considerations in procurement strategy - 2014 olswang construction law conference
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2014 Construction Law Conference: Considerations in Procurement Strategy Thursday, 6 February 2014
Francis Ho, Head of Construction [email protected] | +44 20 7067 3505 | @fkyh
Procurement Strategy Issues
• Methods by which clients may be able to procure more competitively and collaboratively
• In this talk we consider:
• Framework Agreements
• Two-stage tendering
• Construction Management
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Framework Contracts #1
• Umbrella agreement under which terms agreed in advance for works and services
• Works/services instructed each time via “call-offs”
• Each call-off becomes a separate contract
• Typically in place for several years
• No need to negotiate terms or tender prices each time
• Requires more upfront work; saves time and cost in the long-term
• No guarantee of work but economies of scale may reduce suppliers’ costs
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Framework Contracts #2
• Create long term relationships with suppliers
• Can measure performance for continuous improvement
• May allow clients to gain advice from construction experts without taking on staff, e.g. project management, cost management, legal advice
• Multi-supplier framework allows mini-competitions between suppliers
• Mainly bespoke but some standard forms exist:
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Two-Stage Tendering #1
• Construction market heating up, especially in London
• Position for contractors healthier than any time since 2007
• Greater demand may mean return to two-stage tendering
• Single stage tendering = lowest cost (lump sum or prime cost)
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Two-Stage Tendering #2
• Two stage tendering:
• First stage – select preferred Contractor
• Competitive tender with some information – preliminary costs, programme, OHP, agree construction contract terms
• Collaborate with preferred Contractor on pre-construction services on prime cost/lump sum basis
• Preferred Contractor tenders long-lead subcontracts, build up fixed price, programme and cost plan
• Second stage – finalise contract terms, finalise fixed price
• Usually bespoke but some standard forms
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Two-Stage Tendering #3
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Advantages Disadvantages Can de-risk project by second stage (advantages for both Client and Contractor)
Longer, costlier tendering process
Better collaboration - Contractor inputs into design and buildability
Can be time-consuming/costly to replace Contractor before second stage
May achieve quicker programme and more cost and time certainty on more complex projects
Needs a more sophisticated client
Client can withdraw from process before accepting second stage bid
Client may achieve lower cost on more straightforward projects
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Construction Management
• Popular in the 1980s (Broadgate, Canary Wharf)
• Declined rapidly due to poor publicity (Holyrood, Great Eastern) and continued rise of design and build
• Client appoints Construction Manager and professional consultants
• CM manages construction, consultants design. CM may manage some specialist design
• Client appoints trade contractors which are administered by CM
• CM responsible for its services but not for design and construction of project
• Should we reconsider the role of construction management?
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Construction Management Structure
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Direct Contracts
Developer
Construction Manager
Cost Consultant
CDM Co-ordinator
Design Consultant
Design Consultant
Design Consultant
Trade Contractor
Trade Contractor
Trade Contractor
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Alternative 1: Design-Build
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Sub-Contracts
Direct Contracts
Client
Contractor
Sub-Contractor
Sub-Contractor
Sub-Contractor
Design Consultant
Design Consultant
Design Consultant
Contract Administrator
Cost Consultant
CDM Co-ordinator
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Alternative 2: Traditional Contracting
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Sub-Contracts
Direct Contracts
Client
Contractor
Sub-Contractor
Sub-Contractor
Sub-Contractor
Contract Administrator
Cost Consultant
CDM Co-ordinator
Design Consultant
Design Consultant
Design Consultant
#olswangconstruction www.constructiveblog.com
Construction Management Suitability
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May be suitable Less likely to be suitable Complex projects where Contractors charge heavy premium for turnkey risk
Straightforward, lower value projects
Clients with experienced, hands-on development teams
Inexperienced or under-resourced clients
Construction start needed before design completed
Financing needed from lenders (no cost/time certainty)
Flexibility to change design required
Clients unwilling to trade risk for cost-effectiveness
Strong collaboration between Client and Contractor
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Construction Management – Getting it right
• Choose the right project
• Select the right Construction Manager and appoint early
• Achieve as much cost certainty as possible before start on site
• Strong administration and record-keeping processes
• Providing sufficient Client management
• Invest time in relationships with construction team
• Tender trade packages with as much information as possible
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