A study of procurement routes and

their use in the commercial sector

Miss Joanne Larmour

Thesis

Interdisciplinary Design for the Built Environment

June 2011

Word Count: 14,679

2

Abstract

The choice of procurement route may have a significant effect on the construction of a

building project. Through a review of previous research on the history and use of different

procurement routes, and analysis of procurement routes in use in the commercial sector, this

thesis seeks to identify any trends and determine what, if any changes need to be made to

improve procurement routes in order to improve construction. A summary of the factors

which should be considered in the decision to choose a particular route is also included.

In order to conduct analysis of the use of procurement routes, it is necessary to set certain

constraints for comparison. This paper includes an analysis of the procurement of large scale,

new-build commercial projects in Central London, completed within the last decade. Whilst

the results are specific to this particular sector, some of the conclusions are relevant to client

bodies across many sectors. It is of particular note that the sector analysed primarily includes

experienced clients, and there ought to be a dissemination of knowledge of these clients and

their practices to the inexperienced or one-off client in an attempt to improve the industry as a

whole.

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Contents

1. Introduction 5

1.1. Procurement History and Background

1.2. Analysis of recent projects and procurement data

1.3. Issues to be addressed for future procurement

2. History of Procurement in Construction 7

2.1. Procurement categories

2.2. Contract types

2.3. The evolution of procurement

3. What influences the procurement system chosen? 12

3.1. Project strategy

3.2. Client organisation

3.3. Financial objectives

3.4. Method of organising design and construction

3.5. Risk management

3.6. Project constraints

4. Limitations with existing procurement systems 22

4.1. Demand issues

4.2. Supply issues

4.3. Common issues

5. Trends in the UK 25

5.1. Contracts in Use

5.2. Trends from Contracts in Use 2004

5.3. Trends from Contracts in Use 2007

6. Trends in London Commercial Sector 29

6.1. Criteria for selection

6.2. Trends in the commercial sector

6.3. Cost and time analysis

6.4. Further analysis required

7. Client opinion 34

7.1. Procurement strategies

7.2. Market trends

7.3. Risk allocation

7.4. Preferred contractors

7.5. Use of contracts

7.6. Design stages

7.7. Sustainable design and cost

7.8. Off-site manufacture

7.9. Summary

8. Conclusions and recommendations for the future of procurement 38

8.1. Procurement history

8.2. Project strategy

8.3. Analysis in the commercial sector

8.4. Market influence

8.5. Industry problems to be addressed

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8.6. Conclusions

Bibliography 41

Appendix 1 – Data from Hibberd and Djebarni survey

Appendix 2 – Data from Masterman survey

Appendix 3 – Data from Contracts in Use 2004, and Contracts in Use 2007

Appendix 4 – Client Interviews 2011

Appendix 5 – Project data

List of Figures

Figure 1 Procurement route characteristics ............................................................................... 8

Figure 2 Time/Cost/Quality model .......................................................................................... 12

Figure 3 Client Objectives (Hibberd and Djebarni study) ....................................................... 15

Figure 4 Client objectives (Masterman study) ........................................................................ 16

Figure 5 Risk Matrix (Cox and Townsend) ............................................................................. 19

Figure 6 Risk Management - The Mace Approach ................................................................. 19

Figure 7 Contract Options (Latham, 1994) ............................................................................. 20

Figure 8 Methods of Procurement by number of contracts (2007) ......................................... 25

Figure 9 Methods of Procurement by value of contracts (2007) ............................................. 26

Figure 10 Method of Procurement across ten years ................................................................ 29

Figure 11 Method of Procurement per year............................................................................. 30

Figure 12 Cost of Construction (£/sq foot) .............................................................................. 31

Figure 13 Construction Rate (sq foot/week) ........................................................................... 32

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1. Introduction

The choice of procurement route may have a significant effect on the design and construction

of a building project. This thesis includes a review of previous research on the history and use

of different procurement routes and the factors which might be considered in the decision to

choose a particular route.

1.1 Procurement History and Background

Procurement routes remained relatively unchanged for over 100 years prior to the Second

World War, with the main forms being traditional or conventional routes. Post 1945 many

newer forms of procurement emerged and the use of different procurement routes changed

over time. The rise and fall of the economy during the next fifty years has seen a number of

different procurement routes fall in and out of favour depending on trends in the industry and

changes in the project team structure.

Section 2 focuses on the classification and history of procurement from 1945 to present day.

Four main procurement types are described; Traditional, Single Source, Management, and

Partnering, although there are many variants within each of these classifications.

It is clear that construction is a cyclical industry, and that this has an impact on procurement.

Some of the trends in the different phases may partly be attributed to the rise and fall of

orders in the industry. In general, a new procurement strategy appears to have been developed

in order to solve the problems identified with the previous preferred route, but does not

necessarily address all the problems a with previous route.

Section 3 focuses on the factors which should be considered prior to choosing a procurement

route. Some of these requirements can be linked to interview responses collected in Section 7

which allows conclusions to be drawn with regard to the relevance of these factors.

1.2 Analysis of recent projects and procurement data

In order to conduct analysis of the use of procurement routes, it was necessary to set certain

constraints for comparison. Section 5 uses data produced by the Royal Institution of

Chartered Surveyors to assess procurement trends across the UK. Whilst this data provides

some interesting results, it relies on participation of clients and contractors. The surveys

received generally cover between 10% and 20% of the total value of new orders in the UK,

which should be borne in mind when using this information to identify trends. Section 6

therefore focuses on a specific sector, and project size to attempt to collect more directly

comparable data. The information was collected for large scale, new-build commercial

projects, in Central London, which have been completed within the last decade. The data from

these projects is used to identify trends and determine what, if any, changes can be made to

improve procurement in construction.

From the analysis of commercial construction projects in London, two procurement routes

dominate, Construction Management and Lump Sum Design and Build. Traditional or

conventional contracting within the commercial sector has declined over many years,

although is occasionally still used.

The last decade encompasses a period of high demand during the construction boom of the

early 2000’s, followed by a sharp downturn and recession within the UK in the latter part of

the decade. The opportunity to assess procurement routes during two very different types of

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market conditions offers an insight into the decision making process involved in procuring a

new building.

What is clear is that there is no one route which is considered best practice for all clients. If

the experienced developer client is taken as an example, the strategy adopted appears to be

focused on knowledge of the route, and the particular client drivers which can be achieved

within that route (e.g. cost certainty, or control of quality). These drivers vary depending on

the client. There are increasingly opportunities for the client to choose a route which offers

both cost certainty, and a good degree of control of design quality. For example the use of

pre-construction agreements with a contractor for a defined period prior to moving to Design

and Build, and a decision to take design of architecturally important elements to a later design

stage, before moving to Design and Build.

1.3 Issues to be addressed for future procurement

One of the impacts of the move away from traditional contracts is the increasing

fragmentation of the industry. It has become more common for certain packages to be sub-

contractor designed, resulting in a loss of skills within consultant practices. The fragmentation

of the industry whilst enabling the development of specialist teams may preclude the use of

some procurement systems in the future and may be detrimental to some projects.

When choosing a procurement route, many factors must be considered depending on the type

of client, development and mechanisms for funding the project. At the outset, before a

procurement route is chosen, it is important that the client develops a project strategy. This

would include factors such as identifying the objectives for the project, completion of a risk

management process, relevance of timescale, degree of quality expected, and appropriate

team structure.

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2. History of Procurement Routes in Construction

In order to consider the history of procurement routes in construction we must first define

what is meant by procurement routes.

The Commission for International Building (Commission for International Building, 1992)

defines procurement as ‘a strategy to satisfy clients’ development and/or operational needs

with respect to the provision of constructed facilities for a discrete life-cycle’.

Masterman (Masterman, 2002) argues that there is a need to accept that contemporary

procurement routes can now embrace not only design and construction, but also financing,

operating, facilities management etc, and therefore proposes this definition; ‘A procurement

system is the organisational structure adopted by the client for the implementation and at

times eventual operation of a project’.

Whilst the whole project organisation process and its influence on procurement will be

reviewed in the following sections, for the purpose of the analysis within this thesis,

procurement will be considered as ‘the route adopted by the client to implement the design

and construction of a building project’.

Procurement routes have been categorised by many people, in many different ways, and with

varying degrees of complexity. The ‘Thinking about building’ report (NEDO, 1985)

categorises procurement routes into four groups.

2.1 Procurement categories

Traditional – single or two-stage tender

This category is used to describe procurement which involves the client’s design team

producing a full construction design. The contractor will then tender for the construction of

this package. Traditional procurement usually results in maximum cost certainty for a project

with a fully defined project, but a long programme as design and construction are sequential.

It is also inflexible in terms of design changes, which will can result in excessive cost and

programme implications.

Single Source – D&B (direct, competitive, develop and construct) This category is used to describe procurement which involves contractor design and

construction. It is generally associated with good cost certainty and a minimisation of risk to

the client. This route is often associated with programme benefits as design and construction

can be overlapped. There are many variants within this category, such as Direct (when the

designer/contractor is appointed following appraisal, there is no price competition);

Competitive (when the price and design proposal are submitted based on the employers

concept design); Develop and Construct (part design to produce Employers Requirements,

contractors complete and guarantee the design in competitive tender). Competitive is

prevalent in current public procurement, for example the Building Schools for the Future

programme. Develop and Construct is the most commonly referred to as ‘Design and Build’

in the private commercial sector and will be used in that context for the remainder of this

thesis.

Management – Management Contracting, Construction Management

This category is used to describe procurement which involves a contractor providing

management services. The two main variants of this are Management Contracting and

Construction Management, which are both very different approaches. In Management

Contracting, the contractor provides management services to control and coordinate all site

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activities, sub letting works to suitable contractors on a competitive basis. In Construction

Management the client enters into separate contracts with the construction manager,

designers, and trade contractors. Construction Management is generally associated with

programme savings, and a higher degree of control for the client in terms of design quality,

but less cost certainty.

Partnering Partnering involves two or more organisations working together to improve performance

through agreeing mutual objectives, devising a way for resolving any disputes, and

committing themselves to continuous improvement, measuring progress and sharing gains

and pains. Examples include framework agreements and joint ventures. This is a relatively

new form of procurement and although discussed in the Latham report in the 1990’s, has

taken a long time to come into general use. It is more commonly seen within large civil

engineering projects, than individual building projects.

The relationship between each route is summed up in the Construction Industry Board best

practice guide to procurement. (Rowlinson, et al., 1999) The diagram below is an adaptation

of the information within this guide.

Figure 1 Procurement route characteristics

2.2 Contract types

There are a variety of different forms of standard contract, some of which are specific to the

procurement categories above. Those most relevant in the context of this thesis are:

Joint Contracts Tribunal (JCT) 2005 suite of contracts including:

- Standard Form of Building Contract, Revision 2, 2009 (SBC)

- Management Building Contract (MC)

- Design and Build Contract Revision 2, 2009 (DB)

- Construction Management Appointment (CM)

- Major Project Construction Contract, Revision 2, 2009 (MP)

TraditionalManagement Contracting

Construction Management

Design and Build

Build Operate Transfer

Construction Management

Management Contracting Design and ManageDesign, Manage and

Construct

Increasing integration of design and construction

Professional Contractual

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New Engineering Contract (NEC) suite of contracts including:

- NEC3 Engineering and Construction Contract (EEC)

o Option A – Priced contract with activity schedule

o Option B – Priced contract with bill of quantities

o Option C – Target contract with activity schedule

o Option D – Target contract with bill of quantities

o Option E – Cost reimbursable contract

o Option F – Management contract

There are other standard forms related to different types of project and sector which are not

covered in detail within this thesis.

2.3 The evolution of procurement

Pre-World War II (1939-1945) a majority of projects in the United Kingdom used traditional

(or conventional) procurement.

Post 1945 the variety of methods available increased, partly due to import from USA, and

partly willingness to try something new due to frustrations of the poor performance of the

construction industry (Masterman, 2002).

Phase 1: 1945 - 1972 – Sustained economic growth The Simon Report (Central Council for Building Works, 1944) strongly recommended

selective bidding, and The Phillips Report (Ministry of Works, 1950) reiterated this

recommendation and highlighted the need for cooperation between all parties in the

construction process.

By the 1950’s negotiated tenders and Design and Build had begun to be used in a very limited

scale by the private sector. The Emmerson Report (Ministry of Works, 1962) criticised the

lack of cooperation between members of the project team and their clients, notably

highlighting ‘in no other important industry is the responsibility for design so far removed

from the responsibility for production.’

The Banwell Report (Ministry of public building and works, 1964) included similar themes to

previous reports, yet there was still a general failure to adopt alternative methods of tendering.

Action on the Banwell Report (Economic Development Committee for Building, 1967)

highlighted some progress, with the increased use of selective tendering becoming apparent.

The early to mid 1960’s was a time of economic expansion, rapidly developing technology,

changing social attitudes, demand for more complex and sophisticated buildings, and the

increased need from clients for faster completion at minimum cost. These factors generated

considerable activity within the industry, a consequence of which was that the general

standard of performance and organisation improved. (Masterman, 2002).

In summary, this was a time of economic growth, with general use of conventional

procurement methods, and only a small use of non-conventional procurement methods.

Phase 2: 1973 - 1980 – Recession This was a period of recession due to the unexpected and large price increases in crude oil,

coupled with high inflation caused by the previous economic boom. Government sponsored

studies during this period tended to be specific to individual sectors and only The Wood

Report (Building Economic Development Committee, 1975; NEDO, 1978) specifically

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examined purchasing polices and procurement practices in construction (within the public

sector).

In 1976 a private client body published a report for the first time. The Slough Estates Report

(Slough Estates, 1976) found that the overall time to implement an industrial project in the

UK was considerably longer than other countries, and the final cost considerably higher in all

but one of seven other countries. The reason attributed to this was ‘an unnecessarily lengthy

and complex design and pricing process, and the time taken to obtain statutory permits’.

A number of other reports were also published around this time including ‘Construction for

Industrial Recovery (NEDO, 1978), and Royal Institution of Chartered Surveyors, UK & US

Construction Industries: A comparison of Design and Contract Procedures’. (Bennett, et al.,

1979)

As Masterman (Masterman, 2002) summarises, the theme of the 1970’s reports reflected

conservatism, as a diminishing number of clients were prepared to commit to projects in an

uncertain economic climate.

Phase 3: 1981 - 1990 – Post recession recovery This was a period of post recession adjustment and recovery. Changes such as labour only

sub-contracting emerged due to long term shifts in the structure of the industry.

The British Property Federation (BPF) launched a new procurement system ‘System for

Building Design and Construction’ in 1983. (British Property Federation, 1983) The BPF

concluded that many existing procurement systems were inefficient, could increase costs, and

could cause and sustain confrontational attitudes between clients, consultants and contractors.

Whilst this new system attracted much comment, there is little evidence to suggest it was

adopted by many clients.

There were also a number of government sponsored reports during the 1980’s. Faster

Building for Industry (Building Economic Development committee, 1983) provided statistics

for the use of different procurement routes, with almost half of projects using conventional

methods, about one third design and build, and the remainder other methods (including

management). Faster Building for Commerce (Building Economic Development Committee,

1988) was specific to the commercial sector and stated that two thirds of projects used

conventional procurement, one sixth design and build, and one sixth management.

The 1980’s also saw the emergence of an expert client sector with in-house resources to

manage large projects. There was ongoing construction and therefore clients developed

bespoke methods of procurement, mainly based on Construction Management, to ensure their

needs were met. This client sector is typical of those interviewed in Section 7.

Phase 4: 1991 - 2000 – Recession and recovery

The early part of this decade saw low economic growth, uncertainty in business and finance,

social pressures and environmental issues emerge. In addition to government capital spending

cuts, there was little enthusiasm for major projects in the private sector. The results were a

major downturn in the construction industry with more than 500,000 construction related jobs

lost, and more than 16,000 construction companies becoming insolvent. (Cox, et al., 1998b)

In 1997 there were signs of recovery, but annual input was still 20% below 1990 levels.

During such a volatile time there were two defining reports published; Constructing the Team

(The Latham Report), (Latham, 1994) and Rethinking Construction (The Egan Report) (Egan,

1998)

The Latham Report concentrates on a number of problems to be tackled including the client’s

role, management of the project process, fragmentation of the industry, competitive tendering,

the reputation of the industry and barriers to attracting the best people.

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The Egan Report focuses primarily on promotion of an integrated project process around four

key elements; product development, project implementation, partnering of the supply chain,

and production of components.

Masterman (Masterman, 2002) suggests that the reason the Egan report was criticised upon

publications, was for its provocation and unnecessarily hostile approach, and failure to

address the needs of occasional/one-off clients and implementers of small to medium sized

projects. This could be particularly relevant given that current figures show that in all sectors

over 90% of projects are for a value of less than £5 million, and with the exception of public

housing over 75% of new orders are for a value of less than £1 million (Office for National

Statistics, 2010).

There was a lot of government support for the implementation of Egan’s recommendations

with a £500M programme of demonstration projects being established. This programme was

implemented by Constructing Excellence in 1998, and continues today (Constructing

Excellence, 2010). Between 1998 and 2007 there had been a total of six hundred and twelve

demonstration projects (Olayinka, et al., 2007). These include projects such as Bleak Hill

School, St Helens, which was chosen as a demonstration project for its pioneering approach

to procurement, and Great Notley Primary School, Essex, which was selected for its

sustainability and technology credentials.

During this period the use of Design and Build procurement routes and Management

procurement routes fluctuated, but with an overall increase compared to their use throughout

the 1980’s. There was also an increase in the use of partnerships and alliances, perhaps

resulting from the Latham and Egan Reports.

Phase 5: Sustained economic growth, followed by recession (2000-2010) This decade saw continued growth with major projects throughout the UK constructed in the

first half of the decade. The financial crisis towards the latter part of the decade resulted in

recession from June 2008 – Dec 2009, the longest UK recession since the 1950’s. During this

decade, the growth period saw an increase in the use of Construction Management for large

scale projects, and an increase in the use of Design and Build. This may partly be due to the

requirement to bring new buildings to the market in very short timescales.

The impact of the recession in the last few years of this phase is difficult to determine at

present, however it appears to have caused an increase in use of Design and Build

procurement routes, and a more competitive market for consultant fees. The results of this are

likely to be felt over the next few years in various parts of the construction industry.

This decade also saw a shift in the procurement route for public sector projects. The increased

use of private finance to fund public projects, and a desire to meet the partnering aspirations

of the Latham and Egan Reports have resulted in a change in the way in which public sector

projects are procured.

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3. What influences the procurement route chosen?

There are many influences to the procurement route chosen, ranging from the structure of the

client organisation, to risk management, to market trends. This chapter focuses on the

influences related to the client organisation and project strategy.

The conventional view is that the choice of procurement route is based around the traditional

time-cost-quality model.

Figure 2 Time/Cost/Quality model

It is generally accepted that only two of the three criteria above can be achieved, and therefore

the procurement route should be chosen to maximise the most important criteria. However,

these very broad criteria are often used inappropriately to define project requirements. For

this reason there are a series of pre-procurement strategies which should be followed to

define, for example, the project requirements prior to choosing the preferred procurement

route. These strategies are described in more detail below.

3.1 Project Strategy

There is often a misconception that a procurement route is chosen at the outset of the project,

however Masterman (Masterman, 2002) argues that the project strategy needs to be defined

before the procurement route is chosen. Only with the project strategy in place can the

appropriate procurement route then be chosen.

Latham (Latham, 1994) described a project strategy which requires the following steps:

1. The client perceives a need for new construction or refurbishment.

2. An internal assessment is made which considers benefits, risks and financial

constraints. It lists options for carrying out the project.

3. Options are put in order of benefits and feasibility.

4. Client makes a decision in principle as to whether the project is necessary or feasible.

5. Client decides the project should proceed and roughly how much risk and direct

involvement to accept.

6. The project and design briefs are prepared.

Latham is also quite clear that if a client does not hold the necessary skills, then a project

manager or clients’ representative should be appointed to liaise with the designers or

contractors.

Morris (Morris, 1994) identified a more comprehensive list of topics to be considered at the

project strategy stage:

• Role of client and third parties

• Client project objectives

• Financial objectives

• Legal and insurance issues

• Project/work breakdown structure

• Method of organising design and

construction

• Logistics

TIME QUALITY

COST

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• Employment and industrial

relations

• Environmental issues

• Quality

• Safety

• Technical and design philosophy

• Milestone schedule

• Risk management

• Project constraints

• IT

• Public relations/communication

Those considered directly relevant to the choice of procurement route are listed below and

considered in further detail in this chapter.

• Role of client and third parties

• Clients project objectives

• Financial objectives

• Method of organising design and construction

• Risk management

• Project constraints

Egan (Egan, 1998) describes the project strategy in terms of a process. ‘An integrated project

process should utilise the full construction team, bringing the skills of all the participants to

bear on delivering value to the client. The process should be explicit, transparent, and easily

understood.’

3.2 Client Organisation

The role of the client and client objectives for the project are influenced by a number of

factors such as the client’s experience, the client’s needs, and the client’s attitude to

construction.

Types of client The characteristics of clients that are relevant to the procurement process are defined by

Masterman. (Masterman, 2002)

1. Whether the organisation is publicly or privately owned

2. Level of knowledge and experience within the organisation related to construction

projects

3. Whether the project is needed by the client to accommodate their own commercial

activities, or whether the project is needed to lease/sell to others

There are some very specific differences between typical public and typical private sector

clients, those most relevant are listed below.

Public Private

Safeguarding of funds Maximising profits

Risk averse External funders

Conservative policies Aggressive policies

Public sector clients are often inexperienced one-off clients (for example a local authority

project). As such they tend to be more risk averse. They are often required to justify costs and

safeguard funds.

Private sector clients are typically a mix of experienced and partially experienced clients.

Experienced clients are more likely to have management teams in place which will broaden

the choice of procurement routes available to them.

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However, this delineation between public and private sector clients is becoming less relevant.

The introduction of Private Finance Initiatives to fund public sector projects, and the increase

in joint ventures or additional funders for private sector projects, has resulted in the

characteristics above being present in many projects regardless of the client sector.

Cox and Townsend (Cox, et al., 1998a) have a more idealistic view of the client (and indeed

the rest of the project team). They argue that practitioners need to adopt a way of thinking,

rather than specific practices, to attain better management. In other words, clients must

choose wisely from a range of tools and techniques for each individual set of circumstances.

It is perhaps most noticeable in the experienced client sector that clients aspire to the type of

project leader described by Cox and Townsend. The external drivers for inexperienced or

public sector clients may make it more difficult to adopt the way of thinking described.

Client needs or objectives It is important that the client’s needs or objectives are defined at the outset of the project

strategy to ensure that the systems chosen throughout the process are tailored to meet those

objectives, however these objectives can be difficult to quantify.

Latham (Latham, 1994) defined client wishes as:

• Value for money

• Pleasing to look at

• Free from defects on completion

• Delivered on time

• Fit for purpose

• Supported by worthwhile

guarantees

• Reasonable running costs

• Satisfactory durability

These are fairly broad objectives with language which is open to interpretation.

Bennett and Flanagan (Bennett, et al., 1983) propose an expanded list of typical client

requirements which could be a starting point to help a client define their objectives for a

particular project.

• A functional building, at the right price

• Quality, at the right price

• Speedy construction

• A balance between capital expenditure and long term ownership costs

• Identification of risks and uncertainty

• Accountability (particularly in the public sector)

• Innovative design/high technology buildings

• Maximisation of taxation benefits

• Flexibility to enable design to be changed

• A building which reflects the clients activities and image

• Minimisation of future maintenance

• Ability to keep any existing buildings operational during construction

• Involvement in and need to be kept informed about the project throughout its life

One of the weaknesses of this type of list however is that there is no ‘typical’ client. A public

sector owner-operator will have different requirements to a private sector owner-operator

client which in turn will be different to a developer only client.

The Commission for Architecture and the Built Environment (CABE) focus more on the

design aspects of requirements. Their procurement guidance very much focuses on the

process of agreeing a procurement strategy, and therefore identifies the need of establishing

the vision and objectives at the outset of a p

appropriately (Commission for Architecture and the Built Environment, 2009)

It is also clear that often, particul

the outset of a project are different to the actual objectives which only come to light as the

project progresses and perhaps there are constraints which prevent a particular objective from

being achieved.

The difference between perceived objectives

the work of Hibberd and Djebarni

to obtain information from clients and consultants

satisfaction with method chosen.

importance, on a scale of 1 to 10.

has been reversed for the purposes of illustration (

important, 1 is least important)

The results showed that predictable cost,

important criteria. Working relationships and transference of risk were least important, yet

risk is often perceived as the being one of the most important criteria.

satisfied with the current procurement route and

procurement route used.

15

the vision and objectives at the outset of a project, and communicating these requirements

(Commission for Architecture and the Built Environment, 2009).

It is also clear that often, particularly with inexperienced clients, the perceived objectives at

the outset of a project are different to the actual objectives which only come to light as the

project progresses and perhaps there are constraints which prevent a particular objective from

en perceived objectives and actual objectives is demonstrated through

Hibberd and Djebarni. (Hibberd, et al., 1996) They used a series of questionnaires

from clients and consultants relating to procurement choice and

satisfaction with method chosen. Respondents were asked to rank the criteria below

on a scale of 1 to 10. The original data can be found in Appendix 1. The ranking

has been reversed for the purposes of illustration (i.e. on the bar chart below, 10 is most

Figure 3 Client Objectives (Hibberd and Djebarn

ts showed that predictable cost, accountability and speed of completion are the most

important criteria. Working relationships and transference of risk were least important, yet

risk is often perceived as the being one of the most important criteria. More than 50% were

h the current procurement route and most were dissatisfied with the

0 2 4 6 8 10

hese requirements

the perceived objectives at

the outset of a project are different to the actual objectives which only come to light as the

project progresses and perhaps there are constraints which prevent a particular objective from

and actual objectives is demonstrated through

questionnaires

procurement choice and

Respondents were asked to rank the criteria below for

The ranking

i.e. on the bar chart below, 10 is most

t Objectives (Hibberd and Djebarni study)

are the most

important criteria. Working relationships and transference of risk were least important, yet

More than 50% were

the previous

Rank

Mean

16

The paper coincided with a five year period which saw an increase in Design and Build but

many respondents were still using traditional methods, which would align with the results that

predictability of cost and accountability were most important. It’s difficult to draw

conclusions from the results relating to time as the different procurement routes result in time

being perceived in different ways.

A study by Masterman (Masterman, 1994) uses a similar set of criteria asking sixty client

organisations to rank them in order of importance. The results are summarised in the chart

below. The original data can be found in Appendix 2.

Figure 4 Client objectives (Masterman study)

Predictability of cost, and certainty of completion date (which the study recognized is

different to speed of construction) are the most important criteria, however accountability is

most important to experienced clients. The Masterman survey aligns with the Hibberd and

0 1 2 3 4 5

Ability to change design

Accountability

High Quality/Innovative

architecture

Value for money

Single point of contact

Minimise risk

Min design and construction

time

Lowest possible tender

Active involvement

Certainty of completion date

Certainty of final cost

Mean value

Private Inexperienced Secondary Private Part Experienced Secondary

Private Experienced Secondary Private Experienced Primary

Public Experienced Secondary Public Experienced Primary

17

Djebarni research in relation to risk as both surveys show this to be a low priority for clients.

One of the gaps in the Masterman survey is that inexperienced clients in the public sector are

not represented. It is unclear if this is due to the experience of the specific respondents, or if it

was felt that this set of clients did not exist frequently.

3.3 Financial Objectives

The funding mechanisms for a project can have a significant impact on the procurement. If a

project is to be publicly funded, the procurement process must comply with EU procurement

directives which set out a legal framework for public procurement (Office of Government and

Commerce, 2008). Their purpose is to open up the public procurement market and to ensure

free movement of goods and services within the EU. Where the regulations apply, a contract

must be advertised in the Official Journal of the EU (OJEU), and certain procedures must be

followed before awarding a contract.

If a private sector client is in a joint venture with another funder, the funder may dictate

certain requirements of the procurement route, for example to ensure cost certainty.

Cost certainty is often considered one of the important objectives of a project. Depending on

the client and their experience there are different routes to achieving cost certainty. The

perception seems to be that a lump sum single source route will provide the best cost

certainty, but this is not necessarily the same as best value. Those clients most concerned with

quality and value may choose a route which allows for significant client input, but does not

allow for a fixed price at an early stage, such as Construction Management. This is not to say

that cost certainty is reduced, just that cost certainty will increase as the design progresses.

The introduction of schemes such as Private Finance Initiative (PFI) has led to an increased

interest in running costs or ‘whole life costing’ and a different way of procuring projects.

3.4 Method of organising design and construction

Effective management of the design process is a crucial factor in the success of a project.

Latham (Latham, 1994) identifies a series of roles and tools required to achieve effective

management.

• A lead manager who acts as the main point of contact is essential.

• To achieve coordination of consultants, a design responsibility matrix is

recommended. This is an interlocking matrix contained within the consultant

appointments to define responsibilities, and coordination for each design item.

• Definition of scope split between consultants and specialist contractors is also crucial.

• It is important that the client understands the design proposals, and that there is

formal sign off of all stages, but with sufficient flexibility to accommodate the

commercial wishes of the client.

Within the contracts for the project there are common features which are desirable whatever

form is chosen.

• A general duty to trade fairly, with specific requirements relating to payment.

• Clearly defined work stages, including milestones, or other forms of activity

schedule.

• Pre-pricing of any variation (The NEC contract has some good mechanisms in place

for this).

• An adjudication system which is independent of contract administration.

18

3.5 Risk Management

Whilst risk is shown above as one of the least important criteria, it continues to be perceived

as the single most important factor in choosing a contract or procurement route among many

organisations. This misconception could be the result of inexperienced clients, or could

simply be a misuse of the term risk.

Risk can be defined as the exposure to loss or injury as a consequence of uncertainty, or as the

chance of an adverse event occurring.

There has been considerable research on the area of risk management. One of the most

important facts which need to be understood by clients and other parties involved in the

procurement process is that risk cannot be eliminated. The management process should allow

for risk to be reduced, controlled or transferred, but it cannot be ignored.

Cox and Townsend (Cox, et al., 1998a) argue that a risk management process is one of the

most important prerequisites for effective procurement of a project.

Risk analysis involves the identification, estimation and evaluation of risk, and risk

management could be considered as the formation of suitable responses to the risks analysed,

through planning, resourcing, controlling, and monitoring.

Masterman (Masterman, 2002) maintains that whichever route is chosen, the principle of

allocating risk to the party most capable of dealing with it at the minimum cost should always

be followed. For example, risk due to environmental factors could be retained by the client,

and managed by ensuring that site investigations are completed prior to contract negotiations.

On the other hand logistical risks are likely to be best managed by the contractor who can

plan activities and develop contingency plans to account for potential risks.

So, the question could be posed ‘What is risk in the context of construction projects?’

Perry and Hayes (Perry, et al., 1985) identify a series of factors which cause risk in

construction:

• Physical

• Environmental

• Design

• Logistics

• Financial

• Legal

• Political

• Operational

Some of the risks identified above can be quantified, controlled or minimised through the risk

management process.

The impact of a risk can be measured as the likelihood of a specific unwanted event and its

unwanted consequences of loss (Godfrey, 1996). Simply put:

Godfrey (Godfrey, 1996) argues that risk and opportunity go hand in hand. He identifies that

there is usually a commerical benefit, or ‘added value’ from the risk control measures taken.

For example, the decision to use a hoist instead of ladders may be taken to reduce the risk of

people falling. The added benefit could be that the hoist increases mobility and therefore their

productivity.

Impact of risk = likelihood x consequence.

19

There are three basic approaches to risk according to Cox and Townsend (Cox, et al., 1998a):

1. Qualitative – identify the most significant risks and provide management with a

focus for appropriate action

2. Pragmatic Quantitative – both qualitative and quantitative aspects of the approach

3. Precise Quantitative – attempt to quantify risk in exact terms (e.g. impact =

likelihood x consequence)

The appropriate approach is dependent on a set of circumstances. This selection matrix

explains the proposed method of selection.

Pragmatic Quantitative/

Pragmatic Quantitative

Pragmatic/

Qualitative Pragmatic

Quantitative/

Pragmatic

Qualitative Pragmatic/

Qualitative Pragmatic

Figure 5 Risk Matrix (Cox and Townsend)

If risks can be quantified in financial terms, it is possible to provide a more effective approach

to cost management. In other words, rather than one large number to account for risk, there is

more discipline to the estimating process, and a differentiation between how much an item

should cost to construct, and how much is apportioned to the management of risk.

The risk management process can also be used to establish project priorities (and identify the

real value criteria), roles in the process, and number/type of packages. Key issues for the

contract strategy can then be addressed such as:

• Division of responsibility

• Terms of payment

• Appropriate allocation of risk

• Basis for contractor selection

• Degree of client

control/involvement

Once the risks are identified a process of prioritisation and management should be adopted.

The Mace Approach (Cox, et al., 1998a) is reproduced below.

Medium Priority

Contingency High Priority

Manage

Low Priority

Ignore Medium Priority

Manage out

Figure 6 Risk Management - The Mace Approach

Ris

k C

om

ple

xit

y/

Mag

nit

ude

Low

Low Medium

Medium

High

Value of Project

High

Conse

qu

ence

of

Ris

k

Low

High

Probability of occurrence

High

Low

20

Latham however links contract options with the transfer of risk, and defines who holds

different risks dependent on procurement route. The routes are categorised differently in this

document, so the equivalent terms are highlighted to the left.

Figure 7 Contract Options (Latham, 1994)

Latham’s view is that management contracts result in all the risk being held by the client. The

central options can be broadly classified as Traditional with the client retaining a degree of

risk. A package deal and Design and Build are the procurement routes which are likely to

transfer a majority of the risk to the contractor.

3.6 Project Constraints

Project constraints can encompass many aspects including physical, programme, funding,

legal, and political. The project constraints should be identified and considered at the project

strategy stage when setting out the project objectives.

Physical constraints – these can range from site constraints such as limited access or

unknown ground conditions to planning restrictions. The key to managing physical

constraints is to ensure that unknown aspects are either investigated early in the process, or

identified as potential risks within the risk management strategy.

Management

Traditional

Single

Source

21

Legal/political constraints – this is often linked to the funding mechanisms for the project. If

a project is publicly procured it must comply with the EU procurement rules which will

therefore have an impact on programme and selection criteria for the project team. If a

funding mechanism involves a separate party it may be that that party places certain

restrictions on the procurement process to safeguard investments.

Programme – some projects are dependent on project completion dates, or in more complex

situations, windows of opportunity for construction (e.g. construction on existing school sites

may require certain activities to be limited to school holidays). This may have a knock on

effect of either prolonging a construction programme, or accelerating a programme to the

detriment of a particular quality aspect, or at a financial premium.

22

4. Limitations with existing procurement routes

Existing procurement routes have a variety of limitations depending on the situation to which

they are applied. Each new procurement route developed is often trying to solve a particular

inadequacy of the previous preferred route, but a holistic view of the requirements of the

procurement route do not seem to be incorporated.

Cox and Townsend (Cox, et al., 1998a) argue that the current practice of benchmarking is not

appropriate, as the concept of sustainable business success is ultimately based on being in

possession of an inimitable or non-replicable, or unique series of resources or capabilities.

They categorise problems into three types, demand issues, supply issues and common issues.

4.1 Demand Issues Low and discontinuous demand - Construction is a cyclical industry and therefore must deal

with periods of low demand and high demand. Briscoe (Briscoe, 1988) describes the

limitations of both periods. During a period of low demand a supplier’s workforce may not be

operating at full capacity, and whilst a firm will seek to adjust this, the process of reduction of

workforce takes time. The result is more cut-throat bidding and an adversarial culture to try to

recover costs. In contrast, during periods of high demand a supplier may not have sufficient

workforce, and hiring new direct labour takes time. The result is more use of sub-contracting,

and often a reduction in quality and expertise of labour. Masterman (Masterman, 2002) also

identifies that the change from a philosophy of confrontation to one of cooperation can only

be achieved where clients have a consistent and long term demand for construction services

and where there is a coincidence of interest among the participants within the supply chain.

Frequent changes in specification – Latham (Latham, 1994) argues that there are too many

changes introduced when a scheme is already underway. He argues that this stems from an

inadequate brief from the client, which subsequently requires detailed changes as the client

decides what they really want. Change at a late stage has a much greater cost and programme

implications. For some projects this cannot be avoided – e.g. for a speculative development a

pre-let may be secured during the design or construction period which is likely to result in

design changes being required. The procurement route ought to allow for this scenario if

appropriate to the project.

Inappropriate Selection Criteria – Cox (Cox, et al., 1998a) uses the following quote to

illustrate his point: ‘There is scarcely anything in this world that some man cannot make a

little worse, and sell a little more cheaply. The person who buys on price alone is this man’s

lawful prey’. It seems that only recently, construction clients have realised that value for

money is not necessarily secured by competitive tender for the lowest price. This can also be

linked to the problems with low demand. For example during a period of low demand the

contractor may cut costs to win a bid, but then provide a lower standard of service which may

result in additional fee claims, less trust, and higher capital costs.

Inappropriate allocation of risk – Latham acknowledged that no construction project is risk

free. The risks though can be managed, minimised, shared, transferred or accepted. The client

may make unfair allocation of risk, for example imposing risks upon the contractor which are

best carried by the client, or not providing proper re-imbursement for the risks carried by the

contractor. This can lead to a more adversarial culture.

23

4.2 Supply Issues Poor quality – Latham argues that this stems from the low barriers to entry in general

contracting (a construction firm can be established with no qualifications or experience and

only a small amount of capital).

Inefficient methods of construction – Briscoe (Briscoe, 1988) argues that inefficiency in the

UK is due to lack of industrial building methods. Latham (Latham, 1994) is also quoted

saying ’standardisation, prefabrication, modularisation can bring about productivity

improvements and savings of 30-60% costs’. The industry is now making moves to

implement some of the recommendations related to prefabrication. Laing O’Rourke have

made a public commitment to use of design for manufacture and assembly components

(Laing O'Rourke, 2010). The goal is to achieve 70% use of elements produced through

Design for Manufacture and Assembly (DfMA) by 2012. They expect to see an associated

60% reduction in on-site labour, and 30% reduction in site programme.

Poor public image – The construction industry has historically had a poor reputation with

both clients and the public. Latham considers the problem, and attributes it to the industry’s

lack of ability to attract and retain high calibre personnel. He also addresses lack of diversity,

particularly related to women. Whilst much has been done to improve quality, productivity

and value for money, the industry needs to attract and retain competent people. Since the

Latham report many initiatives have been developed, particularly in relation to improving the

diversity of the workforce, however improvements seem to be slow. The first annual statistics

report published by the UKRC (Kirkup, et al., 2010) identified that there has been an

improvement in the percentage of females entering engineering studies, however in 2008,

women still only made up 6.9% of registered engineering professionals.

4.3 Common Issues Poor management – Good organisation and management are vital to ensure a firm’s

structure and systems are set up to achieve the highest possible productivity (Briscoe, 1988).

This applies to all sides of the industry (clients, designers, contractors). Clients must

understand the industry and criteria which are important to have in a contractor. Contractors

must understand the constraints of a project to ensure the systems are set up to address the

particular circumstances for that project.

Inadequate investment – The lack of investment in training, research and development has

an impact on quality in the industry. On-site, the decline in level of skills is partly due to

availability of cheap, unskilled and temporary labour which suits the cyclical demand nature

of the industry, but creates a disincentive to invest in training and skilled labour. On the

subject of Research and Development, Latham quoted evidence from CIC discussion

document (Working Party of the CIC Research & Development Committee, 1994) ‘UK

spending on construction research and its dissemination is substantially below that judged

necessary by a succession of authoritative studies’.

Adversarial culture – This has been recognised as a problem for many years. Cox and

Townsend reference (Cox, et al., 1998a) The Chartered Institute of Purchasing and Supply

(CIPS) arguing that this problem is prevalent at all levels, and the primary causes are:

• Lack of clear contract strategy

• Inadequate planning

• Improper assessment and inappropriate allocation of risk

• Insufficient preplanning

• Inadequate selection and adjudication of tenderers

24

• Traditional contracts leading to conflict

• Vicious claimsmanship circle

• Payment problems

Many of these aspects were discussed in the previous section as pre-requisites for forming a

successful project strategy, but it appears the absence of them leads to an adversarial culture.

Fragmented industry structure – Various recessions have forced an end to vertical

integration by contractors. Many main contractors no longer undertake work directly and

traditional craftsmen are in decline. There has been an increase in labour only sub-

contracting, buying in materials, and plant hire. This has resulted in reduced training and the

symptoms of the decline in skills discussed above. In addition the move away from traditional

procurement routes has resulted in the designers being further fragmented, as consultants

become more specialised, and the development of specialist sub-contractors continues. This

increased volume of interfaces can lead to inefficiencies, and less trust amongst design

parties. This ultimately leads to increased cost and reduced efficiency. Rowlinson

(Rowlinson, et al., 1999) identifies this problem when describing the project team as ‘small

groups of professionals working in different locations, on specialist tasks which are all

interdependent.’

Whilst some of the limitations, such as fluctuating demand are difficult to tackle, issues such

as changes in specification, inappropriate selection criteria, and risk allocation are problems

which can be tackled through the procurement process and education of clients.

In addition issues such as public image and investment and research and development are

industry wide problems which are being actively tackled. There has been much improvement

in the way organisations advertise positions, and equality and diversity policies are often

published by organisations wishing to attract a diverse workforce. Initiatives such as the

Considerate Constructors Scheme (Considerate Constructors Scheme Ltd, 2010) are also

seeking to improve the image of the industry with the wider public.

The issue of a fragmented industry is likely to continue to be a problem, and therefore future

procurement routes will need to embrace this to ensure the industry can take advantage of the

specialist skills developing instead of this being a barrier to efficient design and construction.

25

5. Trends in the UK

There is a wealth of analysis available for the decades up to the late 1990’s by various authors

however there is limited information currently available on the most recent decade. The Royal

Institution of Chartered Surveyors (RICS) have completed UK wide surveys of contracts in

use within the industry since 1985, with the most recently available editions being Contracts

in Use in 2004, and Contracts in Use in 2007.

5.1 Contracts in Use

The RICS Contracts is Use surveys, whilst not capturing the whole industry, can be used to

provide a useful comparison of contract use across the years. The summary tables of

Contracts in Use for 2007 (Royal Institution of Chartered Surveyors, 2007) have been used to

create the graphs below. The original data which documents the results from each survey

since inception can be found in Appendix 3.

Figure 8 Methods of Procurement by number of contracts (2007)

0

10

20

30

40

50

60

1985 1987 1989 1991 1993 1995 1998 2001 2004 2007

Per

cen

trag

e u

se

Year

Lump sum – Firm BQ Lump sum – spec & dwgs

Lump sum – D&B Target contracts

Remeasurement – Approx BQ Prime cost plus fixed fee

Management Contract Construction Management

Partnering Agreement

26

Figure 9 Methods of Procurement by value of contracts (2007)

It is important to note that these surveys only capture between 10 and 20% of the total value

of new orders in the UK. In addition the 2007 survey captured approximately half the number

of projects compared to previous years, but almost double the value of projects, therefore a

greater number of large value projects are included in the 2007 results. This will inevitably

distort the figures and make comparisons per year more difficult.

There are a few trends which can be identified across the years, such as the rapid decline in

the use of Bill of Quantities from the mid 90’s onwards (most notable when reviewing by

value) and an associated increase in use of Lump sum Design and Build.

Management Contracting continues to decline, but is still in use.

The introduction of Partnering agreements in 2001 has seen a steady rise, although is still a

small percentage of the overall contracts used.

0

10

20

30

40

50

60

1985 1987 1989 1991 1993 1995 1998 2001 2004 2007

Per

cen

trag

e u

se

Year

Lump sum – Firm BQ Lump sum – spec & dwgs

Lump sum – D&B Target contracts

Remeasurement – Approx BQ Prime cost plus fixed fee

Management Contract Construction Management

Partnering Agreement

27

5.2 Trends from Contracts in Use 2004

Concentrating specifically on the 2004 surveys (Royal Institution of Chartered Surveyors,

2004), some trends can be identified which may be associated with the boom period in

construction in the early part of the decade.

It is clear that Design and Build became the single most prevalent method since the previous

survey in 1995, previously it was Bill of Quantities. Whilst the number of contracts did not

change significantly since 2001, the change in percentage by value was very large (4.1% of

contracts, but 43% of value). The survey also identified that Design & Build seemed to

dominate in London and South East England. One of the reasons for this may have been the

relative period of construction boom in the early part of the decade which saw lots of private

sector projects come to fruition.

There was little evidence of two-stage tendering which was perhaps a result of the average

value of projects recorded, as two-stage tendering is more likely to be used in large scale

projects.

The continued decline of Management Contracting was evident, although there was still some

use. It would suggest the slight increase in the late 1990’s was a blip in the trend, but the

reasons for this are unknown.

The 2004 survey also recorded a drop in the use of JCT contract forms, and associated

increase in use of the NEC suite of contracts. This trend is likely to continue with NEC

becoming the contract form of choice for public sector projects, although anecdotal evidence

suggests this will not become widespread due to the perception of procedural requirements.

77% of NEC contracts captured in the survey used target cost with activity schedule, and 19%

lump sum with activity schedule. It is unlikely that this will be able to be identified as a trend

as the options used will be very dependent on the individual client requirements and the

current economic situation.

One of the interesting aspects to note is a rise in the use of Partnering agreements. Partnering

first emerged in the surveys in 2001, and increased for the 2004 survey.

The survey appears to show an increase in negotiated contracts rather than competitive tender

through a number of ways (Construction Management, Partnering etc). This may be relevant

to the research area in the next section, although the scale of project is quite different.

Whilst this survey provides some interesting data, the average project value captured was

£1.3M which is significantly lower than the proposed area of research in the next section,

therefore it is unlikely that any results can be directly compared to each other.

5.3 Trends from Contracts in Use 2007

The 2007 survey (Royal Institution of Chartered Surveyors, 2007) is the most recent data

available in this area, and will have captured projects just prior to the major recession in

2008/2009. Whilst the report is useful to provide an overview, there is a significant decline in

the number of responses which will inevitably reduce the opportunity to identify trends.

The interesting points which can be identified include the following:

28

• Smaller projects continue to be dominated by ‘Plan and Specification’ procurement,

and Lump-sum contracts, whereas larger projects prefer Construction Management or

a form of Design and Build.

• The use of Bill of Quantities is still in decline with just 13% by value using this

method of procurement, compared to 23% in 2004.

• The use of negotiated methods of procurement showed a further increase with

Partnering agreements increasing to 15% by value which is big jump from the 2004

results. There was also an increase in two-stage tendering which may partly be due to

the type of size of projects captured in the 2007 survey compared to previous years. It

is therefore too early to tell if there will be a major impact on the market.

The 2007 survey confirms the continued decline of Management Contracting.

Construction Management continues to be most prevalent for larger projects, which aligns

well with the data captured in the next section.

The use of contract types clearly shows a slow switch from JCT to NEC. The use of JCT

shows a further decline from the 2004 figures. Design and Build with standard contract form

is most popular, with Quantities form second. The intermediate form is more prevalent for

smaller projects. The impact of the Major Projects form is also starting to be seen.

NEC suite was strongly supported by Egan and Latham, but has taken a long time to become

common use. The contract is now firmly embedded in the industry and the results of the

survey clearly show an upward trend in use of NEC over the last six years. One of the

concerns though will be industry familiarity with the NEC form and the potential for

inappropriate use of options which is likely to emerge in the coming years.

The 2007 survey overall reinforces the dominance of Design and Build in the middle market,

and that JCT still dominates as a contract type, but the alternative forms are growing in use,

particularly NEC.

6. Trends in the London commercial sector

In order to analyse trends in the construction industry a confined research pool has been

chosen. Using data from the projects such as size, cost, construction period it may be possible

to identify some characteristics of particular procurement routes.

6.1 Criteria for selection

The chosen projects meet the following criteria:

• New build project

• Central London location

• Project completion between January 2000 and December 2010

• Construction cost over £20 million

• Major use commercial

There was some difficulty in gaining accurate data for projec

For this reason, only 23 projects were identified w

information was available. The information for the project was collated

clients interviewed in Section

information for those clients. The source

that as the data is from a number of different sources, there may be some inconsistency in

way in which data such as cost or area was reported to the author.

6.2 Trends in the commercial sector

Figure 10 shows the distribution of procurement routes across the full data set.

This shows that Construction Management was the most popular route from 2001

use on almost two thirds of the projects. Design and Build was also popular with use on a

39%

26%

29

Trends in the London commercial sector

order to analyse trends in the construction industry a confined research pool has been

Using data from the projects such as size, cost, construction period it may be possible

to identify some characteristics of particular procurement routes.

Criteria for selection

the following criteria:

Central London location

Project completion between January 2000 and December 2010

Construction cost over £20 million

y in gaining accurate data for projects due to confidentiality issue

projects were identified which satisfy the criteria above and

The information for the project was collated directly

n 7, or from a leading cost consultant who ma

. The source data is available in Appendix 5. It should be noted

that as the data is from a number of different sources, there may be some inconsistency in

way in which data such as cost or area was reported to the author.

6.2 Trends in the commercial sector

shows the distribution of procurement routes across the full data set.

Figure 10 Method of Procurement across ten years

This shows that Construction Management was the most popular route from 2001-

use on almost two thirds of the projects. Design and Build was also popular with use on a

13%

13%

5%

4%

Two stage D&B

Design and Build

Two stage Traditional

JCT 98 with CDPS

Construction Management

CM bespoke

order to analyse trends in the construction industry a confined research pool has been

Using data from the projects such as size, cost, construction period it may be possible

ts due to confidentiality issues.

and for which

y from the

anages this

It should be noted

that as the data is from a number of different sources, there may be some inconsistency in the

ross ten years

-2010, with

use on almost two thirds of the projects. Design and Build was also popular with use on a

Design and Build

Two stage Traditional

JCT 98 with CDPS

Construction Management

quarter of the projects. Whilst this

commercial sector.

It is also possible to look at the use of different routes acro

compares the use of procurement routes per year.

The results of 2003, 2004, and 2009 should be discounted as there was only one project in the

data set completed in each of these years

and Build during the later part of the

Management, although with only a few projects completed in each year this may not be

representative of the wider industry. This may be attributed to decline in the economy, and

perceived need to gain cost certainty early in the procurement process.

6.3 Cost and Time Analysis

The most useful comparisons which are likely to be of interest to

project and time to construct the project

foot, and Figure 13 shows time to construct per square foot and is referenced to the

procurement route used.

0

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2

3

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2001 2002 2003 2004

Nu

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30

quarter of the projects. Whilst this shows an interesting split, it is likely to be specific to the

It is also possible to look at the use of different routes across the ten year period. Figure 11

of procurement routes per year.

Figure 11 Method of Procurement per year.

The results of 2003, 2004, and 2009 should be discounted as there was only one project in the

ompleted in each of these years. There appears to be an increase in use of Design

and Build during the later part of the decade, and a reduction in use of Construction

Management, although with only a few projects completed in each year this may not be

representative of the wider industry. This may be attributed to decline in the economy, and

tainty early in the procurement process.

6.3 Cost and Time Analysis

The most useful comparisons which are likely to be of interest to a client are the cost

the project. Figures 12 shows cost of construction per square

shows time to construct per square foot and is referenced to the

2004 2005 2006 2007 2008 2009 2010

Year of completion

Management

Single Source

Traditional

, it is likely to be specific to the

ss the ten year period. Figure 11

Method of Procurement per year.

The results of 2003, 2004, and 2009 should be discounted as there was only one project in the

. There appears to be an increase in use of Design

decade, and a reduction in use of Construction

Management, although with only a few projects completed in each year this may not be

representative of the wider industry. This may be attributed to decline in the economy, and

are the cost of a

n per square

shows time to construct per square foot and is referenced to the

Management

Single Source

Traditional

31

Figure 12 Cost of Construction (£/sq foot)

The cost of construction for each project varies. The cost per square foot ranges from

approximately £150 per sq ft to almost £280 per sq ft. This large range is seen within the

projects which were all procured through Construction Management. The large range which

cannot be attributed to choosing a particular procurement route suggests there are other

factors which influence the cost of the project, regardless of how it is procured. This could be

factors such as complexity, quality required, or project constraints similar to those identified

in section 3. As the data is also from a number of different sources, it is also possible that

different costs have been included within the results which are not always considered to the

shell and core costs.

The results for these particular projects suggest that Construction Management (including CM

bespoke) can achieve the lowest costs with the six lowest costing projects being procured

through a form of Construction Management, but also highlight that other factors will

influence the cost of a project.

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ruct

ion M

anag

emen

t

Co

nst

ruct

ion M

anag

emen

t

Co

st (

£/s

q f

t)

Project Procurement Route

32

Figure 13 Construction Rate (sq foot/week)

The rate of construction varies significantly within each type of procurement route. The rate

of construction for Two Stage Traditional and JCT with Contractor Design Portions will be

discounted as these include only one project and are not necessarily representative. The

remaining results suggest that Construction Management and Two Stage Design and Build

achieve a similar construction period. Design and Build (including two stage) could be

considered the best performing route in terms of construction period, with most projects in the

data set achieving almost 5000 sq ft per week. One of the benefits of Design and Build is

often considered to be that the contractor has more control over the design and can therefore

choose the optimum solutions to maximise on site efficiency, however the results are fairly

inconclusive for this analysis.

6.4 Further analysis required

One of the difficulties with analysing the results in such a confined way is that often the

balance between design requirements and construction requirements are not considered. It is

not possible to ascertain from this data set whether there is a significant difference in the

overall length of project. For example Construction Management will overlap the design and

construction period, giving programme benefits which are not apparent in simply analysing

the construction rate in isolation. The information on the stage at which each project was

procured as Design and Build was not available which may also have an effect on both cost

and construction rate.

There does not seem to be any significant correlation between construction period and cost of

construction which might have been expected, and in fact the construction period seems to

vary much more widely than the cost of construction. It’s likely that many other factors

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

Des

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Des

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Const

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98 w

ith C

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Const

ruct

ion M

anag

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Const

ruct

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anag

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Co

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sq f

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)

Project Procurement Route

33

influence the construction period such as site constraints, the proportions of the building, and

the inclusion of significant substructure works.

The results whilst not showing any conclusive trends broadly show that the procurement route

does not have a significant effect on cost, but they suggest that Design and Build may have

significant programme savings. There must therefore be other reasons for many projects being

procured through a Construction Management Route. The client interviews in section 7 offer

some insight into this apparent anomaly.

34

7. Client opinion

As part of this research, clients in the London commercial sector were interviewed to gain

their opinions on procurement routes. The author used industry contacts to set up meetings

with five of the major developers who are active in the London commercial building market.

For each client body, individuals who fulfil the Project Director role of commercial projects

were interviewed (with the exception of Client Interview 4). The following questions were

posed to each participant:

1. Does your organisation have a specific procurement strategy across all projects?

2. Given the current downturn in the market have you adjusted your procurement

strategy?

3. How do you perceive the allocation of risk within procurement?

4. Where do you see the design portion best sitting?

5. Do you have preferred contractors you work with?

6. Do you have a standard contract agreement for all projects?

7. What are your thoughts on capital costs against running costs (whole life costs)?

8. What are your thoughts on sustainable strategies? Does your organisation have a

strategy, and are you willing to pay more for sustainable design?

9. What are your thoughts on the use of off-site manufacture?

The individual interviews can be found in Appendix 4, however some of the more interesting

similarities and differences are highlighted in this section. It is important to note that each of

the clients interviewed would be considered an experienced private client, and therefore the

opinions and trends identified are specific to this client type.

7.1 Procurement strategies

• Most interviewees had a preferred procurement route which appeared to be about

familiarity of the process and specific requirements, however the preferred route

differed between clients.

• The preferred routes identified by interviewees were either Construction Management

or lump sum Design and Build.

• Only one interviewee mentioned a procurement route other than Construction

Management or Design and Build and this organisation seemed to take a more

individual approach to each project.

• Those with a preference for Construction Management tended to have a preference

for control over the process and had an experienced client management team, or

employed a third party to provide management services.

• Those with a preference for Design and Build discussed cost certainty and this was

usually identified as the main reason for choosing this route.

7.2 Market trends

• All interviewees concluded that whilst they had a preferred procurement route,

market conditions can influence the route chosen for a specific project.

• Those with a preference for Construction Management tended to choose Design and

Build only if market conditions made it a favourable option.

• One interviewee gave the example of a switch to Construction Management because

the market conditions were very good for contractors, who as a result were quoting

excessive lump sum prices which did not represent value for money.

35

• One interviewee felt that market conditions indirectly affected the choice of

procurement route. For example the current downturn has required increased use of

external funders, many of whom are more risk averse than developers and therefore

insist on a lump sum agreement.

7.3 Risk allocation The subject of risk allocation raised some interesting debate, however it is difficult to draw

comparisons on this topic. The author suggests that there is the common misconception when

discussing risk, as identified in section 3 which is also apparent in some of the interviews.

• The author’s impression was that interviewees with a preference for Construction

Management had quite a considered approach to risk management. The approach

seemed to be that by retaining control of the process and having direct contact with

trade contractors. This helped to avoid escalation of potential problems and early

identification of new risks. This heavy involvement was more likely to enable the

client to manage or reduce the impact of the risks identified.

• One of the interviewees stated that ‘risk doesn’t go away’. This is an important

message that all client organisations ought to understand.

• This same client also maintains that the client can’t remove time risk. Whilst financial

penalties can be levied against the contractor, ultimately the client will still have to

suffer the time delay.

• Those interviewees with a preference for Design and Build consider this approach

more appropriate to reduce risk to the client and transfer it to the contractor.

• The same interviewees identified some of the risks with Construction Management

such as direct contracts with trades. If a particular trade contractor goes out of

business the client must deal with the losses and the time and costs of the process to

procure a new trade contractor.

• One interviewee stated that for large and complex projects the risk can be too

uncertain to place a reasonable value against it in a lump sum agreement, therefore in

these situations it would be best to choose a Construction Management route.

• Two interviewees identified two-stage tendering as an effective approach to risk

management. The use of a pre-construction agreement and tendering of the major

packages in the first stage can reduce the price allocated to risk for the final contract

• Those interviewees with a preference for Construction Management tended to have

concerns in relation to risk within a Design and Build route due to the loss of control.

One identified that the loss of direct contact with trades meant that problems were not

identified early and often escalated significantly before ever reaching the client. The

interviewee felt that the Design and Build route was prohibitive to good risk

management.

• Most of the interviewees identified Construction Management as a better route for

managing change regardless of their preference for a particular route.

7.4 Preferred contractors

• Whilst not explicitly stated in all cases, the prevalence for good working relationships

was clear. Three interviewees confirmed that a large part of the selection process

involved assessment of the actual project team proposed by a contractor.

• This aligns with the views of Walker (Walker, 1995) who maintains that it is the

relationship between team members and their subsequent performance that is the

most significant factor in determining project success.

36

• It is however contradictory to the results of the some of the analysis by Hibberd and

Djebarni (Hibberd, et al., 1996) referenced in section 3.

7.5 Use of contracts

• The only real trend which could be identified was that all organisations interviewed

had developed a bespoke contract which is a standard for them, but not necessarily an

industry standard form. Some used a modified version of a standard form such as

JCT, others had entirely bespoke contracts which have been developed over the years.

7.6 Design stages

• A preference for design responsibility seems very much related to the quality aspects

of a project.

• Those with a Construction Management preference identified that this route was good

as the design team were under direct control of the client for the whole of the process.

• Those with a preference for Design and Build identified similar requirements, with

one interviewee stating that finishes should be designed as fully and completely as

possible prior to contract to retain as much control as possible.

• It is likely this similarity across all interviewees is due to the fact that the finishes and

aesthetics of a building are a major factor in attracting tenants in the commercial

sector.

7.7 Sustainable design and cost

• All interviewees agreed sustainable design was important and that the procurement

route did not adversely affect incorporation into design. Opinion on what contributed

to sustainable design varied depending on the client.

• Some of the interviewees highlighted the issue that sustainable strategies are not

necessarily measured in an appropriate way and that the label can be a selling point,

but not necessarily a positive contribution.

• One interviewee summarises this by confirming that sustainable strategies should

only be included if they actually contribute and are commercially viable.

• The same interviewee also had some specific ideas relating to sustainable strategies

such as minimising energy before looking at renewable sources etc.

• Legislation was also indentified by some of the interviewees as being the most

appropriate way of including sustainable strategies in projects.

• Regardless of client type (owner operator, developer only etc) all interviewees

concluded that running costs were as important as capital costs, this is partly due to

actual costs to the client and partly due to the need to market a building to tenants.

• What is interesting is that most organisations are only now starting to monitor energy

usage for analysis. It is likely that in five or ten years there will be a significant pool

of data available in order to conduct more research into this area.

37

7.8 Off-site manufacture

• Generally interviewees were positive about the use of off-site manufacture and its

benefits, from a cost, quality and programme perspective.

• One interviewee suggested it was important that designs were developed to not

preclude the use of off-site manufacture, rather than specifically trying to incorporate

certain products at an early stage.

• One interviewee praised the Construction Management route for enabling product

development through projects and provided examples from previous projects where

the use of Construction Management enabled the development with a sub-contractor

of off-site manufactured products which suited the specific needs of the client. These

products were subsequently rolled out on a number of projects providing significant

savings in time, cost, and a reduction of waste materials.

7.9 Summary

The purpose of conducting structured interviews with clients within a similar sector was to

understand the drivers behind how buildings are procured from the client’s perspective and

identify if there were any similarities with the information extracted as part of the literature

review in sections three and four. A number of themes can be identified:

Knowledge of the process – it was clear from most of the interviews that each organisation

choose to have a preferred route which individuals were familiar with and therefore able to

use to achieve the best outcome for the project.

Risk management – whilst the approaches to risk management varied between different

clients, it was clear that there is a risk management strategy which influences the procurement

route chosen. In general terms, those clients most concerned with cost certainty tended to

choose the lump sum Design and Build route, choosing to move to contractor design at a

relatively late stage (usually RIBA design stage D or E). Those clients most concerned with

quality and control tended to choose Construction Management ensuring maximum client

involvement, but an acknowledgement that the client retains more of the risk on the project.

Programme – as most clients choose the Construction Management or Design and Build

route, there was little discussion about programme benefits. One client still occasionally used

traditional procurement, however stated this was specific to certain circumstances and is only

viable when programme considerations are not critical.

Market influence – all clients identified that regardless of the preferred route, the market

conditions can have an influence on the chosen route for a project. For example in a period of

high demand it may not be possible to achieve a reasonable lump sum price as the contractor

will attach a large price to the risk portion of the cost, in such cases Construction

Management may be the only available route to enable to client to obtain value for money.

Conversely in a period of low demand, a client who normally uses Construction Management

may choose lump sum Design and Build to reduce risk associated with trade contractors

going out of business and to take advantage of lower bids as a result of market conditions.

One client emphasised that whilst it is prudent to take advantage of market conditions, it is

important that the supply chain is treated fairly to maintain good working relationships and

avoid deterioration into the adversarial claim culture. This is an important point for

procurement routes generally. Only by treating all parties fairly, can a project have any

chance of a successful outcome.

38

8. Conclusions and recommendations for the future

8.1 Procurement history

The form of procurement routes have changed significantly from 1945, continue to develop

today and are likely to continue to do so. Prior to the Second World War most construction

projects were procured under a traditional form. Post-Second World War, during a period of

sustained economic growth, the use of negotiated tenders and Design and Build emerged.

Over the years new or modified procurement routes have been developed primarily to solve

the short comings of the previous route in use.

There are now four broad categories for procurement, but with many variations within each

category. All are in use to varying degrees, but some have fallen in and out of favour

depending on the trends within the industry during a specific time.

The most significant overhaul of the industry and how projects are procured could be

attributed to two main aspects. Firstly, the emergence of the experienced developer client and

secondly a desire as an industry to tackle the major problems identified in government

reviews such as Latham and Egan in the 1990’s.

Latham and Egan reports have been hailed as the most significant reports on the change

required within the industry in recent years. These reports, while focusing on the supply chain

in the industry, identify a series of significant challenges in construction which need to be

addressed.

8.2 Project strategy

A number of pre-procurement requirements were identified and discussed in section 3. The

project strategy encompasses these requirements and includes setting roles and

responsibilities within the project team and ensuring a risk analysis and management

procedure is in place. If the potential risks can be identified and a management strategy put in

place which is open and fair to all parties, then there is more chance of a project team as a

whole being able to tackle the risks if they arise.

8.3 Analysis in the commercial sector

There has been a general move away from traditional procurement in which the design and

construction phases are entirely separated, although this is still in use on some projects.

There have been phases when routes such as Management Contracting have been in favour

with the industry generally, but these seem to have been relatively short-lived trends.

The data used for analysis in this thesis focused primarily on commercial office buildings in

central London. The most commonly used routes for this sector are Construction Management

and Design and Build. There is little evidence that these routes are varied for particular

projects and in fact, knowledge of a system appears to be the overriding factor when choosing

which route to adopt. Each experienced client had a preferred method of procurement and

would only vary from this route for a specific set of circumstances.

When Construction Management was the preferred route, this was typically because of the

ability to have control over the process and therefore quality of design and construction. It

39

was also suggested that this is the best route for particularly large and complex projects which

need a lot of front end design. However it was identified as a route which required

experienced clients willing to manage risk. When Design and Build was the preferred route

this was typically because of the need for cost certainty and some transfer of risk. It seems to

be a good value route when demand is lower, but needs to be balanced with a fair price for all

those involved.

8.4 Market influence

There is some debate as to whether market conditions influence the choice of procurement

strategy. The interview results in Section 7 would suggest that it does. For example a client

who usually chooses a Design and Build route, may be forced in times of upward market

trends to change strategy and adopt an alternative approach in order to agree acceptable cost

for the project, as with the supply side in demand they can apportion a high cost to risk within

this procurement route which the client would have to pay.

Conversely in times of downward market trends, the client who generally chooses

Construction Management may choose to switch to the Design and Build strategy, firstly to

take advantage of the competitive market, but also to guard against risk of many smaller trade

contractors going out of business.

Unfortunately market conditions all too often result in an unfair agreement for one party or

the other. Some of the limitations highlighted in Section 5 such as loss of skilled labour, cut

throat bidding leading to reduced quality and an adversarial culture are very much related to

the problems of a cyclical industry.

8.5 Industry problems to be addressed

Fragmentation of the industry is a theme which has been discussed by authors such as Latham

(Latham, 1994), Cox and Townsend (Cox, et al., 1998a), Masterman (Masterman, 2002).

However a desire to make the industry less fragmented is somewhat unrealistic considering

the way in which the construction industry has evolved over the last 20 years. The decline of

traditional procurement has further fragmented the design process and the introduction of

Design and Build has blurred the lines of design responsibility even further. Whilst it is not

appropriate that we return to the traditional forms of procurement and try to stop the evolution

of the industry, it is important that this newer structure of construction projects team is

recognised and the procurement routes are modified accordingly. For example if the use of

contractor design portions are to be utilised, the lines of responsibility need to be clearly

defined at the outset and the contractor should be involved in the design process at the

appropriate stage to ensure constraints which result in inefficient design are not imposed.

Training within the industry was also tackled as an issue by Latham (Latham, 1994), Cox and

Townswend (Cox, et al., 1998a) and others. This is linked to the issue of a fragmented

industry, but is also affected by wider social and economic matters. Latham identified that

there was a major problem with attracting and retaining the best in the industry. One of the

key successes of a project team are individuals within client bodies, design teams, and

construction companies who excel at managing the process required, regardless of the route

chosen. There has been a lot of work in the last ten years to improve the diversity of the

industry. Many companies have a diversity team and the introduction of role models and

specific events to attract young people into the industry have emerged. This can only serve to

improve the construction industry, but it will take time to see the results.

40

The key to improving the industry may be to tackle the problems identified above during

times of upward market conditions when perhaps many parties can see the benefits.

8.6 Conclusions

The conclusion that may be taken from this thesis is that there is no ‘best practice’ solution

for procurement of construction projects. Cox and Townsend (Cox, et al., 1998a) are very

much of this view, but for slightly different reasons. Their argument is that ‘the essence of

better practice, is the ability to know the full range of tools and techniques that are available

to allow individuals (or companies) to leverage their business position effectively.’ They

argue that for every project there is a different set of circumstances for which a particular

procurement route will achieve desirable results. Rowlinson (Rowlinson, et al., 1999) is also

clear that the view that a best solution exists can be detrimental to the process. All key issues

and participants need to be defined before a suggested procurement route can be devised.

In fact, whilst the author agrees with the theory that there can only be better practice, it is

clear from the client interviews that knowledge of a process, whatever that process is, seems

to be the simplest way to achieve the best outcome for a project.

Whilst the private developer client appears to have settled on a process which is successful, it

would be desirable if those projects with a one off client, particularly those in the public

procurement sector could take some of the ideas of the experienced clients and put them into

practice to achieve successful projects which represent value for money.

It is likely that procurement routes will continue to develop and change as the industry does,

and that there will never be a perfect formula which works for every project. Only by

understanding procurement routes, establishing an experienced project team and ensuring fair

trading mechanisms for all parties can we begin to improve the image of the industry by

producing successful, value for money projects in a non adversarial atmosphere. It is

important that some of the wider industry issues identified above are tackled to ensure that

procurement routes develop in a way which improves the industry as a whole.

41

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43

Appendix 1

Data from ‘Criteria of Choice for Procurement Methods’

Client Objectives (Hibberd and Djebarni study)

This base data was used to create Figure 2, page 15. For the ranking in this table, 1 is the most

important, 10 is the least important. The ranking has been reversed in Figure 3, page 15 from

those shown below to aid graphical representation.

(Hibberd, et al., 1996)

Selection Criteria Mean Rank

Accountability 6.99 2

Design input 4.83 7

Dissatisfaction with

previous procurement

process

5.58 5

Knowledge of process 5.37 6

Predictable cost

(predictability of cost)

7.08 1

Punctuality 5.79 4

Speed in commencement

(Total design time)

4.98 8

Speed in completion (Total

construction time)

5.82 3

Transference of risk 4.12 10

Working relationships 4.44 9

44

Appendix 2

Data from ‘A study of the bases upon which the clients of the

construction industry choose their building procurement systems’

Client Objectives (Masterman Study)

This base data was used to create Figure 4, page 16. The mean values only have been used to

show order of importance of client objectives, with the highest mean values representing the

most important objective.

Client’s needs Public

Experienced

Primary

Public

Experienced

Secondary

Private

Experienced

primary

Private

Experienced

Secondary

Private Part

Experienced

Secondary

Private

Inexperienced

secondary

Mean/Rank Mean/Rank Mean/Rank Mean/Rank Mean/Rank Mean/Rank

Certainty of

final cost

5.00 =1 5.00 =1 4.00 =4 3.50 =6 4.35 3 4.62 1

Accountability 5.00 =1 4.00 6 3.00 =10 4.45 1 3.69 7 3.00 10

Value for

money

4.50 3 5.00 =1 4.00 =4 4.17 =2 4.18 4 3.59 =7

Lowest

possible tender

4.25 =4 5.00 =1 5.00 =1 3.55 5 3.75 6 3.94 4

Active

involvement

4.25 =4 5.00 =1 4.00 =4 4.17 =2 4.83 1 4.27 3

Single point of

contact

4.25 =4 3.00 =7 3.00 =10 3.00 10 3.54 8 3.59 =7

Minimise risk 4.25 =4 3.00 =7 4.00 =4 3.08 9 4.14 5 3.75 6

Min design

and

construction

time

3.75 =8 3.00 =7 5.00 =1 3.50 =6 3.46 9 3.88 5

Certainty of

completion

date

3.75 =8 5.00 =1 5.00 =1 4.17 =2 4.46 2 4.35 2

High

Quality/Innov

ative

architecture

3.25 10 2.00 11 3.50 =8 2.67 =11 3.15 11 3.13 9

Ability to

change design

2.75 11 3.00 =7 3.50 =8 3.17 8 3.29 10 2.89 11

(Masterman, 1994)

45

Appendix 3

Data from ‘Contracts in Use 2004’ and ‘Contracts in Use 2007’

Methods of Procurement – by number of contracts

This table is taken directly from the published data referenced, and used to create Figure 8,

page 25.

Type of

contract

1985

%

1987

%

1989

%

1991

%

1993

%

1995

%

1998

%

2001

%

2004

%

2007

% Lump sum –

Firm BQ 42.8 35.6 39.7 29.0 34.5 39.2 30.6 19.6 31.1 20.0

Lump sum – spec

& dwgs 47.1 55.4 49.7 59.2 45.6 45.6 43.7 62.9 42.7 47.2

Lump sum –

D&B 3.6 3.6 5.2 9.1 16.0 11.8 20.7 13.9 13.3 21.9

Target contracts - - - - - - - - 6.0 4.5 Remeasurement –

Approx BQ 2.7 1.9 2.9 1.5 2.3 2.1 1.9 1.7 2.9 1.7

Prime cost plus

fixed fee 2.1 2.3 0.9 0.2 0.3 0.7 0.3 0.2 0.2 0.5

Management

Contract 1.7 1.2 1.4 0.8 0.9 1.2 1.5 0.6 0.2 0.7

Construction

Management - - 0.2 0.2 0.4 1.3 0.8 0.4 0.9 1.1

Partnering

Agreement - - - - - - - 0.6 2.7 2.4

(Royal Institution of Chartered Surveyors, 2007)

Methods of Procurement – by value of contracts

This table is taken directly from the published data referenced, and used to create Figure 9,

page 26.

Type of

contract

1985

%

1987

%

1989

%

1991

%

1993

%

1995

%

1998

%

2001

%

2004

%

2007

% Lump sum –

Firm BQ 59.3 52.1 52.3 48.3 41.6 43.7 28.4 20.3 23.6 13.2

Lump sum – spec

& dwgs 10.2 17.7 10.2 7.0 8.3 12.2 10.0 20.2 10.7 18.2

Lump sum –

D&B 8.0 12.2 10.9 14.8 35.7 30.1 41.4 42.7 43.2 32.6

Target contracts - - - - - - - - 11.6 7.6 Remeasurement –

Approx BQ 5.4 3.4 3.6 2.5 4.1 2.4 1.7 2.8 2.5 2.0

Prime cost plus

fixed fee 2.7 5.2 1.1 0.1 0.2 0.5 0.3 0.3 <0.1 0.2

Management

Contract 14.4 9.4 15.0 7.9 6.2 6.9 10.4 2.3 0.8 1.0

Construction

Management - - 6.9 19.4 3.9 4.2 7.7 9.6 0.9 9.6

Partnering

Agreement - - - - - - - 1.7 6.6 15.6

(Royal Institution of Chartered Surveyors, 2007)

46

Appendix 4

Client Interviews 2011

Client Interview 1:

Date of interview: March 10th 2011, 9am

Does your organisation have a specific procurement strategy across projects?

Yes, Construction Management (CM) is our default procurement route. However the funder

for a project can sometimes influence the chosen procurement route.

For example, on recent projects funders have been more likely to request a guaranteed

maximum price (GMP).

We have on some occasions managed to persuade the funders that this is not the route to

choose. We do this by comparing the GMP with the CM price at each stage. If they diverge in

such a way that the CM price is significantly lower than the GMP for early packages this can

be persuasive.

Given the current downturn in the market have you adjusted your procurement

strategy? We occasionally use design and build, which is a completely market driven decision. We will

use the market to gain the best value for money for a project.

Construction Management is still the preferred route in the current market however it is only

sensible if the CM companies still breakeven. Our strategy is to ensure the supply chain is

treated fairly to safeguard the project. (i.e. if the CM doesn’t breakeven there is potential for a

lower level of service).

How do you perceive the allocation of risk within procurement?

Risk doesn’t go away, it’s just transferred between parties. Ultimately as a client we cannot

remove time risk. Through the contract this risk could be transferred to the contractor,

however if there is a delay, whilst the contractor may have to pay financial penalties, the

client still suffers the time delay.

Where do you see the design portion best sitting? Our preference is to retain the design team under direct contract as the CM route. If design

team are novated under D&B it’s likely that any further design work required (e.g. changes

for fit-out if a tenant is secured) come at a cost premium

A word of warning though: CM is only suitable for the experienced client. A large degree of

client input is required due to direct contracts with the different trade contractors. The client

therefore needs to have good knowledge of the industry, processes etc.

Do you have preferred contractors you work with?

Yes, we have 3 preferred CM contractors. For us it’s all about the project team, not

necessarily competitive tender. We may ask two or three contractors to put a proposal forward

for a project, but what is important is seeing the proposed project team in action. We like to

use those we know from previous projects, or for newer teams review them in action on a

current project.

Do you have a standard contract agreement? We have basic agreements in place with all preferred contractors which will be adjusted as

necessary for the project. Legal appointments are 90% agreed between the parties as

standard. There are frequently some additional requirements added to satisfy the funder, or

account for a tenant. We generally use the Major Project form of contract.

What are your thoughts on capital cost against running (whole-life costs?) Both are important – but to understand why you need a bit of history.

We were an owner-developer with subsidiaries which dealt with tenant fit out, and facilities

management respectively until the recession of mid 1990’s. At this time the subsidiaries and

most properties were sold off to deal with the recession.

We have always had an interest in the long term running costs, and this has been retained

although we are no longer owners. We often use the facilities management organisation to

provide a review at Stage D design to ensure the FM requirements of a building have been

incorporated.

Post Occupancy Evaluation (POE) would be an ideal way to gather info, but it doesn’t seem

to happen enough in the industry.

Agreed – it is much harder to complete POE unless you are the owner of the building. For

those which we do own we’re completing POE on both a technical and social level.

What are your thoughts on sustainable strategies? Does your organisation have a

strategy, and are you willing to pay more for sustainable design?

Yes we have a published strategy which sets criteria and measurement requirements for all

projects. We are starting to gather more data in relation to sustainability.

Example – waste recycling. Contractors are probably ahead of developers with monitoring of

this, but the question we should be asking is how do we reduce the amount of waste produced

in the first place?

Example – We have set a general target of achieving 20% better than Part L, however with

the recent changes in legislation this is becoming harder.

What are your thoughts on off-site manufacture? My personal view is that the mechano kit style of off-site manufacture is the best approach.

There is no point transporting a box full of air, but transporting completed walls, floors etc

which can be connected together have benefits.

Benefits of off-site are primarily quality control. By working with familiar suppliers, we have

more influence over the developments of pre-fabrication and can suggest products to focus

on. An example is the challenge set to a toilet fit out contractor to develop service pods for

toilets. This has resulted in huge time savings which is now utilised on many projects.

Ease of construction is important to us due to the time and cost benefits usually achieved.

We are much more able to do this type of work under a construction management route as we

have a direct link with the trade contractors.

Client Interview 2:

Date of interview: March 14th 2011, 3pm

Does your organisation have a specific procurement strategy across projects? We are entirely a cyclical industry which is market driven. In the current climate we have a

preference of fixed price design and build

Given the current downturn in the market have you adjusted your procurement

strategy? D&B fixed price wherever possible. As a business, cost certainty if very important to us and

we believe this gives us cost certainty.

There are exceptions though, large and complex projects often go Construction Management

route. As an example on one project recently completed, the D&B contractors where quoting

a risk budget of approx 20% due to complexity of the project. This wasn’t good value for

money, so Construction Management route was chosen, and worked well for the project (on

time, in budget).

Equally in boom times contractors can afford to increase prices for risk etc, and therefore the

client gets less value for money from a Design and Build route.

How do you perceive the allocation of risk within procurement? We like to eliminate risk, hence our preference for lump sum.

As a business we don’t like Construction Management due to the risk – for example if a

contractor goes bust, the client must deal with consequences, whereas with D&B the

contractor picks up any cost.

CM is however good for big complex projects as sometimes the risk in these cases is too

uncertain to cost.

Where do you see the design portion best sitting? Normally we would develop a scheme to Stage D/E then go D&B, sometimes with novation

of the design team, sometimes not.

The last 2 projects we’ve taken more of a chance due to the recession and gone D&B at stage

C/D.

Generally we use novation to retain consistency of design, but sometimes contractors have a

proposed team for a specific reason – e.g. good delivery architects.

Do you have preferred contractors you work with? Yes, we generally only ask 3 or 4 contractors to price a project.

We sometimes use pre-construction agreements, but I’m not a personal fan.

Do you have a standard contract? Yes – we have a consistent contract wherever possible. It’s a modified version of JCT.

What are your thoughts on capital cost against running (whole-life costs?) We have a whole range on our portfolio, so both are important.

Develop & own

Develop & trade

Develop & manage

We often have to hold buildings for a time, so running costs are important. Generally high

quality is important as it’s easy to let, however the specification (and therefore cost) is usually

market driven.

Internal Rate of Return (IRR) is very important – this is what your money is earning you,

which is very time dependant and can influence construction programme required.

Construction time period can be critical for a pre-let.

Design period is not generally such an issue

What are your thoughts on sustainable strategies? Does your organisation have a

strategy, and are you willing to pay more for sustainable design?

We strongly believe in incorporating sustainable strategies into our projects.

Yes, it costs more in capital, but the tenant gains. (e.g. put lots of PV’s on the building, costs

money, but tenant sees benefits – hard to charge a premium for this).

Legislation is much easier as it puts all developers on a level playing field.

What are your thoughts on off-site manufacture? (not discussed)

Final thoughts:

All projects are D&B at present which is entirely market driven, we have no doubt this will

change in the future.

Client Interview 3:

Date of interview: March 16th 2011, 4pm

Does your organisation have a specific procurement strategy across projects? Yes, our strategy is, D&B, single stage competitive tender, transfer of risk.

We generally design everything visible to Stage E for cost certainty. Services usually

performance spec.

Given the current downturn in the market have you adjusted your procurement

strategy? We’re still using D&B however in the current market this can go wrong. If a tenant (or we)

make a late change we pay a premium for these changes.

In retail for example, repeat business from tenants is very important, therefore the developer

will concede late changes and pay for them.

How do you perceive the allocation of risk within procurement? Market risk – this is something the client can’t deal with.

In D&B the risk is transferred to the contractor at a certain point in time.

Value we have little control over (dependent on market), costs we can control.

Risk reduction prior to and during the tender process. On 2 stage tenders:

1st stage – contractors price overall project (packages tested but not tendered).

Contractor selected on a pre-construction services agreement for 6-9 months.

Contractor during this time tenders approx 80% of project and must take the risk on final

20% to give the client a lump sum.

We operate a risk schedule which is shared with the contractor throughout the tendering

process. The intention is to eliminate risks where possible and identify residual risks to the

contractor prior to contract agreement,

Where do you see the design portion best sitting? For architecture, up to Stage E with client is best, then switch to D&B.

For Structure and Services Stage C (or less) with client. Contractors often propose

alternatives to engineering and start from scratch to use their preferred construction methods.

We often novate and retain a compliance team.

One of the problems with the D&B process is that often the contractor proposes a list of VE

items which we agree to that can be taken after contract, but planning constraints or

programme constraints then prevent the contractor taking these savings which can cause

problems.

Do you have preferred contractors you work with? Yes, there four main contractors we would consider for large >£100M projects in UK.

Normally ask 3 to competitively tender, then continue negotiations with two.

Selection criteria for contractors is wide ranging and strict:

Money, Programme, Team (individuals), Contract conditions, sustainability, community

relations, Corporate Social Responsibility, H&S strategy, and in this market financial

integrity.

Do you have a standard contract? Shared savings pre-contract sometimes used.

What are your thoughts on capital cost against running (whole-life costs?) In retail we retain centres for their design life. An additional engineer specification is imposed

on tenants to ensure equipment meets the FM requirements.

Dept stores do all their servicing.

Small units are provided with a route to the roof, and power/water, and sprinklers.

Benefit – capital costs are lower, and running costs reduced as retailers (tenant) is responsible

for the servicing of equipment etc. Part L is proving an issue requiring a change of strategy.

Part L is pushing towards centralised plant, but retailers are unwilling to pay for this. We have

produced a ‘Low Carbon Fit out guide’ in an attempt to educate retailers.

What are your thoughts on sustainable strategies? Does your organisation have a

strategy, and are you willing to pay more for sustainable design?

We have a corporate strategy to implement sustainable strategies. We have set targets such as

BREEAM very good for all projects. This is much harder now as BREEAM considers whole

development, but retailers won’t cooperate.

Legislation is the only way forward, and we can see this happening to make retailers fall in

line with the requirements. We believe retailers are committed at corporate level, but not at

operational level.

Yes – we definitely pay more for sustainability. There is a specific line in the funding

structure for environment and Corporate Social Responsibility.

What are your thoughts on off-site manufacture? It’s a good idea. Some supermarkets are already acting on this. For example – supermarkets

made of timber glulam frames. A kit of components manufactures off site and constructed

quickly on site. Use of precast systems is another example of off-site being utilised.

Final thoughts: Negotiation route probably won’t happen, we will continue to use the current strategy.

We’ve tried target cost – didn’t work well

We’ve tried open book – better, but still not enough trust

Client Interview 4:

NB: This was not a full interview, but a general discussion with head of procurement rather

than project directors.

Date of interview: March 22nd

2011, 9am

Does your organisation have a specific procurement strategy across projects?

Yes – achieve planning before procurement. Then procure under D&B. Reduces risk and

means we are ahead of the market.

Do you have preferred contractors you work with? Yes, three main contractors, they all know the terms of our contracts

Do you have a standard contract agreement for projects? Yes – we have a consistent contract wherever possible. It’s a modified version of JCT.

CM contracts all grew out of the Broadgate development

Cyclical industry. When the market is rising it’s better to go CM route. When the market is in

decline and at a low it’s best to go D&B lump sum – Stage D+

Procurement time – for a average £150M project, a 5 month procurement period – maximum

to agree contract. (In reference to public sector projects, this is much faster)

Client Interview 5:

Date of interview: March 24nd 2011,2pm

Does your organisation have a specific procurement strategy across projects? Yes, however we are fairly flexible. Typically we use CM for larger projects. Sometimes use

two stage lump sum, sometimes traditional.

More recently we’ve started using single and two stage D&B, but this is relatively new.

Given the current downturn in the market have you adjusted your procurement

strategy?

Depends on the project.

One project we bought the site from a contractor developer with the agreement that the

contractor would build D&B from a certain stage

On another project we’ve just recently agreed to D&B for significant reasons. Originally CM,

but project stopped in recession. Start up is a JV with a funder. An acknowledgement that the

funder is sharing the risk and requires more cost certainty, therefore we have agreed D&B

route.

How do you perceive the allocation of risk within procurement?

We have concerns about D&B due to the loss of control.

CM is better for flexibility, programme benefits, and change

Traditional can still be used if circumstances are right

Management – we prefer the ability to manage the process with CM. This is usually done by a

third party development manager

Where do you think design best sits? For finishes best to develop design as far as possible with design consultants. For engineering

this could be contractor designed at an earlier stage.

Retail – lots of D&B and early contractor appointment

Commercial – Stage E for certainty of scheme

Engineering could be performance spec

Do you have preferred contractors you work with? Yes, we have three preferred CM companies that we use.

We look at lots of things – the actual project team, H&S attitude, CSR, supply chain auditing

etc. What is the relationship – are we an important client to them

Do you have a standard contract agreement? Yes, bespoke been developed over the years

What are your thoughts on capital cost against running (whole-life costs?)

Costs for CM generally ok, but programme is usually the main driver

Capital and running costs important – we’ve only started monitoring this more recently.

Running costs are important as generally the tenant pays and if services charges are too high,

then you can’t get tenants in

What are your thoughts on sustainable strategies? Does your organisation have a

strategy, and are you willing to pay more for sustainable design? Yes, sustainable strategy, but only if they actually contribute and are commercially viable. As

a general rule our strategy is to minimise energy use in the first instance, then look a

renewable etc.

What are your thoughts on off-site manufacture? Lots of benefits such as programme and quality. We must design building to not preclude use

of off-site manufacture elements.

Client Interview 6:

Date of interview: March 25th 2011 , 9am

Does your organisation have a specific procurement strategy across projects? Yes, we are dealing primarily with a multi-phase long project, so the development strategy is

important for why procurement route chosen.

Buildings were delivered to demand, not as speculative developments. The same model

spec/brief is fine tuned to the tenant’s requirements.

Procurement strategy therefore had to be flexible. CM was preferred route for each building,

but also used two stage and single stage traditional lump sum for some projects. Funding

primarily from one bank. First projects were two stage contracting, but moved to CM for

larger projects, and as funders trust in the development increased.

Potential problems with CM include risk of scope gaps, but easier to manage change.

Given the current downturn in the market have you adjusted your procurement

strategy? (not applicable)

How do you perceive the allocation of risk within procurement? Lump sum traditional if the design is fully completed first. Not good for changes, no good if

design isn’t fully resolved.

D&B – one of the issues is lack of access to the real problems – i.e. a trade contractor

problem can escalate and become programme critical if not identified to the client early

enough. CM shortens the communication chain, and gives more access to the real problems. It

also takes out the commercial interest.

Where do you think design best sits? (not discussed)

Do you have preferred contractors you work with?

Yes, we typically used the same steel and concrete contractors for each building. Benefit that

the teams knew each other and therefore lessons learned were used to influence the next

project.

One CM contractor used throughout the process – good relationship developed, and therefore

maintained throughout.

Do you have a standard contract agreement for projects? Yes, Bespoke CM, consultant, and trade contracts. JCT by exception

What are your thoughts on capital cost against running (whole-life costs?)

Cost model for buildings depends on tenant occupancy. If a building is 100% occupied, the

tenant will manage the running costs and maintenance. If there is multi occupancy, estate

management will manage running costs and maintenance.

At development it is still often debated – high running costs will put tenants off, therefore it’s

good business sense to reduce running costs.

What are your thoughts on sustainable strategies? Does your organisation have a

strategy, and are you willing to pay more for sustainable design? Balance is to have low capital cost which doesn’t preclude the options to reduce energy

usage.

Yes, it matters. A great deal is actually about common sense, but increasingly meeting

legislation. BREEAM ratings – one good example is that a tenant wanted to reach BREEAM

outstanding, so we made changes to the base build design in order to facilitate this.

CM is good for this as we had access to suppliers to have the right conversations to make

changes for the better.

The key to sustainability is flexibility for improved technology or change in technology

And what are your thoughts on off-site manufacture? (not discussed)

Final thoughts: It’s the client’s job to build a team

You need the right individuals on top of the base answer

Client Interview 7:

Date of interview: Wednesday 5th May 2011

Does your organisation have a specific procurement strategy across projects? No, we look at each project and the circumstances individually. The type of project, funder,

programme requirements, market conditions all impact on the way in which we procure a

building. In the last ten years, many of our projects have been procured under a hybrid of

construction management and lump sum design and build agreement.

Given the current downturn in the market have you adjusted your procurement

strategy?

The market conditions definitely influence our procurement strategy. In the current conditions

we’re more likely to choose a lump sum design and build route, although this is not

necessarily our preference.

How do you perceive the allocation of risk within procurement? Our strategy is to minimise risk by ensuring that as much as possible cost can be predicted,

however it’s dependent on the circumstances of a particular project and what the drivers are.

For example, on one project we had a pre-let and therefore a defined deadline for completion

of the building. This made it necessary to use a hybrid Design and Build route, due to the

programme constraints only about 85% of the packages were secured at the time of contract,

which left 15% in provisional sums, we generally prefer to have approx 95% of packages

secured.

Reduction of risk has become very important to funders and therefore we need to choose a

route that provides this comfort to secure funding for a project.

Where do you see the design portion best sitting? It’s best to design as much as possible to a late stage, and where contractor design portions

are required, bring those trades into the project team as early as possible.

Do you have preferred contractors you work with? Yes, although the situation has changed significantly in the last 10 years. For a design and

build route, mid 2000’s there was only a limited number of main contractors who could take

on large scale commercial projects, it was therefore important to develop good relationships

with those contractors.

Do you have a standard contract agreement? Yes, but it’s a modified version of JCT for design and build contracts.

What are your thoughts on capital cost against running (whole-life costs?)

Both are important. Whether the project is speculative for development for a pre-let tenant,

the ability to offer low service charges is a benefit.

What are your thoughts on sustainable strategies? Does your organisation have a

strategy, and are you willing to pay more for sustainable design?

Yes, we have a strategy across all projects. Many of our major projects have incorporated

innovative environmental strategies in the last ten years, and we continue to support use of

new design developments to improve the sustainability of buildings.

What are your thoughts on off-site manufacture? Not discussed.

47

Appendix 5

Project Data

A study of procurement routes and their use in the commerical sector

Appendix 5 - Selected Project Data - Central London Jun-11

Project

Completion

Date Gross Floor Area Net Floor Area Efficiency Construction Procurement Route Total Cost

Total length of

Construction Cost Time Source

sq foot sq foot Pounds weeks £/sq ft sq ft/week

1 Dec-03 750,000 550,000 73 Two stage D&B £149,000,000 152 £198.67 4.934E+03 Client A - direct

2 Sep-10 730,000 560,000 77 Two stage D&B £152,000,000 150 £208.22 4.867E+03 Client A - direct

3 Feb-10 650,000 451,000 69 Two stage D&B £148,000,000 169 £227.69 3.846E+03 Client A - direct

4 Oct-05 602,000 398,000 66 CM bespoke £125,670,000 134 £208.75 4.493E+03 Client B - Cost Consultant A

5 Oct-05 560,600 417,200 74 CM bespoke £80,980,000 120 £144.45 4.672E+03 Client B - Cost Consultant A

6 May-07 200,000 121,400 61 CM bespoke £36,800,000 124 £184.00 1.613E+03 Client B - Cost Consultant A

7 May-07 369,700 257,000 70 CM bespoke £62,200,000 124 £168.24 2.981E+03 Client B - Cost Consultant A

8 Jun-06 177,000 132,000 75 Two stage Traditional £31,850,000 108 £179.94 1.639E+03 Client B - Cost Consultant A

9 Mar-05 205,000 138,000 67 JCT 98 with CDPS £34,500,000 82 £168.29 2.500E+03 Client B - Cost Consultant A

10 Jun-02 225,800 162,100 72 CM bespoke £35,400,000 90 £156.78 2.509E+03 Client B - Cost Consultant A

11 Jan-05 729,400 495,100 68 CM bespoke £113,500,000 100 £155.61 7.294E+03 Client B - Cost Consultant A

12 Oct-08 320,500 222,300 69 Construction Management £89,030,000 178 £277.78 1.801E+03 Client C - Cost Consultant A

13 Sep-08 205,800 129,400 63 Construction Management £54,200,000 98 £263.36 2.100E+03 Client C - Cost Consultant A

14 Jun-07 569,700 422,300 74 Construction Management £115,900,000 122 £203.44 4.670E+03 Client C - Cost Consultant A

15 Jul-06 212,700 160,300 75 Construction Management £36,300,000 75 £170.66 2.836E+03 Client C - Cost Consultant A

16 Nov-04 228,200 179,500 79 Construction Management £33,500,000 109 £146.80 2.094E+03 Client C - Cost Consultant A

17 Jan-05 729,400 495,100 68 Construction Management £113,500,000 116 £155.61 6.288E+03 Client C - Cost Consultant A

18 Sep-02 181,900 121,100 67 Construction Management £34,400,000 72 £189.11 2.526E+03 Client C - Cost Consultant A

19 Sep-01 355,600 249,000 70 Construction Management £63,300,000 79 £178.01 4.501E+03 Client C - Cost Consultant A

20 Nov-01 334,900 207,400 62 Construction Management £61,900,000 82 £184.83 4.084E+03 Client C - Cost Consultant A

21 May-08 1,100,000 692,000 63 Design and Build £200,000,000 125 £181.82 8.800E+03 Client D - direct

22 Aug-07 1,200,200 753,400 63 Design and Build £208,000,000 190 £173.30 6.317E+03 Client D - direct

23 Jul-09 645,834 541,000 84 Design and Build £160,000,000 99 £247.74 6.524E+03 Client E - direct

This information was collected either directly from the clients interviewed in Section 7, or from the Cost Consultant the client referred the author to.

Projects 4 to 20 were issued to the author in an non-identifiable form from a leading cost consultant who collates information for the relevant client for benchmarking.

As projects 4 to 20 are from the same source, the author is confident that these can be directly compared as the information is consistently collated.

The remaining projects may introduce some inaccuracies as these are from a variety of sources and therefore consistency cannot be guaranteed (for example, shell and core cost definition may vary according to the

client).