Rationale / Executive Summary

In order to begin the process of building a project, it is essential to start with choosing an appropriate procurement method. According to Love et.al. (1998) procurement systems are described as an organisational system that assigns responsibilities and authorities to people and organisations, and defines numerous elements in the construction project. Many research articles published in the last few years (Wardani 2004; Bygballe et.al 2010) has defined the process of procurement as activities that are undertaken by a client or an employer that desires construction or refurbishment of an edifice. Although procurement methods have been changing over the years they still play an imperative role for the success and performance of projects, specifically those in the construction and civil engineering industry (Ruthankoon and Ogunlana 2003).

Therefore, it is essential that Oldcross Borough Council (Department of Community Services) to analyse various procurement methods before choosing the one which is best suited for the project. Moreover, it is pivotal to review the procurement method of “Design Build Finance and Operate” for major public-sector projects, since it include financing of the project along with other management aspects. The report will analyse this particular procurement method against other suitable methods with specific focus on public-sector projects.

Furthermore, the following report will analyse the advantages and disadvantages of Design Build Finance and Operate against other methods for client, consultants, and contractors. It is also necessary comprehend the benefits of partnering relationship in projects of design and construction of civil engineering. Procurement also involves the analysis of cost risk as it has an impact on choice of procurement method. How cost risk impacts the selection of procurement method will also be discussed in the following report.     

The Basis of "Design Build Finance and Operate" system for procurement of a major public-sector project. Explanation of the major advantages and disadvantages by comparing procurement systems of contractors, consultants and clients

Before initiating the procurement processes for any project, it is first necessary for the client to develop a project strategy. To develop this strategy, it is essential to consider many dynamic aspects such as benefits, risks, experience/expertise and budget constrictions that are associated with the project in order to come to an informed decision about the most appropriate procurement methodology. Based on literature (Love et.al. 1998; Wardani, 2004; Mishra 2006; Davis et.al. 2006) there are four main procurement methods utilized in the construction industry, outlined as below;

• Traditional; A system that incorporates standard procurement procedures, where the contractor is only responsible to undertake construction in accordance with the provided design and Bill of Quantities (BOQs)
• Management; A tailored systems where information is shared and management supervises the contractors, where client assumes major responsibility
• Design and Build; Where the risk of design as well as construction are transferred to the contractor
• Integrated; A systems where risk assumptions are carefully drafted and responsibilities are shared

The procurement method used is impacted by various factors such as policies, resources, desired contractual agreements, and organisational structure of the client. Therefore, it is necessary to evaluate these factors as they can have a major influence on procurement strategy. From the literature reviewed during this research, it was observed that the client should evaluate the external factors first. According to Rowlinson (1999) external factors include financial, commercial, governmental, social, licit, and technical factors which are known to influence the client and the immediate business under development.

Additionally, Mortledge et.al. (2006) asserts that it is necessary to evaluate the stakeholders resources such as the understanding and familiarity of the organisation in light of construction project being undertaken, and the situation in which the client functions. Furthermore, Mortledge et.al. (2006) argues that it is necessary to evaluate project characteristics which includes factors of size, complexity, uniqueness, and location of the project, and including how it influences risk, time, and cost of the project. Rowlinson (1999) further explains that it is important to evaluate the probability of any expected change to the project’s original requirements. as the project’s technology, scope and implications can be re-defined as project matures practically.

It is evident that that financing of a project has a crucial role to integrate with procurement strategies during the process of developing a project. Hence, it is essential that contractors, clients, and consultants analyse various methods of financing during all the project process phases. Hoffman (2007), Hamza and Greenwood (2007), and Smith et.al. (2006) all argue that precise project financing along with integrated procurement strategy is necessary for a long term success of the any infrastructure project, especially for cases where long term deliverables are required, such as for public sector projects. Therefore method of financing can have an influential impact on the selection of the procurement systems, as it can also dictate the risks to be assumed by the contractor and/or the client.

As discussed above, project financing can take many forms, and of particular interest in this paper is the Design - Build - Finance - Operate (DBFO) which stems from the characteristics of Build – Own – Operate – Transfer (BOOT). DBFO and BOOT share various aspects of financing structure, but with the exception that there is no ownership transfer in the contractual structure of DBFO. The DBFO method allows the contractor to assume the risks of financial aspects of the project, up until the completion of the contract period, with the owner assuming the primary responsibility for maintenance and operation. The DBFO form of procurement structures is derivative of design and build system, in which the contractor assumes the responsibility of designing as well as construction of the project and the client provides a preliminary order of requirements, and with the integration of finance and operation to these terms, the systems becomes more acceptable for public sector projects where the aim is to ensure that expert contractors assumes the responsibility of ensuring complete success of the project

There are various advantages of DBFO, the most pivotal of which includes encouraging the private investors to invest more in public sector projects, and attracting foreign capital into a country that is acting as the project host. DBFO also has the advantage of being able to transfer new technology and knowledge by implementing such large scale projects, which acts as an integration of technology and skilled labour. DBFO also allows for the completion of public sector projects within the given time frame and within the bounds of the initially planned budget which is frequently not guaranteed in other finance systems/models.

Additionally, the DBFO models allows for additional finance resources to be allotted for other projects within an on-going project; especially those which are of priority in public sector, which allows for an enhanced flexibility of the finances involved in the project.  Using the DBFO model, the government is able to release an excess of burden that is placed on public budgets, which are aimed at improving infrastructure through civil development. Furthermore, the government also has the advantage of remaining the sole owner of the facility which is being built, while also avoiding getting into debt. This is due to the use of cash flows for contracted number of years as mode of repayment of investment to the involved shareholders of the project.     

Discussing the benefits in the design and construction of civil engineering projects for the contractor, client and supply chain when considering the partnering relationship. The disadvantages associated with the stakeholders and management systems and how to cater them

Wood and Ellis in the year 2005 argued that partnering relationships have become a new innovation in the construction industry which has resulted in the improvement of project performance. Partnering is defined as a long-standing pledge among two or more businesses/parties, for the main tenacity of attaining particular business objectives that are used to capitalize on the resources that each participant of the partnership have contributed with (Construction Industry Institute 1991; Bygballe et.al. 2010). Bygballe et.al. (2010) and Love et.al. (1998) suggested that partnerships are thought to be strategic arrangements by which a contractor is involved in a succession of projects or short-term individual projects, with the central aim of decreasing the overheads and optimizing the project outcomes.

There are various options of entering into an operating partnerships, which are independent of strategic alliance by which the stakeholders share their resources and cooperate in order to achieve common project aim and goals. Various academic literature has shown that there are numerous positive characteristics that are connected with partnership arrangements. Gordon (1994) suggested that large enterprises such have reported that they have experienced savings of considerable percentage on costs and time from partnership relations. Furthermore, Gordon (1994) indicated that collaboratively working on project produces can an influential effect on clients and contractors that have decided to partner-up.

Hughes et.al. (2006), Hughes et.al. 2005, and Lui and Fellow (2001) have correlated that partnering can improve the performance of projects if the following are fulfilled;

• The project has presence of work assurance; meaning partners are able to work cooperatively as one unit.
• The project insures benefit; meaning each partner is able to gain benefits on an equal scale without discriminating between partners.

Based on research by Hamza and Elkadi (1999), Hamza and Greenwood (2007) and Black et.al (2000), it can be concluded that if project partnering is practically implemented using apposite methods, there a varying levels of advantages that are reaped. Hamza and Greenwood (2007) indicated that such partnerships reduce the time and cost for completing a project, which includes operational savings, construction project savings, and a greater project execution speed. Chan et. al. (2004) suggested that partnering brings advantages in risk sharing that includes reducing the risk exposure through a strong relationship which is not combative as there is an improved understanding between the parties, which results in an engineered transformation/sharing of key information, design and construction enhancement, optimization of procurement related activities and various other aspects.   Therefore, due to the improved nature of the partnership, the partners are able to improve the project’s design, quality, administration; allowing for better financing options. Hamza and Elkadi (1999) have proven that partnerships can contribute to the economic growth of the country in which the project is being built resulting in an increase of revenue generation which also contributes to national development.

It was also observed during the literature reviewed that the construction industry is best known for using public-private partnerships. Public-private partnerships are defined by Hoffman (2007) as a business venture or government service that is financed and functioned through a partnering of the government and private sector companies. The public-private partnership is established by inducing a contract between a public sector entity and a private entity. The major risk that are associated with large scale public sectors projects include financial risks, technical risks, and operational risks. The private entity is commonly responsible for providing a public service/project by taking the risks which are associated to the project, and hence this government is able to achieve its one of the primary objective of mitigation the major risks involved in the development project (Hoffman, 2007).

The arrangement of partnership also include advantages of cost certainty as the contract highlights current and future costs that may be associated with infrastructure project throughout the given time frame of project completion. Public-private partnerships provide for a method of developing abilities of both the local and private sector by harbouring resources (tangible and intangible) through the multiparty endeavour (Palaneeswaran and Kumaraswamy, 2000).      

However, there also various disadvantages of entering into public-private partnerships, but these can be overcome with appropriate management methods. With public-private partnerships, Anderson and Molenaar (2007) highlight that there are often various form of on-going expenditures, developments, and bidding expenditures in partnership contracts, than compared to a traditional procurement method that can be favoured by governments due its real-time low costs. However, many researchers have suggested that the government or public sector organisation who is taking ownership of the project first determine if the increase in cost/expenses of the project are vindicated. There is also the detriment of taking up excessive cost due to debt. Moreover, presence of a private organisation as a partner can make getting additional finance easier (Cantarelli 2012).  

The condition set for obtaining finance is that operating cash of the company who owns the project should be capable of giving a return on investment. There is, however, no limit to risk taking. Hence, private organisation and their lenders retain a position of caution when taking on major risks within a project that they believe to be beyond their control (Hamza and Greenwood 2007). In the situation that private organisations are assumed to endure the risks, the cost of their services does mirror the extent of the risks that they are taking, which must be considered a fair practice since the balance between the cost and the associated risk have to maintained. It is recommended that before the project is undertaken, public and private sector partners should negotiate and plainly state specific criteria within the contract such as the agreement of incentives and performance requirements of the project.

The impact of risks associated with the project costs on the selection of Procurement Method

According to PMBOK Guide book (2008), risk is defined as “an uncertain event or condition that if it occurs, it can have a negative effect on a project’s objectives.” Thus, anything that is described as a risk means that it may or may not occur, but actions must be taken to reduce the probability of its occurrence. Cost risk is often defined as the probability of losses due to cost overruns (Hulett 2009). In infrastructure projects, construction costs turning into overruns are thought of as major risks. Thus, it becomes highly essential that the probability of the cost overruns taking place is determined, and its effect on overall project planning and application is calculated and consequently mitigated.

The information of cost overruns is an important factor that is used as an input to decide risk in costing assessments, in order to increase equity and debt financing for construction projects. Morledge et.al. (2006) adds that the establishment of an appropriate project team to deliver a project at the right time for the right costs, which estimated as the formulated strategy, as it is extremely important for the stakeholders and they needs to consider taking independent advice on this critical aspects. Further, Holt et.al. (2000) asserts that when running costs for the building project are considered to be important (of high risk) or if the design is complex and given much importance, then the procurement methods that are used must allow for a greater amount of integration and collaboration between project team members. Hence, it is evident that risks associated with the project cost is one of the most pivotal factor when deciding to selected the most appropriate method of procurement  

According to Cantarelli (2012) and Makovsek (2012); in their research indicated that accuracy of cost estimates can have a strong  impact on procurement,  as the selection of the procurement systems  is dependent upon the probability distribution of cost overruns, as it is systematic risk which is continuous and positive. They further indicated that the construction risk in public projects are considered to be very high. According to Flyvberg et.al. (2002) construction risks arise from two major factors;

1. Exogenous risks - includes examples of: weather, engineering challenges, unprecedented archaeological sites, and ground conditions.
2. Endogenous risks - a party’s exposure to uncertain costs.

The endogenous risks are normally associated with the contractor, and not the client. Blanc and Makovsek (2013) indicated that if there is higher risk in construction costs it may be bared by the party that is in charge of the design and building, for the case of design build procurement system, as the contactor assumes the responsibility of the completing the final design as well as construction of the project, and thus must also take the responsibility of the risk associated with the completion of these tasks,

However, with the right procurement method and its optimum implications, many of such risks can be mitigated. According to Morledge et.al. (2006) and Rowlinson (1999) it is first essential that a primary strategy for the project is established after which other factors as listed below are evaluated for the most appropriate procurement strategy;

1. External factors
2. Client resources
3. Project characteristics
4. Ability to make changes
5. Cost issues
6. Timing

According to Mortledge et.al. (2006), a thorough assessment on price certainty must be undertaken by the client, while also considering various dynamic elements such as a possibility of a time delay in tendering, generation of BOQs, alteration in market prices and variation in design etc. The degree to which the design of the project design has been completed will also affect the cost at the time of the tender (Mortledge et.al. 2006). Therefore, if price certainty is considered to be a top priority then the designs for the project must be completed before the construction of the project takes place, and any form of design changes need to be avoided (Rowlinson 1999).

When the prime strategy/objective is to ensure reduction in cost risk, the traditional procurement method is preferred as it allows for maximum cost certainty for a project that is defined to the full. This method of procurement also is obstinate to any design changes that are known to at times cause excessive cost repercussions (Luu et.al. 2003).

However, Flyvberg et.al. (2002) argues that the tendering system which is mostly found in the traditional procurement method contributes to uncertainty over the contract reached between the teams. This is because there are often incomplete documentations during the tender stage which makes it challenging for the primary contractor to attain an accurate price estimation. This occurs because of the lack of expertise by the client to accurately estimate the BOQs with respect the required designs. Also, it is necessary under the traditional system to have a design completed before works begins on the project (Flyvberg et. al. 2002).

In conclusion, the decision on selection of procurement systems such as the design build, management, integrated or traditional must be taken at the early phase of the project, and the expected variations in the cost must be critically reviewed and analysed before coming to a final decision, as it impacts the overall cost of the project as well as the risks assumed by the partnering organizations.  As suggested by Mark and Picken (2000), adaptation of optimized procurement methods can increase the pace the construction and can result in successful completion of the construction projects.

References

Anderson, S. D., Molenaar, K. R., and Cliff, S. (2007). Guidance for Cost Estimation and Management for Highway Projects.  

Blanc, B. F., and Makovsek, D. (2013). Construction risk in infrastructure project finance. EDHEC Business School.

Black, C., Akintoye, A., and Fitzgerald, E., (2000). An analysis of success factors and benefits of partnering in construction, pp. 422-433.

Bygballe, L. E., Jahre, M., and Sward, A. (2010). Partnering relationship in construction: A literature review., pp. 238-249.

Cantarelli, C., (2012). Cost overruns in large-scale transport infrastructure projects- A theoretical and empirical exploration for the Netherlands and worldwide. Transport Policy, pp. 89-92.

Chan, A. P. et. al. (2004). Exploring critical success factors for partnering in construction projects. pp. 191-194.

Construction Industry Institute, (1991). In search of partnering excellence.

Davis, P., Love, P., and Baccarini, D. (2006). Report- building procurement methods. CRC Construction Innovation.

Flyvbjerg, B., Holm, M. S., and Buhl, S. (2002). Underestimating costs in public works projects, pp 280-294.

Gordon, C. M. (1994). Choosing appropriate construction contracting method.’ ASCE pp. 195-209.

Hamza, N., and Greenwood, D, (2007). The impact of procurement methods on delivering environmentally sensitive buildings. Procs 23^rd Annual ARCOM Conference, 3, p. 723-732.

Hamza, N., and Elkadi, H. (1999) ‘Impacts of thermal performance regulations on office building refurbishment.’ Proceedings of the 3^rd International Conference for Teachers in Architecture, p. 9-12.

Hoffman, S., (2007). The Law & Business of International Project Finance 3^rd ed,. Cambridge University Press.

Holt, G.D., Proverbs, D., and Love, P. E.D. (2000) ‘Survey findings on UK constrction procurement: Is it achieving lowest cost, or value?’ Asia Pacific Building and Construction Management Journal, 5, p. 13-20.

Hughes, W.P., Greenwood, D. J., and Hillebrandt, P. M. (2005) ‘Impact of procurement method on costs of procurement.’ Proceedings of the 11^th Joint CIB International Symposium: Combining Forces-Advancing Facilities Management and Construction Through Innovation, Helsinki, Finland, p. 13-16.   

Hughes, W.P., Hillebrandt, P. M., Greenwood, D. J., and Kwawu, W. (2006) ‘Procurement in the construction industry- The impact and cost of alternative market and supply process.’ Spon Research Series. London: Taylor Francis.

Hulett, D. (2009) Practical Schedule Rise Analysis. Farnham, UK: Gower Publishing.

Love, P. E. D., Skitmore, R. M., and Earl, G. (1998). Concurrent engineering: A strategy for procuring construction projects. pp. 223-232.

Luu, D. T., Thomas, S., and Chen, S. E. (2003). Parameters governing the selection of procurement system,  An empirical study. pp. 222-229.

Mak, S., and Picken, D. (2000). Using risk analysis to determine construction project contingencies. pp. 130-136.

Makovsek, D. (2012). Public private partnerships, traditional financed projects, and their price.

Mishra, R. C. (2006). Modern Project Management. New Age International, Inc.

Mortledge, R., Smith A., Kashiwagi, D. T. (2006) Building Procurement. Oxford, UK: Blacwell.

Project Management Institute (PMI) (2008).  A Guide to the Project Management Body of Knowledge (4^th ed.). Project Management Institute: USA. 

Palaneeswaran, E., and Kumaraswamy, M. M. (2000). Benchmarking contractor selection practices in public sector construction, A proposed model. pp. 287-295. 

Rowlinson, S. (1999). Selection criteria.’ In. Rowlinson, S., and McDermott, P., Procurement Systems: A Guide to Best Practice in Construction. London, UK: E & F Spon, pp. 274-289.

Ruthankoon, R. and Ogunlana, S. O. (2003). Two factor theory in the Thai construction industry, pp. 335-339.

Smith, W., and Charles, A. (1995) Privatized infrastructure: The Build Operate Transfer Approah. Essex, UK: Thomas Telford.

Wardani, M. A. E. (2004). Comparing procurement methods for design-build projects. Computer Integrated Construction Research Program.