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Procurement Level Construction

This chapter of the construction procurement handbook provides guidance on selecting a procurement strategy and form of construction contract. It summarizes five generic procurement strategies - integrated, traditional, design-build, management, and revenue financed. Each strategy has variants that can be used, such as frameworks, two-stage tendering, and target cost contracts. The two most commonly used contract forms in Scotland are JCT and NEC. The chapter then describes common procurement strategies and evaluates them based on 12 characteristics to help clients determine the best fitting strategy.

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0% found this document useful (0 votes)
160 views43 pages

Procurement Level Construction

This chapter of the construction procurement handbook provides guidance on selecting a procurement strategy and form of construction contract. It summarizes five generic procurement strategies - integrated, traditional, design-build, management, and revenue financed. Each strategy has variants that can be used, such as frameworks, two-stage tendering, and target cost contracts. The two most commonly used contract forms in Scotland are JCT and NEC. The chapter then describes common procurement strategies and evaluates them based on 12 characteristics to help clients determine the best fitting strategy.

Uploaded by

Gamini Kodikara
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Construction

Procurement Handbook

Chapter 5

Contract Selection and


Procurement Strategy
Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy

Contents:
Section Subject

1. Introduction

2. Summary of Generic Procurement


Strategies

3. Common Procurement Strategies


and their Characteristics

4. Early Integrated team/Partnering

5. Scotland’s Hub Programme

6. Traditional Lump Sum Strategy

7. Design and Build

8. Design Develop and Construct

9. Management Contracting

10. Construction Management

11. Revenue Financed

12. Variant: Two Stage Tendering

13. Variant: Target Cost Contracts

14. Variant: Frameworks

15. Selecting a Procurement Strategy


and Form of Contract

16. Short List Procurement Strategies


Based on Pass/Fail Criteria

17. Example One

18. Example Two

19. Select from Short List Based on a


Weighted Scoring of Characteristics

20. Introduction to Risk Management


and Apportionment
Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy

21. Risk Apportionment

22. Risk Management

23. Amendments to Standard Form


Contracts

24. Selecting a Form of Contract

25. Standard Form Construction


Contracts

26. Other Contracts

27. Commonly Used Contracts

28. JCT (SBCC) or NEC?

29. Choosing from the Different Forms


of Contract

30. Management of the Contract

31. Dealing with Claims

32. Design Responsibility

33. Insurance Arrangements

34. Dispute Resolution

35. Other Useful Sources of Advice and


Guidance
Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy

Introduction

1.1 The Review of Scottish Public Sector Procurement in Construction noted that
a wide range of contract forms were being used by public sector clients for the
procurement of construction works. In some cases, a clear selection process had
been applied to the choice of contract which was appropriate for the nature of the
work, the procurement method and the risks lying within the project. However, in
other cases, it appeared that much less thought or planning had been given to the
form of contract used where there was a reliance on historic practice regardless of
whether the contract type was the best fit or approach for the project in question.

1.2 This Chapter of the Construction Procurement Handbook provides an


overview on the relative merits of a range of procurement strategies and forms of
contract. This will help to inform a contracting authority’s decision on the
procurement strategy and form of contract it wishes to adopt for the delivery of its
desired project outcomes.

Summary of Generic Procurement Strategies

2.1 There are five generic procurement strategies:

• Integrated

• Traditional

• Design and Build

• Management

• Revenue Financed

2.2 Each has variants, and further options can be applied to some of the variants:

• Frameworks

• Two Stage Tenders

• Target Cost Contracts

2.3 In addition, there are a number of forms of construction contract which can
be used with each variant and/or option which reflect differences in risk allocation
between the contracting parties and differences in the mechanisms for payment, for
variations to the contract required by the client and for resolution of disputes.

2.4 The two forms of contract most commonly used for construction works in
Scotland are:
Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy

• The Joint Contracts Tribunal (JCT) as amended for use in Scotland by the
Scottish Building Contract Committee Ltd.; and,

• The New Engineering Contract (NEC).

2.5 Two standard forms of contract which, historically, were widely used (The
Institution of Civil Engineers, ICE Contract and the Government Conditions of
Contract, GC Works) are no longer maintained by their publishers and were
withdrawn from sale in 2011. While some procuring authorities continue to use these
on a regular basis, those authorities not familiar with them may wish to consider
other, more contemporary forms of contract.

2.6 Other forms of contract such as the FIDIC suite published by the International
Federation of Consulting Engineers, and the ICC Conditions of Contract, published
by the Association of Consulting Engineers (ACE) and the Civil Engineering
Contractors Association (CECA), are available. However, these are not in common
use and are not considered in detail in this chapter.

2.7 A summary of the generic procurement strategies and associated forms of


contract and their potential applicability is contained in Figure 1.

Procurement
Integrated Traditional Design and Build Management Revenue Financed
Strategies
Early Design,
Hub Design Design and Management Construction
Variants Integrated Traditional Develop and Hub DBFM NPD
and Build Build Contracting Management
Team Construct
Option for Cost
Reimbursable
Target Cost         
Option for Two
Stage
Tendering
 
      
Option for
Framework         
Available forms SBCC Standard SBCC SBCC Design SBCC Design SBCC/JCT SBCC/JCT Standard hub Standard
of Contract Constructing hub Design, Various and Build and Build Management Management DBFM Model NPD Model
Excellence Build, NEC 3 NEC 3 – NEC 3 – Contract Contract Form Form
Developme Options A Various Various NEC 3 Option NEC 3 Option F
NEC 3 Option nt and B Options Options F
C with Agreement Combinations Combinations
Secondary
Partnering
Option X12

PPC 2000

Figure 1: Summary of Generic Procurement Strategies


The hub programme pricing mechanism is very similar to a 2-stage tendering approach.
Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy

Common Procurement Strategies and their Characteristics

3.1 In this section, the key characteristics of a range of commonly used


procurement strategies are described. Each description is accompanied by an
assessment, in matrix form, of the relative impact (from low (1) to high (10)) of a set
of twelve specific characteristics may have on the particular procurement strategy;
for example, what level of client expertise is required in its application or is it suitable
for simple or more complex projects. The twelve characteristics are described in
Figure 2, along with a description of what each characteristic assesses.

Characteristic What the Characteristic Assesses

Expert client involvement needed The degree of expertise, low-high, needed by the client body

The amount of control afforded to the client in selecting a


Client control over design and specification
design solution, rather than simply testing if the specified
solutions
project benefits are achieved.
The extent to which the procurement strategy is reliant on a
Needs the client to produce an output performance
detailed set of client technical requirements. For each
specification. Often called “Employers
design element this is normally expressed as achieving a
Requirements” or “Accommodation Requirements”
minimum performance level.
The ease of implementing change during The ease of instructing a change and of agreeing any
construction implications of cost and time
The extent to which the strategy enables contractors and
Supports the early appointment of an integrated
designers to work collaboratively from an early stage of the
team
project
The extent to which responsibility for both design and
Single point design and construction responsibility
construction is contractually combined.
Measures the degree to which construction phase risks are
Cost and time certainty after contract execution
typically able to be transferred to the contactor
A measure of the relative speed from project inception to
Speed of development
start of construction
Low resource levels and limited expertise needed – low
Suitable for simple projects
client administration
Supports a high level of client involvement, specialist
Suitable for complex projects contractor design, optional supply chain intervention by the
client, complex risk management
The extent to which the strategy supports the use of a
Suitable for a target cost approach
collaborative approach to procure to a cost target
The extent to which the strategy supports a 2-stage
Suitable for 2-stage tendering
tendering approach
Figure 2: Characteristics of Common Procurement Strategies

3.2 Selection of the most appropriate strategy should be undertaken following a


project specific analysis of the relative characteristics of each option. As a first step
in the selection process, all the procurement strategy options should be sifted by
means of simple pass/fail criteria to identify those most suitable for the project in
question. The remaining options should then be assessed using a more rigorous
weighted score analysis to help inform the choice of the optimum project specific
strategy. This process is described in more detail from section 15 onwards.
Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy

3.3 The following procurement strategies are considered:

• Early Integrated Team/Partnering

• Scotland’s hub Programme

• Traditional Lump Sum

• Design and Build Strategies

• Management Strategies

Along with the following variants:

• Two Stage Tendering

• Target Cost Contracts

• Frameworks

Early Integrated Team/Partnering

4.1 The benefits of developing projects collaboratively between the various parties
to a project is well established – working together as a team, for the mutual benefit
for all, minimises wasteful activities. For example, the hub programme (further details
below) has been developed in Scotland on these principles. However, it is important
to note that the approach does not replace formal contracts of engagement between
parties or proper and appropriate management structures and procedures. It is a
pragmatic way of working together to find ways of delivering the project to the
required quality within budget and within programme. Three forms of standard
contract that have been developed to facilitate partnering approaches include:

• JCT Constructing Excellence;

• NEC suite of contracts (e.g. NEC 3 and NEC4 with appropriate


collaboration and partnering options); and

• PPC 2000 with PPC(S)2000 (a supplement containing alternative


attestation clauses and amendments to PPC2000 in accordance with Scots
Law).

4.2 The first two rely on a series of bilateral contracts between the client and each
supplier. PPC 2000 provides for a multilateral partnering agreement.

4.3 Although a number of operating models exist for partnering, most embody the
following principles:

• The client develops a functional, outcome focussed brief with specific


requirements covering budget, sustainability criteria and community benefits;
Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy

• An integrated team of designers, contractors (including specialist design


contractors if appropriate) and facilities managers is assembled;

• In collaboration with an informed client, the team develop the most


appropriate design solution, normally based upon open-book cost
management and transparent risk identification, mitigation and allocation;

• The subsequent construction contract can be based on a variety of


approaches but will be characterised by fairness in risk allocation and
payment mechanisms;

• Key performance measurements are used to drive improvement and


include reviews of behaviours as well as hard processes.

Partnering is often used in framework arrangements where the long-term benefits of


teams who work together regularly can be realised.

4.4 The potential benefits are;

• Maximises the opportunities for innovation in developing the optimum


solution.

• Provides very good risk management.

• Strong alignment with client objectives and outcomes.

• Strong basis to develop continuous improvement in long term


relationships.

• Potential to minimise claims during construction because of better risk


identification, mitigation and allocation.

4.5 The potential risks are;

• Requires strong client leadership and experience.

• Disputes between partners can be more difficult to resolve using


contractual remedies - instead resolution relies on the operation of mutual
trust and respect between parties, and escalation if necessary to senior
management.

• Care and diligence is needed to understand the final risk allocation and its
management in the construction contract.

• Relies on good benchmarking and cost data to establish a cost ceiling in


order to demonstrate value for money, especially if competitive tendering is
not used for all packages of works.
Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy

Strategy: Early Integrated Team/Partnering

Low High
Characteristics 1 2 3 4 5 6 7 8 9 10
1 Expert client involvement needed
2 Client control over design and specification solutions
3 Needs Client production of an output performance specification
4 Ease of implementing change during construction
5 Supports early appointment of an integrated team
6 Single point design and construction responsibility
7 Cost and time certainty after contract execution
8 Speed of development
9 Suitable for simple projects
10 Suitable for complex projects
11 Suitable for a target cost approach
12 Suitable for 2-stage tendering
Figure 3: Characteristics of Early Integrated Team/ Partnering

Scotland’s Hub Programme

5.1 The Scotland-wide hub programme is an integrated procurement strategy


based on a partnership between the public and private sectors to deliver new
community facilities that are built by five hub companies spread across Scotland. It is
designed to provide the public sector with a mechanism to deliver and manage
buildings more effectively. The hub companies (hubCos) are jointly owned - 60% by
a competitively procured private sector development partner (PSDP) and 40% by the
public sector. Each hubCo can undertake project development work, strategic
support services (professional consultancy services) or facilities management
services. Further details about the hub programme can be obtained from Scottish
Futures Trust.

5.2 Public bodies wishing to participate (Participants) with their local hubCo are
required to sign a Territory Partnering Agreement (TPA). Having signed a TPA,
Participants with a project meeting the original procurement criteria – essentially a
project delivering community services – can issue a ‘New Project Request’ (NPR) to
the hubCo. This consists of a project brief and an associated budget which, if
accepted by the hubCo, means that an Integrated Team, consisting of a Tier 1
contractor, designers and other consultants as appropriate, is then selected from the
hubCo supply chain in consultation with the Participant. A proposal for delivering the
project, based on a scheme design, is then developed collaboratively over a period
of approximately three months.

5.3 Design development is a joint exercise between the Integrated Team and the
Participant. Risks are jointly identified, surveys and investigations carried out and
options considered. A project development fee is only payable by the Participant if
the proposal meets the project brief and budget criteria set out in the NPR (and can
also demonstrate value for money). All components of the project development fee
Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy

are subject to percentage fee caps set at the time of the original, competitive PSDP
procurement.

5.4 Once the initial (“Stage 1”) proposal is accepted, the hubCo develops the
design and, via its Tier 1 contractor, competitively tenders a minimum of 80% of the
prime cost of the project on a transparent open book basis to establish a “Stage 2”
proposal. The Tier 1 contractor’s overheads, preliminaries and profit are subject,
again, to percentage caps of the prime cost. The “Stage 2” proposal is presented to
the Participant and if this is accepted, a development contract is entered in to
between the Participant and hubCo.

5.5 A “back-to-back” construction contract (where the contract between the hubCo
and the Tier 1 contractor mirrors the obligations of hubCo to the Participant), is let at
the same time between the hubCo and its Tier 1 contractor. The standard hub terms
are based on those of a design and build contract. Recognising the period during
which the Integrated Team has identified, mitigated and priced risks, the terms
include for the risks on ground conditions, weather, utilities and contamination (with
exceptions for areas not able to be surveyed) to be transferred to the hubCo and in
turn to its Tier 1 contractor.

5.6 Each hubCo has an initial 20-year term. The performance of each hubCo is
monitored by a Territory Partnering Board, with a representative from each
Participant, against both project Key Performance Indicators (KPIs) and continuous
improvement KPIs.

5.7 The potential benefits are;

• Significant time and resource is saved by the client not needing to


advertise or competitively tender for designers or a main contractor, as these
steps have already been undertaken for the appointment of the PSPD.

• Embraces all the benefits of Early Integrated Team working.

• Provides very good risk management.

• Provides benefits of a long-term relationship with the hubCo.

• Provides very good time and cost certainty in the absence of variations.

5.8 The potential risks are;

• Relies on clients being able to identify well defined project outcomes (a Brief)
and to have a good understanding of the likely outturn cost.

• Relies on robust interrogation of the hubCo proposals by the client.

• Choice of contractors and consultants are mostly restricted to members of the


hubCo supply chain, although there is a requirement for this to be refreshed
regularly in accordance with the relevant Territory Partnering Agreement.
Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy

Strategy: Hub

Low High
Characteristics 1 2 3 4 5 6 7 8 9 10
1 Expert client involvement needed
2 Client control over design and specification solutions
3 Needs Client production of an output performance specification
4 Ease of implementing change during construction
5 Supports early appointment of an integrated team
6 Single point design and construction responsibility
7 Cost and time certainty after contract execution
8 Speed of development
9 Suitable for simple projects
10 Suitable for complex projects
11 Suitable for a target cost approach
12 Suitable for 2-stage tendering
Figure 4: Characteristics of Hub

Traditional Lump Sum Strategy

6.1 With this type of contract, the design team are employed directly by the client
to fully develop the design prior to going out to tender. Suitable contractors are then
invited to submit a tender priced against the client’s requirements. Traditionally, this
can comprise a Bill of Quantities. However, it is becoming increasingly common for
contracts to be based on drawings and specifications, or activity schedules with
contractors needing to satisfy themselves as to the quantities of material required.

6.2 The construction contract is with a main contractor who has responsibility only
for the construction works. If the design has been fully thought out, developed and
frozen, this type of contract should provide a reasonable degree of cost certainty at
tender stage, subject only to client risk events, such as unforeseen ground
conditions. However, by their nature, Lump Sum Contracts may be less appropriate
where the timescales for delivery of the project may mean that a fully developed
design cannot be prepared in advance of tendering; in which case subsequent
design development changes will usually lead to cost and, possibly, time escalation.
Typically, this procurement strategy also uses forms of contract where the client
generally retains the risk of, for example, unexpected ground conditions, adverse
weather and utilities. The client should also ensure the project budget includes an
appropriate contingency allowance to cover such risks – for example, an allowance
of approximately 10% on cost and 10% for extensions of time is typical, but the
precise level will depend on the level of complexity and uncertainty of the project

6.3 The potential benefits are:

• Price certainty and transfer of risk to the main contractor is achieved at


contract award, provided no subsequent changes are instructed to the design,
and no client held risk events occur.
Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy

• A high level of quality in design and construction is achievable as the


scope of the work is prescribed on an input specification basis by consultants
reporting directly to the client.

• The client retains individual direct contractual relationships with the design
team, cost consultant and main contractor.

• Changes to the works can be simply instructed and then evaluated on the
basis of known prices obtained in competition without necessarily excessive
cost or time implications.

• Tender pricing can be achieved based on a comprehensive bill of


quantities which is attractive to the contracting market.

6.4 The potential risks are:

• The overall development programme may be longer due to the need to


produce a fully detailed design before the project goes out to competitive
tender and work starts on site.

• The Client must have the resources and access to the expertise
necessary to administer the contracts of consultants as well as the main
contractor.

• The consecutive timing of design and construction results in a lack of


continuity between the designer and the builder (and hence little opportunity
for input on ‘buildability’).

• Not all project risk is transferred to the contractor and some is retained by
the client. Claims for delay and disruption can arise if the design is not fully
detailed prior to agreeing the contract sum; if the Client varies the design
afterwards; if outstanding design information is late; or if the issued design
contains errors or omissions.

• Defects, where there is a dispute over whether the cause is design or


workmanship, can prove difficult for the client to identify the party responsible
and secure rectification.
Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy

Strategy: Traditional

Low High
Characteristics 1 2 3 4 5 6 7 8 9 10
1 Expert client involvement needed
2 Client control over design and specification solutions
3 Needs Client production of an output performance specification
4 Ease of implementing change during construction
5 Supports early appointment of an integrated team
6 Single point design and construction responsibility
7 Cost and time certainty after contract execution
8 Speed of development
9 Suitable for simple projects
10 Suitable for complex projects
11 Suitable for a target cost approach
12 Suitable for 2-stage tendering
Figure 5: Characteristics of a Traditional Strategy

Design and Build

7.1 In a “Design and Build” contract, a single supplier is appointed by the client to
undertake both the design and construction of the facility. Typically, the client’s own
design team (either in-house or outsourced) develop a concept or scheme design to
RIBA Stage 2 along with an output performance specification. Together these form
the “Employer’s Requirements” or “Works Information” depending on the form of
contract chosen. The client then invites competitive tenders in accordance with the
guidance set out and relevant procurement legislation referred to in Chapter 7 of this
handbook, covering “Procurement Route 2”.

7.2 The contractor is likely to deliver the greatest performance benefits to the
client through innovation and standardisation, where appropriate output
specifications are produced by the client. Where an output specification is
insufficiently well developed, there is a risk that the quality, design and performance
of the completed facility may be compromised by a contractor pursuing the lowest
cost material specification or design solution. Careful attention to the output
specification is required to achieve the required outcome. Often the client retains the
services of the original design consultants to scrutinise the contractor’s developing
design and to confirm it is compliant with the Employers Requirements.

7.3 There may be some circumstances where it may be beneficial for the design
and build procurement option to be extended to cover maintenance and also
possibly operation of the facility for a substantial period known as Design, Build,
Finance & Maintain (DBFM) or Design, Build, Maintain & Operate (DBMO). By
including the maintenance and operation requirements within a design and
construction contract, the supplier has an increased opportunity for adopting
innovative solutions that provide greater value for money when considering whole life
costs.
Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy

7.4 The potential benefits are:

• Low tendering and preparation cost to the client.

• Single point responsibility for design and cost risks, including design
errors and omissions.

• Statutory Approvals are the responsibility of the contractor

• Potential for more economical construction due to earlier consideration of


building methods (‘buildability’).

• Could result in a shorter overall design and construction period.

7.5 The potential risks are:

• The client’s requirements must be properly specified prior to signing the


contract as client changes to the scope of the project, once let, can be
expensive.

• The client has little control over design once the contract is let, as the
building is specified on a performance basis with output specifications.

• Design and build is unsuitable for complex, challenging projects which


benefit from a developed design prior to pricing.

Strategy: Design and Build

Low High
Characteristics 1 2 3 4 5 6 7 8 9 10
1 Expert client involvement needed
2 Client control over design and specification solutions
3 Needs Client production of an output performance specification
4 Ease of implementing change during construction
5 Supports early appointment of an integrated team
6 Single point design and construction responsibility
7 Cost and time certainty after contract execution
8 Speed of development
9 Suitable for simple projects
10 Suitable for complex projects
11 Suitable for a target cost approach
12 Suitable for 2-stage tendering
Figure 6: Characteristics of Design and Build

Design Develop and Construct

8.1 Just as in a design and build contract, a single supplier is responsible for both
the design and construction of the facility. However, in the case of Design Develop
and Construct, the client’s own design team (either in-house or outsourced) develop
the design to a much greater level of detail than in a simple Design and Build
strategy. Typically, this will be to RIBA Stage 3 and will include both fully designed
input specifications as well as output specifications for those elements of design
Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy

being left to the successful contractor to complete. Together these form the
“Employers Requirements” or “Works Information” depending on the form of contract
chosen. Commonly, Planning Consent is secured by the client in advance of the
tender, leaving the contractor to comply with any Planning Conditions and to secure
Building Warrants and other statutory approvals. The client then invites competitive
tenders in accordance with the guidance set out in Chapter 7 of this handbook,
covering “Procurement Route 2”.

8.2 The successful contractor will either employ their own design team or, more
commonly, have the client’s team novated to them. The contractor is then required to
complete the outstanding design – often integrating many specialist contractor
elements such as cladding, steelwork, building services – all of which must comply
with the relevant output specifications contained in the Employers Requirements.

8.3 Where an output specification is insufficiently well developed, there is a risk


that the quality, design and performance of the completed facility may be
compromised by a contractor pursuing the lowest cost material specification or
design solution. Careful attention to the output specification elements is required.

8.4 There may be some circumstances where it may be beneficial for the design
and build procurement option to be extended to cover maintenance and also
possibly operation of the facility for a substantial period. By including the
maintenance and operation requirements within a design and construction contract,
the supplier has increased opportunity for adopting innovative solutions that provide
greater value for money when considering whole life costs.

8.5 The potential benefits are:

• Single point responsibility for design and cost risks, including design
errors and omissions.

• Greater control of the design and specification compared to a simple


design and build.

• Some, if not all, Statutory Approvals are the responsibility of the


contractor.

• Potential for more economical construction due to early consideration of


building methods (‘buildability’).

• Could result in a shorter overall design and construction period compared


with a traditional strategy.

8.6 The potential risks are:

• The client’s requirements must be properly specified prior to signing the


contract as client changes to the scope of the project, once let, can be
expensive.
Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy

• The client has little control over the outstanding design and quality
standards once the contract is let, other than to issue variations to their
Employers Requirements.

• Design coordination issues can arise between the Employer


Requirements and those elements still to be designed by the contractor.

Strategy: Design Develop and Construct

Low High
Characteristics 1 2 3 4 5 6 7 8 9 10
1 Expert client involvement needed
2 Client control over design and specification solutions
3 Needs Client production of an output performance specification
4 Ease of implementing change during construction
5 Supports early appointment of an integrated team
6 Single point design and construction responsibility
7 Cost and time certainty after contract execution
8 Speed of development
9 Suitable for simple projects
10 Suitable for complex projects
11 Suitable for a target cost approach
12 Suitable for 2-stage tendering
Figure 7: Characteristics of Design, Develop and Construct

Management Contracting

9.1 This is a ‘fast track’ strategy which overlaps the design and construction
stages and enables contracts for early work packages, for example groundworks and
steelwork, to be placed before the overall design is complete.

9.2 A management contractor is appointed by the client to manage the overall


construction contract in return for a management fee. The design team, however, is
not part of the management contractor’s team and are either the client’s own in
house design team or appointed separately by the client as appropriate. That said, if
appointed before the design is complete, the management contractor, can advise on
buildability, programming, sequencing and the procurement of the various works
packages.

9.3 The contracts for the various works packages are between the management
contractor and the individual trade contractors. Costs are controlled by the
development of a cost plan in which estimates of the costs of works packages are
initially used for budgeting purposes prior to being replaced with actual costs
obtained in open book competitive tenders. The projected final cost (still subject to
risk events) will only be known once the final works package has been awarded and
hence management of the cost plan focussing on risks and contingencies is
extremely important.
Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy

9.4 The potential benefits are:


• Early completion is possible due to a shorter overall development period
achieved by overlapping design and construction activities, even with complex
buildings.

• While the client maintains direct control over the design team, the
management and trade contractors can contribute to design development and
improve the management and buildability of the construction process.

• Particularly suitable where there is complex design from specialist works


package contractors to be incorporated

• The management contractor assumes some risk for the performance of


the trade contractors.

• Changes can be accommodated more easily than in other forms of


contract in both let and unlet packages provided there is little or no impact on
the overall project timetable.

• Achieves good alignment of objectives between client and management


contractor.

9.5 The potential risks are:

• The final price and timescale are not fixed at the commencement of the
works and do not become so until the last work package has been let, and
even then, are subject to the risks that lay with the client under the form of
contract chosen.

• If the management contractor fails to organise and coordinate the various


works packages it could result in claims from package contractors that the
client could become responsible for.

• The client must have the resources and access to the necessary expertise
to deal with separate design consultants and the management contractor and
the scrutiny of each of the works package tenders.

• Management Contracting is unsuitable for an inexperienced and/or hands-


off client as there is a risk of increased costs and delays arising from
ineffective administration.
Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy

Strategy: Management Contracting

Low High
Characteristics 1 2 3 4 5 6 7 8 9 10
1 Expert client involvement needed
2 Client control over design and specification solutions
3 Needs Client production of an output performance specification
4 Ease of implementing change during construction
5 Supports early appointment of an integrated team
6 Single point design and construction responsibility
7 Cost and time certainty after contract execution
8 Speed of development
9 Suitable for simple projects
10 Suitable for complex projects
11 Suitable for a target cost approach
12 Suitable for 2-stage tendering
Figure 8: Characteristics of Management Contracting

Construction Management

10.1 This is also a ‘fast track’ strategy where works packages are let before the
design of later packages has been completed. A construction manager is appointed
by the client to manage the overall contract in return for a management fee and, as
with management contracting, the project can benefit from the early involvement of
the contractor. The main, and very significant, difference from management
contracting is that the contracts for the works packages are placed directly between
the client and the trade contractors. As with management contracting the projected
final cost (still subject to risk events) will only be known once the final works package
has been awarded. Costs are controlled by the development of a cost plan in which
estimates of the costs of works packages are initially used for budgeting purposes
prior to being replaced with actual costs obtained from open book competitive
tenders. The management of the cost plan focussing on risks and contingencies is,
therefore, extremely important.

10.2 Construction management was largely devised for use in the commercial
development market and, where there are examples of public sector projects being
successfully procured via this route, this approach is generally unlikely to represent
an appropriate option for public sector procurers other than in exceptional
circumstances and where the client has the necessary resources and experience.
While the use of construction management is not ruled out entirely, it should only be
adopted following full consideration of the risks and benefits and an assessment of
the management team’s level of resource and expertise. Finally, in the case of
clients subject to the requirements of the Scottish Public Finance Manual, the choice
of this route must be approved by the responsible Minister.
Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy

10.3 The potential benefits are:

• Construction management should reduce the overall project timescale by


allowing procurement and construction to proceed before the design is
completed.

• The client controls the design and changes can be accommodated in let
and unlet packages provided there is little or no impact on the overall project
timetable.

• It can be applied to a complex building and has opportunity to allow good


buildability input.

• Achieves good alignment of objectives between client and the


construction manager.

• Particularly suitable where there is complex design from specialist works


package contractors to be incorporated.

• The client contracts directly with trade contractors, which could result in
lower prices and allows poor performance to be dealt with directly.

10.4 The potential risks are:

• The final design, price and timescale are not fixed at the commencement
of the works and do not become so until the last work package has been let,
and even then, are subject to the risks that lay with the client under the form of
contract chosen.

• The client bears most of the total risk including delays, disruption, design
and its coordination with construction; there must be a robust process for
instructing and approving changes.

• The construction manager commonly does not assume any risk other than
negligence, is not contractually responsible for achieving programme and
cannot instruct third parties.

• The design team must envisage both the totality and detail of the design
at the outset, accommodating uncertainty, procuring long lead-time items
early and avoiding retrospective change.

• Clients need to be experienced, informed, decisive, and have the


necessary expert resources to administer the contracts of the separate design
team members, the construction manager, and many trade contractors.

• Construction management contractors must be sufficiently incentivised to


avoid fee escalation; they should be experienced in construction management
and have very good leadership skills.
Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy

• The client must place an even greater premium on risk management in


construction management than under other procurement strategies and needs
to ensure that roles and responsibilities are well defined at the outset.

• The construction manager can build better team relationships with trade
contractors and hence potentially resolve disputes swiftly in the absence of a
direct commercial relationship.

Strategy: Construction Management

Low High
Characteristics 1 2 3 4 5 6 7 8 9 10
1 Expert client involvement needed
2 Client control over design and specification solutions
3 Needs Client production of an output performance specification
4 Ease of implementing change during construction
5 Supports early appointment of an integrated team
6 Single point design and construction responsibility
7 Cost and time certainty after contract execution
8 Speed of development
9 Suitable for simple projects
10 Suitable for complex projects
11 Suitable for a target cost approach
12 Suitable for 2-stage tendering
Figure 9: Characteristics of Construction Management

Revenue Financed

11.1 Revenue financed solutions, are created for the provision of services and not
specifically for the exclusive provision of capital assets such as buildings. For this
reason, it is preferable to investigate revenue financed solutions as soon as possible
after a user need has been identified rather than leaving it until a conventional
construction project has been selected as the solution. It is possible that a revenue
financed solution using such a model may result in a provision of services to meet
the user need that does not require a construction project.

11.2 Due to the complexity of the contractual structure of a revenue financed


project, it should be noted that the tendering process can be expensive for both
potential service providers and the client, as this usually requires the negotiated or
competitive dialogue procedure to be followed.

11.3 Use of a revenue funding model requires that the private sector assumes the
risk and responsibility for both performance and availability of the contracted
services – which may include the delivery of the building. The public sector sets out
its service requirements in the form of an output specification which prescribes the
level and quality of service required. This is normally done through a long-term
contract and the standard of delivery is monitored by the public sector throughout the
contract period, with deductions made from the monthly service payment where the
specified outputs and standards are not delivered. Value for Money is achieved
through private sector innovation, effective use of the competitive process,
Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy

incentivisation of performance and appropriate allocation of risk to the party best


able to manage it.

11.4 Where a revenue financed solution is being considered by the contracting


authority, it is important that further advice is sought from Scottish Futures Trust at
the earliest opportunity.

11.5 The potential benefits are:

• The process is service rather than project focused and concentrates on


the whole life of the service and associated assets, rather than the
construction phase alone.

• Avoids the use of a procuring authority’s capital finance.

• There is a single point of responsibility for service delivery.

• There is an opportunity to draw on a wider range of management and


innovation skills.

• Appropriate risk transfer to the private sector partner for construction


maintenance and lifecycle performance.

11.6 The potential risks are:

• The benefits of the contractual process will be at risk without a long-term


commitment and monitoring from both the client and “service providers”.

• The process leading up to contract completion for the project can take a
long time and needs an extensive and fully refined brief at the outset.

• There is a significant cost to bidders in tendering which may limit the level
of interest in a project.

• Changes to existing contracts can be difficult to achieve after contract


signature. In addition, changes to existing requirements can be time
consuming and potentially expensive.
Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy

Strategy: Revenue Financed

Low High
Characteristics 1 2 3 4 5 6 7 8 9 10
1 Expert client involvement needed
2 Client control over design and specification solutions
3 Needs Client production of an output performance specification
4 Ease of implementing change during construction
5 Supports early appointment of an integrated team
6 Single point design and construction responsibility
7 Cost and time certainty after contract execution
8 Speed of development
9 Suitable for simple projects
10 Suitable for complex projects
11 Suitable for a target cost approach
12 Suitable for 2-stage tendering
Figure 10: Characteristics of Revenue Financed Procurement Strategies

Variant: Two Stage Tendering

12.1 Two-stage tendering is used to allow early appointment of a contractor, prior


to the completion of all the information required to enable them to offer a fixed price.

12.2 In the first stage, a limited appointment is agreed allowing the contractor to
begin work and in the second stage a fixed price is negotiated for the contract. It can
be used to appoint the main contractor early or more commonly as a mechanism for
early appointment of a specialist contractor such as a cladding contractor. A two-
stage tender process may also be adopted on a design and build project where the
employer's requirements are not sufficiently well developed for the contractor to be
able to calculate a realistic price. In this case, the contractor will tender a fee for
designing the building along with a schedule of rates that can be used to establish
the construction price for the second stage tender.

12.3 The basis of the appointment for the first stage may include:

• A pre-construction and construction programme.

• Method statements.

• Detailed preliminaries including staff costs.

• Agreed overheads and profit.

• A schedule of rates to be applied to the second-stage tender.

• Agreed fees for design and other pre-construction services.

• CVs for proposed site and head office staff.


Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy

• Tendering of any packages that can be broken out and defined.

• Agreed contract conditions to be applied to the second-stage construction


contract.

12.4 It is important that this appointment is based on as much information as


possible and that requirements are well defined; as subsequent changes could prove
expensive.

12.5 The first-stage appointment might be made on the basis of a bespoke


agreement, a consultancy agreement or a pre-construction services agreement
(PCSA), with an appendix setting out all tender items to be applied to the
construction contract, with a clause that makes it clear there is no obligation to
proceed to the construction contract, and in such circumstances the pre-construction
fee would be full and final settlement of the contractor's costs.

12.6 The pre-construction services carried out by the contractor in the first phase
might include:

• Helping the consultant team to develop the design, or the contractor


undertaking all design development themselves.

• Helping the consultant team to develop the method of construction, or the


contractor developing the method of construction themselves.

• Obtaining prices for work packages from sub-contractors or suppliers on


an open book basis.

12.7 In theory, this early involvement of the contractor should improve the
buildability and cost-certainty of the design as well as creating a better integrated
project team and reducing the likelihood of disputes.

12.8 Ideally the second-stage negotiation is a mathematical exercise using the


pricing criteria agreed in the first stage agreement. In reality however, there will be
some items not previously considered, around which negotiations will ensue. In the
case of sub-contractors, the second stage construction contract is negotiated by the
main contractor subject to the approval of the design team.

12.9 Two-stage tendering enables the client to transfer design risk to the
contractor, however the client inevitably loses leverage as the contractor becomes
embedded in the team and competition is less of a threat. However, whilst tender
prices for two-stage contracts may initially be higher than single-stage tenders, which
are subject to full competition, the final account tends to include fewer variations and
fewer claims. A longer period of familiarity with the project creates better
relationships as well as a reduction in learning curves and programme performance.

12.10 It is in the client's interests to try to include some packages in the first phase,
and to ensure that they have some means of securing an alternative bid if
negotiations with the preferred contractor fail, albeit this is likely to result in delays
Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy

and difficulties regarding design liability. However, the client may find that alternative
contractors lose interest once they find out that another contractor has been
awarded the first stage tender.

12.11 The potential benefits are:

• Early appointment of the contractor, potentially bringing forward the


completion date of the project;

• Second stage tender should be based on more complete information and


a better understanding of the scope of works, so the final account should be
closer to the contract sum;

• Improved identification of project risks within a timescale where action can


be undertaken;

• Ability to procure specialist design contractor packages ahead of a first


stage main contract tender that can then be incorporated into the second
stage via novation;

• Client has no commitment beyond the preconstruction services


agreement governing the first stage of the tendering process and through to
the completion of stage two.

12.12 The potential risks are:

• Temptation to go to market with incomplete information;

• Can be used to mask the inadequacy of design development;

• Additional cost of a preconstruction fee;

• The cost of second stage tenders may be higher than predicted at Stage 1
leaving the client with difficult decisions on how to deliver within budget.

• Does not eliminate many sources of scope change;

• Increased input from client and consultants during the second stage
tender;

• Difficulties in verifying the transparency of main contractor allowances and


subcontractor costs;

• The contractor is able to walk away at any time.

Variant: Target Cost Contracts

13.1 Target Cost Contracts provide employers with a contractual mechanism to


incentivise contractors to deliver projects within a specified budget. However, while
Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy

this route may offer some advantages – for example, where a contract must be let
before design development is sufficiently advanced to permit a lump sum price to be
fixed – employers need to be aware that they are sharing a greater degree of risk in
respect of a contractor’s performance under a target cost contract than they would
under a fixed price contract. Therefore, it is important that employers considering
using target cost contract approach have full regard to Scottish Procurement
Construction Policy Note CPN 5/2017 – “Guidance on the operation of target cost
contracts and pain share/gain share mechanisms”. This guidance provides an
overview of the operation of target cost contracts and identifies a range of issues that
need to be considered if such a strategy is to be adopted.

13.2 The basic principle underpinning this approach is that a “target cost” for the
works is agreed between the employer and contractor, with the contractor then paid
for the work undertaken on a cost reimbursable basis. The payments to the
contractor are made on the basis of the contractor’s accounts and records, provided
to the employer for inspection on an “open book” basis.

13.3 At the end of the project, the final target cost – which is the original target cost
plus the effect of any changes and risk events the contracting authority is
responsible for – is compared to the actual cost expended by the contractor. If the
actual cost is lower than the target cost, a saving has been made, and this is shared
between the parties on a pre-agreed percentage basis – referred to as “gain-share”.
Conversely, if the actual cost is higher than the target cost there is an over-spend,
again shared between the parties on a pre-agreed percentage split – referred to as
“pain-share”.

13.4 The principal benefit of target cost arrangements is their ability to align the
objectives of the parties, which helps to create a partnering environment. The
contractor and contracting authority are both encouraged to work together to control
costs, sharing the risk of over or under spend through the gain-share/pain-share
mechanism. The open book approach helps to build trust between the parties,
through the sharing of sensitive information by the contractor and the visibility to the
contracting authority of the true cost of the project to the contractor.

13.5 However, one issue that often occurs is that target cost arrangements are
entered into without fully understanding how the process works – in particular the
additional risk that the contracting authority takes compared to a fixed price contract.
It is vital that this risk is effectively managed. Too frequently there is insufficient
control of the target cost value, so the contract becomes little more than a cost
reimbursable arrangement with limited incentive for the parties to perform efficiently.

13.6 There are many examples where the actual cost has far exceeded the target
cost, yet it appears there are few examples of contractors suffering from pain share.
In most cases the gain-share/pain-share calculation results in a neutral or positive
gain share.

13.7 Value for money will only be secured if the contract is let with a well-defined
target cost and is thereafter very actively managed. Therefore, when considering a
target contract, it is important the contracting authority recognises that it is carrying a
Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy

larger degree of risk than a fixed price contract and therefore requires a greater
resource to manage it.

13.8 Care is also needed when reporting likely outturn costs. It is not uncommon
for a contractor, due to poor cost management of their supply chain, to under-
estimate their final costs during the construction period only for a large amount of
“actual cost” to come to light at the end of the project as sub-contractors present final
account information. This can result in the contracting authority needing to secure
approval for additional funding beyond the budget to cover the incurred costs.

13.9 In summary, target cost contracts will only deliver value for money when:

• The target cost is set at a level which requires the contractor and the
contracting authority to work together to create efficiencies beyond those
normally expected

• The target cost is actively managed and maintained so as to remain valid


and to continue to drive performance

• The gain-share/pain-share mechanism is carefully chosen to drive the


right behaviours in the parties to seek savings and thus avoid pain

• The contractor performs in an efficient manner, mitigating risk, and not


incurring excessive actual cost

13.10 The potential benefits are:

• Provides contractors and subcontractors with an incentive to improve


performance.

• Encourages active and equitable risk sharing, based on a clearly defined


allocation of risk agreed at the outset of the project.

• Can incorporate both lump sum and prime cost-reimbursable subcontracts


under a single target price.

• Target costs provide incentive for the timely administration of change


control mechanisms.

• Provides an accountable mechanism to enable public sector clients to use


incentives.

13.11 The potential risks are:

• The contracting authority and contractor must share “gain” and “pain” if
the full benefits are to be secured. This exposes the employer to greater risk.

• Potential for failure on insufficiently defined projects owing to complexities


in the operation of the incentive mechanism.
Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy

• Complex target price, gain/pain-share and change controls may not easily
be understood by all parties.

• The separation of target and actual costs before completion creates the
potential for loss of control in predicting the final cost to the employer.

• Requires best practice in project administration and a suitably skilled


project manager.

• Disputes and adversarial behaviours can occur when the employer


scrutinises the contractor’s cost records to ensure they are valid.

Variant: Frameworks
14.1 Framework agreements provide an option for contracting authorities which are
procuring construction works on a regular basis and want to reduce procurement
timescales, learning curves and other risks; in addition, a further benefit is the ability
to build stronger long term working relationships between the client and contractor.
Using a framework agreement allows the contracting authority to invite tenders from
contractors and/or consultants over a period of time on a “call-off” basis as and when
required.

14.2 The framework contract documents should define the scope and possible
locations for the works or services likely to be required during the defined time
period. They should describe the contract conditions that will be used for pre-
construction services (such as design) and/or the contract conditions that will be
used to execute the works. In addition, the contract documents should also identify
the organisations permitted to use the framework.

14.3 Depending on the size and complexity of the anticipated projects, the supplier
might provide a pricing mechanism or risk adjustment mechanism for different types
of contract that might be used, for example, but not limited to, a minor works
contract, a cost reimbursable contract or a design and build contract.

14.4 Framework tender documents might include:

• The starting and completion dates of the agreement.

• Requirements and obligations regarding insurance, bonds and warranties.

• A description of the contract conditions to be used and assumptions


regarding preliminaries.

• A description of how the project will be managed in its various stages and
the basis of remuneration.

• A description of the tender selection procedure and assessment


procedure to be employed by the client.
Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy

• A description of inflation, interest and retention percentages to be applied.

• A description of incentive mechanisms to be applied.

• A description of dispute resolution procedures.

• Rates for travel and subsistence expenses.

• A request for schedules of rates and time charges to be submitted and a


breakdown of resources and overheads to be applied to design, or
manufacture and installation (including any proposed subcontractor or sub-
consultant details).

• Any other criteria required from tenderers in order that the client can
properly assess their suitability.

14.5 Following a competitive tendering process, one or more suppliers are then
selected and appointed to the framework. When specific projects arise, the
contracting authority is then able to simply select a suitable framework supplier and
instruct them to start work.

14.6 Where there is more than one suitable supplier available, the contracting
authority may introduce a secondary selection process to assess which supplier is
likely to offer best value for a specific project. The advantage to the contracting
authority of this process is that they are able instigate a selection procedure for
individual projects without having to undertake a time-consuming pre-qualification
process. This should also reduce tender costs.

14.7 The advantage to the supplier is that the likelihood of them being awarded a
project when they are already on a framework contract should be higher than it
would be under an open procurement process. Some suppliers, however, complain
that having already been appointed on a framework agreement, they may still have
to bid for individual projects, with a result that the potential efficiency gains of this
process are lost.

Selecting a Procurement Strategy and a Form of Contract

15.1 A suggested approach to assist in the selection of an appropriate procurement


strategy and a form of contract is shown diagrammatically below in Figure 11 and
each step is then described in later sections of this guidance. Contracting authorities
should also take advice from their professional advisers.
Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy

Step 1 Short list possible procurement strategies based on pass/fail criteria

Selection of a prefrerred procurement strategy based on a weighted


Step 2 scoring of characteristics

Is an appropriate framework available for use?


Step 3

No Yes

If permitted by the Framework,


Step 4 Based on an analysis of risks, determine a risk allocation
determine a risk allocation strategy strategy between client and
between client and contractor contractor

Step 5 Select a standard form of contract

Incorporate any necessary Incorporate any necessary


project specific amendments to project specific amendments to
Step 6 the chosen standard form the standard Framework
contract contract

Figure 11: A Suggested Approach for selecting a Procurement Strategy and Form of Contract

Short List Procurement Strategies Based on Pass/Fail Criteria

16.1 Some procurement strategies are only suitable for certain types of project,
and for contracting authorities with expert and experienced construction procurement
resource availability. It is therefore important that contracting authorities undertake a
project specific analysis of the relative characteristics (as described previously in this
chapter) of the various procurement strategies to help inform their decision on which
strategy they should adopt for the project in question.

16.2 As a first step in this analysis, it is suggested that an initial short list of
possible procurement strategies is drawn up by testing 6 of the characteristics listed
in Figure 12 against a simple pass/fail process. The criteria recommended for this
process are:

• Is expert client involvement needed due to the complex nature of the


strategy? (Shown as Characteristic No 1 on Figure 12)

• If required, does the strategy support the early appointment of an


integrated team? (No 2 on Figure 12)

• Is the strategy suitable for low value, simple projects? (No 3 on Figure 12)

• Is the strategy suitable for complex projects? (No 4 on Figure 12)


Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy

• If required, does the strategy support the operation of a target cost


approach? (No 5 on Figure 12)

• If required, does the strategy support a two-stage tender approach for the
main contractor? (No 6 on Figure 12)

• In addition to the above, a further test (No 7) is recommended as follows:

• Is the contracting authority a Participant in the hub programme?

16.3 Two worked examples are shown below to demonstrate the process

• Example 1, a simple project for a contracting authority not possessing


expert construction procurement professionals; and,

• Example 2 – a complex project for a contracting authority which


possesses expert knowledge and wants to develop a design solution
collaboratively with an integrated team.

To assist, Figure 12 sets out how each of the various procurement strategies meet
the pass/fail criteria listed in paragraph 16.2 above.

Procurement Strategies

Early
Pass/Fail Design Design Develop Construction Management Revenue
Integrated Traditional hub
Criteria & Build & Construct Management Contracting Financed
Team
1. Expert
contracting
authority Yes No No No No Yes Yes Yes
involvement
needed
Single
2. Supports the
Stage –
early
No
appointment of Yes No No Yes Yes Yes No
Two
an integrated
Stage -
team
Yes
3. Suitable for
Yes Yes Yes Yes Yes No No No
simple projects
4. Suitable for
complex Yes Yes No Yes Yes Yes Yes Yes
projects
5. Suitable for a
target cost Yes Yes Yes Yes Yes No No No
approach
6. Suitable for
2-stage Yes Yes Yes No Consider 1 No No No
tendering
7. The
contracting
authority is not Not
Yes Yes Yes Yes No Yes Yes
a hub Applicable
participant or
shareholder

Figure 12: Pass/Fail Criteria

1 *
The hub programme contains many of the characteristics of 2-stage tendering.
Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy

Example One
17.1 A simple project for a contracting authority not possessing expert construction
procurement professionals. Only three strategies are considered suitable non-expert
contracting authorities, which are:

• Traditional;

• Design and Build; and,

• Design, Develop and Construct.

17.2 A weighted, project specific scoring analysis of the options will help the client
to select the most appropriate strategy for the project in question. Where the
contracting authority has signed a Territory Partnership Agreement with its local
hubCo, the further option of a hub procurement strategy is available to it.

17.3 Finally, if the contracting authority has some expertise in this area, it may also
wish to consider using a target cost approach or a 2-stage tendering approach.

Example Two

18.1 A complex project for a contracting authority which possesses expert


knowledge, and which wants to develop its design solution collaboratively with an
integrated team. Only five strategies are suitable for integrated teams, and of these
four are suitable for complex projects:

• Early Integrated Team;

• Hub (where the contracting authority has signed a Territory Partnership


Agreement);

• Construction Management; and,

• Management Contracting.

18.2 Once again, a weighted, project specific scoring analysis of the options will
help the client to select the most appropriate strategy for the project in question.

Select from Short List Based on a Weighted Scoring of Characteristics

19.1 Earlier in this chapter, each procurement strategy description ends with a
matrix of 12 characteristics, scored as a range from 1 (low) to 10 (high). This matrix
can be used as a tool to help inform a contracting authority’s decision making
process as to which procurement strategy might be appropriate for its particular
needs as follows:

• Six of these characteristics have been used for the pass/fail criteria in
order to develop a strategy short list. The other six can now be used as part of
Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy

a weighted scoring system to select the best fit strategy for the particular
project.

• It will be for the contracting authority to determine the weighting of these


six criteria, and subsequently the score to be applied to each short-listed
strategy. The individual scores should not sit outside of the ranges suggested
earlier in this chapter.

19.2 To illustrate the process, a suggested weighting split for each for each of the 6
characteristics of three generic project types is shown in Figure 13. However, the
contracting authority should select their own weightings based on the specific
circumstances of the project. Finally, template for the weighted scoring exercise is
shown at Figure 14.

19.3 Once a procurement strategy has been selected, the contracting authority
should then give consideration to whether it is eligible to use an existing appropriate
framework which uses the same strategy. If it does not, a new contractor
procurement exercise must be undertaken.

Example Weightings Project Score


Speed
Simple
essential,
project, low Complex, high
comfortable
value and value and risk,
Characteristic Description with higher
risk, no expert expert client
risk, expert
client available
client
availability
available
Client control over The amount of control afforded to
design and the client in selecting a preferred
specification solutions design solution rather than simply
20 25 20
(Shown as testing if the specified outcomes
Characteristic No 1 on are achieved by a proposed design.
Figure 14)
Needs contracting The extent to which the
authority production procurement strategy is reliant on
of an output a detailed set of client technical
performance requirements expressed as 0 10 10
specification achieving minimum performance
(Shown as No 2 on levels.
Figure 14)
Ease of implementing The ease of instructing a change
change during and of agreeing any implications of
construction cost and time 15 10 10
(Shown as No 3 on
Figure 14)
Single point design The extent to which responsibility
and construction for design and construction is
responsibility contractually aligned 15 20 20
(Shown as No 4 on
Figure 14)
Cost and time Measures the degree to which
certainty after construction phase risks are able to
contract execution be transferred to the contactor 35 25 15
(Shown as No 5 on
Figure 14)
Speed of A measure of the relative speed
development from project inception to start of
15 10 25
(Shown as No 6 on construction
Figure 14)
100 100 100

Figure 13: Example Procurement Strategy Characteristic Weightings


Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy

Procurement Strategies
Early Design
Construction Management Revenue
Integrated Traditional Design & Build Develop & hub
Management Contracting Financed
Team Construct

Weighted

Weighted

Weighted

Weighted

Weighted

Weighted

Weighted

Weighted
Score

Score

Score

Score

Score

Score

Score

Score
score

score

score

score

score

score

score

score
Characteristic Weighting

1. Contracting authority control over


design and specification solutions
2. Needs client production of an
output performance specification
3. Ease of implementing change
during construction
4. Single point design and
construction responsibility
5. Cost and time certainty after
contract execution
6. Speed of development

100

Total weighted score

Ranking 1. 2. 3.

Evaluation Panel Members Name:

Signature:

Figure 14: Example weighted scoring. Note: Only those procurement strategies remaining after the pass/fail test should be scored.
Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy

Introduction to Risk Management and Apportionment

20.1 The recommendations of the Review of Scottish Public Sector Procurement in


Construction made clear that risk should lie with the party most able to understand
and manage it. If that is the contractor, it should have an opportunity to understand
and price the risk. In this context, “risk” should be understood as relating to the
procurement process itself or specific contracts within it, considered as a sub-set of
the overall project/programme risk.

20.2 If risks do materialise, and they have not been adequately priced, this can
result in undesirable behaviours between the contracting parties and a breakdown in
the partnering relationship. In a more extreme situation, especially where risks have
been forced down the supply chain, this could result in insolvencies, the impact of
which could create a significant disruption to the planned programme.

Risk Apportionment

21.1 The following diagram Figure 15 illustrates the principles of risk apportionment
between client and contractor. Note that the primary purpose of the form of
construction contract is to define risk apportionment.

Overall Budget

Estimated Cost of Designed


Risks
Works
C
Contractor Client
O
Priced Risks Risks
S
T
Form of Contract Defines
Risk Apportionment

Contractor Tender Including Priced Risks Client Retained Cost


Risk Allowance

Overall Development Period


T
I
M
E Contractor Completion period Including Client Retained Time
Priced Risks Risk Allowance

R
E
Interim project reporting should be based on overall cost and time parameters
P
indicating how much of the respective cost and time risk allowances remain, together
O with an assessment of outstanding client retained risks
R
T

Figure 15 – Principles of risk apportionment


Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy

Risk Management

22.1 The key to successfully managing design and construction risks is to


adequately determine and implement mitigation strategies from the earliest point in a
project.

22.2 Examples include:


• The earliest commissioning of comprehensive surveys (with optional
transferable warranties in favour of a future contractor) including, but not
limited to, ground conditions, contamination, utilities, ecology and
archaeology.

• Establishing a coherent strategy for design coordination between client


employed consultants and specialist contractor designed elements.

• Establishing a strategy for the responsibility for securing statutory


consents.

• Where it is planned to place responsibility on a design and build


contractor for previous design work carried out by others, how this can best be
de-risked from the contractor’s perspective.

22.3 The following, Figure 16, is an example of a template which a contracting


authority can use as a tool to address these issues. In the case of an actual project,
the contracting authority should start with a blank template.

Example of a risk Example of a possible Consider Information needed to


mitigation strategy Client Owned? price the risk, whomever
Contractor Owned? owns it
Insurance?
Ground Conditions, 1. Commission comprehensive contracting authority or 1. Results of surveys
Contamination surveys with transferable contractor depending on 2. Copies of warranties
warranties of duty of care form of contract chosen 3. Possible follow up surveys
Piling Obstructions 1. Ground radar survey To be priced by contractor. Results of surveys and probing
2. Ground probing exercise Then consider value for exercise
money.
Utility Connections 1. Ground radar survey To be priced by contractor. 1. Information from surveys.
2. Hand dug trial holes Then consider value for 2. Quotations from utility
3. Early client application for money. infrastructure providers
supply infrastructure
Design is in insufficient detail to 1. Define level of detail in Contractor owned 1. Review available design
price works accurately consultant services (preferred) information – assess for level
2. Monitor a detailed design contracting authority owned of detail and evidence of
and coordination programme if a traditional, re-measured coordination
3. Review detail two weeks procurement strategy. 2. Review forms of consultant
before tender appointments, check liability
4. For specialist contractor obligations and scopes of
designed elements, consider 2- service.
stage tenders
Damage to adjoining properties 1. Dilapidation surveys to Insurance taken out by Results of surveys.
establish condition client.

Figure 16 – Worked example of a risk mitigation and pricing template.

22.4 Where it is considered desirable to transfer such risks to the contractor,


contracting authorities should preferably establish the cost of doing so. This can be
done by seeking provisional prices at tender stage for the effect of transferring each
Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy

risk. The more successful each mitigation strategy has been, the lower the price
should be.

22.5 Dialogue with all of the tendering contractors, or prior to tender with the
market more generally, will inform contracting authorities on how best to present
tender information such that risks are priced as economically as possible.

22.6 Contracting authorities should take appropriate legal advice to ensure such
pre-tender dialogue with contractors complies with the relevant procurement
regulators.

22.7 On more complex projects, contracting authorities may wish to make the
process of risk apportionment a negotiation with each tendering contractor prior to
submission of their final offer. The OJEU Competitive Procedure with Negotiation or,
exceptionally, the Competitive Dialogue procedure can be used in these
circumstances.

Amendments to Standard Form Contracts


23.1 The Review of Scottish Public Sector Procurement in Construction noted with
concern the prevalence of wholesale amendments introduced by public bodies to
standard form construction contracts. The Review concluded this practice is often
intended transfer more risk on to the contractor. While in some situations this may be
appropriate, this is not always the case. Risk should lie with the party most able to
understand and manage it; and if that is with a contractor, they should be afforded
the opportunity to price the work accordingly. If contractors are hiving to carry risks
without being able to factor them into their prices, there is a very real danger of these
driving undesirable behaviours, such as cutting corners on quality in order to recoup
the cost back from elsewhere.

23.2 The Review noted that amendment of contracts presents two further main
risks. Firstly, that additional clauses may be incompatible with the remainder of the
contract. This may lead to contractual disputes, or to clients being liable for costs
which they thought they had passed to the contractor. Secondly, as the complexity of
the contract increases, parties to it face increasing legal costs. The additional of
inappropriate or unnecessary amendments simply exacerbates this problem.

23.3 Therefore, it is recommended that any variations to standard forms of contract


should be kept to a minimum and used only when absolutely necessary to take
account of the particular circumstances of a project. It is also recommended that
where a contracting authority considers that amendments may be required, it should
consult with its legal advisers to understand the likely consequences and impact of
its proposed amendments to the parties to the contract and the contractor’s supply
chain.

23.4 Finally, it is also recommended that any amendments introduced should be


clearly highlighted within the contrast documentation so that both client and
contractor are clear on the variations being made to the standard terms. The original
text of a clause should be typed with any deletions struck through, and any additional
text highlighted. Also, a schedule should be prepared which explains why the
Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy

amendments are required. This will help contractors by significantly reducing the
amount of time and additional cost they will incur in considering the effect of the
amendments.

23.5 A contracting authority must be mindful that the greater the number of
amendments made, the greater the risk of disputes arising. This is due either to
differences in interpretation or to the amendments being incompatible with the
remainder of the contract. There is also a danger that the personnel administering
the contract, for both parties, are not intuitively aware of, or understand, the effect of
the amendments.

23.6 Figure 17, below, provides examples of the type of amendments which should
not normally be considered as appropriate along with reasons not to amend the
standard form of contract.

Proposed Amendment Reasons not to Amend

Different or more onerous payment or The payment terms in standard contracts are fair
retention arrangements and comply with the requirements of the
Procurement Reform Act. Authorities must
recognise their responsibilities for maintaining a
sustainable industry and understand the importance
of cash flow to contractors and sub-contractors. The
Procurement Reform Act also requires authorities to
introduce measures to ensure maximum 30-day
payments throughout the supply chain.
Different or more onerous periods for the The periods in standard contracts are fair and are
issue of contract notices familiar to contractors and sub-contractors.
Amendments present the particular risk that tier 2
and 3 contractors may miss notice dates and
become unfairly and disproportionately penalised.
Different or more onerous dispute Any amendments which extend periods for dispute
resolution procedures resolution, or present barriers to its access, are
disproportionately unfair to small businesses -
particularly in securing payments.
Responsibility for the consequences of Such an amendment presents a risk that cannot be
changes in law or statutory regulations either understood or priced at the time of tender.
after a contract is executed. The consequences will likely be stepped down the
supply chain to businesses that are not equipped to
take such risks.
Figure 17. Examples of contract amendments for risk transfer which should not
normally be considered.

23.7 Figure 18 provides examples of common amendments which should only be


introduced if information is provided at the time of tender to allow the main contractor
and its sub-contractors to both understand and price the risk being transferred from
the authority.
Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy

Proposed Risk Transfer Considerations

Ground conditions, contamination, Each tendering contractor should be given sufficient


archaeology time to study site investigation reports and have an
opportunity to request further investigations. Pre-
market engagement recommended. Dark ground risk,
e.g. under existing buildings, should always remain
with the authority.
Effect of adverse weather conditions If standard terms are proposed to be amended – for
example to introduce a 1:10 year weather event test –
there should always be a backstop after which the
authority retains the risk.
Establishing specific completion criteria Any amended criteria for determining when
completion is achieved should be clear and objective
such that disputes on interpretation are avoided.
Availability of utilities Such risk transfer should only be considered if
quotations for supply are available from utility
providers at the time of tender. Pre-market
engagement recommended.
Securing statutory approvals, other Pre-market engagement recommended. For a
than planning consent conventional design, this may be a reasonable risk
transfer. If, however the design is complex, or will rely
on relaxations to regulations - perhaps with cost
implications - it should be avoided.
Compliance with Planning Conditions Risk transfer should only be sought for those conditions
which can be delivered by the contractor without
reliance on the actions of the authority. Pre-market
engagement recommended.
Responsibility for previous design work This is common in the case of an authority’s design
team being novated to a design and build contractor. In
other circumstances, it should only be considered for
conventional designs and with sufficient time for the
contractor to carry out due diligence.
rd
Compliance with 3 party contract Such obligations should always be referenced by a
obligations e.g. covenants, wayleaves, detailed schedule at the time of tender and not by
rights of way simple notification of the existence of a 3rd party
contract.
Figure 18: Examples of contract amendments for greater risk transfer – but only with
an opportunity for the contractor and its supply chain both to understand and to price
the risk at the time of tendering.

Selecting a Form of Contract

24.1 Once a procurement strategy is selected and a risk allocation strategy is


prepared, the final step is to choose a form of contract. Figure 1, earlier in this
chapter, notes of variety of forms of contract which might be selected for a particular
procurement strategy. Contracting authorities are encouraged to consider all
available forms, not relying solely on familiarity or previous use, and to take advice
from their professional advisers in arriving at the most appropriate selection.
Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy

Standard Form Construction Contracts

25.1 There are many different standard form construction contracts available for
use in the UK market. This guidance note only considers those most often used.
These are contracts published by:

• The Joint Contracts Tribunal (JCT), one of whose members is the Scottish
Building Contract Committee (SBCC) which produces equivalent, very similar,
contracts for use in Scotland.

• The NEC, which is a division of Thomas Telford Ltd, a wholly owned


subsidiary of the Institution of Civil Engineers.

• The Association for Consultancy and Engineering (ACE) and the Civil
Engineering Contractors’ Association (CECA) which jointly publishes the
Infrastructure Conditions of Contract (ICC). These are effectively re-prints of
the now abandoned ICE Conditions of Contract.

• The Association of Consultant Architects (ACA) publishes contracts


specifically drafted for integrated team/partnering arrangements.

Other Contracts

26.1 Other, less often used, contracts are published by:

• The Institution of Chemical Engineers produces a suite of contracts used


mostly in process industries.

• FIDIC (International Federation of Consulting Engineers) publishes a suite


of contracts used internationally, and by the World Bank. If contemplating use
in the UK, amendments would be needed to comply with UK legislation
requirements.

• The Institution of Mechanical Engineers and the Institution of Engineering


and Technology produce contracts for electrical and mechanical work.

• The Chartered Institute of Building has launched a contract for use with
Complex Projects – CPC 2013.

• Scottish Futures Trust publishes contracts for use on revenue financed


schemes, and for design and build projects using the hub programme.

Commonly Used Contracts


27.1 The most commonly used contracts for each type of procurement strategy are
listed in turn in the following paragraphs.

27.2 Traditional Contracts:


Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy

• JCT (SBCC) Standard Building Contract 2011 (in versions of with


quantities, without quantities, and with approximate quantities)

• JCT (SBCC) Intermediate Building Contract 2011

• JCT (SBCC) Minor Works Building Contract 2016

• JCT Measured Term Contract

• NEC 3 ECC Option A (lump sum) or Option B (with quantities)

• ICC Minor Works 2011

• ICC Measurement Version 2011

• ICC Crown Investigation Version 2011

27.3 Design and Build:

• JCT (SBCC) Design and Build Contract 2016

• JCT Major Project Construction Contract 2011

• NEC3 ECC Options A-E

• ICC Design and Construct Version 2011

27.4 Management Forms:

• JCT Management Contract 2011

• JCT Construction Management 2011

• NEC3 ECC Option F

27.5 Integrated Team (Partnering):

• PPC 2000 (2013 edition)

• NEC3 ECC with Option X12

• JCT Constructing Excellence 2014

• ICC Partnering Addendum

27.6 Cost Plus/Cost Reimbursable/Prime Cost:

• JCT Prime Cost 2011


Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy

• NEC ECC Option E

27.7 Target Cost

• NEC 3 ECC Options C and D

• ICC Target Cost

JCT (SBCC) or NEC?

28.1 For building projects, unless an Integrated Team or Revenue Financed


procurement strategy has been chosen, the procuring authority will mostly find it
needs to choose between a JCT (SBCC) or a NEC form of contract. Advice should
always be sought from professional advisers to assist in making that decision,
however care should be taken to ensure such advice is impartial, avoiding any
consultant self-interest.

Choosing from the Differing Forms of Contract

29.1 The JCT provides a wide range of different forms depending on the
procurement route – traditional contracting, design and build, management
contracting, etc. – and the size and complexity of the project. The NEC starts from
the reverse position: there is a single common form of main contract and flexibility is
obtained by selecting one of the main pricing ‘Options’ (lump sum, target cost, etc.)
and then from an extensive range of secondary clauses dealing with matters such as
delay damages, sectional completion, limitation of liability and key performance
indicators.

Management of the Contract

30.1 With the JCT form, management is the responsibility of the leader of the
Design Team, which is normally the Architect, whilst in the NEC form the
management is carried out by the Project Manager (PM) and is more onerous than
those required by the JCT form. Therefore, the costs to manage an NEC project will
be more than those required for a JCT contract of similar size and complexity. The
overriding logic is that by increasing resources during construction, problems and
issues can be dealt with as and when they occur at a time when the outcome can
still be influenced. This should assist in completing the project on time and within
budget and should reduce uncertainty for all parties. Compliance with the contractual
procedures should also create an excellent set of records of project activities.
Therefore, if claims or disputes are raised later, both parties will have access to
these records and enable agreement of any dispute.

Dealing with Claims

31.1 The NEC Contracts promote the compilation of a ‘risk register’ and risk
reduction meetings to manage the consequences. There is a strict eight-week cut-off
period for the contractor to notify that a compensation event has occurred, after
which the right to compensation is lost.
Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy

31.2 Even shorter timescales are fixed for the contractor to submit quotations to
deal with the event. A failure by the PM to respond to a notification or quotation
within equally short periods will lead to its deemed acceptance, binding the employer
and potentially exposing the PM to a claim by the employer. The quid-pro-quo for the
NEC’s pro-active approach is that it requires a heavy resource commitment from all
sides to administer the project.

31.3 In contrast, the JCT standard forms give the parties greater freedom to put
contractual claim issues to one side before completion and focus on delivering the
project. The downside of this, which the NEC strives to avoid, is the greater
possibility that claim issues will then fester over time, ultimately to the detriment of
the project and the parties’ relationships. Before opting for either suite, it is important
that adequate resources are available to meet all the relevant contractual
obligations.

Design Responsibility

32.1 The JCT forms provide for partial design by the contractor through the use of
a ‘design portion supplement’ and for full design, via a range of ‘design and build’
forms. NEC approaches the issue in a rather more flexible way: the amount of any
contractor’s design is set out as part of the ‘works information’, a schedule to the
contract containing technical information relating to the scope of work. Under the
JCT design and build forms, the standard design warranty expressly restricts the
level of duty owed by the contractor to one of reasonable skill and care. In contrast,
under NEC the parties must expressly agree a secondary option clause (X15) to
have this effect. Without such an agreement, a fitness for purpose obligation will
normally be implied by law as part of the design and build contractor’s
responsibilities. It is interesting to note that under this clause, where a defect arises
in the works due to the design, the contractor has the burden of proving they used
reasonable skill and care.

Insurance Arrangements

33.1 Whereas the JCT forms require insurance of the works to be maintained until
practical completion is certified, under the NEC the contractor’s obligation to arrange
insurance extends to issue of the defects certificate.

Dispute Resolution

34.1 JCT and NEC forms provide an automatic right to adjudication as provided for
by the Construction Act. Under NEC there is a further opportunity to challenge the
decision of an adjudicator by arbitration or through the courts. The dissatisfied party
must give notice to the other side within four weeks of that decision. After that, the
decision becomes final and binding on the parties. Both forms of contract will provide
the client with the protection that they require albeit in different ways. As noted
above, all Design Teams and Contractors are familiar with the JCT Contracts and
possibly less so with the NEC contracts. However, the pros and cons of each form of
contract should be considered in relation to the procurement strategy to make the
best decision for the delivery of the Project.
Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy

Other Useful Sources of Advice and Guidance

35.1 The following may be of help:

• The NEC publisher’s website: https://www.neccontract.com

• The SBCC website: http://www.sbcconline.com/

• A comprehensive guide to choosing the most appropriate contract from


the JCT suite: http://www.jctltd.co.uk/docs/Deciding-on-the-appropriate-JCT-
contract-2011-Sept-11-version-2.pdf

• A flowchart for choosing from the JCT suite:


https://www.jctltd.co.uk/docs/Guide-to-selecting-the-apprpriate-JCT-main-
contract-Sept11.pdf

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