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Procurement Management of Construction Project
Procurement Management of Construction Project

May 24, 2024

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Procurement process in construction is not only about executing the work at the best price, but a complicated process requiring careful thought and planning.


By definition, procurement in the context of a construction project encompasses all the processes necessary to purchase or acquire the required products or services needed for the project’s execution. A typical procurement process involves key milestones, including defining the project scope, establishing the project procurement plan, conducting the bidding process, awarding contracts, executing the work, and ultimately closing the contract. 

A detailed and well-defined scope of work is essential to ensure that project requirements are clearly understood, thereby mitigating project-related risks. Developing an appropriate procurement plan for the project involves evaluating prospective bidders based on technical and financial criteria. The bidding process must accurately assess requirements related to machinery, manpower, materials, management, milestones, and cash flow to shortlist capable bidders. 

After the bidding process, the project is awarded to the most suitable bidder, and it’s important to note that the lowest bidder (L1) doesn’t always receive the contract. Monitoring the work is critical to ensure both parties comply with the contract terms and conditions, preventing breaches or failed commitments. It also helps resolve conflicts related to project budget, schedule, or quality parameters. 

In cases of non-compliance or substandard work, stringent actions may necessitate corrective measures such as early termination or re-awarding the work in the project’s best interest. Following completion of the work, an internal audit ensures alignment with the approved plan and contract terms. Upon successful completion, a completion certificate is issued to the respective agency. 

Key Criteria for Selecting the Right Procurement Strategy


Types of Construction Procurement Contracts and Strategies

Fixed Price Contract: This type of contract is preferred when the project scope is well defined and unlikely to change in the future. The parties agree on a fixed price for the specified scope of work, and the risk and responsibility for completion lie with the bidder.


Cost Reimbursable Contract (Cost Plus): This contract is beneficial when the project scope is not well defined and is expected to change during the project. The actual costs incurred in executing the project, along with an additional fee representing the contractor’s profit margin (as per agreed contract terms), are reimbursed to the main contractor.


Guaranteed Maximum Price (GMP): GMP contracts are useful when there are uncertainties and risks associated with the project. The parties agree on a guaranteed cost for the defined scope. If the construction cost exceeds the fixed price, it becomes the contractor’s responsibility to cover the additional costs required to complete the project. While this type of contract provides security to the client by minimizing risk, there is a chance that the contractor may default, leading to project delays.


Design & Build (D&B): In this type of contract, the main contractor takes responsibility for both pre-construction design and construction execution. The main contractor collaborates with the client to understand project requirements, prepares cost estimates, and establishes project timelines. D&B contracts are often more efficient than traditional methods in terms of cost and construction timelines because all aspects of the project scope fall under one ownership. However, since the main contractor holds ownership, there may be instances where design, aesthetics, or build quality are compromised for financial gains. Therefore, robust oversight and monitoring from the client are necessary to minimize any deviations.


Management Contracting: Management contracting is preferred when there is a large or complex project, and the client lacks the resources to oversee the fast-tracked construction of the overall project. The management contractor further appoints various sub-contractors under their ownership to execute different project phases. The management contractor collaborates with the design consultants appointed by the client separately for design closure and acts as a Single Point of Contact (SPOC) between the client and the sub-contractors. Since the complete ownership of the construction lies with the management contractor, there is very little scope for design modifications or amendments once the construction has started.


Private Financing Initiative (BOT): This type of contract, also known as Build Operate and Transfer (BOT), is preferred by clients who want to execute a project but lack the working capital required for execution. The client awards a single contract to an agency with technical and financial capability and expertise to finance, design, construct, and manage the project. The contractor funds the design and construction of the project either completely or partially, depending on the agreement, and then leases it out to the client for the agreed period as per the contract. After the completion of the lease period, the building ownership is then handed over to the client. 

Summary

Procurement process in construction is not only about executing the work at the best price, but a complicated process requiring careful thought and planning. There may be instances when a project demands different types of procurement process to be implemented at different project phases. Thus, during project initiation, as part of the development strategy, it’s important to evaluate and strategize the project procurement plan and the contingency measures to deal with potential risks.

About the Author:

Taha Ansari | Managing Director | Business & Operations and Developer Relations | Colliers


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