This document discusses various procurement strategies and contract types for construction projects. It begins by outlining the key stages of the procurement process. It then describes different contract types including fixed price, remeasurement, drawings and specifications, and cost reimbursement contracts. For each contract type, it discusses the advantages and disadvantages as well as scenarios where they may be suitable. It also covers risk allocation between the client and contractor for different contract strategies. Finally, it discusses design-build procurement and the variations of management fee procurement including management contracting and construction management.

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2. PROCUREMENT
STRATEGIES
Methods of Procurements

3. PROCUREMENT
The process of acquiring a building

4. (You)
(Contractor)

5. The Procurement Triangle

6. Feasibility
Design
Tendering
Construction
Operation

7. Tendering

8. Fixed Price Contract
Traditional Procurement

9. Fixed Price Contract
■ Firm Price Contract
■ Based on complete Bills of Quantities
■ Quantities + Unit Rates
■ Complete design is needed before Contract can be formed

10. Fixed Price Contract
Advantages
■ Clear picture of
commitments
■ Unit rates provide a basis
for valuation of variations

11. What is a Variation?
■ PAM Contract 2006 Clause 11.1:
– Addition, Omission, or Substitution of any Work;
– Alteration of the kind/standard of any materials or goods
used in the Works;
– Removal of any works/materials from the Site
– Changes to:
■ Working hours
■ Working space
■ Access/Utilisation of the Site
■ Execution of works in a specific order

12. Fixed Price Contract
Advantages
■ Clear picture of
commitments
■ Unit rates provide a basis
for valuation of variations
■ Detailed breakdown of
tender sum
Disadvantages
■ Time needed for
preparation of a complete
BoQ
■ Large amount of
variations to be
processed

13. Contract Sum
■ PAM Contract 2006 Article 2
■ PAM Contract 2006 Clause 13.1:
“The Contract Sum shall not be adjusted or altered in any
way whatsoever, other than in accordance with the express
provisions of the Contract…”

14. Why Fixed Price Contract?
■ There is sufficient time to prepare complete designs +
measure accurate quantities
■ Client’s total commitment must be known (to make borrowing
arrangements)

15. The Procurement Triangle

16. Fixed Price Contract
Traditional Procurement
Remeasurement
Contract

17. Remeasurement Contract
■ Based on Approximate Bills of Quantities
■ Also called ‘Measurement Contract’
■ Quantities are not exact (Subject to ‘Remeasurement’)
■ Works may commence before design is completed

18. Remeasurement Contract
Advantages
■ Construction process
begins earlier
■ Lower cost and time
during preparation of
BoQ
Disadvantages
■ Less certainty of the
extent of commitment
■ Remeasurements incur
extra costs
■ Design-related decisions
may not need to be made
prematurely

19. Why Remeasurement
Contract?
■ Complete design is available but insufficient time for the
measurement of quantities
■ Design can not be completed soon enough for taking off to be
done
■ A BoQ is desired without the cost in terms of time and money
(therefore BoAQ)

20. BoQ vs BoAQ
Bills of Quantities
■ Accurately measured
quantities
■ Establishes a firm cost
■ Small amount of
Provisional Sums
Bills of Approximate
Quantities
■ Can be prepared earlier
■ Large amount of
Provisional Sums

21. The Procurement Triangle

22. Fixed Price Contract
Traditional Procurement
Drawings and
Specifications
Remeasurement
Contract

23. Drawings & Specifications
■ Based on Drawings and Full Specifications (No BoQ)
■ Schedule of Rates
■ Bill of Quantities is not provided
■ Works may commence before design is completed

24. Drawings & Specifications
Advantages
■ Construction process
begins earlier
■ Lower cost and time
during pre-tender stage
Disadvantages
■ No breakdown of tender
sum provided
■ No reference for the
valuation of variations

25. Why Drawings &
Specifications?
■ The project is fairly small and simple in nature (School, public
restrooms, etc.)

26. The Procurement Triangle

27. Fixed Price Contract
Traditional Procurement
Cost
Reimbursement
Contract
Drawing and
Specifications
Remeasurement
Contract

28. Cost Reimbursement
■ The most UNCERTAIN contract type
■ No contract sum, difficult to estimate final cost
■ Only used if Time > Cost
■ No on-site measurement necessary

29. Cost Reimbursement
Advantages
■ Construction process
begins earlier
■ Lower cost and time
during preparation of
BoQ
Disadvantages
■ Least certainty of the
extent of commitment
■ Likely greater
construction costs
■ Verification of cost
incurred is tedious

30. Why Cost Reimbursement?
■ Cost < Time
■ Client is willing to pay a higher cost to a trusted contractor
■ Emergency cases such as repairing a damaged structure

31. Types of Cost Reimbursement
Cost + Percentage Fee
Cost + Fixed Fee
Target Cost

32. Cost Plus Percentage Fee
■ Contractor is paid a fee equal to an agreed percentage of
prime costs
■ To cover overhead and profit
■ Disadvantage (to client):
Inefficient contractor’s
operations
Resources
waste
Fee paid to
contractor

33. Example
$ $
Total prime cost
(Labor, plant and
materials)
50000
15% addition for
overheads
7500
5% addition for profit 2500 10000
Total cost of contract 60000
20%

34. Cost Plus Percentage Fee
■ Due to uneconomic organization of contract, inefficiency and
excessive waste
$
Total prime cost 55000
20% addition for overheads and profit 11000
Total cost of contract 66000
Profits
Disincentive to
contractor to work
efficiently
Prime cost

35. Cost Plus Fixed Fee
■ The fee paid to contractor is a fixed sum (irrespective of prime
cost).
■ As contractor’s profit
■ Lower fee in percentage terms if prime cost is higher
$ $
Total prime cost 55000
Overheads 7500 10000
Profit 2500
Total cost of
contract
65000

36. Target Cost
(Cost + Fluctuating Fee)
• Act as an incentive to reduce total prime cost
• Provides for a bonus to be paid to contractor ( total cost <
‘target’ )
• A penalty if total cost > agreed sum
ProfitTotal prime cost

37. Example: Penalty
$
Total prime cost 55000
Fixed fee 10000
65000
Deduct penalty, being 50% of
excess
Over $60000 -2500
Amount of final payment 62500

38. Example: Bonus
$
Total prime cost 48000
Fixed fee 10000
58000
Add bonus, being 50% of saving
Over $60000 +1000
Amount of final payment 59000

39. The Procurement Triangle

40. RISKS ALLOCATION
Client vs Contractor

41. Risks Allocation
■ The Contractor takes the risks that his anticipated profit will be
reduced or converted into a loss as a result of the outworking of
the conditions under which the contract is carried out
■ The Employer takes the risk that he will become liable for a
greater total cost when initianting the project
■ Generally speaking, the contractor’s risk increases as the
Employer’s risk reduces and vice versa

42. Drawings & Specifications
■ Contractor bears a high degree of risk
Reasons:
1) It is a lump sum contract, he must estimate his expected costs as
accurately as possible ( any adverse mistake will reduce his profit )
2) No bill of quantities provided for tendering purposes

43. Drawings & Specifications
■ Employer’s risk is small
Reasons:
1) He knows at the outset what his financial liability will be
2) He is under no contractual obligation to reimburse the contractor for
any errors

44. Cost Reimbusement
■ The Contractor’s risk is reduced because he is paid his full
costs and a fee in addition
■ However, Employer bears the risk of the prime cost becoming
much higher than estimated ( owing to an inefficient site agent
or to wastage of resources )

45. Risks Allocation

46. DESIGN AND BUILD
PROCUREMENT
A procurement route where the main contractor is appointed to design
and construct the works

47. Design and Build
 Contractor accept responsibility for some or all of the designs
 Client’s requirements are stated briefly and simply
 Offers certainty on contract sum and brings cost benefits
 Construction works can start early

48. Design and Build
■ Advantages
 Reduce the need to commit resources and time
 Price certainty is obtained before construction commences
 Overlap of design and construction activities reduce project
time
 Constructability improves

49. Design and Build
■ Disadvantages
 Difficulties experienced by client in preparing brief
 Client changes to project scope is expensive
 Difficulty in comparing bids since different designs
 Client need to commit to a concept design at early stage and
before detailed designs are completed
 Design liability is limited to the standard contracts available

50. Variations of Design & Build
I. Direct
- No competition is obtained in tenders
- Some appraisals of possible competitors may be made
II. Competitive
- Tenders are obtained from documents prepared
- Enabling contractors to offer in designs and prices

51. Variations of Design & Build
III. Develop and construct
- Consultants design the building to a partial stage ( ‘scope
design’ )
- Contractor develop and complete the design, and
construct the building
IV. Package deal
- When the contactors competing use significant part of
building system/ they will be constructing different theme
- Eg. Offer to find site/ sell, mortgage or lease products

52. Variations of Design & Build
V. Novation
- Refer to a design, novate and construct
- Contractors take over from client a previous contract for
design work, completes the design and constructs the
works.

53. Why Design & Build?
 Building is simple and functional
 Brief for scope design is likely to change
 Programme can be accelerated by overlapping design and
construction activities
 Single point of responsibility (Contractor)

54. The Procurement Triangle

55. MANAGEMENT FEE
PROCUREMENT
Management Contracting vs Construction Management

56. Management Fee
■ Based upon client employing a professional team to advise him on
design and cost issues & management consultant to advise on and
supervise the construction aspects of the project
■ Construction work is broken down into individual packages and let
out to sub-contractors

57. Management Fee
■ There are 2 main variations of management fee approach
Management
Contracting
Construction
Management

58. Management Contracting
■ Management contractor does none of the construction work
■ He provides construction management service on a fee basis as part
of the client’s management team
■ He provides and maintains all the necessary site facilities and
dealing with labour-related matters

59. Management Contracting
Advantages
• Work can begin on site as
soon as works packages
have been designed
• Reduce time requirement,
earlier return on client’s
investment
• Contractor is able to identify
with client’s needs and
interests
Disadvantages
• Uncertainty to the final cost
of project
• No. of variations & amount of
re-measurement required >
traditional contracts

60. Construction Management
■ Similar to management contracting
■ Construction manager is responsible for the organization and
planning of the construction work on site
■ Construction work is carried out by a number of contractors, each
contractor is responsible for a defined trade package

61. Construction Management
Advantages
• Close liaison between the
construction manager and
design manager
• Trade packages being let as
the design of each is
completed, thus shortening
the project time
• Privity of contract between
client and each of the trade
contractors
Disadvantages
• Client has one more
consultant and a number of
contractors to deal instead
of only one main contractor
• Client’s financial
commitment is uncertain
until the last of the works
contracts has been signed

62. Construction Management >
Management Contracting
■ In construction management the trade contractors contract directly
with the client whereas in management contracting all the works
contractors are in a direct contractual relationship with the
management contractor
■ Although construction management causes the client much more
administration and possibly a greater level of risk by contacting
directly with the trade contractors
■ It is claimed that the closer arrangement and involvement of the
client with the trade contractor is generally beneficial to the building
process

63. The Procurement Triangle

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