
and time to contracting designers and contractors separately
► Price certainty is obtained before construction commences as client‘s

requirements are specific, and changes are seldom entertained

► Use of a guaranteed maximum price with a savings option split can
stimulate innovation and reduce time and cost
► Overlap of design and construction activities can reduce project time; and

► Improved constructability due to contractor’s input into the design

Cons of Design and Build procurement

► Difficulties can be experienced by a

► Client changes to project scope can be expensive

► Difficulty in comparing bids since each design will be different, project

programme will vary between bidders, and prices for the project will
be different for each design
► Client is required to commit to a concept design at an early stage and often
before the detailed designs are complete; and
► Design liability is limited to the standard contracts that are available
ANOTHER SPECIALIZED PROCUREMENT TYPE

Novated Design Contract

► Used in mostly international projects.​

► Project company initially hires a designer to design the facility.​

► Later, engagement of a construction contractor-novates the design contract to

contractor (making design contractor a nominated contractor).​

► Thus converts the contract with construction contractor as an EPC type of contract.​

► Used when project company wants the design done quickly due time constraints and

tight control over initial design.​

► Pros:​

► Like EPC, but better initial design control with project client.​

► Also choice of designer with client.​

► Better for fast track projects.​

► Cons:

► Some countries (Chinese) have restrictions on nominated subcontracting.​

► If designer sub contracted part of design work-feasibility etc.-Sub contractors become

part of construction contractor.​

Management Contracting

► If project company cannot have resources to manage work packages

contractors/sub contractors.
► The owner holds multiple contracts with the designer/consultants who are

paid fees (based on qualifications)

► Under the management contractor who is paid fees, the construction
labor/subcontractors are deployed as per their requirement/schedule •often
manages all the s/contracts making this delivery very similar to the design-
bid-build delivery method, but instead of a single lump sum contract there
are multiple subcontracts.
► Client reimburses to the management contractor price paid to sub

contractors
Management Contracting: Pros and Cons

► Pros
► Management team is involved at early stage

► Design can be influenced (buildability)

► Claims can be solved, delays reduced

► Save time –series of tenders, work packages

► Flexibility in design to suit the client to suit the budget

► Cons

► More risk in design –higher requirement in design

► No assured final cost at the start of construction

► Management contractor controls sub contractors instead of client unlike

packages contract
Construction Manager

► Client does not allocate risk and responsibility to single main contractor
► Client employs design team with construction manager (advisor)-fee based

professional to programme, manage and coordinate design and

construction activities - thus facilitating collaboration
► Under the client actual construction work carried out by trade contractors-
often specialists-direct contract with client through work packages/trades as
and when they are required.
► Enables design process to overlap with constr.

► Usually adopted when primary objective is relative speed to completion.

► Little cost certainty-because trade contractors unknown till work is let out.

► Can be used for large complex projects where high deg of design

innovation. Client should have adequate risk management ability

► Pros ► Budgeting depends heavily on design
► Relative time saving potential for overall team estimates and duration
project time due overlapping design and ► Pro-active client required to operate this

construction procedures strategy and a good quality brief needed

► Trade contractors and construction from client
manager can contribute to design and ► Skillful and committed team selection by

Project planning client needed

► Roles, risks and relationships for all ► Proficient and committed construction

participants clear manager prerequisite

► Client has direct contracts with trade ► Good control reqd by client over design

contractors and pays them directly- team programme & delivery-ensuring

reduced prices and better cash flows. timely procurement of work packages and
► Cons avoid delay at site
► No price and time certainty until last trade ► Coordination of various sub contractors

package let out directly under client could lead to disputes

Public-Private Partnerships

► Used in public projects (using tax payer money)

► Governments neither possess expertise nor the requisite funds to make the

innumerable infrastructure projects needed for a country’s sustenance and

progress.
► Private companies are roped in invest in projects – build them – recover
their costs – earn profits and exit from the projects
► Private partners also called – ‘Concessionaires’

► PPP agreements called – Concession Agreements

► Validity period of Concession Agreements called – Concession Period

► Several modes of PPP exist, some of the most common are:

► BOT (Build-Operate-Transfer)
► BOOT (Build-Own-Operate-Transfer)

► DBT (Design-Build-Transfer)

► DBFOT (Design-Build-Finance-Own-Transfer)

► Hybrid-Annuity Model (mostly used for highway construction in India)

► Choice of PPP Model depends on the risk exposure and financing

capabilities of the public partner
► Due to severe cash crunch and delays in cost recovery, hybrid-annuity

models are being taken up more frequently now, where the public partner
pays a certain percentage of the total project cost up-front (in equal annual
instalments), thus easing the cash flow of the private partner.
 THANK YOU

Thanks to Prof. Avinash Tandon, Ms. Deepti Shitoley and Brig. Vinod Nakra for their help.