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International Journal of Managing Projects in BusinessConstruction project procurement routes: an indepth critique

Adekunle S. Oyegoke Michael Dickinson Malik M.A. Khalfan Peter McDermott Steve RowlinsonArticle in format ion:

To cite this document:Adekunle S. Oyegoke Michael Dickinson Malik M.A. Khalfan Peter McDermott Steve Rowlinson,(2009),"Construction project procurement routes: an in#depth critique", International Journal of ManagingProjects in Business, Vol. 2 Iss 3 pp. 338 - 354Permanent link to this document:http://dx.doi.org/10.1108/17538370910971018

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Construction project procurementroutes: an in-depth critique

Adekunle S. Oyegoke and Michael DickinsonSalford Centre for Research and Innovation in the Built and Human Environment,

University of Salford, Manchester, UK

Malik M.A. KhalfanSchool of Property, Construction and Project Management, RMIT University,

Melbourne, Australia

Peter McDermottSalford Centre for Research and Innovation in the Built and Human Environment,

University of Salford, Manchester, UK, and

Steve RowlinsonDepartment of Real Estate and Construction,

The University of Hong Kong, Hong Kong

Abstract

Purpose The purpose of this paper is to examine different categories of building projectprocurement routes based on organisational, contractual, financial and technical issues.

Design/methodology/approach The paper is based on review of literature and conditions ofcontracts. The UK construction industry serves as a general frame of reference. The Royal Institution ofChartered Surveyors survey ofContracts in Usefrom 1985 to 2004 is used to probe the share and valueof contracts along different procurement routes and across different conditions of contracts in the UK.The logic is thatthe value and the share of contracts will indicate the behaviour of different procurement

routes in the UK construction market while the in-depth analysis of conditions of contracts will showthegaps and relationships between the general definition/categorisation and contractual context(conditions of contracts) of each of the procurement routes.

Findings The preliminary result of the analysis shows that traditional routes remain the main type ofprocurement route for the construction project industry sector, within which different management andincentivisation systems are applied for greater efficiency. The conditions of contracts in the UK supportthisassertion by aligningdifferent procurement routes to different conditions of contracts and additionallyspecifying different forms of agreements, special provisions and incentivisation in order to increaseperformance, reduce risks and improve compensation methods.

Research limitations/implications The studycan serveas a learning opportunity forconstructionproject stakeholders internationally, and clients in particular, to differentiate between procurement routes,management-oriented systems, relational contracting and incentivisation.

Originality/value The research provides an original assessment of construction procurement which

can be used as intervening tool in different levels of private and public procurement strategies.

KeywordsProcurement, Construction industry, Contracts, United Kingdom

Paper type Research paper

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/1753-8378.htm

Note this paper was originally delivered at the Building Abroad Procurement of Constructionand Reconstruction Projects in the International Context Conference held at Universite deMontreal October 23-25, 2008. Papers were double blind reviewed and subsequently amendedand expanded to reflect the project management perspective and furthered reviewed.

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Revised February 2009Accepted February 2009

International Journal of Managing

Projects in Business

Vol. 2 No. 3, 2009

pp. 338-354

q Emerald Group Publishing Limited

1753-8378

DOI 10.1108/17538370910971018


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IntroductionA construction project is a complex process that involves many stakeholders, longproject durations and complex contractual relationships. Projects can be a tangibleoutcomethat areof finite-duration or those that do not existin any concrete or conceptual

sense (Hodgson and Cicmil, 2006). According to Pheng and Chuan (2006) projectmanagement (PM) is only one of the many criteria upon which project performance iscontingent, it is also arguably the most significant as it is people formulating theprocesses and systems who deliver the projects. In realising clients project objectives,PM is often used throughout the duration of a construction project, namely in the design,construction, and facility management phases. There has been a parallel transformationin what constitutes a project and the development of PM tools and theories that beapplied in practice. This assertion was supported by Walker and Rowlinson (2008) whopostulate that PM theory has now extended to a broad range of project types from highlydefined projects to completely ephemeral and intangible projects.

In recent years construction procurement has also been subject to considerabletransformation from lowest cost to best value procurement and a revised agenda fordelivering broader policy goals related to social and environmental sustainability.However, procurement has not been given adequate attention in the PM world.According to Walker and Rowlinson (2008) PM theory and practice have poorlyaddressed the wider issues of procurement as being a key activity to achieve value formoney. They postulate further that most PM practitioners only perceive procurement asa simple make or buy decision and still consider PM to be predominately based ontraditional project delivery process with a delivery chain comprising a design team,a main contractor who sub-subcontracted and supervised detailed operational work andinput resources (Walker and Rowlinson, 2008).

As construction procurement has evolved many different types and categories ofprocurement routes have been developed. Project delivery systems have gone through

different stages in their evolution. In early 1900s, most projects were completed underlump sum contracts (the traditional system) and this trend continued for most the firsthalf of twentieth century with only some limited exceptions developed in the privatesector to improve costs, schedules and adversarial relationships through contractorcentred approaches (design and build) (Dorsey, 2004; Oyegoke, 2001). Constructionmanagement (CM) emerged in the 1960s but fully developed in the 1970s in the UK dueto the economic recession at that time (Dowd, 1996), consultative design and build alsodeveloped in the 1970s, and program management emerged in the 1980s (Dorsey, 2004)as clients sought more efficient ways to complete complex projects. Othermanagement-oriented approaches like partnering and framework agreements (FA)based upon the concepts of teamwork, integrated teams and collaborative workingarrangements became more prominent during the late 1990s and early 2000s

(McDermott and Khalfan, 2006). Krubasik and Lautenschlager (1993) categoriseddifferent forms of co-operation from mergers and acquisitions to core business jointventures, sales joint ventures, production joint ventures, product swaps, productionlicenses, technological alliances and development licenses. They further highlight theobjectives of co-operation which include development of new markets, sharing ofup-stream risks or development costs, leapfrog product technology, increased capacityutilisation, exploitation of economies of scale, filling product-line gap or penetration ofnew geographic markets.

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There is a series of relationships between procurement and PM during the projectwhole life. According to the Project Management Institute (2000), PM is the applicationof knowledge, skills, tools, and techniques to a broad range of activities in order to meetthe requirements of the particular project. Therefore, construction procurement can be

applied to PM process in three different areas: as a broad strategic approach in placingjobs in market place, as a means of defining how production will take place and as a partof production process as to when, where and how resources could be sourced. These arefundamental issues that will be faced by the project managers in overall PM process.

Another very important cost factor inherent in project procurement that has impactson PM is that associated with transaction costs. This is due to the duration ofpre-investments, investments, and construction planning and management periods.However, there are different views about the scope of transaction costs based on theperiod and the nature of such costs. Miller (2002) refers to a transaction period as a periodthat begins on the date when the initial application to build a project is submitted, andruns through to the date when construction starts. Transaction costs cover the expensesincurred by the initiator of a project from the initiation stage to the point when theconstruction starts. These costs, incurred during the transaction period do not actualdesign, construction, or operation costs. Gray and Hughes (2001) assess that transactioncost theory the relative costs associated with the different forms of economicorganisation to be the most significant factor in the decision to either use in-houseproduction or to outsource. Between these two polar decision choices, however there isan intermediate structure called network, which is most applicable to the constructionindustry as the choice of firms depends on price competition, reputation, reliability,knowledge, and experience.

These two divergent views show that transaction costs have a wide meaning,depending on how the term is defined. The difference between these two opinions is thatMillers view can be attributed to the business stage of infrastructure project

development, while Gray and Hughess opinion can be attributed to the cost alternativesof buy, make or networking throughout the construction process. According toWillcocks and Choi (1995) transaction cost theory has two major limitations in relation tointerorganisational relationships approaches: a focus on cost minimisation in the focalcompany which neglects the interdependent relationship between exchange partners intheir efforts to maximise value; and a focus on structural features of the exchange actthat neglects significant processual issues.

It is envisaged that the lessons learned from the critique of construction procurementapproaches will be applicable to PM procurement and broader PM theory. Some of therelationships prominent in CM procurement could also be applied in other PMprocurement areas, for example, application of the design and construction procurementroute in IT system development, outsourcing that could be aligned with the

build-own-operate-transfer (BOOT) approach or a public private partnership (PPP) thatis formed in the manufacturing or health sectors (Walker and Rowlinson, 2008).

The aim of this study reported in this paper is to differentiate between constructionprocurement methods, the management systems and factors that influence the efficiencyof procurement routes. The unit of analysis of the study is the procurement route and thescope of the study is limited to construction industry context. Although this is not to saythat the results and discussion will not be of some relevance to all project types. Thepaper is structured as follows; first, the authors address the research method, outline the

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research questions and objectives and provide clarity over the different procurementterms and contract types described in the paper. Second, a general overview ofprocurement routes is presented followed by a critique of procurement routes based onfour categorisations, outline results of the research and conclusions.

Research methodsThe paper begins with an extensive literature review and statistical data analysis of theRoyal Institution of Chartered Surveyors RICS (2004) survey ofContracts in Use. Thesurvey was undertaken from 1985 to 2004 and because 2004 was the last full year thatthe survey was completed special emphasis is placed on that particular report. Thereview identifies procurement routes in terms of types and evolution, and critiquescategorisation methods and the conditions of associated contracts. The conditionsof contracts are explored because they set out project organisation and how productionis carried out. The data contained in the RICS reports is valuable because the reports areone of the few data sources with a reasonable representative sample of contracts in useinany one country (in this instance the UK). For example, more than 3,700 projects wereinvestigated in the 1993 study amounting to 17.7 per cent of the proportion of total valueof new orders. In 2004, 2,330 projects were captured in the survey, which were wortha total of 3,035m, amounting to 8.6 per cent of the total value of new orders. The studylogic is that the value and the share of contracts will indicate the behaviour of differentprocurement routes in the UK construction market while the in-depth analysis ofconditions of contracts will show the gaps and relationships between the generaldefinition/categorisation and contractual context (conditions of contracts) of each route.

Research questions

RQ1. What are the main distinctions between different procurement routes fora construction project?

RQ2. How can procurement route categorisation assist in understanding thedifferent working mechanisms of procurement routes?

RQ3. What are the normative principles that inform procurement routecategorisation in a construction project?

Research objectives. To understand the working mechanisms of the prevalent routes.. To categorise prevalent routes and identify good practices.

. To differentiate between procurement routes and mechanisms including

management and incentivisation systems that aid their usage.. To develop a novel procurement route that will utilise the strengths of the

existing routes and eliminate their weaknesses.

General overview from the RICS surveyThe RICS conducted a survey ofContracts in Usefrom 1985 to 2004. For simplicity andpracticality the procurement cases are reclassified based on two main principles:

(1) by combining-related types, e.g. all lump sums under traditional routes; and

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(2) by recognising those procurement routes that have sizable number and valueunder the RICS categorisation.

Table I presents the percentage share of different procurement routes from 1985 to

2004. The definition of different procurement routes can be found under fourcategorisations of procurement routes. The traditional approach remains the mostpopular route with over 76 per cent of the total number of contracts in 2004. However,the traditional route has decreased in usage by almost 16 per cent from 1985 to 2004.The design and build approach has shown a significant improvement, from 3.6 per centin 1985 to more than 13 per cent in 2004. Combined, the traditional and design andbuild routes dominate the market with at least 90 per cent in every year because mostclients are satisfied with one of their alternative ways of distributing of risks andallocation. According to the RICS (2004) some clients required a degree of risk transferaway from themselves (design and build) while others were happy to keep the majorityof design and construction procurement risks in order to keep costs down. The costreimbursable contract is another form that is increasing in usage, from 0.2 in 2001 to

6.2 per cent of total number of contracts in 2004. This is because it encourages anadditional contract provision of incentivisation. The increase of partnering, since 2001,has been significant. It represented about 0.6 per cent of the total number of contractsin 2001 and surged to 2.7 per cent in 2004. The RICS survey indicates that partneringis particularly very strong in the public procurement of social housing.

Table II presents the value of the contracts across different procurement routes from1985 to 2004. The value of work done through the design and build route amounted to43.2 per cent in 2004 making it the most popular procurement route by value in thisyear. The RICS survey attests to the fact that the use of all types of design and build formprogressively increase in number from lower (up to 100,000) to higher bounds (over50m) of contract value. A larger proportion of the contracts valued between 20 and

Procurement 1985 1987 1989 1991 1993 1995 1998 2001 2004

Traditional 92.6 92.9 92.3 89.7 82.4 85 76.6 84.2 76.7Design and build 3.5 3.6 5.2 9.1 16 11.8 20.7 13.9 13.3Management routes 1.7 1.2 1.6 1 1.3 2.5 2.3 1 1.1Partnering 0 0 0 0 0 0 0 0.6 2.7Cost reimbursable contracts 2.1 2.3 0.9 0.2 0.3 0.7 0.3 0.2 6.2

Source: RICS (2004)

Table I.Percentage breakdownof procurement routesby year

Procurement 1985 1987 1989 1991 1993 1995 1998 2001 2004

Traditional 74.9 73.2 66.1 57.8 54 58.3 40.1 43.3 36.8Design and build 8 12.2 10.9 14.8 35.7 30.1 41.4 42.7 43.2Management routes 14.4 9.4 21.9 27.3 10.1 11.1 18.1 11.9 1.7Partnering 0 0 0 0 0 0 0 1.7 6.6Cost reimbursable contracts 2.7 5.2 1.1 0.1 0.2 0.5 0.3 0.3 11.7

Source: RICS Contracts in Use in the UK

Table II.Value of the contractsby year

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50m were executed under the design and build form. The Joint Contract Tribunal ( JCT)with contractors design (WCD) dominates the field of design and build in number ofcontracts. WCD data show an even distribution by value within a wider value range of500,000-5m but mostly between a 2 and 5m value band. Conversely, the GC/works

design and build form was used in some of the larger schemes.The value of traditional contracts has plummeted from 79.9 percent in 1985 to 36.8 per centin 2004. This was due to the substantial decline in the use of the lump sum (firm bill ofquantities (BQ)) traditional route by about 30 per cent from the 1985 survey. The lumpsum (firm BQ) did reverse the trend of decline in 2001 when usage was recorded at over20 per cent use, however, it declined back to 10.7 per cent in 2004.

Cost reimbursable contracts have grown in value from 5.2 per cent in its peak of 1987to almost 12 per cent in 2004. The issue of higher demand chasing less supply hasboosted different forms of incentivisation in projects. The RICS survey found that someform of incentivisation provision was used in both small and large projects amounting to3.3 per cent of contracts under survey in 2004. The most remarkable contract under costthe reimbursable form is target contracts with about 11.7 per cent of the contract value inthis category.

The trend in partnering arrangements is becoming interesting. The surge inpartnering arrangements cannot be dissociated from integrated team workingpromoted by Latham (1994) and Egan (1998). This working arrangement has beenembraced by public clients. It is too early to know if the present trends in partnering willstand the test of time. If there is no meaningful way to balance demand and supply inconstruction industry, the death of partnering could be imminent. This was the case forfew years until 2007 in the UK when there was demand capacity problem. The influenceof the market cycle (structure, behaviour, risks and responsibilities) will always affectthe way demand is placed in the market. This was the case with management routes thatgained prominence in 1980s but have since reversed more recently. The cyclic nature of

the market most especially in the recent credit crunch and subsequent recession will leadto reduced demand placed against supply. In this situation, partnering will remain oneof the ways for firms to survive and therefore, partnering and FA/arrangements shouldendure and even prosper during the recession.

The decline in the usage of management routes might be due to two factors:

(1) because the structure of management routes is similar to collaborative workingarrangements which result in the use of trade and specialist contractors; and

(2) because a hollowing out of contracting capabilities by main trade contractorsalso leads them to develop their management capacity.

Critique of procurement routes categorisation

According to Love et al. (2002) procurement is an organisational system that assignsspecific responsibilities and authorities to people and organisations, and defines therelationships between the different elements of construction in a project. Projectprocurement set outs ways in which works are placed in the market and establishes thecontractual framework that determines the nature of relationship between the projectteam members for the duration of their interactions. In other words, procurement dealswith the determination of the relationships between different elements of a constructionproject and the way it is placed or nor placed in the market.

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Several different classifications of procurement routes have been proposed bydifferent authors from several different perspectives. Categorisations have been createdby considering the process through which the work is carried out, the contracting partythat carries out the project, the bearer of risks and responsibilities, the form of

relationships between the parties, the compensation method employed and themanagement process adopted. According to the Office of Government Commerce(OGC, 2008) report of the Public Sector Construction Clients Forum: Private FinanceInitiative (PFI), design and build, and prime contracting represent the majority of theprocurement strategies adopted by government clients and account for the majority ofpublic sector construction expenditure. The report also states that in some instances,clients have developed hybrid forms of procurement based on one or a combination ofthese strategies, e.g. the Department of Healths Procure 21 arrangement, an enhancedform of design and build that uses an integrated supply chain.

The procedure in a PFI project begins by establishing a special purpose vehicle (SPV),which is responsible for the project including the limit of recourse of the founders to theassets of the SPV. The risks inherent in the design, construction, and commissioning offixed assets is transferred to the private sector. The PFI project participants include tiersof governments on the one hand and the shareholders of a SPV on the other. Normally,the SPV consists of the construction contractor/developer, the operator or facilitiesmanager, and the financial instruments or infrastructure investment fund. The SPV isresponsible for design, finance (including initial working capital), build, andmanagement (ancillary services) of the facility. The most important issue is that therevenue stream from the facility must meet the operating costs, debt service obligations,and provide a return on the equity for its founders. Depending on the terms of thecontract, the government may subsidise the services, and, if required, the facility istransferred to the government at an agreed time (Cox, 2001).

Categorisation based on the ways projects are organisedThere are four prevalent procurement routes in the UK: traditional general contracting,design-and-build, management contracting and CM. The categorisation ofprocurement systems from Franks (1992), Cornick (1991), Seeley (1997) and Oyegoke(2001) fall under these four headings:

(1) designer-led competitive tender/lump sum/conventional either sequential oraccelerated;

(2) design and build/package deal either direct, competitive or develop andconstruct;

(3) design and manage, either by contractor or consultant; and

(4) designer-led construction works managed for fee/fee construction/managementmethod either management contracting or CM.

Mohsinis (1993) classification meanwhile pursues the following logic: in terms of thesequence in which building procurement options are performed (design/bid/build), thedominant contractual framework (design/build), and central control of the processes(management-oriented, integrated and co-operative). There is a technicalmisunderstanding, which might lead to confusion in Mohsinis (1993) categorisation. Forinstance, design and manage is categorised under the management-oriented type, while

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design and manage is also a major part of the traditional method as the architect designsand manages construction administration. The categorisation of management-oriented,integrated and co-operative approaches under the same centralised control of processes isalso a concern as it is applicable to other routes as well. This shows that project

procurement is a complicated issue and that success is based on a combination of projectconditions and the organisational form the client intended to employ.

Mastermans (2002) categorisation is broad in nature and it includes separated andcooperative strategy (traditional system plus many of its varieties), integrated strategy(turnkey, owner build), and management-oriented strategy (agency, and at-risk).The technical similarities within separated and cooperative strategy approach are themultiple points of (performance) responsibilities and risks. In a nutshell, the traditionalsystem lump sum allows for a multiple points of (performance) responsibilities andrisks. The design responsibility is placed on separate organisations. In principle, theowner normally contracts with consulting firms to produce design documents, which areused to solicit fixed price bids (lump sum) from construction contractors. One contractoris usually selected and enters into an agreement with the owner to construct a facility inaccordance with the plans and specifications. Subcontractors usually have a direct legalrelationship with the construction contractor. Lump sum contracts can be based on BQ,specification and drawings, schedules of rates and approximate quantities.

The technical similarities within the design and build classification (integrated routes)are that design and construction is the responsibility of a single firm (single point ofresponsibility), usually a construction firm. In practice, portions of the responsibilities aresubcontracted to other firms/companies especially documentation and specialised works.The management routes allow for the involvement of management consultants orcontractor, usually in agency capacity. The agency agreement between the managementfirm and the owner may cover partial or full responsibility in contracting services,construction co-ordination, PM, and construction administration. Other points of

responsibility include design, construction and handover and therefore this approach istermed multiple points of responsibility. JCT (1987) describes a management contract asa binding agreement between an employer and a building contractor, in a situation wherethe building contractor plans, co-ordinates, organises, supervises and generally managesand secures the construction of the building project. Seeley (1997) refers to a CM contractas a situation where the client assumes the contractual position of the main contractor andthe works contractors directly engaged by the client undertake the actual work.

Dalrympleet al.(2006) criticised the traditional procurement system due to a lack ofvalue for money and Walker and Hampson (2003) presented criticisms was based onthe inferior quality of relationships between team members in the project deliverysystem. Although there is a move towards price/quality mechanism at the tenderevaluation stage in the UK.

Categorisation based on financial issuesDelivery and financing options. Procurement routes have also been categorised basedon delivery and financing options by Miller (2002) as shown in the four-quadrantframework in Figure 1. Basically the classification follows the independent andinterdependent nature of major construction contract variables: design, construction,operation, maintenance and finance. For instance, the traditional design and build is inquadrant I because the route allows a combination of design and construction (single

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point of responsibility) while still under a direct form of financing. The weakness withcategorising the procurement routes by quadrants is that many of routes are confusedin the execution of real life projects and/or take more than one basic form which meansthat they could be placed in several quadrants. On the vertical axis is the financingstrategy, which might be direct (cash appropriations or debt financing) or indirect(income stream, incentives, debt, equity, and bond financing). On the horizontal axis isthe delivery routes categorised as fragmented (multiple point of responsibilities) andintegrated (single point of responsibility).

Quadrant II in Figure 1 represents infrastructure and facility procurement that hasmoved away from traditionally delivery system where projects were financed upfront(design, construction, operation and maintenance) from public taxes and state funds.Many other innovative routes based on responsibilities allocation and distributions ofrisks were developed. Among the innovative approaches that allows for private sectorequity, recourse, limited recourse or non-recourse financing schemes, and debt investmentare: design-build-operate (DBO), design-build-operate-maintain (DBOM),build-operate-transfer (BOT), build-own-operate (BOO), design-build-operate-transfer(DBOT), BOOT, buy-build-operate (BBO), and lease-develop-operate (LDO) (Miller, 2002).

The combination of key project task/activities both in production and operation of thefacility, determines the form of procurement method. For instance, the BOT approach issynonymous with design-build-finance-operate (DBFO) as the client procures design,

construction, financing, maintenance, and operation of the facility as an integratedwhole from a single producer. The owner provides only initial planning and functionaldesign. The same principle applies to DBO, except the owner will not procure financingas part of the package (Miller, 2002).

The structure of BOT allows the host government to grant concessions to a privatefirm that wants to invest in a scheme for profit purposes. The concession ends at thetime of transfer of the property at a nominal cost. Because of the enormous benefitsthe government derives from the project (service point of view) and the reversion

Figure 1.Construction procurement

categorisation based onorganisation andfinancing strategies

Direct

Fragmented Integrated

Indirect

DBBCM

MC

DB

Turnkey

DBO

BOO

BOT

DBOM

BOOT

DBFOFinancing

Metho

ds

Delivery Methods

I

IIIII

Source:Applying Miller (2002)

IV

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ideology after a satisfactory (agreed) return has been made on the project, the hostgovernment supplies credit support for project borrowing. The extent of concessionsby the players depends on the risks/benefits and the return/reward based on anequitable approach. Best and Valence (2002) refer to Buljevich and Park (1999), when

highlighting some success factors that encourage the use of BOT, including: strongrelationships with host governments, efficient resources allocation, effective financing,high-confidence rating of the investors, accessibility to fund raising in the markets,associated incentive features, ownership transfer or reversion, and a risk/returnnegotiation scheme.

The transition from public to market-oriented sponsorship has encouraged theemergence of other forms of procurement in order to add value and efficiency to publicsector activities. The most common routes are PPP, PFI and private sector involvement(PSI). The government assumes the primary responsibilities but there is a shifting ofposition in responsibilities and functions from public sector to private sector. Cox (2001)postulates that the underlying success factors in terms of creating a conduciveenvironment include favourable investment conditions in terms of regulatory and

organisational set-ups. The underlying principle in PFI is that the government movesaway from its traditional role (finance, ownership, and operation) via the purchasing ofservices from the private sector. Cox (2001) refers to PFI projects as service-orientedrather than assetbased as the services to be performed by the SPV represent the primarypurpose, or the end-product, of the PFI project; e.g.:

[. . .] the provision of waste water treatment in a newly constructed sewerage plant. In othercircumstances, the SPVs services are required to facilitate the Authoritys achievement of theprimary purpose, e.g. the provision of a new hospital or school together with the necessaryfacilities management services to allow the Authority itself to provide healthcare or educationto the public.

A government department concentrates on its core function and the SPV provides

non-core services. The government pays on delivery of required services that meetspecified quality standards.

Cox (2001) outlines three key concepts of PFI: the purchase of services not assets;an appropriate allocation of risk, and value for money for the public sector. Thedifference between PFI and BOT with similar terms is the government agrees onpurchasing the service and PFI is an alternative financing model that usesinfrastructure procurement routes: BOT and the DBFO. Graham (2001) refers to theBusiness Services Promotion Unit (2000) defines PSI as a strategy for improvingpublic services by involving the private sector in selected roles and responsibilitiesotherwise performed by government. One can deduce that PFI, PPP, and PSI entailthree basic components: purchaser agreement, privatisation, and a combination ofprivate and public sector (PPP) in providing facilities and services (management skills).

There have been arguments about using financing methods for categorisingprocurement routes. The argument in support is based on the practical meaningof procurement, i.e. ways of placing jobs in the market. Financial modalities play amajor part in shaping the ways jobs are placed and the market behaves. In this regard,PPP and PFI can both be classified as procurement routes. The counter argument isthat different financial modalities can be used in different procurement routes. Inaddition, PFI and PPP is a description of a financial tool that is used to execute a DBOprocurement type or any of its acronyms as for infrastructure projects in quadrant II of

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Figure 1. Mohsini (1993) also classified procurement routes under financial modalities.This is based on the organisational variables affecting the performance of the process(PFI, BOOT). The weakness of this element of Mohsinis (1993) categorisation is theinclusion of cost-driven contracts and the tendering method as procurement methods

because both are not distinct and exclusive procurement routes. The tendering methodfor example, is a process that will be undertaken in every procurement route.

Incentivisation or reimbursement contract. The cost reimbursement contract issometimes referred to as cost-plus or prime cost contract. In cost reimbursement contractsthe employer pays the contractor the actual cost of the work plus a management fee whichwill include the contractors overheads charges, supervision costs and profit. In a cost-pluscontract, negotiations may include a procedure for pre-qualifying and selectingsubcontractors after key trade contractors have been identified. The owner may setguidelines for hiring subcontractors, including minority participation and use of localentities. Most often the general contractor is given a degree of latitude in selection, with theprincipal criteria being reasonable costs, timely completion, and good quality.Nevertheless, the owner has the right to approve subcontractors, while the general

contractor remains responsible for the performance of all subcontractors (Robert, 1997).The most typical form of cost reimbursement contracts are based on prime cost pluspercentage contracts, prime cost plus fixed fee contracts, and prime cost plus fluctuatingfee contract.

Another form of contract in this family is target cost contracts. In this form of contract,a basic fee is quoted as a percentage of an agreed target estimate usually obtained froma priced BQ. The target estimate maybe adjusted forvariations in quantity and design andfluctuations in the cost of labour and materials. The actual fee paid to the contractor isdetermined by increasing or decreasing the basic fee by an agreed percentage of saving orexcess between the actual cost and the adjusted target estimate. In practice variousmethods have been used for computing this sum. An alternative method that has beenused is to pay the contractor the prime cost plus the agreed fee and for the differencebetween target price and prime cost, whether a saving or extra, to be shared between theemployer and the contractor in agreed proportions.

Distinctions need to be made between procurement routes and additional contractprovisions. For instance, the negotiated contract is an additional provision indicatingnegotiation rather than normal tendering processes. Additional incentivisationprovision is more of a price provision rather than form of contract, e.g. guaranteedmaximum price, fluctuations contract, cost plus, target cost. Other provisions may lookinto ways of advancing the procurement strategy, e.g. electronic tendering, two stageprocurement strategy.

Categorisation based on the conditions of contractsThe conditions of contract seek to establish the legal framework under which the work is tobe carried out. There area variety of conditions of contracts: standard forms which compriseone of any of the pre-printed forms and take precedence over the other contract documents.The conditions of contract in any of its forms have a high degree of comparability, but aredifferent in their details. All of these conditions (e.g. JCT, new engineering contract (NEC),etc.) cover different forms of contracts families of forms e.g. design and build, and minorworks.

It can be summarised from the RICS (2004) survey, that there are some conditions ofcontracts that suit certain types and values of contract, e.g. the UK Institute of Civil

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Engineers (ICE) forms were not used for a project over 5m value and accounted for lessthan 0.5 per cent of the total project value recorded, compared to 0.7 per cent in 2001.Conversely, there are others like JCT conditions of contract that were used acrossdifferent contract bands but more pronounced in contracts of 2-5m, amounting to over

75 per cent of this band in the survey carried out by RICS in 2004. Further breakdownshows that JCT standard form WCD amounted to 35.6 per cent, followed by traditionalmethod that amounted to 32.8 per cent. In a distant third is the management contractwhich amounted to 1.2 per cent, the major project form was 0.4 per cent whilereimbursable contracts amounted to 0.1 per cent. General conditions establish a commonbasis for the relationship of all of the parties by using language of proven legal merit.The NEC Engineering and Construction (ECC) forms, i.e. NEC family of contracts wereused in different contract value bands. According to RICS report, NEC variantsaccounted for 6.7 and 12.8 per cent of all the number and value of contracts recorded intheir survey in 2004, respectively.

Overall, all the types of JCT standard forms continue to serve a highly significantproportion of the market amounting to 78 and 71 per cent in 2004 both in total numberand value of contracts. Although there is a slight drop of 13 and 7 per cent in the totalnumber and total value of contracts, respectively, when compared with 2001. This is dueto the preference of clients in adopting NEC and PPC 2000 in contracts with highercontract values and the introduction of 135 non-standard forms by local authority forsmall contracts below 100,000. Another standard form that is gaining prominence inuse is the Association of Consultant Architects (ACA Standard Form Project PartneringPPC 2000) form. This form covered contracts between 100,000 and 20m in value, andhas accounted for 1.9 and 6 per cent of number and value used in the survey.

As well as the standard forms, the usage and importance of the non standard formshas increased. Non-standard bespoke forms accounted for 8.1 and 3.2 per cent of thenumber and value of contract in RICS survey of 2004. The prominence of these types of

forms is due to its usage and acceptance by the local authorities for small contractsbelow 100,000 values.An example of a contradiction in procurement route categorisation through the

conditions of contract is divergence in the meaning of design and build. In recent timesthere has been confusion on the true meaning of design and build. Design and build canbe generally categorised based on two principles:

(1) the bearer of responsibility, and risks on performance and non-performanceof the project; and

(2) the economic notion of separable activities under common ownership.

The earlier allows for a fragmented supply chain through outsourcing of key project skillsunder a single responsibility of a contractor or designer for risks related to

non-performance. The latter allows the contracting firm to posses both design andconstruction capability in-house for the execution of the project. This is the true form ofintegration in traditional design and build contract (DB).

The JCT DB main contract comprises different attributes that potentially supportthe economic and non-performance notions of integration in design and build. Thecontract document stipulates that the design and build conditions of contract form isappropriate where detailed contract provisions are necessary and employersrequirements have been prepared and provided to the contractor. In addition, it is also

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appropriate where the contractor is not only to carry out and complete the works but alsoto complete the design. Another major attribute of the document can be closely associatedwith the traditional form of contract that allows a separate trade contractor or maincontractor to design and build a small (specialist) part of the project. The conditions of

contract stipulates that the document can also be used where the contractor is restricted todesign small discrete parts of the works and not made responsible for completing thedesign for the whole works.

The fact that design and build sub-contract (DBSub/A and DBSub/C) containssub-contract agreement and conditions of contract provisions negate against economicand non-performance notions of integration. In an economic sense, the subcontracting firmis supposed to be part of the firm under single ownership while, in the non-performancesense, it should be back-to-back agreement between the design and build firm andsubcontracting firm. The DBSub/A and DBSub/C documents emphasise itsappropriateness for use with the DB; and for sub-contract works whether or not theyinclude design by the sub-contractor.

In response to market changes the Major Project Construction Contract (MP) wasdeveloped. According to the RICS (2004) report, this condition of contract isappropriate for major works where the employer regularly procures large-scaleconstruction work and where the contractor to be appointed is experienced and able totake greater risk than would arise under other JCT contracts. It is also applicable wherethe contractor is not only to carry out and complete the works but also to complete thedesign; and where the works are to be carried out in sections.

These documents support the assertion that there are varieties of design and buildforms (Akintoye, 1994). The terms used in the conditions of contracts show thedifferences in meaning. The JCT puts emphasis on contractors design (JCT WCD),the GC document on works design and build, the ICE on design and construct, and theDefence Estate Defcon 2000 focusing on contractors design. There are others,

non-standard employer or quantity surveyor forms. The divergence in categorisingdesign and build can be divided into two: based on point of responsibility forperformance (non performance) or based on economic notion of common ownership.

Categorisation based on management process, relational contracting and integratedworking arrangementThe management process adopted in bringing the project team together has recentlybeen used as a form of procurement route. This is sometimes referred to as relationalcontracting or relationship-based procurement (Walker and Hampson, 2003). Althoughnot all forms of frameworks are relational in nature, e.g. OGC buying solutions in theUK which is just a glorified shorter long-lists. Some of the notable examples arepartnering and FA. McDermott and Khalfan (2006) refer to partnering and strategic

alliance as a form of procurement. Partnering represents commercial agreements ina two stage multi party-contract and can be immensely useful in managing potentialrelational risks. The ACA document PPC 2000 allows the clients, consultants,contractors and specialists to sign an agreement at an early stage and work towards anagreed maximum price and a commencement agreement. Kululanga et al.(2001) sounda note of caution because of the fact that the numbers of contractual difficultiescontinue to rise even though the construction business environment has moved towardpartnering arrangements. Steer (2007) suggests that the partnering arrangement is

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dying because the rise in demand has not been matched by the supply chain. This isindicative evidence that partnering and other forms of social integrative devices aretemporary arrangements which are often shaped by a market cycle. The recenteconomic recession of last quarter of 2008 has now reversed the trend from a demand

to a supply capacity problem in the UK. This situation encourages partnering,integrated working arrangements and management processes. For instance,a contracting firm will prefer to go into a partnering arrangement with a client thathas substantial stream of work. The contracting firms will also prefer in this period ofrecession to engage in relational contracting approaches with their subcontractors andsuppliers. Dorsey (2004) asserts that success or failure of any contractual arrangementis heavily dependent upon performance, trust, and co-operation among the parties.

Distinctively, this form of relational contracting is applicable for use in conjunctionwith the prevalent routes or any form of JCT form of contract. The partnering with JCThas room for incorporation under a non-binding partnering charter (PC) for singleproject. This also negates the general belief that partnering is always used for series ofprojects. Partnering with ICE is a form of addendum, allowing for partnering to beincorporated in other forms of contracts. The partnering with NEC allows its use inconjunction with Procure 21 or use as a secondary option as part of the NEC family ofcontracts. Therefore, partnering is a way of fostering collaborative workingarrangements between supply chain members through different contract forms.These collaborative mechanisms can be through binding partnering agreement, or nonbinding partnership or alliance provisions.

In response to integrated supply chain management, the JCT ConstructingExcellence Contract (CE) was developed to cover procurement of construction works andconstruction related (professional) services throughout the supply chain. The RICSpostulate that it is appropriate for use where participants wish to engender collaborativeand integrative working as well as partnering. It can also be used whether or not the

supplier is to design or if works are carried out in sections and either for a target cost orlump sum. Another special provision for project team agreement JCT ConstructingExcellence Contract Project Team Agreement (CE/P) allows for the members of theproject team to enter into a multi-party pain/gain agreement.

Another response to market behaviour for an integrated supply chain is a FA whichhas been applied by many local authorities in the UK. The Local Government Task Force(2006) report describes construction frameworks as an extension and application ofpartnering principles advocated by Latham (1994) and Egan (1998) to individualprojects to programmes. Though this is not entirely new, especially frominter-organisational management point of views, i.e. network of organisation. Incontractual terms, some of the special features of the FA are the possibility that it can beused by contractors, sub-contractors and/or suppliers sub-letting to others in the supply

chain, on single or multiple projects, and used in conjunction with most standard formsof construction and engineering contracts and sub-contracts. In addition the FA(non-binding) (FA/N) is used where the parties do not wish to enter into a legally bindingagreement but wish to create a collaborative working environment. The bindingagreement is often referred to as a FA while the non-binding alternative is referred to asframework arrangement. The OGC (2008) report attested to the fact that integratedworking depends greatly on building interpersonal relationships which in that caseshould not be viewed as being limited to PFI, design and build, and prime contracting.

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Another charter that allows for collaborative working environments is PC(non-binding) (PC/N). According to RICS, this is for use with most standard forms ofconstruction, engineering contracts, and sub-contracts and appropriate where theparties do not wish to enter into a legally binding agreement but wish to create

a collaborative working environment. The spontaneous development of differentcontract formats in the different families of construction contracts also supports theresponse of the construction sector towards integrated team building and collaborativearrangements. For instance, in the ICE and NEC family, addendum to partnering andpartnering option (2001) which is used in conjunction with Procure 21 was introduced.The ACA introduced ACA PPC 2000 project partnering, another agreement contractspecifically drafted for use in partnering.

All these forms of agreements cannot be regarded as a form of procurement as it canonly be used in conjunction with standard form of contracts with extra or specialagreement binding or non binding between the parties. This agreement is not new as inthe area of dispute resolution where Adjudication Agreement (Adj) is always used.

ConclusionsProject procurement continues to grow in importance because of its relationship withoverall quality of life in terms of economic, social and environmental wellbeing. Thereare different types of procurement routes (illustrated here to deliver a constructionproject but relevant to other industry sectors) that are now increasingly becoming morecomplex because of their operandi which in principle are fragmented. The constructionprocurement routes are distinguished by categorising them into four based on theways projects are organised, based on financial issues, on the conditions of contracts,on management process, relational contracting and integrated working arrangements.It is evident that the industry structure supply chain encourages collaborative workingarrangements in all of construction procurement routes. Anecdotal evidence supports

the notion that the behaviours of the market, most especially the shift in demand andsupply capacity, dictate the trends in procurement. The trends in partnering andframework arrangements support this assertion. The paper differentiates betweenproject procurement routes and its mechanisms which include management andincentivisation systems that aid their usage. The prevalent routes remain the basicforms where management principles, compensation methods, additional specialclauses and incentivisation are used to meet the challenges posed by the marketplace.Finally, the research presented in this paper provides a general understanding andinsight into different types of procurement routes being used within constructionindustry. The paper also clearly made differentiation between procurement routes andother catalyst that aid their performance. The research would help project stakeholders

in strategic project decision-making and selection of an appropriate procurement route.In addition to that, this preliminary contextual study would also provide thefoundation for background understanding and defining the frame of reference fora larger study in this subject area.

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Appendix. Terms and definitions

. Procurement routes: traditional (general contracting); design and build; management

routes; partnering; cost reimbursable contracts.. Integrated delivery and financial procurement methods:DBO; DBFO; DBOM; BOT; BOO;

DBOT; BOOT; BOO; BBO and LDO.

. Major public and private sector procurement initiatives: PPP; PFI; PSI.

. Contract brands/conditions of contracts: JCT; NEC; ICE; ACA.

. Contract products: JCT (WCD), JCT (DB); JCT (CE); NEC (ECC); ACA (PPC 2000); FA/N;PC/N; MP; Defcon 2000.

Corresponding authorsMichael Dickinson, Malik M.A. Khalfan, Peter McDermott and Steve Rowlinson can be contactedat: [email protected], [email protected], [email protected] and

[email protected] respectively.

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