FREE BOOK SAMPLE: ‘Key Drivers of the Potential Procurement Strategy’ from ‘A Comparative Guide to Standard Form Construction and Engineering Contracts’ by Jon Close

The procurement strategy identifies the best way of achieving the completion of a construction project – often taking into account the best value for money over the entire life-cycle of the building or facility.

The aim of a good procurement strategy is to achieve the optimum balance of risk, control and funding for a project. The choice of a particular procurement strategy largely depends on a client’s required balance of cost, quality and time risks.

It is worth remembering that the construction project itself may only be a relatively small part of the entire life-cycle of the building or facility as a whole. The procurement strategy for the construction project therefore also needs to take into account where and how the construction project sits in relation to that wider picture. The issue of ‘sustainability’, particularly in respect of public sector works, is a major factor that needs to be considered at this stage.

To establish the procurement strategy, the procurement team needs to establish what the client’s attitudes and key drivers are, and needs to state them in a way and in a language that is understood by the entire project team. More often than not, the lawyer (or whoever is going to reduce this concept into a contractually binding agreement for tender etc.) is not party to discussions on the basis that they are purely commercial considerations.

In my experience, this is a flawed strategy as many a commercial nuance has been lost in translation or simply omitted when contracts are then drafted. Whilst it may appear to add upfront cost to a project, you actually close the gap and avoid contractual risk being placed with the wrong party (which is often a cause of extreme irritation) by considering commercial and legal considerations together. Trust me, you will end up with a better draft the first time around (saving cost and time) if everyone knows what the contract is supposed to look like and its feasibility, as opposed to reverting to the square pegs in round holes strategy which creates endless waste and further frustration.

Fundamental to the process is understanding what the client requires from the project, together with some key information as to how much it wishes to spend, what quality it is seeking to achieve, and by what time it requires the project to be completed.

This process may take some considerable time, but this is of vital importance given that that there is so much that flows hereafter. It is usual, in many cases, for the procurement team to assist the client with the formulation of their own ‘brief’ for the project as, initially, it may well be that the client does not know much about the construction project. This is of course perfectly understandable especially if the client is an end user of the facility, but it will know the output or outcome that it requires at the end of the process. This output or outcome requirement needs to be expressed in such a way that the construction team can understand the client’s needs and desires.

Do not be shy in ‘playing back’ to a client what you believe they are trying to achieve. If you cannot understand what they are trying to do, then you risk producing a contract draft which is at best a template unrelated to the reality of what will occur on site and, at worst, is wholly inappropriate as a contractual tool, confuses everyone and gets dismissed as another expensive irrelevance. Keeping the outputs simple when the design, technology and other concepts are anything but simple is an art form and will help you distil what is really most important and provide clarity to your first draft.

For this purpose, it may be useful to provide the client with a selection of ‘high level’ construction project outputs which they can consider further, for example:

  1. a project at a stated cost;

  2. a project of a certain size, shape, appearance and quality; and/or

  3. a project to a defined timescale.

It is likely that a number of options and sub-options will also be provided (with suitably qualified statements to cover any assumptions made, so that the client is aware of the parameters upon which the guidance is being provided) but these are your foundations.

Eventually, the client’s attitudes and drivers can be established through the above process, and it is these attitudes and drivers that are behind the choice of a particular procurement strategy and procurement route. These attitudes and drivers are usually considered against the headings of:

Time

Cost          Quality

1.1.1 Cost

The cost of the project will be of paramount importance to the client, in that often a business investment decision is based upon the balance between the return or benefit to be achieved against the investment to be made. This is often considered as being two sides of an equation which must always balance each other out – with the surplus (as added value) being the difference between the resource input (the investment) and the benefits to be obtained. There may be a need to reduce construction project costs because of other cost pressures in the overall development spend profile.

Some of the questions that may be asked at this stage are:

  • Is there a need or desire for cost certainty?

  • Is a lump sum contract preferred?

  • Will that be a fixed price or with fluctuations?

  • Do the circumstances dictate remeasurement of the works?

  • Must all tenders be on a competitive basis; are restrictions placed based on the form of funding available or required to be used?


1.1.2 Quality

Issues surrounding quality often go hand-in-hand with the extent to which a client needs (or perceives the need) to maintain control over certain aspects of the design and level of workmanship being employed.

Typical questions to ask are likely to be:

  • Is the project for a completely new detached building, an extension to an existing building, the refurbishment of an existing building, the restoration of a historic structure or a repair and maintenance programme?

  • Should the design be wholly in the hands of the client’s consultants or can some detail design be placed as a contractor’s responsibility?

  • Does an innovative design demand sophisticated construction methods?

  • Should there be provision for design by specialist subcontractors?

  • What measure of control will the client wish to exert over materials and workmanship?

  • How much reliance can be placed on performance specified requirements?

The answers to the above will assist you in terms of deciding whether other professional appointments are needed as well as the level of design sign off and change control that the client will expect to be in place governed, naturally, by the contract you will draft.


1.1.3 Time

Time is likely to be a very important factor for many clients and not just in terms of how quickly you can turn around the necessary contractual documents.

The financial benefits of undertaking the project in the first place will usually be based upon certain programme constraints. The projected financial outcome will therefore only be achieved in full if the project commences the ‘delivery’ of its benefits in line with a particular timescale.

Some of the questions that may be asked in respect of this matter are:

  • Is a ‘fast track’ project with the shortest overall programme a priority?

  • Is an early start date required; will there be adequate time to prepare full information for tendering purposes?

  • Do circumstances dictate a specific completion date; can the contractor be provided with exclusive possession from its start on site?

1.1.4 Risk

As everyone is aware, risk is inherent in the construction process. The way that risk is to be dealt with is a fundamental issue when considering procurement strategies and procurement routes.

Any risk which serves to increase the costs and thereby reduce the ‘added value’ over the life of the construction project, or which has an effect upon the quality of the construction project that can be achieved, or which can delay the delivery of the construction project to the target timescale, will adversely impact upon the client’s successful outcome of the construction project.

The risks may appear in any number of different ways, many of which are outside the direct control of the client. It may be forced in these circumstances to react to these risk events and to seek to change the scope, the standard, the cost or the time period for the project in some way.

Such risks can occur at any point in the life of the project and the earlier those possible risks are recognised and taken into consideration and allowed for within the chosen procurement strategy and procurement route, the less disruptive those risks will be if they actually occur.

The source of the risks might include some or all of the following:

1.1.4.1 Political or economic change (globally, nationally or locally)

A change in government and/or a change in the economic climate prevailing at the time may result in a different landscape upon which project decisions are to be made.

On occasion, this might result in the original project scope and size being delayed, rather than changed in scope, and then undertaken at a later date. An example of this may be a government decision to cut back on investment in a particular area in times of economic hardship, thereby putting the whole justification for the project in doubt. If contracting in regions which are prone to conflict or terrorist attack, the commercial risk is that a project could be suspended for a period of time. In turn, this could lead to a difference between prices originally tendered and what they subsequently are later on in real terms once the notice to proceed has been issued. If this is a real risk, then contracts with price fluctuation clauses will be at the forefront of your mind to allow flexibility in the event of transportation and goods/materials costs being so high that a party simply cannot proceed, meaning that the whole project falls over before it has begun. This can be avoided.

1.1.4.2 Legislative change National or local government changes in policy or law

This is of particular relevance in industries where the client’s affairs are highly regulated and where such changes would have a fundamental impact on the manner in which the client’s business is conducted. An example of this may be Brexit in the UK where the introduction of new laws (or abolition of certain EU based laws) could restrict the ability of the client to conduct his business with the flexibility enjoyed previously and the need to adapt suitability to ensure continuing compliance. In such circumstances, contracts which do not rigidly define personnel on site as being the contract price paid but which recognises that people may need to be based away from the site but are equally still part of the cost may inform decisions as to the form to be adopted.

1.1.4.3 Environmental influences

Over the course of recent years, the trend has been to place a greater emphasis on environmental issues, thereby forcing firms to take account of such pressure in the conduct of their business and in the products or services offered. An example of this may be the need to amend production methods such that a greater proportion of the energy used is sourced from renewable resources and with sustainability of the environment in mind. Consequently, certain methods of collaborative working may need to be engendered within the contractual draft and/or various pre-conditions (or conditions precedent as they are often referred to) may need to be included in order to meet such expectations.

1.1.4.4 Social or technological change

A change in the social environment or some technological advancement may result in the client needing to amend his/her thinking behind the entire justification for the project.

An example of this may be the adaptation of a retail offering from an out-of-town development to one which offers further public transport infrastructure or is adapted to be moved to an inner town regeneration site with further physical restrictions and deemed liabilities in terms of site conditions. Or the proposed development of an incineration plant, the technology for which is significantly out of date but which due to funding restrictions needs to go ahead and with engineering installation contracts signed by a specific date. In such cases, a closely monitored re-design process could be accommodated subject to clearly worded post contract variation and valuation clauses being operated so that one party does not end up with a severely bad bargain (which then needs to be justified to shareholders or the tax payer) at the expense of another’s windfall due to simply the passing of time and technological advances.

1.1.4.5 Competitive influences

Most companies within each industry or business sector do not operate in a vacuum and are therefore always seeking to react to moves by competitors. On many occasions this will involve the need to quickly respond with a change in the product offered to the market.

An example of this may be the need to accelerate the production or increase the quantity or the quality of a new item to the market, to ensure that it is in front of the launch of a competitor’s product.

1.1.4.6 Risks inherent in the construction process

There are certain features of construction projects that create particular challenges and risks for clients, contractors and subcontractors. In addition, there are many variables that can be impossible to predict accurately in advance, yet have can have enormous impact on the ultimate cost and duration of the project.

Some of the features and variables which create risks in the construction process are:

  • The complex nature of building works, for example:

    • entirely new build;

    • demolition of an existing building and its full reconstruction;

    • partial demolition and rebuild; or

    • refurbishment and/or extension of an existing building or structure.

  • Unforeseen circumstances, for example:

    • unexpected ground conditions;

    • unpredicted weather conditions;

    • a shortage of resources;

    • a new design that proves impossible or very difficult to construct.

  • The length of the contract (projects vary in the time required for completion from days to years).

  • The number of participants (the number of parties involved in a project can have a large effect upon the contractual chain).

As can be seen from the above, many risks may be faced and may therefore need to be taken into account in considering the appropriate procurement strategy.

A major point to understand is that risks can be accepted by the client, can be transferred to another party by the client, or can be reduced or mitigated; but risks cannot and should not be ignored. The contract should address known risks head on and not leave the parties guessing at a later date.

If an identified risk can be removed altogether, so much the better, but this is unlikely to be possible in most cases. Elimination of risks will usually only occur during the course of the project, and so is unlikely to be possible at the commencement when the procurement strategy is being considered. However, risks can be managed in such a way so that the effect of the risks is greatly reduced.

It is often considered that risks should be held by the party best able to deal with that risk, and this is a factor that should be taken into account when considering the appropriate procurement strategy.

Clients may choose to allocate greater risk to themselves, thereby deriving potential benefits in terms of cost, time and quality. Alternatively, they may choose to attempt to divest themselves of risk almost entirely, with the resultant opposite effect, and with the added factor that the client may lose control of that risk item altogether.

Obviously, any risks that are transferred from the client to the contractor normally have attached to them a cost and/or programme impact, and this is in effect a risk ‘premium’, being a premium that (when recognised by the client) the client may rather not face.

The client’s attitudes and drivers may change over time, as various risks begin to materialise. This is a factor that must be considered in the choice of a procurement route during the initial strategy meeting.

By way of analysis, it is usual to place the list of risks in various categories, depending on the nature of the risk involved and the potential ownership of those risks. Categories of risks could include some or all of the following:

  • strategic risks, such as failure to obtain planning permission, or client funding problems;

  • external risks, such as changes in the environment;

  • project risks, such as overspends or delays to the programme;

  • discovery risks, such as poor ground conditions or the like.

The listed risks are normally placed into a risk register, a contractual document that both lists the risks and provides a description of the impact that the risk in question would have on the project, should that risk event occur.

The overall list of risks can be as long or as short as is necessary (and this may well depend upon the complexity of the project). These risks will either be generic (common to most if not all construction projects) or will be specific to the particular construction project in question.

Generally, those risks that are external to the project are less able to be controlled in the timing or extent of impact upon the construction project, whilst those risks that are internal to the construction project can be more easily managed and can be allocated to the appropriate party in the construction project.

In the analysis of the risks in the risk register, a risk scoring exercise is normally undertaken. Each risk event is scored by reference to a pre-agreed scale of the likelihood of the event occurring. An element of judgment is inevitably needed as the project team may not necessarily be aware of the likelihood of client risk events occurring.

To avoid bias in the results, often the scoring is undertaken by various different disciplines in the client’s procurement team and the scores are then averaged for each risk event. The risk events are also scored in a similar way on the basis of the impact that the event in question would have on the programme should the event occur. Consequently, it may be that some risk events are more likely to occur but would have little impact upon the project should they occur and vice versa.

This resultant risk profile may make it plain that the originally envisaged procurement strategy needs to be changed. The opportunity to deliver real benefits to the client (and for these to be accurately encapsulated within the contractual structure) is obviously best obtained if decisions to change the procurement strategy are made as early as possible, given that it is a well-known fact that any ‘window of opportunity’ to gain benefits progressively closes as the project continues.

In addition, this risk profile coupled with the client’s attitude to risk (which may be an attitude developed through free choice, or, particularly in the case of public sector clients, may be an attitude dictated to it by statutory or other regulatory obligations) helps to decide upon the procurement route to follow to satisfy the procurement strategy, and which allows flexibility to deal with the anticipated risks that may be faced.

A chosen procurement route should be made with a clear awareness of the likelihood of occurrence and severity of the impact of risks. If a procurement route is chosen in this way, the project should be less severely impacted if the risk event in question actually occurs. Undertaking a risk analysis at this early juncture means that it can be updated throughout the construction process and can be used as a management tool to assist with the management of risks as they occur.

In some contract forms (the NEC forms, for example) the use of risk registers is an established way of recording risks during the construction process, and procedures are put into place to allow the parties to agree whether the risk should be carried by one party or the other, or whether the risk should be shared, or even if the risk can be eliminated altogether.

This approach is particularly useful if the allocation of the risks considered at the procurement stage are dealt with on a similar basis, and if used correctly can be utilised to anticipate and minimise the impact of potential risk items in the future.

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