2. Construction Planning & Management Construction Project Procurement process and Construction Project Delivery Methods Dr. Attaullah Shah

3.  Definition It is the process required to supply equipment, material, service and other resources needed to carry out a project that satisfy customer 3

4.  Procurement is acquisition of goods and services.  Project Procurement Management includes the contract management and change control processes required to administer contracts or purchase orders issued by authorized project team members.

5.  Procurement means the activities related to purchase, subcontracted items  Procurement items are usually classified as goods, work or services (GWS)  Goods represent raw material or produced items  Work means contracted labor  Service means consultation  Planning, budgeting, scheduling and follow-up control of all fall under procurement management  Logistics plan includes everything related to the transport and storage of materials for the projects. GWS items cannot be scheduled to arrive just-in-time (JIT). Provision must be made to store and protect them until they are needed.

6.  Procurement management refers to planning and control of the following  Equipment, material or components designed and provided by vendors specifically for the project  It may be a portion of a work package or entire work package  It may be off-the-shelf (OTS) equipment and components  bulk material, like cement, metal piping etc.  Consumables items; nails, bolts, lubricants  Support equipment for construction, cranes, lifts etc  Administrative equipment, computers, project office facilities

7. ItemDescriptionWeight 1Engineering5% 2 Equipment / Material 65% 3Construction15% 4Testing and Commissioning10% 7

9.  Plan Purchases and Acquisitions. Determining what to purchase or acquire and determining when and how.  Purchase of equipment  Procurement of works  Procurement of supplies etc  Plan Contracting – documenting products, services, and results requirements and identifying potential sellers.  Developing the requisite documents  Specification  No and make etc. Procurement Cycle

10.  Request Seller Responses.  o btaining information, quotations, bids, offers,or proposals, as appropriate.  Inviting bids  Inviting quotations  Request for Proposals ( RPFs)  Expression of Interest ( EOI) etc.  Select Sellers.  Reviewing offers, choosing among potential sellers, and negotiating a written contract with each seller.  Tender/bids opening  Evaluation and Assessment of bids  Negotiation if required and allowed  Selection of the seller/contractor

11.  Contract Administration –  Managing the contract and relationship between the buyer and seller.  Reviewing and documenting how a seller is performing or has performed to establish required corrective actions  Provide a basis for future relationships with the seller,  Managing contract-related changes and, when appropriate,  Managing the contractual relationship with the outside buyer.  Contract Agreement  Contract Closure –  completing and settling each contract, including the resolution of any open items,  Closing each contract applicable to the project or a project phase.

12.  Procurement planning involves identifying which project needs can be best met by using products or services outside the organization. It includes deciding  whether to procure  how to procure  what to procure  how much to procure  when to procure 12

13.  Make-or-Buy Analysis  Make-or-buy analysis: determining whether a particular product or service should be made or performed inside the organization or purchased from someone else. Often involves financial analysis

14.  Assume you can lease an item you need for a project for $150/day. To purchase the item, the investment cost is $1,000, and the daily cost would be another $50/day.  How long will it take for the lease cost to be the same as the purchase cost?  If you need the item for 12 days, should you lease it or purchase it? 14

15.  Set up an equation so the “make” is equal to the “buy”  In this example, use the following equation. Let d be the number of days to use the item. $150d = $1,000 + $50d  Solve for d as follows:  Subtract $50d from the right side of the equation to get $100d = $1,000  Divide both sides of the equation by $100 d = 10 days  The lease cost is the same as the purchase cost at 10 days  If you need the item for 12 days, it would be more economical to purchase it 15

16.  Expert Judgment  Expert purchasing judgment can also be used to develop or modify the criteria that will be used to evaluate offers or proposals made by sellers.  both internal and external, can provide valuable inputs in procurement decisions  Contract Types  Different types of contracts are more or less appropriate for Different types of purchases.  Fixed-price or lump-sum contracts.  Cost-reimbursable contracts.( cost Plus)  Time and Material (T&M) contracts.

18. An owner`s primary goal in choosing a delivery method is to ensure that;  It will meet project objectives, at the same time,  Allow the project to be delivered on time and within budget. In a risk-free, predictable world, -- this is simple task But, world is full of  unpredictable forces,  Undesirable outcomes.  So, owner must monitor the process to prevent unpleasant outcomes along the way. 18

19. Construction projects have many unique characteristics. a) Creating a large facility takes a long time, b) It involves a large capital investment, c) Cost overruns, delays and other problems, d) Process of building is complicated, why?  Component numbers by many suppliers e) Even if an owner builds repeatedly, the nature of product and parties involved in building depends on  Time, Site conditions  User needs,Economic health 19

20. When compared with other industry professionals, Designers and constructors have less opportunity to transfer lessons learned from project to project. All of these factors combine to create uniqueness, which carries with it heightened risk. A building not delivered on time usually costs more than planned, and late delivery can have cascading effects throughout an owner`s organization. Example: need a facility for chip manufacturer. 20

21. Owner`s pitfalls:  Late delivery of facility,  Miss the market,  A competitor enter to market. How avoid these pitfalls? Set up a team of people; whose skill match the type of project Who have a proven record of delivering such projects. Before team set up, owner decide how members will interact, with owner organization, and each other. This approach is called project delivery method. 21

22. Lessons from History; Owner choose a delivery method after studying history. Why projects failed? a) Separated functions.. Communication of designer and constructor. In a design change contractor may wait,. b) Scope creep.. Scope may be product quantity and character of work, If scope of work increases, the cost also increase. Factors of scope growth. Complexity, politic, critical user left out, miscommunication between users. c) Project acceleration.. Buyer prefer quick delivery d) Poor working relationships.. Less time, personal wok style, contract forms 22

23. Two primary professionals` (designer and constructor) communication is key to project success. Projects tend to be; a) Large, b) Complex, c) Unique Actions of one can have a major impact on the concerns of the other. Example: A design change after construction has started can adversely affect construction sequencing. So increasing cost due to lost efficiency. 23

24. Scope of work on a project : It can be defined as product of; a) the quantity of the work, and b) the character of work. Example: 1000 square meter rock excavation defines excavating subcontractor. Scope of work is primary determinant of costs on a project. If scope increases costs also increase. Factors on scope increase: a) Involving complex and highly political organisations, b) Tight timelines c) Leaving out of a critical user d) Miscommunication. 24

25. Buyer prefer quick delivery. Benefits; a) Lowers some costs, b) Put it into service sooner, c) Cut interest costs d) Psychological impact e) Enthusiasm exist Risks of going too fast; a)No consideration of all elements of design Incomplete documents b)Construction may be stopped, 25

26.  Unique character of construction.. there is not enough time to work out all the relationships necessary to perform difficult interconnected work.  Personal work styles  Contract forms can work against teamwork  Communication among project participants formally We can mitigate these pitfalls through organization of team, contract choice, partnering sessions, and delivery methods. 26

27. Selecting a delivery method and a contract type involves sequential decision making.  General risks  Project specific risks  Owner organization risk 27

28. General risks occur on a project can be classified into four major areas. a) Financial.. Project may cost more b) Time.. Project may not complete within planned time c) Design.. Project may not perform the function d) Quality.. Project may have poor quality materials or workmanship 28

29. A project team will address these risks during project development. Risks are approached differently in preconstruction and construction phase. Preconstruction: it is known as design phase (working out functional, aesthetic, material requirements of the job) In this phase project team balance DESIGN/COST equation. Risks occurs when realistic assessments of costs are not part of design process. Construction: emphasis shifts from DESIGN/COST tradeoffs to executing a project within the constraints defined by contract documents, schedule, and budget. Risks involve time and external unknowns. Some are community disapproval, labor actions, weather, site, etc. 29

30. In addition to general industry risks, there are specific risks that all owners and designers must take into account during their work. a) Site risks.. Neighbours, regulatory environment, geological characteristics, underground conditions, economic region. b) Project itself.. Uniqueness, complexity, new technology. 30

31. In addition to technical concerns, there are organizational and financial risks. a) Knowledge of building process, b) Financial changes c) Tightening the schedule 31

32. Once general and specific project risks assessed, owner must build a good project team to minimize the risks.  Choosing the right delivery method: Before choosing project team members, owner must choose delivery method. Dilemma here: one of price versus performance  Choosing a contract type: goal is to purchase actual construction service for lowest price possible without creating undue risk for owner.  Monitoring the entire process: owner must devise mechanisms to ensure that budget is monitored, schedule maintained and quality ensured. 32

33. The term delivery method refers to the owner`s approach to organizing the project team.  Design/Bid/Build (D/B/B) Traditional Method  Design/build method  Construction management method Combination of these strategies may be employed as well. 33

34. Design/Bid/Build (D/B/B) is often considered the traditional project delivery method.  All design work is completed  Bid process completed  Construction Starts. When this delivery method is selected?  When cost is primary important  Schedule is secondary important, and  scope is well defined. three-party arrangement: owner, designer, and contractor. 34

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36.  The owner signs one contract with the designer for design services and signs an other contract with the contractor for construction services. Both the designer and contractor work for the owner.  The contractor does not work for the designer; however the owner usually designates the designer as their representative during construction.  The designer is usually paid based on a prearranged fee or on a percentage of the construction contract. 36

37. Payment: The contractor is paid based on a lump-sum amount. Designer is paid based on pre-arranged fee, or on a percentage of construction contract. In D/B/B -- the responsibility, risk, and involvement of all parties are well defined. The owner has relatively high level of involvement and control during design, but low involvement during construction. Biggest disadvantage--: the extended time that may be required for completion the design and bidding the project before starting actual construction. Changes after award can be costly to owner. 37

38. Disadvantages: Biggest disadvantage--: the extended time that may be required for completion the design and bidding the project before starting actual construction. Changes after award can be costly to owner. 38

39. D/B project delivery method is often chosen to compress the time to complete the project. The completion time usually is reduced because construction can start before all the design is completed. The owner has considerable control and level of involvement throughout the project. This provides flexibility to the owner for revision of the design during construction. When Selected? when the schedule is preliminary, the cost is secondary, and the scope is not well defined. Two-party arrangement: owner and D/B company. 39

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44. A contract is signed between the owner and D/B firm to perform both design and construction services. All design, including construction drawings, are done y the D/B contractor. All construction is done by the D/B contractor, although the D/B contractor may hire one or many subcontractor. 44

45. This arrangement can reduce the conflicts between the designer and contractor that often occur in the D/B/B delivery method. How D/B firm is selected?  By a qualifications-based selection (QBS) procedure.  By price Owner solicits proposals from a pre-qualified, safety record, schedule, cost performance on past jobs, and other factors from each prospective D/B firm. Thus, selection is based on qualification rather than price. 45

46. The cost of the D/B services is usually based on some type of cost- reimbursable arrangement, either cost plus a fixed amount or cost plus a percentage. By price: For project that have a reasonably defined scope, the D/B firm is sometimes selected based on price. For incentives--: The contract may be based on a guarantied maximum amount. Handling inspection is an issue that must be addressed early in the project, because the designer is also the builder. 46

47. If qualified individuals are available in the owner’s organization, the owner may perform inspection. In some situations, an independent third party is used for inspection services. 47

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49. There are many variations of the construction management method of project delivery. 1.Agency CM (pure CM): 1.Agency CM (pure CM): CM is a firm outside the owner’s organization that acts as the agent for the owner. The agency CM firm performs no design or construction but assists the owner in selecting one or more design firms and one or more construction contractors to built the project. The agency CM firm assumes no risks because are contracts are signed between the owner and the designers and/or contractors. Generally agency CM work for a fee. 49

50. 2. Corporate CM: 2. Corporate CM: is similar to agency CM, except the CM services are provided by the personnel inside the owner's organization. Design and construction is performed by third party organisations. CM manages and coordinates the overall effort. 50

51. CM @ Risk: 3 CM @ Risk: The CM will actually perform some of the project work, thereby exposing themselves to risks associated with quality, cost, and schedule.  There are two sub variations in CM @ Risk,  Contractor CM: Primarily construction firm that become involved in CM,  Designer CM: Primarily design firms that become involved in CM.  The CM @ Risk firm may work on 3 basis;  A lump sum,  Cost reimbursable,  Guaranteed maximum price. 51

52. Regardless of the variation of CM methods that is used for project delivery, CM is a single-source management of the project that allows the owner to control his or her level of involvement. To be successful the CM must be involved at the beginning of the project. The CM must carefully monitor multiple construction contracts to ensure there are no gaps or overlaps in work. Tracking the cost of multiple construction contracts also requires careful attention. 52

53. Bridging is a hybrid method of project delivery for building type projects. The contracts document are prepared by the owner’s designer. These documents define;  functional use and,  appearance requirement of the project. Performance specifications are used to specify the construction technology. The details of construction are developed by the construction contractor. Final design, consisting of the construction drawings, is done by an engineering/construction constructor. Constructor performs final design and provides construction services using subcontractors. 53

54. Fast-track is the term commonly used for project that must be completed in the earliest possible time. Construction work overlaps design. As soon as a portion of the design is completed, then construction work is started. Fast-track project can be performed under the D/B and CM methods of project delivery. Fast-truck applies to project that are schedule driven -- if the owner requests. For example For example: the owner may want to complete a process plant at the earliest possible date Why? --- in order to produce and market a product before a competitor. Or a business may want to complete a building by a specific date Why? -- to accommodate a special event. 54

55. Turn-key is the term commonly used for projects that are designed, built, and put into operation before the project is turned over to the owner. The company providing the turn-key services may  Secure the land for the project,  Perform or coordinate all aspects of the design,  Arrange and administer construction contract,  Manage construction,  Staff and train the personal to operate the facility,  Turn project over to the owner. Turn key project typically are manufacturing or process plant type facilities in remote locations. 55

56. The following issues can have a significant impact on the success of any project and should be considered in selecting the project delivery method. 1.Number of contracts one contract--------------many contracts 2.Selection criteria price-----------------------qualification 3.Relationship of owner to contractor agent-----------------------vendor 4.Terms of payment Lump-sum----------------cost-plus 56

57. 1.Number of Contracts: One contract|||Many Contracts The number of contracts can vary from one to many, depending on the chosen method of project delivery. For D/B/B projects, the owner awards contracts to two parties:  Designer, who may contract some of the design work to other design firms,  Construction Contractor, who may contract the numerous subcontractors who perform special construction work. For D/B projects, owner awards a contract to one party: D/B firm, who may in turn subcontractor to many contractors. 57

58. 1.Number of Contracts: For CM projects, the owner awards contracts to three parties:  The construction manager,  Designer  Construction contractor. Under this scenario. There may be many subcontracts awarded under each of these three principals parties. 58

59. 2.Selection Criteria: Price |||Qualification Contractor may be selected on the basis of price or qualification.  Designer are selected based on qualification,  Contractors are selected based on price. Qualification are used for unusual products, proprietary work, or services that require special expertise, knowledge, and judgement. 59

60. 3.Contractual Relationship: Agent|||Vendor A contractor may be viewed as an agent or vendor.  An agent represents the owner’s interests, works for a fee, and usually is selected based on qualifications.  A vendor delivers a specified product or service, works for a price. And generally is selected based on price. 60

61. 4. Terms of Payments: can vary from fixed price to cost reimbursable. Lump-Sum|||Cost-Plus Fixed price... is used when detail of work are well understood. Cost reimbursable... is used when the scope of work is unknown or not clearly defined. There are ranges of terms of payment from fixed to cost reimb. Lump-sum arrangement, Cost-plus fee with fee a guaranteed max. Price (GMP) Cost-plus fee with a target price Cost plus projects. 61

62. 4. Terms of Payments: The above payment terms can be combined into one contract, for example, fixed-price, lump-sum with a unit price for ordinary soil excavation and cost-plus fee for rock excavation. The amount of payment should be commensurate with the amount of risk assumed by each party. 62

64.  Single fixed price  Unit price contract  Cost plus a fee 64

65. Also called Lump sum contracts. I Also called Lump sum contracts. In this type of contract, the contractor agrees to perform the work described in the contract documents for a fixed sum of money. It is used with traditional method Advantage: Owner knows cost before construction. Risk: for owner, contract is only as good as accuracy of contract documents. disadvantage: If scope changes, or error exist in documentation, contract need renegotiated. Process need time. 65

66.  Lump-sum--: intent is to fix project cost by providing complete set of plans and specifications. However, contractor is entitled to extra compensation for any change --  major source of cost overrun. Error free complete design is necessary adequate review of contract document 66

67. UNIT PRICE CONTRACTS In this type of contract, owner and the contractor agrees to perform the prescribed work at a fixed cost per unit of work accomplished. Owner provides estimated quantities, Asks contractors to bid using unit prices, Calculates final price. Contractor overhead, profit and other project expenses must be included within the unit prices. Owner may not quantify the work necessary. Provides competitive bid situation. Eliminates the risk of renegotiation. Work can begin before design completed. Know knows cost before construction. Risks: mistaken quantities. Requires owner on site during quantity measurement. Not knowing actual price until work nears completion. 67

68. UNIT PRICE CONTRACTS : Advantages and disadvantages: If quality of work can not be determined with a degree of accuracy for lump-sum bid, then this can be used. Major cost overrun is errors in the estimated pay quantities. Unbalanced bids by contractors -  means cost increase expensive legal disputes 68

69. COST REIMBURSABLE CONTRACTS In cost plus fixed fee, In cost plus fixed fee, owner agrees to pay the cost of construction plus a fixed fee, which is dependent upon the actual cost of construction. Cost plus fixed fee with guaranteed maximum cost Cost plus fixed fee with guaranteed maximum cost – the owner to pay the contractor for all costs plus a fixed fee with a guaranteed from the contractor that total cost including the contractor’s fee will not exceed a certain amount. This contract requires a reputable contractor or construction manager whom owner can trust implicitly. Risk: project starts with considerable unknowns. Can be used with CM or D/B delivery methods. 69

70. COST REIMBURSABLE CONTRACTS  Require extensive monitoring  material delivery,  measurement of work  Require a field office of owner to review & approve cost of  material,LaborOther costs This method gives flexibility to owner organization, but owner must have extensive experience with handling projects. When we can use? When desirable to start construction before design is complete. Examples :  Projects that are complex in nature  Projects that must be completed due to emergency situations 70

71. Contract changes occur for three main reasons.  Change in owner requirement, scope of project increases or degreases.  Unforeseen conditions, when contract was agreed to, the work must be performed differently.  Omissions in documents or design features that can not be built as specified, the design must be adjusted. Contract changes are reality. Generally, fixed prices contracts require the greatest number of changes, cost reimbursable is the least. 71

72.  Because no two projects are exactly alike, owner choose a delivery method and contract type. Once the project is matched with a delivery method, the owner can choose a contract type and a delivery method.  The goal is to minimize risk while minimizing the costs to organization.  Owner must weigh the risks against the price and come up with a type that best protects his organization. 72