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PROCUREMENT STRATEGIES 1 BACHELOR OF QUANTITY SURVEYING | PROFESSIONAL PRACTICE 1 | QSB 60604 Group Members: Student Name Student ID LEE REN JET 0319058 NG SENG HE 0323037 PANG KHAI SHUEN 0318423 YAP JIA EN 0319550 YEO DOR EEN 0316224

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Page 1: PP1 report

PROCUREMENT STRATEGIES

1 BACHELOR OF QUANTITY SURVEYING | PROFESSIONAL PRACTICE 1 | QSB 60604

Group Members:

Student Name Student ID

LEE REN JET 0319058

NG SENG HE 0323037

PANG KHAI SHUEN 0318423

YAP JIA EN 0319550

YEO DOR EEN 0316224

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PROCUREMENT STRATEGIES

2 BACHELOR OF QUANTITY SURVEYING | PROFESSIONAL PRACTICE 1 | QSB 60604

TABLE OF CONTENT

No. Title Page

1.0 Introduction 3

2.0

Principles of Basic Procurement Methods

2.1 Traditional Procurement Method

2.1.1 Advantages

2.1.2 Disadvantages

2.2 Management Contracting

2.2.1 Advantages

2.2.2 Disadvantages

5

5

6

6

7

7

8

3.0 Design & Build Procurement Method

3.1 Strength of D&B

3.2 Weaknesses of D&B

3.3 Comparison of D&B with Traditional and

Management Contracting

9

9

9

10

4.0 Form of Contract and Standard Contract Forms

4.1 PAM Standard Forms of Contract 2006

4.2 JKR (PWD) Standard Forms of Contract 203A

4.3 FIDIC Standard Forms of Contract

4.4 Forms of Contract

11

11

12

13

13

5.0 Critical Analysis and Recommendation of Basic

Procurement Method

15

References 18

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1.0 Introduction

The construction industry is considered as one of the major economic sectors in Malaysia.

This sector has contributed a lot to economic growth in our country, showing a strong relationship

between the construction industry and the growth of our country’s economy. It has been playing an

important role in affecting and stimulating Malaysian economy aspect. It is necessary for the

government to give appropriate attention and focus to construction industry since there is still a lack

of attention to its development in Malaysia (Abu Bakar, et al., 2011).

Figure 1: Malaysia GDP Annual Growth Rate (Source: Department of Statistics Malaysia)

Research has found that the Malaysian construction sector has gone through high

proportion of business failure during the recent economic downturn (Abu Bakar, et al., 2011). It was

impacted by some external and internal factors. The large economic downturn in Malaysia has

threatened to end its high growth rates. This crisis has caused the country’s currencies to fall,

property values to drop and stock markets to decline. This occurrence has affected the developers of

the country in delivering and meeting property development and sales target.

It is assumed that our client is a large-scale property development company with an

employee count of 200 people. The project is a 20 storey condominium, assumed to be a medium-

high cost development with an average unit selling price of RM 700,000. The location of the project

shall be in Kajang, Selangor Darul Ehsan due to the limited amount of vacant lands in Kuala Lumpur.

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We are specialist consultants in procurement strategies, and were hired by our client to

outline the different methods of procurements available and recommend a suitable procurement

strategy to carry out this project.

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2.0 Principles of Basic Procurement Methods

A procurement method shows the relationship between construction companies, consultants and

clients. The selection process of procurement method is tough because no one knows all the risks

and benefits in each procurement even though experienced contractor or client. Therefore, they use

procurement as ‘calculated risks’ to reduce risks faced in the project. Each procureent method has

its strengths and weaknesses so the client or employer should choose the most suitable method

base on scope and nature of work given, finance, the risk bearer, consultants’ performance, project’s

budget constraints and more. The selected procurement will affect the time of completion of

project, quality of project and the completion of the project within budget. (The Chartered Institute

of Building, 2010)

2.1 Traditional Procurement

(Multiproject (SE) Ltd, 2011)

For traditional procurement, employer accepts the design and appoint consultant for contract

administration, cost control and design whereas contractor needs to carry out the works. Suppliers

and sub-contractors are responsible to materials and workmanship. After contractors gave

completed information in competitive tendering on documents, contractor will be appointed.

Besides, contractor also can be chosen earlier via negotiation on basis of notional or partial

information.

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2.1.1 Advantages of Traditional Procurement Method

One of the advantages of traditional procurement is accountability of contractor is due to a

competitive selection. The competition is fair to every tendering contractor on same basis. Few sets

of tender document will be prepared for contractors to fill in the rates. Then, employer will choose

the most suitable tender for the project based on the advice given by the consultant. Client and

design lead should have direct influence to improve and produce higher level of quality project or

design. This can reduce the low quality or design risk as the majority of the work is designed by

insured consultants working directly for the client. In this procurement, changes to the contract are

easily managed and arranged such as design drawing.

2.1.2 Disadvantages of Traditional Procurement Method

For disadvantages, disputes are common in this procurement because of the nature of

separating construction processes and design. This is because different parties like contractor,

consultants etc have their own role, so disputes will easily arise from different opinion. Furthermore,

people who deliver the project such as contractor lack of opportunity to give suggestion on design,

risk allocation and cost. Traditional method is time consuming to produce a full contract

documentation. This may cause the project period become longer compare to other procurement

methods.

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2.2 Management Contracting

In management contracting procurement method, the client normally starts by appointing a

consultant team to prepare the construction drawings and specifications (S, et al., 2009). After that,

the client will appoint a management contractor to participate in planning the project and the whole

construction process. Subcontractors are responsible for executing the works using direct works

contracts during construction (Davis, 2006). The management contractor’s obligations include

planning of the programme and making decisions on the contents of each package to be sub-

contracted. They also organize and manage the construction duties undertaken by those sub-

contractors. During construction, there will be a fee added either on a percentage or lump sum

basis.

2.2.1 Advantages of Management Contracting

By implementing management contracting method, the construction team is able to achieve

early construction commencement due to overlapping of design and construction. The management

contractor can contribute its expertise on construction methods and consultants are able to gain

more advice about buildability or input from them. Meanwhile, parallel working can be inherent

(Trett, 2015). The overall development time will be shorter and lead to early completion. The

flexibility of management contracting has allow the client to change the design anytime during

construction since the drawings and detail matters can be adjusted (Davis, 2006). Apart from this,

management contractor is responsible to handle all delays and default on every disputes that has

caused by subcontractors.

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2.2.2 Disadvantages of Management Contracting

This procurement method has poor certainty of final cost until the last works of contract has

been signed and final cost is dependent on quantity surveyor’s estimates after project completion

(Trett, 2015). The overall cost of construction is higher. Moreover, the number of variations and

amount of remeasurement may be greater than traditional method due to insufficient design

development. In addition, consultants have less pressure to control their design pace and quality at

an early date; design process is inevitably very close to construction process and this has make the

delay particularly damaging (Trett, 2015).

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3.0 Design and Build Procurement

In general, design and build procurement method is described where the main contractors

are appointed by the clients, which undertakes full authority with risk to design and construct the

project. In this method, contractors are usually nominated by using negotiated and selective

tendering. (Lupton, 2009)

3.1 Strengths of D&B Procurement

Based on my opinion, it is possible to use Design and Build procurement method to

construct and design a condominium. Design and construction process may be overridden which

may reduce the overall project time (Tyler, 2010). For example, technologies are getting better and

upgraded like IBS (industrialised building system). They are commonly used for condominium which

speeds up the project period by assembling structures at one go. Besides that, client does not need

to bear much responsibility and they are only required to deal with a particular firm which may

reduce time and resources on finding alternative contractors (Davis, 2006).

3.2 Weaknesses of D&B Procurement

Design and build procurement method can also be a hindrance to construct condominium. If

the condominium is big and contains a lot of complicated facilities and services, it would be difficult

since the drawings and design prepared by the contractor would be strenuous. We do not

recommend client to find unexperienced contractor as the contractor bears full risk and

responsibility in design and construct. Hiring a well-known contractor requires more money and time

which is a disadvantage to the client. Lastly, the quality of workmanship and materials obtained from

the contractor may minimize as he has motive to complete his tasks as quick as he can. (Cudney,

2006).

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3.3 Comparison of D&B to Traditional and Management Contracting

Procurement method other than design and build such as traditional method or

management contracting are also important and the methods are extremely critical to deliver a

project on time (Anon., 2010). CIOB did a research where it states that ‘’87% of surveyors conclude

that a good procurement method is basically a successful project’’. Each method has its own

strength and limitations. Traditional procurement method is commonly used in the industry and its

greatest advantage is where consultants are responsible for design whereas the contractor will be

focusing on constructing the building, while design and build allows the contractor to bear full

responsibility and risk by handling the design and construction, this also may allow the contractor to

control cost for design based on their judgement and their motives (Anon., 2012). Lastly, I would like

to compare the difference between designs and build process and management contracting

procurement method. We know that design and build speeds up the entire design and construction

process. As for management contracting, the construction will be usually executed by the work

contractors. Management contracting allows the client to change the design during the construction

stage, this is because drawings and details can be modified and finalised while the work proceeds.

Management contracting are also much complicated compared to design and build and thus

conflict arises easily. The main reason is because the works are separated into many work

contractors whereas design and build mainly done by the contractor itself. Utilizing management

contracting may assure the client that the project can be completed for a particular amount of

money and time. The bad part about using management contracting is where the industry is lacking

of professional management contractor which is also difficult for the client to hire in a short period

of time.

All in all, using different procurement method will lead to different outcome. The traditional

procurement method will be a more viable option to construct a 20 floor condominium because this

method is common and widely used by all contractors in Malaysia. It would also impose risk to client

if they hire inexperienced contractor for design and build and construction management

procurement method.

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4.0 Forms of Contract and Standard Contract Forms

There are a few types of contract forms being used in the construction industry alongside

with procurement methods. The 3 major form of contract that are available for this project are PAM

Contract 2006, FIDIC and JKR 203A.

A standard form of contract is important when procuring for a project, it is the foundation of

exchanging of promises between parties. As mentioned by Ho (2010), a contract is defined by a

legally binding agreement between parties in which one party provides something in return for

something else from another party.

The reason form of contract is used is to achieve mutual understanding between the parties

involved and to reduce misunderstandings. There are a few advantages in using standard form of

contracts. One of the main advantages is that it saves time for parties involved, it is too time

consuming to compose new contract every time. Also, these contracts are made by professionals in

the industry, this helps to make a clearer understanding of contract terms, reducing the

uncertainties to a minimum.

4.1 PAM Standard Forms of Contract 2006

PAM Contract 2006 is a standard form of contract that is widely used in Malaysia, many

projects have been successfully completed under this contract. According to Rajoo (2014), this

contract is mainly used for private sector projects, buildings works and usually undertaken through

Traditional procurement route. There are 2 types of PAM Contract 2006, one with quantities,

another without. The main difference between the two can be seen in Clause 11 and Clause 12

which are listed on the table below.

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PAM with Quantities are commonly used for bigger projects while PAM without Quantities

are used for smaller projects. This is because for big projects, a well defined BQ is necessary to

reduce any disputes and discrepancies, even a small error or miscalculation may arise to a huge

financial loss.

4.2 JKR (PWD) Standard Forms of Contract 203A

Next in line is JKR form 203A, which is formed by the Public Works Department in Malaysia,

now known as JKR. According to Rajoo (2014), this form of contract has been modified progressively

over the years to suit with the local conditions as well as current industry developments. This is

mainly used for public work projects such as building highways, railway roads, public infrastructures

etc.

The table below is extracted from an article by Hansen, S (2014), which highlights the

differences between PWD contract and PAM contract.

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4.3 FIDIC Standard Forms of Contract

The final form of contract is FIDIC which is Federation Internationale des Ingenieur Conseils.

This contract is an international based contract which may be used in many countries with

accordance to their legislation. According to Rajoo, S (2014), the most commonly used FIDIC forms

consist of Red Book; Yellow Book; and Orange Book. Despite that, the use of FIDIC has not been the

main choice for a local contract, it is usually more popular for foreign-funded and foreign joint-

venture projects.

For this project, it would be necessary for a suitable contract to be incorporated. Hence,

PAM Contract 2006 (with quantities) would be a better choice than JKR 203A and FIDIC contract.

This is due to the fact that this is a decent size project that involve local private companies, not a

government based project.

4.4 Forms of Contract

Alongside choosing our procurement method, we are also required to strategically choose

our forms of contract. We have a few strategies available for traditional method and management

contracting as shown below.

For traditional method, 4 types of strategies are available as shown above. Fixed price

contract shows a very clear picture of commitments but more time is needed for preparation of BQ.

Remeasurement contract allows construction process to begin earlier but there are less certainty in

the contract sum due to remeasurements and variations. On the other hand, Drawing &

Specification also allows construction to begin earlier, but there are no breakdown of the tender

sum provided. Lastly, cost reimbursement contract also allows construction to begin early but it

provides the least certainty of the extend of commitment.

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Furthermore, management contracting strategy involves management fee which are meant

for the employment of a professional team. This is to assist the client on design and cost issues and

construction related issues. However, this strategy does involve a higher cost, hence the element of

cost is compromised.

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5.0 Critical Analysis and Recommendation of Basic Procurement Method

It is previously discussed that the Traditional procurement method yields a better cost

certainty as compared to Management Contracting, however is much more demanding in terms of

the time spent during the overall stages of construction due to the inability to overlap detailed

design and construction stages. This feature of Management Contracting allows the overall timeline

of the construction project to be cut short.

The selection of the right procurement method is very important as has to “achieve the

optimum balance of risk, control, and funding of a project.” The selection process usually consists of

two components (Royal Institution of Chartered Surveyors (RICS), 2013):

1) Analysis of the client’s needs and objectives; and

2) Selection of the possible procurement options.

The procurement triangle serves as a decent guideline for the analysis of the client’s needs.

Referring to the figure below (Royal Institution of Chartered Surveyors (RICS), 2013), the client’s

primary concerns can be made known. The client might consider this paradigm as being the “highest

quality, at the lowest cost, in the shortest time” (Hackett, et al., 2007), however this not always the

case.

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In our project, the elements that will take precedence are cost and performance. As we are

procuring for a condominium, cost certainty takes precedence as the cost price of each unit cannot

fluctuate too much from the initial estimation, as this directly affects the profit obtained from the

sale of these unit. The performance of the contractor also affects the quality of the housing units,

which should be meeting the customers’ expectations.

Some of the other important details to be collected are the project objectives, requirements,

and characteristics. (Casey & Bamford, 2014) Elements such as the project size (in this case, a 20-

storey condominium), project location, and the expected quality to be delivered has to be

ascertained. It is also beneficial to outline the special requirements of the project such as the need

for specially-built plants and equipment, or the key challenges such as the site accessibility or project

characteristics that pose a huge impact on the project time scale if unaddressed.

For instance, our project is a high rise, which certainly requires heavy machineries such as tower

cranes and temporary lifts. The transportation and erection of these machineries has to be carefully

planned out, including the method of ingress on egress at the construction site. This leads to the

need of proper planning of flow of heavy transportations in and out of the site.

Another major consideration will be the project risks, which almost always play a huge role on

the selection of procurement methods. All risks relating to site issues, design, building materials, and

constructability etc (Casey & Bamford, 2014) should be properly mapped out.

There are generally 4 categories of risks (Royal Institution of Chartered Surveyors (RICS), 2013):

1) Strategic risks, for instance funding problems and failure to obtain premises

2) External risks, such as changes in the environment

3) Project risks, such as delays in the work programme or overspending

4) Discovery risks, which are problems that will only arise during the commencement of the

works.

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As no construction project is risk free, it is important for the client to identify these risks early on

in order to Terminate, Treat, Transfer, or Tolerate such risks (Hackett, et al., 2007), for instance,

obtaining insurances or bank guarantees.

The client’s resources to carry out the project should also be taken into account (CRC

Construction Innovation, 2004). The carrying out of the project requires a specific level of expertise,

experience, knowledge and skill. The capability of human resources available to commit to this

project has to be known beforehand as this affects the selection of the type of procurement

methods.

If our client’s firm is assumed to be an experienced firm with ample resources to monitor and

procure for the works required for this project, the traditional method will be a better choice as

compared to management contracting, as our client’s company already has the expertise to handle

this project and vice versa.

All these elements point to the same conclusion: We will recommend the traditional

procurement method for this construction project due to the significant priority on cost and quality.

We believe that this procurement method best suites our client’s needs to monitor the project, and

presents a lesser risks portion as compared to Management Contracting. Our client also has the

adequate financial resources to provide input and control the outcome of the project through the

traditional procurement method.

(3147 Words)

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