A Report on Procurement Strategies - PP1

REPORT
Procurement Strategies
An Analysis and Recommendation of
Procurement Methods
BACHELOR OF QUANTITY SURVEYING (HONS)
PROFESSIONAL PRACTICE 1 [QSB 60604]
ASSIGNMENT
November 11th
, 2016
A comprehensive analysis on the Traditional, Management
Contracting, and Design & Build Procurement Method

PROCUREMENT STRATEGIES
1BACHELOR 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

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

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.

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.

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.

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.

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.

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).

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).

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.

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.

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.

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.

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.

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.

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.

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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