srilanka's procuremet arrangement.pdf

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0 6 S L - a ( a ; - 3 'Built-Environment-Sri lanka -Vol. 02 IssueO2:2002

Trends in Construction ProcurementSystems in Sri Lanka

R a u f d e e n R a m e e z d e e nSadhana De S i lva

AbstractThe procurement system is a key means through which the client creates pre-conditions for successful achievement of project specific objectives. The use and the development of procurement systems in any constructionindustry are affected by various factors. Thus it is interesting to discover different systems used in differentinstances . This paper presents the results of a questionnaire su rvey carried out amo ng major contracting organizations in Sri Lanka on procurem ent system s to discern the trend from year 1977 to 2000. The paper also shedssome light on the underlying factors that affected the changes in procurement systems in Sri Lanka during theperiod concerned .

In t roduct ionThe con struction industry of any country, recognized asan econ omic regulator, plays a key role in its economyproviding significant contribution to the national output.Its strong interdependence with other sectors of theeconom y has been established (Turin, 1973; Hillebrandt,1984; Ofori, 1990). Thus, well being of the national construction industry is of paramount importance for economic development and long-term growth of e country.As the construction industry is an open system, whichis very sensitive to change , its characterization throughout the world is determined by the operating externalenvironment, which consists of subsystems such aseco nom ical, political, financial, legal and technologica l.This h as lead the indu stry to be in a challenging state inaddressing the changes forced by the subsystems inan efficient and effective manner. Thus, the construction industries in the world are striving to tackle thesechanges through the new and innovative ways of construction , efficient reso urce utilization and better organization of projects. Consequently, construction projectprocurement systems practiced in the industry have alsobeen subjected to changes resulting in many newly innovated procurement systems that could be used tomeet contemporary requirements.This paper discusses the change of procurement trendin the construction industry of Sri Lanka, focusing onthe building sub-sector from 1977 to 2000. The underlying factors that are responsible for the cha nge are discussed w ith comparisons from other countries.Methodo logyThe necessary data, among other information, werecollected from top m anagers of M1 and M2 grade contractors in Sri Lanka . The method used for the collection of information w as a written structured questionnaire. In addition to the questionnaire survey, few interviews were conducted among professionals to support

the interpretation of findings. The purpose of the questionnaire was to unearth the procurement systems usedin projects hand led by the particular construction com pany from 1977 to 2000. The sam ple represents approximately 73% of the total population of M1 and M2contractors operating in Sri Lanka. This is consideredto be a go od representation and these contractors together cover a m ajor portion of construction wo rk in SriLanka. Table 1 presents the profile of the sample in thequestionnaire survey.Table l : Prof i le of the Survey Sample

Grade Survey Sample Tota lM1 12 15M2 12 18Total 24 33

Construct ion ProcurementThe procurement concept in construction has been defined in many ways (McDermott, 1999; Love et.al. 1998).Masterman (1992) considered a construction procurement system to be "the organizational structure adoptedby the client for the management of design and construction of a building project". In a more elaborativeway, Love et. al. (1998) viewed procurement systemsas "an organizational structure that arranges specificresponsibilities and autho rities to participants and de fines the relationship of the various elements in the construction projects". In an attempt to develop a widelyapplicable d efinition, CIB W92 at its com mission m eeting in 1991, developed a working definition for procurement system s as "the framework w ithin which construction is brought about .acquired or obtained". Differentprocurement systems are used for different projects and

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Prime cost contracts include three main approache s,i.e. cost plus contracts, target cost contracts and feecontracts. Prime cost contract result in the contractorreceiving only what is spent plus an agreed am ount tocover profits. These m ethods are used where there isan inadequ ate de finition of work at the time of tender,during high inflation and the project is extremely complex or unquantif able risks are involved. The absence oftender sum at the beginning and no contractual commitment of the contractors to reduce the final cost areconsidered as the major disadvantages of these systems. Prime cost arrangements are the most popularmethod in the informal sector of the Sri Lankan construction industry. Informal sector accounts for a considerable amount of workload in the country m ainly fromthe housing sub-sector.In tegra ted Procurement SystemsThese s ystems are also identified as Design and B uildsystem s. They simply mean that one contracting organization offers to undertake the sole responsibility ofdesign and construction of a project. Although the contractor assumes the overall responsibility for projectdelivery, the client may ap point an independent adviserto monitor quality and cost (Cox and Tow nsend, 1998).There are som e variants to the integrated procurementsystem, which have been introduced to bring more com petition into the process and to achieve the balance ofallocation of risks (Valance and Akintoye, 1996). Therange of services offered by the contractor varies greatlywith these variants (Frank, 1998). With some variantscontractors find sites, arrange mo rtgages, sales and fi nance. Some even operate the constructed facility inaddition to design and construction. The comm on variants are package deal, turnkey, develop and construct,novated design and build and concession contracts suchas BOT, BOO, BOOT etc.,It has been widely accepted that closer integration ofdesign and construction is a benefit of the system(McD ermott, 1999). Further, a number of studies havefound that these system s offer shorter overall time whencompared to separated procurement systems. Also,overall econom ical project solutions are found to be pos sible with these system s. However, aesthetically important buildings are not generally recomm ended to procure through this meth od. In Sri Lanka integrated procurement systems are used m ainly for industrial buildings. It was fou nd that they are mainly of prefabricatedtype. Almost all 200 garment factory buildings developed during President Premadasa's period were procured using this method.M a na ge me nt Or ie n t e d S y s t e msThe basic feature of these arrangements is the separation of management function from design and construct ion. With these arrangem ents client enters into a contract with an external organization, which is responsible

for management and coordination of design and construction of the work. The comm on variants to thesesystems are management contracting and constructionmanagement.The overall design and construction time is generallyshorter with these systems (Turner, 1997). Varying ideason cost reliability of the arrangements are reported bymany researchers (Lam and Chan, 1994). Technologically complex buildings and large projects are recom mended for these systems. In Sri Lanka, only fewprojects have been procured through this method andall of them are very complex and large-scale buildingprojects.Col labora t ive SystemsThe basic principle of these systems is the collaboration between two or more parties to achieve successfulproject objectives through fair dealings, commitment,and shared investment. Various forms of joint venturesthrough combine investment of capital and expertise toundertake the works are also considered as collaborative procurement systems (de Valence and Huon, 1999).Partnering is the latest collaborative system that hasenjoyed an increasing attention globally. Crawly andkarim (1995) stated that partnering is a decentralizedorganizational structure that allows better flexibility inmeeting specific project needs through increase d organizational comp etence. The key attributes associatedwith partnering are trust, shared vision and long termcommitment of the parties involved. Some of the advantages of partnering according to Frank (1998) andMatthews (1999) are reduced exposure to litigation, lowrisk of cost and time ove rruns, non adversarial win-winattitudes, better quality prod ucts, quicker start and improved efficiency of human and other reso urces. Nevertheless, the lack of commitment by all parties, culturalissues, higher risks involved and loss of control overdishonesty may be seen as common disadvantages ofpartnering (Matthews, 1999).

CIB (1997) believes that this is the most suitable approach for high-value high-risk construction pro jects. InSri Lanka, Collaborative systems have just started toemerge. It was found that these are also due to theinvolvement of international contractors in Sri Lanka.International contractors form joint venture arrangementswith local counterparts or existing international contractors when entering the Sri Lankan market.Tr e nd o f P r oc ur e me nt S y s t e ms Us e in S r iLankaTable 2 and Figure 2 provides a sum mary of the resultsobtained from the questionnaire survey for 5 panels representing the period 1977-2000. The results clearly highl ight the dominance of separated procurement systemthroughout the period. As such, only the separated system w as divided into its variants in the analysis. How ever, it can be noted that the share of separated systemas a who le is diminishing.

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It has gone do wn cons iderably in certain periods (particularly during 1982-86 and 1992-96) paving way for theimplementation of other systems.The second most popular system in Sri Lanka is theintegrated procurement system. It has recorded a usage rate of 20-3 0% over the years. M anagement oriented systems w ere used only in few p rojects. It recordsonly 1 % throughout the study pe riod. It is still pre-ma-ture to comment on the popularity of collaborative system because it has just started to emerge in Sri Lanka.Within the separated system, measure and pay hasthe highest share in the range of 50-65% of the total.The lump sum system has a varying share of between7-12% of the total. The re is a clear decline of prime costas a procurement system in large building projects.However, it is the most favored system in the informalsector of the industry.Factors Affecting the Change in the Use ofProcurement S ystemsAs the industry's characterization is determined by theexternal environment (political, econo mical, techno logical, financial etc.,) in which it operates, the development and the use of project procurement systems inany construction industry are affected by su ch environmental factors. Thes e environmental factors influencethe industry in various w ays thus determ ining the procurement shares and trends. How the influences of thosefactors are directed towards procurement trends are discussed below.Economic and Market AspectsCyclical demand in the construction industry is causedby the economic status of the country. Moor (1984)highlighted the decrease in construction work load in

1970's, due to the recession in UK, which resulted incontractors diversifying into areas of design andmanagement to ensure adequate work for survival. Suchsi tuat ions have resu l ted in the growth o f newar rangements such as des ign and bu i l d andmanagement contracting in UK construction industry.Further, in UK, the oil crisis in 1970's which resulted inhigh inflation coupled with high borrow ing rates madethe client realise the importance of construction timeand gave r ise to fast track project procurementarrangements like management con tracting.In examin ing the share o f pro ject procurementarrangements used from 1987 - 1 9 9 7 , Ladenpera et.al.(1999) stated that the changes in economic conditionsmay have had an impact on project procurementarrangements use d in Finland. In Finland, economicboom at the end of 1980s was followed by a sharp declineof over 50 % of the construction workload w ithin threeyears. In 1996-97 volumes started to grow again. Thetraditional me thod seem ed to be the choice especiallyin the recession in early 1990s with a low marketstructure.As the economy revived in 1996-97, the shares of designand build and management oriented procurementsystems increased possibly due to the need for shorterproject d uration (Ladenpera et. al, 1999).

In Sri Lanka, with the market changing from c losed toopen econom y in 1977, there has been a tremendousincrease in construction w orkload (see F igure 3). Thishad resulted in a considerable increase in the use ofnon-traditional forms of construction project procurementarrangements. The share of non-traditional procurementsystems increased from 23% to 32 % in the 1982-86Table 2 : Trend of Construction Procurement System s Used in Sri Lanka

Procurement System % of use (avarage)77-81 82-86 87-91 92-96 97-00

Separated System 78 68 71 61 77 Measure and pay 55 50 58 50 64 Lump Sum 12 10 8 7 10Pr im e cost 10 8 5 4 3

ntegrated systems^including Design and Bui ld , Turnk ey and packageleal)

22 31 28 35 21

1 1 I 1Collaborative Systems 0 0 0 3 1

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0 %

Collbarative systems Manag ement oriented systems Design and build Lumpsum Prime cost Measure and pay

7 7 - 8 1 8 2 - 8 6 8 7 - 9 1 9 2 . 9 6 9 7 - 0 0Figure 2 : Trend of Construct ion Procurement Systems Used in Sr i Lanka

per iod. Such a change was due to the burn ingrequirement for faster implementation of projects andincreased involvement of foreign contractors andconsultants in the industry. Similarly, a rise in non-traditional systems co uld be observed in the 1992-96period. The share has gone up to 39%. In both theseperiods, design and build constitute the largest shareamong the non-traditional systems. The increase ofdesign and b uild is mainly due to the increase in industrialactivity in the country. The growth of manu facturing sectoras sho wn in Figure 4 might have resulted in an increasein the share of design and build procurement system,especially during 1992-96 period.

Technologica l AspectsNew technological improvements and innovations ineng ineer ing have increased the complex i t y o fconstruction. This led the industry to seek improvedproject organisation procedures an d practices in orderto be in line with those technolog ical shifts. Thus, withinthis context, project procurement arrangeme nts havebeen identified as one of the areas that need to be reappraised (Kumaraswam i, 1994).Professional advisory programmes towards bestpractices are evolving. UK's Cons truction Best Practiceprogramme is an example. Construction Industry CostEf fect iveness (CICE) Pro ject study in USA andConstruction 21 study in Singapore are some otherexamples. Particularly, decisions pertaining to projectprocurement arrangeme nts are seen as more importantto the construction industry development. An increasedamount of research work has been undertaken in thisa rea . Outcomes o f such s tud ies have led theconstruction professionals to increase the productivity

and harmony of the industry, integrating their knowledge,experience, ethical attitudes and character in the servicesoffered to clients. Further, new roles for e.g. projectmanager and procurement manager have evolved throughthe identification of higher purposes of professionalism.The formation of the Institute of Qua ntity Surveyors SriLanka in 1982 has contributed to identify and popularisevarious alternative procurement systems in the SriLankan construction industry.Government Pol ic iesThe government is an important participant in theconstruction industry of every country, playing the roleof a major c l ient , regulat ing author i ty and theadministrator of the development of the industry (Ofori,1990). de Valance and Huon (1999) and many otherresearchers (M ustapha, et. al., 1994; Mukalula, 1996;Azis and O fori, 1996) have stated that changes in stateregulations and policies have made an impact on theprocurement trend. Further, some gov ernments directlyinfluence the project procurement through their policies.It is the stated policy of the governm ent of Sri Lanka toprocure future investments for new infrastructure projectsthrough the forms of BOT or BOO. By such policies,government expects to provide solutions to the problemof insufficient funds for investme nt (P residential PolicyStatement: Sri Lanka, 1996).Gove rnment be ing a major client .creates an impact onthe construction m arket, thus indirectly regulating theproject procurement practice in a country. In Sri Lanka,the majority of public works are procured using measureand pay sy stem . The reluctance of the public sector touse other non-traditional procurement methods is dueto the bureaucratic barrier created by financial regulationsand adm inistration regulations of the country. As a

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Figure3: Growth rate of construction value added at constant 1982 prices

to. 5 25.0

Year

Figure 4: Growth rate of construction value added at constant 1982 prices

c

consequence, the construction regulatory agency in SriLanka, the Institute for Construction Training andDevelopment (ICTAD) has only considered m easure andpay until recently in developing guidelines . for theindustry. Very little effort was made by the ICTAD topromote other procurement methods in Sri Lanka. Onlyin 2001 ICTAD published a guideline called "StandardBidding Document for Procurement of Wo rks - Designand Build Contracts". This is the first guideline to bepublished by the ICTAD for an alternative procurem entarrangement. This h as further strengthened the hold ofmeasure and pay as the dominant procurement methodin Sri Lanka.Financ ial Aspe ctsMost developing coun tries frequently obtain finance formajor development projects through development aidfunds, Both bi-lateral and m ulti-lateral aid constitute amajor portion of the developm ent budg et in Sri Lanka.These lending institutions essentially safeguard theirinterests by dictating the methodologies that theborrowers should follow. The procurem ent route is onesuch area where their advice is focused. For example, ifthe pro ject is funded by Wor ld Bank or As ianDevelopment B ank, the procedures for procurement willbe according to their whims and fancies. Thus, theissue of cl ient's choice in the procurement of major

construction projects becomes secondary to theperceived benefits of financial arrangeme nts. As such,it was found that the procurement concept is lessrelevant to a country like Sri Lanka where majority ofdevelopment projects are funded by foreign aid. It is alsoobserved that many arrangements for transactionsbetween client, contractors and financiers have evolvedin recent years. In a situation where client has nofinancial resources, projects are implem ented throughproject procurement arrangements such as BOT andBOO . These have resulted in new financial structuresand also have led to a change in project procurementpractice in the construction industry.Socio-cul tura l AspectsHofstede (1984) (of. McDermott, et.al. 1997) ha smaintained that the con cept of culture is a prime driverof both individuals and organizations. Trust andinstitutions are tw o m ajor dimensions related to culture.Latham (1994) accepted trust' as the gatekeeper to anyreal progress in improving procurem ent and contractualrelat ions in UK construction industry. His reportattempted to rebuild the trust in UK co nstruction industrythrough the advocating of partnering and enco uragingrestructuring of client, contractor, subcontractor, supplierand consultant institutions. The importance of institutionsin establishing procurem ent p olicies and p ractices are


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well established by many researchers (Ng, 1994; Oforian d Pin, 1996; Azis and Ofori, 1996). As discussedabove, the dominance ofmeasure and pay in Sri Lankais mainly attributable to the institutionalising of thisprocurement m ethod by public sector agencies and virtualnegligence of other methods over time.Analys ing the relat ionship between procurementsystem and clients interests in both countries, Saito(1994) mad e clear that procurement difference in UKand Japa n is based on cu ltural differentiation. W esternorganisations may need to learn to work with Asianprofessionals by accepting their cultural com position(Matthews et. al., 1999). This is a procurementsystem issue that the system itself must be able todeal with and adapt to . In examining the organizationalstructure of Japanese contractors operating in SriLanka. Rameezdeen and Welaratne (2001) found thatall Japanese contractors have entered the Sri Lankanm a r k e t t h r o u g h jo i n t v e n t u r e p r o c u r e m e n tarrangem ents. Joint venture provides an opportunityto reduce the cultural gap between the internationalcontractor and the host nation, in addition to numerousother advantages to the newcomer. Even a minuteshare of collaborative systems during periods 1992-96 and 1997-2000 (see Table 1) are due to theinvolvement of international contractors in Sri Lanka.ConclusionsThis paper h ighlighted the dom inance of separated procurement systems in Sri Lanka from year 19 77-2000.This is mainly due to governm ent influence on the construction industry of Sri Lanka. Government as a m ajorclient and the regulator neglected and created a barrierfor the development of alternative procurement m ethods.Economic g rowth has favoured som e of the alternativemethods to emerge in Sri Lanka. Design and Build isone such method developed mainly due to the industrialgrow th of the country.R e f e r e n c e sAzis, Abdul, A. and Ofori, G. (1996), Developing WorldBeating Contractors through Procurement Policies: T heCase of Malaysia, In Taylor, R. G. (Ed.,) CIB W92'North Meets South' Procurement System Symp osiumProceedings, Du rb a n , S o u th A f r i c a , pp. 1-10.CIB (1997) , p rocu remen t : A Key to i nnova t ion ,Proceedings of CIB W 92 Symposium, University deMontreal, Canada.Co x , A. and T o w n s e n d , M. ( 1 9 9 8 ) , StrategicProcurement in Construction: Toward s Better-Practicein Management of Construction Supply Chain, ThomasTelford.Crawly, L. G. and Karim, M. A. (1995), Conceptual Modelof Partnering, Journal of Managem ent in Engineering,11(5), pp.33-39.De Valance, G. and Huon, N. (1999), Procurement

Strategies, In Best, R. and de Valence, G . (Ed.), Buildingin Value: Pre Design Issues, Arnold, London, pp.13-21Franks, J. (1998), Building Procurement Systems: aClient's Guide,3 rd Ed i t i on , Longman Har low, .Hillebrandt, P. M. (1984), Analysis ofBritish ConstructionIndustry, Macmillan, London.Kumaraswami , M. M. (1994) , New Paradigm forProcurement Protocols, In Rowlinson, S. (Ed.,) CIB W92' East Meets West' Procurement Systems SymposiumProceedings, Hong, Kong, CIB Publication No. 175, pp.143-148.Lam, P. T. I. and Chan, P. C. (1994), ConstructionManagement as a Procurement Method: A NewDirection for Asian C ontractors, In Rowlinson, S. (Ed.,)CIB W92 "East Meets West" Procurement SystemsSymposium Proceedings, Hong, Kong, CIB PublicationNo. 175, pp. 159-168.Lahdenpera, P. J., Sulankivi, K. K. and Nykanken, V.E. (1999), Procurement Systems Shares and Trends inFinland, In Ogunlana, S. O . (Ed.,) Profitable Partneringin Construction Procurement,Londor\, E & FN Spon, pp.26 5 -27 2 .Latham, M. (1994), Construction the Team: Final Reportof the Joint Government / Industry Review ofProcurement and Contractual Arrangements in U. K.Construction Industry, HMSO, London.Love, P. E D., Skitmore, M. and Earl, G. (1998 ), Selectinga Suitable Procurement Method for a Building Project,Construction Management and Economics, 16:221 -233Matthews, J. (1999), App lying Partnering in the SupplyChain, In Rowlinson, S. and McDermott, S. (Ed.,),Procurement Systems : A Guide to Best Practice inConstruction, CIB Documentation, London, E & FNSpon., pp. 252-275.Mat thews, J. , Rowl inson , S. P., Phua , F. T. T.,McDermott, P. and Chapm en, T. (1999), In Ogu nlana,S. O. (Ed.,) CIBW92 & TG2 3 Proceedings: ProfitablePartnering in Construction Procurement,London, E &FN Spon, pp. 247 -256 .Masterman, J. W. E. (1992), An Introduction to BuildingProcurement Systems, London E & FN SponMcDermott, P., Melaine, Y. and Sheath, D. (1997),Construction Procurement Systems: What Choice forthe third World?, The Building Economists, December,pp. 26-31.Mc De rmo tt, P. (1999), Strategic and Emergent issuesin Construction Procurement, In Rowlinson, S. andMcDermott, S. (Ed.,), Procurement Systems: A Guideto Best Practice in Construction, CIB Documentation,London E & FN Spon., pp. 3-26.

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Moor, R. F. (1984), Response to Change: TheDevelopment ofNon -traditional Forms of Contracting:Occasional Paper 31, Ascot :CIOB.Mukalula, P. (1996), The Effectiveness of he StructuralAd jus tmen t Prog ramme (SAP) on Ma in tenanceProcurement Contracts, (Zambia case), In Taylor, R. G.(Ed.,) CIB W92 'North Meets South' ProcurementSystem Symposium Proceedings, Durban, South Africa,pp. 419-429.Mustapha, F. H., Na uom, S. G . and Ayg un, T. (1994),Public Sector Procurement M ethods used in Turkey, InRowlinson, S. (Ed.,) CIB W92 ' East Meets West'Procurement Systems SymposiumProceedings, Hong,Kong, CIB Publication N o. 175, pp. 221-227.

National Economic D evelopment Office (NE DO ), (1983),Faster Building For Industry, H M S O , L o n d o nNg, W. F. (1994), Procurement Methods for RuralHousing Projects in the Poverty Stricken areas ofGuangxi in the People Republic of China, In Row linson,S. (Ed.,) CIB W92 "East Meets West" ProcurementSystems Symposium Proceedings, Hong, Kong, CIBPublication No. 175, pp. 251-258.Ofori, G. (1990), The Construction Industry:Aspects ofits E conomics and Management, Singapore UniversityPress, National University of Singapore.Ofori, G. and Pin, T. (1996), Linking Project P rocurementto Construction Industry Development, In Taylor, R. G.(Ed.,) CIB W92 'North Meets South' ProcurementSystem SymposiumProceedings, Durban, South Africa,pp . 473-182. Presidential policy statement, 1996.


Presidential policy statement, 199 6. Government of SriLanka, ColomboRameezdeen R. and Welaratne C. (2001), InternationalContractors Operating in Developing Countries: The Caseof Japanese Contractors in Sri Lanka , Proceedings ofth e 57 th Annual Sessions of the Sri Lanka Associationof Advancement of Science, Colombo, Sri Lanka.Row linson, S. (1999), Definition of ProcurementSystems, In Row linson, S. and M cDermott, S. (Ed.,),Procurement Systems: A Guide to Best Practice inConstruction, CIB D ocumentation.London, E & FNSpon., pp. 27-53.Saito, T. (1994), The Comparative Study of ProcurementSystems in UK and Japan , In R owlinson, S. (Ed.,) CIBW92 'East Meets West" Procurement SystemsSymposium P roceedings, CIB Publication No. 175,Hong Kong, pp. 389-398.Turin, D. A. (1973), The Construction Industry: ItsEcono mic Significance and Its Role in Development,2 n d Ed ition, University College Environmental Group,London.Turner, A. (1997), Building Procurement,2 n d Edition,MacMillan, London.

Valance, K. and Akintoye, A .(1996), B uilding ProcurmentSystem s S election and Flexibility, In Taylor,R. G.(Ed.,) CIB W 92 'North Meets South' Procurement System Symposium Proceedings, Durban, South A frica,pp.602-613.

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