Rationale / Executive Summary

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

Therefore, it is essential that Oldcross Borough Council (Department of Community Services) should 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 includes financing of the project along with other management aspects. The report will analyse this particular procurement method against other suitable methods, with a specific focus on public-sector projects.

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

The basis of the "Design Build Finance and Operate" system for the procurement of a major public-sector project. An explanation of the major advantages and disadvantages by comparing the 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 utilised in the construction industry, outlined below:

• Traditional: A system that incorporates standard procurement procedures where the contractor is only responsible for undertaking construction in accordance with the provided design and Bill of Quantities (BOQs).
• Management: A tailored system where information is shared, and management supervises the contractors, where the clients assume major responsibility.
• Design and Build: Where the risk of design as well as construction is transferred to the contractor.
• Integrated: A system 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 the organisational structure of the client. Therefore, it is necessary to evaluate these factors as they can significantly influence 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, lawful, and technical aspects that are known to influence the client and the immediate business under development.

Additionally, Mortledge et al. (2006) assert that it is necessary to evaluate the stakeholders' resources, such as the understanding and familiarity of the organisation, in light of the construction project being undertaken and the situation in which the client functions. Furthermore, Mortledge et al. (2006) argue that it is necessary to evaluate project characteristics, which include factors of size, complexity, uniqueness, and location of the project, and how they influence the 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 the project matures practically.

It is evident that the financing of a project has a crucial role in integrating 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 an integrated procurement strategy is necessary for the long-term success of any infrastructure project, especially for cases where long-term deliverables are required, such as for public sector projects. Therefore, the 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 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) model, which stems from the characteristics of Build–Own–Operate–Transfer (BOOT). DBFO and BOOT share various aspects of the financing structure, except that there is no ownership transfer in the contractual structure of DBFO. The DBFO method allows the contractor to assume the risks of the project's financial aspects up until the contract period's completion, with the owner assuming the primary responsibility for maintenance and operation. The DBFO form of procurement structure is a derivative of the design and build system, in which the contractor assumes the responsibility of designing as well as constructing the project and the client provides a preliminary order of requirements. With the integration of finance and operation to these terms, the systems become more acceptable for public sector projects where the aim is to ensure that expert contractors assume the responsibility of ensuring the complete success of the project.

There are various advantages of DBFO, the most pivotal of which include encouraging 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 serve as an integration of technology and skilled labour. DBFO also allows for completing public sector projects within the given time frame and within the bounds of the initially planned budget, which is frequently not guaranteed in other financial systems/models.

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

Discussing the benefits of 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 to them.

Wood and Ellis argued in 2005 that partnering relationships had become an 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 capitalise on the resources each participant of the partnership has contributed (Construction Industry Institute 1991; Bygballe et al. 2010). Bygballe et al. (2010) and Love et al. (1998) suggest 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 optimising the project outcomes.

There are various options for entering into operating partnerships, which are independent of strategic alliances by which the stakeholders share their resources and cooperate to achieve common project aims 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 have reported that they have experienced savings of a considerable percentage on costs and time from partnership relations. Furthermore, Gordon (1994) indicated that collaboratively working on projects can have 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 a presence of work assurance, meaning partners are able to work cooperatively as one unit.

The project ensures 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 are varying levels of advantages that are reaped. Hamza and Greenwood (2007) indicated that such partnerships reduce the time and cost of completing a project, which includes operational savings, construction project savings, and more significant project execution speed. Chan et al. (2004) suggested that partnering brings advantages in risk-sharing that include reducing the risk exposure through a strong relationship that is not combative as there is an improved understanding between the parties, which results in an engineered transformation and sharing of critical information, design and construction enhancement, optimisation 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, and administration, allowing for better financing options. Hamza and Elkadi (1999) have proven that partnerships can contribute to the economic growth of the country where the project is being built, resulting in an increase in revenue generation, which also contributes to national development.

It was also observed during the literature review 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 operated through a partnership between the government and private sector companies. A public-private partnership is established by inducing a contract between a public sector entity and a private entity. The significant risks that are associated with large-scale public sector 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 with the project. Hence, this government is able to achieve its one of the primary objectives of mitigating the significant risks involved in the development project (Hoffman, 2007).

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

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

The condition set for obtaining finance is that the operating cash of the company that owns the project should be capable of giving a return on investment. There is, however, no limit to risk-taking. Hence, private organisations and their lenders retain a position of caution when taking on significant risks within a project that they believe to be beyond their control (Hamza and Greenwood 2007). In the situation where private organisations are assumed to bear the risks, the cost of their services mirrors the extent of the risks they are taking, which must be considered fair practice since the balance between the cost and the associated risk has to be maintained. It is recommended that before the project is undertaken, public and private sector partners should negotiate and plane 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 the procurement method

According to the PMBOK Guide book (2008), risk is defined as "an uncertain event or condition that, if it occurs, can have a negative effect on a project’s objectives." Thus, anything that is described as 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 significant 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 mitigated consequently.

Information on 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) add that establishing an appropriate project team to deliver a project at the right time for the right cost, estimated as the formulated strategy, is extremely important for the stakeholders, and they need to consider taking independent advice on this critical aspect. Further, Holt et al. (2000) assert 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 are one of the most pivotal factors when deciding to select the most appropriate procurement method.

According to Cantarelli (2012) and Makovsek (2012), their research indicated that the accuracy of cost estimates could 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 a systematic risk which is continuous and positive. They further indicated that the construction risk in public projects is considered very high. According to Flyvberg et al. (2002), construction risks arise from two major factors:

• Exogenous risks include examples of weather, engineering challenges, unprecedented archaeological sites, and ground conditions.
• Endogenous risks include 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 a higher risk in construction costs, it may be borne by the party that is in charge of the design and building. In the case of a design-build procurement system, as the contactor assumes the responsibility of completing the final design as well as the construction of the project and thus must also take the responsibility for the risk associated with the completion of these tasks.

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

• External factors
• Client resources
• Project characteristics
• Ability to make changes
• Cost issues
• Timing

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

When the prime strategy/objective is to ensure a 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 procurement method is also obstinate to any design changes known to cause excessive cost repercussions (Luu et al. 2003).

However, Flyvberg et al. (2002) argue 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 is often incomplete documentation 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 to the required designs. Also, under the traditional system, it is necessary to have a design completed before work begins on the project (Flyvberg et al. 2002).

In conclusion, the decision on the selection of procurement systems such as 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 organisations. As suggested by Mark and Picken (2000), an adaptation of optimised procurement methods can increase the pace of construction and can result in the successful completion of construction projects.