The procurement process in the construction industry is one of the first steps any project plan has to undertake in order to set it up for success.
When a new construction project is required by a client, the next step in turning the project into reality is determining the appropriate procurement method.
In order to maximize cost-efficiency, meet target timelines and increase the success of a construction project, the proper choice of procurement plays a paramount role in the overall strategy of a project.
What is Procurement in the Construction Industry
By broad definition, construction procurement encompasses all the activities undertaken by a client for the purpose of constructing or rehabilitating a building.
It is essentially the process of sourcing labor, equipment and purchasing materials required to complete a build. It also involves the management and oversight of all stakeholders involved in the fulfillment of procurement contracts. In the construction industry, procurement of goods and services are usually done via the bidding process.
Procurement of suppliers, contractors, materials, and equipment is one of the biggest influences on a project's budget, schedule, and success therefore it warrants careful scrutiny of the factors affecting the choice of procurement strategy a construction project team
Steps in the construction procurement process
1. Determine the Procurement Method
The first step in sourcing the necessary labor, equipment and materials is achieved by identifying the project's procurement method.This part is crucial because each procurement contract has its own process of acquiring the suitable supplier and materials needed for a build. Procurement activities go beyond the act of sourcing and finding suppliers, but rather each procurement type has its own distinct approach in procuring suppliers for a construction project.
2. Documentation of Scope of Work
The first step is to initiate the process of creating a written statement outlining what the contractor and subcontractor must do. This is also known as “terms of reference”. A comprehensive and well-written scope of work would save a project from financial difficulties, delays and future problems. Being able to define the scope of work in greater detail helps to increase clarity and ensure that expectations are appropriately aligned. This can be challenging for ambiguous scopes of work because they are open to different interpretations.
A bid is a formal declaration of intent submitted by suppliers to provide a service required by the client and/or project and is usually done in a competitive environment that balances both cost efficiency and projected profit margins.
Construction bidding refers to the process of submitting a proposal to the client as a proposal to conduct or manage a particular project.
Bid documents are also known as Invitation to Tender, Request for Proposal (RFP), or Request for Quote (RFQ).
The bidding process is used by clients and contractors to identify suppliers that align with the requirements of a project. Bidding starts with the identification of requirements through step number 2. After all bids are received within the prescribed notice period, the bid evaluation process is performed by the client and/or its contractors in accordance with predetermined evaluation criteria.
Additionally, clients and contractors also use a Request for Qualification to shortlist vendors who then prepare a more detailed bid can be used as a prequalification process in order to trim down the list of bidders.
4. Awarding After the bidding period has elapsed and the contract has been awarded and accepted, the procurement manager and his or her team must monitor the construction of the project. This is to ensure that all the agreed terms in the contract are fulfilled.
All stipulations and precepts in a contract must be strictly complied with by both parties in order to avoid a breach of contract and/or failed project outcomes.
5. Monitoring & Turn-Over The procuring team must diligently monitor and supervise the contractors in order to fulfill its obligations.
The monitoring of contracts requires a strict and organized approach since clients and contractors need to compare actual performance against the deliverables set out within the agreements.During this time, contract compliance is also strictly enforced, change orders are recorded and the contractor's performance is tracked until its completion and turnover.
Factors that Influence the Choice of Procurement Method
Careful examination and consideration of these factors is an integral part of any well-thought out construction plan that helps increase the success of a construction project even before the first shovel hits the ground.
There are different kinds of procurement methods in construction and the following factors help clients determine the best procurement method to utilize for a construction project.
- Project complexity
- Level of quality required
- Project risk and certainty
- Client resources and financial capability
- Client accountability, involvement and experience level
- Project size
- Scope of work
- Availability of relevant consultants, contractors and subcontractors
Types of Construction Procurement Methods
There are four general procurement methods in the construction industry: traditional method, design & build method, management contracting and construction management.
The table below shows the advantages and disadvantages of each method.
1. Traditional Method
Also known as conventional, the traditional method has become the most widely used procurement method in the construction industry since the establishment of general contractors and independent consultants.
The defining characteristic of a traditional method is the separation of the design phase and the construction phase.
Under this route, the client appoints a separate consultant exclusively for the design phase who then turns over all documentation, drawings, work schedules and bills of quantities.
Contractors are then invited by the client to submit bids for the construction of the project. The contractor with the most competitive bid wins the project.
The contractors then set out to build the project according to the design given by the separate contractor. It is important to note that the contractor has no input on the design phase.
This linear approach helps create greater cost certainty since estimates are submitted on the bids based on the design. Changes in the design are also easily incorporated as long as it is in the design phase.
This approach can, however, be slower than other forms of procurement, as the contractor is appointed only after the design has been finalized. Moreover, the contractor will not be able to contribute to improving the buildability or packaging of the design as it develops.
The lack of contractor engagement during the design phase may also lead to a higher cost of materials since the designer did not receive valuable input from the contractor that could otherwise have provided cost-effective proposals and solutions.
2. Design & Build
In this procurement method, a sole entity or main contractor is appointed to design and build the project. Design and build companies usually include a combination of in-house architects and construction personnel.
Under this setup, it is the contractor's responsibility to design, plan, organize, control, and build the works in accordance with the client’s requirements. Design and build methods offer the advantage of having most of a project’s labor requirements under one firm - this increases the work efficiency considerably.
This type of procurement is the simplest of all because there is only one point of responsibility over the whole project which makes this type very cost efficient. Project delivery or time to completion may also be fast-tracked since the design and build is governed by one team and work takes place simultaneously during the design and build phase.
Once the contract is handed over, the client does not have direct control over the contractor's detailed design and in this regard some contractors are inclined to prioritize cost-efficiency over design quality.
3. Construction management
A procurement method in which works are fulfilled by subcontractors who are managed by a construction manager that acts as the client's agent or point person during the project's lifecycle.
In this setup, the client has full responsibility for employing the sub-contractors assigned for each of the works, who will then be subsequently managed by the construction manager.
The construction manager is not obligated to hire and award contracts but is solely responsible for oversight, supervision and monitoring of the sub-contractors, essentially rendering service but is not required to build anything.
The construction manager leads the design team and coordinates the various construction operations in the project.
An advantage of opting for the construction management method is the early involvement of a construction manager during the designing phase helps create a better quality build through the insights and expertise that they contribute. Lower fees are also paid to the contractors since they are directly employed by the client and generally require less overhead expenses.
One downside to this method is the heavy client involvement. The client must source all of its subcontractors which relies on the client's experience and negotiation skills as well. This also means that costs are also less certain because the construction manager only acts as an agent and does not guarantee project completion on time and on budget as compared to other forms of procurement methods.
4. Management contracting
Management contracting is often used in large and complex projects that employ numerous specialized subcontractors. Works are constructed by a number of different subcontractors who are then under contract to a management contractor.
In this setup the management contractor acts as the principal between the client and the contractors, with the client having no direct contractual relationship with the contractors as opposed to a construction management’s setup.
Unlike construction management where contractors are under a “trade contract”, these contractors are directly under the management contractor’s employment.
Inexperienced clients may be unsuitable for this procurement route since they can have more control over the design, but work is generally initiated before the nature of the project is understood. The absence of specialists may also lead to unproductive gaps in the work being done.
Procurement in construction is more than just finding a reliable supplier at a great price, but rather, it’s a careful and detailed plan that considers and addresses all factors that can affect the result of a construction project.
Different procurement types enter a project’s phase at different stages depending on the method chosen by the client thus it is important to determine and finalize the procurement method during the ideation process of a new project.
Whether a project is as simple as a new residential building or a sprawling multipurpose industrial complex, a strategic approach in procurement activities is important in ensuring that suitable suppliers, contractors, labor, materials and equipment are utilized for a new construction project in order to increase its overall success.
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