TOPIC 3

PROCUREMENT METHODS
LECTURE OUTLINE

Define procurement

Categories & Function of procurement

Principles in selection of procurement contracts

Procurement methods

Traditional, cost reimbursement or cost plus, turnkey,

BOT & construction management as procurement
methods ( Define, advantages & disadvantages )
PROCUREMENT
Is as process acquiring goods,
services, or works from an external
source
Successful construction procurement should result in
a project delivered on time, to cost and to the desired
quality capable of performing the specific function.
 CATEGORIES OF PROCUREMENT

WORK SUPPLIES SERVICES

Works contracts include
construction and engineering
activities involving
infrastructure and structures
Supplies include the supply of
raw, intermediate or finished
goods and products for any
activity of users
Services include engagement
of manpower, expertise and
consultants in the areas of
feasibility studies, research,
designing, surveying,
management etc.
FUNCTIONS OF
PROCUREMENT
CONSTINUOUS SUPPLY STIMULATE ECONOMY
1 To ensure continuous supply of
materials and services to meet
3 To stimulate and encourage the
growth and development of local
the Government needs from the industries through the optimal
best and reliable sources usage of local resources and
materials;

BEST PRACTICE ALTERNATIVE SOURCE

2 To ensure efficient, effective and
ethical procurement practices to
4 To promote alternative and
multiple sourcing through
enable the Government to supplier/vendor development
achieve best value for money according to the aspirations and
without compromising on quality, vision of the Government.
delivery and other price and non-
price factors;
PRINCIPLES IN SELECTION OF PROCUREMENT CONTRACT

COST CONTROLLABLE COMPETITION

VARIATION
price level or cost certainty. To obtain the lowest price for the
Changes during progress
Covers the value for money, project
maintenance & operational
Cost

TIME RISK RESPONSIBILTY

Speed or certainty of How & what degree of Sole responsibility separate
completion date associated risk. management of consultant /
How it will be shared between contractors
client or other organization

QUALITY COMPLEXITY Identify key criteria ?

functionality and performance. Physical services, number of
Based on the condition of sub-con, level of technology
contract & technical uniqueness of project
specifications
 COMMON PROCUREMENT METHOD
TRADITIONAL GENERAL MANAGEMENT PACKAGE DEAL MISCELLANEOUS
CONTRACTING TYPE TYPE METHODS

PRIVATISATION

MANAGEMENT CONSTRUCTION BUILD, OPERATE

CONTRACTING MANAGEMENT TRANSFER (BOT)

FAST
TRACKING

DESIGN & ENGINEERING, DEVELOP &

TURNKEY CONSTRUCT PARTNERING
BUILD PROCUREMENT,
CONSTRUCTION &
COMISSIONING

PRIVATE FINANCE
INITIATIVE
COST PLUS
 COST PLUS
or Fixed Fee (Lump Sum)
5
COST • Based on the agreed estimated cost range
• an agreed fee (for profits & overhead)

REIMBURSEMENT .
PRIME COST
FIXED /
VARIABLE
FEE

A contract where the contractor is paid in full for

1 all actual cost of labour, materials and plant that
has incurred for the project plus FEE to cover his Advantages Disadvantages
profit & overheads.
• Contractor complete the work • Incorrect in estimate meaning
ASAP loss for the project
• Secure the fee because the • If major variation emerged
Prime cost + Fixed Fee / Variable Fee
2 Prime cost + percentage fee fee remain constant then the fee must be
renegotiated
Prime cost + Target Fee (Target Cost Contract) • Some form of
control/supervision necessary
to ensure the prime cost sum
Prime Cost charged by contractor is
3 = cost of materials + labour + machineries rational

Normally used for Complicated project, exact

4 barrier of cost is unknown by the time contract is
awarded, project need to be fast commencement
& completed early
.
 Target Fee
Percentage Fee
7 The targeted cost is agreed by contractor & client.
6 Contractor is paid actual labour cost, material, After completion the actual cost will be compared
plant, equipment & other cost incurred + an with the target cost resulting in the following result
agreed fee based on a fixed percentage on the PC • If the cost exceed the target then the penalty
sum will be imposed on the contractor based on the
total amount exceeded.
. PERCENTAGE • If the cost is not exceeding, then the contractor
PRIME COST
FEE is paid bonus based on the amount saved.

Advantages Advantages
.

• Work may start early once the
basis of contract is agreed
• If the contractor performance
is efficient then the client ‘s
payment should represent the
fair price
Disadvantages
• No indication to perform
efficiently because the %
agreed is fixed
• Client has no ideas about the
total cost
• Supervision / control need to
ensure the price charged by
contractor is rational.
• The contractor has initiative to
perform efficiently &
economically
• Client has benefit in term of
early project completion
Disadvantages
• The difficulties may emerged
on revised target cost due to
variation work
• Administration cost may
increase due to actual Prime
Cost of the work during
construction
PRIME COST TARGET FEE
 TURNKEY

The developer / contractor undertakes the whole

1 responsibility from design to completion so that the
building is available to the buyer in a ready-to-use Advantages
condition
• Contractor /client may benefit
is a type of project that is constructed so that it can their past experiences
2 be sold to any buyer as a completed product • Wider choice of design for
client to choose
• May reduce cost because
Contractor will be responsible for everything from only one organization to
3 securing of land, providing design, construction handle everything, time
team, manage, construct & handing over the saving (the main reason for
project client to choose this method)
The brief is prepared by the client (assisted by
4 professional)
Disadvantages
• Design & aesthetic factor may
be less considered compared
to construction & economic
factor
• Uneconomic use of resources
because too many
involvement of contractor in
design & costing
• Variation or may be very
costly
• drawing is not fully developed
(no detail drawing) when the
contract is signed.

Project title : designing, construction, completion &

5 commissioning of proposed…….
BUILT, OPERATE,
TRANSFER
(BOT)

A type of arrangement in which the private sector

1 builds an infrastructure project, operates it and
eventually transfers ownership of the project to the Advantages Disadvantages
government.
• Public sector can have • Hard the control the fees that
The proposal made by private company to fulfill various facilities increase during concession
2 the needs of public • Public sector can fulfill the period
need of nation without any • The design & aesthetic factor
cost may be less considered
Private company finance and complete the project • Private company have compared to construction &
3 in stipulated period. opportunity to develop and economic factor
gain profit • Difficult to secure the
proposed reliability of
construction cost
Having concession period to earn the construction
4 cost and profit.

End of concession period, transfer all assets to

5 government.
.
CONSTRUCTION 4
Apply where :
• There is the need for an early start to the
MANAGEMENT construction phase
• Design not complete; yet to start construction
• Needs of considering various construction
CONTRACT method for the project
• High complexity project; require high
technology skills
• Employer have insufficient management
A form of contractual arrangement whereby the resources
1 contractor is paid a fee to manage the building of
the project rather than a contract to build.

Management contractor involved from pre-contract

2 until post contract stage

Management contractor job:

3 • Planning & programming the project
• Advise on buildability of design
• Coordinates time, cost and quality control
• Provide site facilities for the works contractor
Advantages Disadvantages
• Speed up the work from • Employer bearing high
inception to completion contractual risk
• Benefits of contractor’s • Lack of certainty in price
expertise • Mostly expensive
• Better communication lines • Limited employer involvement
• Versatility in application