considerations in procurement strategy - 2014 olswang construction law conference

2014 Construction Law Conference: Considerations in Procurement Strategy Thursday, 6 February 2014

Francis Ho, Head of Construction [email protected] | +44 20 7067 3505 | @fkyh

Procurement Strategy Issues

•  Methods by which clients may be able to procure more competitively and collaboratively

•  In this talk we consider:

•  Framework Agreements

•  Two-stage tendering

•  Construction Management

#olswangconstruction #olswangconstruction www.constructiveblog.com

Framework Contracts #1

•  Umbrella agreement under which terms agreed in advance for works and services

•  Works/services instructed each time via “call-offs”

•  Each call-off becomes a separate contract

•  Typically in place for several years

•  No need to negotiate terms or tender prices each time

•  Requires more upfront work; saves time and cost in the long-term

•  No guarantee of work but economies of scale may reduce suppliers’ costs


Framework Contracts #2

•  Create long term relationships with suppliers

•  Can measure performance for continuous improvement

•  May allow clients to gain advice from construction experts without taking on staff, e.g. project management, cost management, legal advice

•  Multi-supplier framework allows mini-competitions between suppliers

•  Mainly bespoke but some standard forms exist:


Two-Stage Tendering #1

•  Construction market heating up, especially in London

•  Position for contractors healthier than any time since 2007

•  Greater demand may mean return to two-stage tendering

•  Single stage tendering = lowest cost (lump sum or prime cost)



•  Two stage tendering:

•  First stage – select preferred Contractor

•  Competitive tender with some information – preliminary costs, programme, OHP, agree construction contract terms

•  Collaborate with preferred Contractor on pre-construction services on prime cost/lump sum basis

•  Preferred Contractor tenders long-lead subcontracts, build up fixed price, programme and cost plan

•  Second stage – finalise contract terms, finalise fixed price

•  Usually bespoke but some standard forms



#olswangconstruction

Advantages Disadvantages Can de-risk project by second stage (advantages for both Client and Contractor)

Longer, costlier tendering process

Better collaboration - Contractor inputs into design and buildability

Can be time-consuming/costly to replace Contractor before second stage

May achieve quicker programme and more cost and time certainty on more complex projects

Needs a more sophisticated client

Client can withdraw from process before accepting second stage bid

Client may achieve lower cost on more straightforward projects

#olswangconstruction www.constructiveblog.com

Construction Management

•  Popular in the 1980s (Broadgate, Canary Wharf)

•  Declined rapidly due to poor publicity (Holyrood, Great Eastern) and continued rise of design and build

•  Client appoints Construction Manager and professional consultants

•  CM manages construction, consultants design. CM may manage some specialist design

•  Client appoints trade contractors which are administered by CM

•  CM responsible for its services but not for design and construction of project

•  Should we reconsider the role of construction management?


Construction Management Structure


Direct Contracts

Developer

Construction Manager

Cost Consultant

CDM Co-ordinator

Design Consultant

Design Consultant

Design Consultant

Trade Contractor

Trade Contractor

Trade Contractor


Alternative 1: Design-Build


Sub-Contracts

Direct Contracts

Client

Contractor

Sub-Contractor

Sub-Contractor

Sub-Contractor

Design Consultant

Design Consultant

Design Consultant

Contract Administrator

Cost Consultant

CDM Co-ordinator


Alternative 2: Traditional Contracting


Sub-Contracts

Direct Contracts

Client

Contractor

Sub-Contractor

Sub-Contractor

Sub-Contractor

Contract Administrator

Cost Consultant

CDM Co-ordinator

Design Consultant

Design Consultant

Design Consultant


Construction Management Suitability


May be suitable Less likely to be suitable Complex projects where Contractors charge heavy premium for turnkey risk

Straightforward, lower value projects

Clients with experienced, hands-on development teams

Inexperienced or under-resourced clients

Construction start needed before design completed

Financing needed from lenders (no cost/time certainty)

Flexibility to change design required

Clients unwilling to trade risk for cost-effectiveness

Strong collaboration between Client and Contractor


Construction Management – Getting it right

•  Choose the right project

•  Select the right Construction Manager and appoint early

•  Achieve as much cost certainty as possible before start on site

•  Strong administration and record-keeping processes

•  Providing sufficient Client management

•  Invest time in relationships with construction team

•  Tender trade packages with as much information as possible


considerations in procurement strategy - 2014 olswang construction law conference

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