Successful Procurement of Construction in India: An Owners Perspective

Bijoy Abraham Varghese M.Tech (Civil Structural Engineering) Practicing Engineer, Framez Consulting Engineers, Kottayam

Abstract
Procuring a construction successfully in India by an Owner needs understanding of various methods prevailing, how different are they from each other, and method of selection of suitable procurement method. This paper is an insight into various aspects of construction procurement methods in India.

Introduction
Construction is a key economic activity in India and accounts for almost 15 percent of the nations GDP.In the recent years, with large scale expansion plans, encompassing infrastructure, energy and natural resources and private building programs, India is witnessing large scale construction. There are many agencies contributing to this big leap; real estate builders, government agencies that develop basic infrastructure, individuals who construct their houses, other business personals who needs construction. Attaining a construction, viz., a built-up area, basic infrastructure for transportation, water management, waste disposal, power transmission or data communication etc., is referred as Procurement of construction. Unlike procurement of any other facility, like car, ship or an aircraft, many organizations are to be contacted and contracted to get the system as desired by an owner. The process is complex, involving the interaction of the Owner, design team, contractor(s) (who provide the construction expertise, labour, materials and plant resources), suppliers and various statutory/public interest bodies. Construction procurement is often the subject of joint funding, with the different parties having varying degrees of interest in the outcome of the process. Successful construction procurement result in a project delivered on time, to cost and to the desired quality capable of performing the specific business function of the Owner. This paper looks into various aspects of different methods of procurement being practiced in India to procure a construction successfully.

1) Procurement:
Oxford Advanced Learners Dictionary gives the meaning of the word procurement as obtain something, especially with care or effort. Construction procurement maybe defined as the series of processes or activities employed to secure the construction of a predefined system for an organization. Construction procurement methods have been described as 'both organizing the works and allocating risks to different stakeholders'.

2) Different Perspectives: of owners and Construction Contractors.

Construction of a built up space or basic infrastructure takes place as part of a project. The commitment for such an investment may be motivated by market demands or perceived needs, the facility is expected to satisfy certain objectives within the constraints specified by the owner and relevant regulations. For example; if an international supermarket chain decide to have an outlet in Kochi, if market demands it, a need of construction arises as part of a project to have an outlet in Kochi.

Essentially, a project is conceived to meet market demands or needs in a timely fashion. Various possibilities have to be considered in the conceptual planning stage, and the technological and economic feasibility of each alternative will be assessed and compared in order to select the best possible project. The financing schemes for the proposed alternatives must also be examined, and the project will be programmed with respect to the timing for its completion and for available cash flows. Hence the owner of the supermarket chain will be having a budget and a head for this construction, which will be only a part of the project. Along with the financial constraints, he will be having limits on completion time and various aspects regarding design and quality of materials to be used. Within these constraints, the owner has to procure the construction. After the construction is completed, there is usually a brief period of start-up or shake-down of the constructed facility when it is first occupied. Finally, the management of the facility is turned over to the owner for full occupancy. Perspective of a construction contractor is different, in which, procurement of man, material, machine and construct the facility as per the contract with the owner. This is referred as construction management and being taught in civil engineering curriculum.

3) Personal or Organizations Involved in Construction

The construction industry in India is a conglomeration of diverse fields and participants that have been loosely lumped together as a sector of the economy having super specialization, such as Architects, Landscape architects, Interior designers, Electrical, Mechanical (Plumbing, refrigeration & air conditioning, elevators, cranes etc..), Structural Engineers, Contractors specialized in various fields, construction material manufacturers, vendors, financial planners, legal advisors etc..

4) Owners: Different Types

An owner is the person who procures construction for his use. Depending on his experience in construction, owners are classified as Experienced and Inexperienced. These owners may be working in an industry, in which, construction may their primary or secondary activity. So an owner may be Primary Experienced, Primary inexperienced, secondary experienced, secondary inexperienced, as shown in the Figure 1.

Figure1:Differenttypesofowners

American food chain giant, Mc Donalds, construct buildings themselves, to their specification and quality. Similarly, Lulu supermarkets also do. Such clients have vast experience in construction, even though, their primary activity is not construction. They are classified as Secondary Experienced. A builder who procures their construction themselves and sells for profit is a Primary Experienced owner. Majority of clients are Secondary Inexperienced.

5) Objectives of a Construction
Any construction has an objective or more; to complete within a budget, to meet some standards or within a time limit etc., depending on the technological and economic feasibility studies. These objectives can be grouped in Cost, Quality or Time.

6) Objectives and Risk

Risk is the possibility of meeting danger or harm. Risk is also defined as an uncertain event or condition that, if it occurs, has an effect on the achievement of a project objective. The objectives are grouped into cost, time and quality, and hence, in any construction, there is risk on these objectives. The risks involved in a construction project come from many sources and often involves many participants in the project. Since each participant tries to minimize its own risk, the conflicts among various participants can be detrimental to the project. Only the owner has the power to moderate such conflicts as it alone holds the key to risk assignment through proper contractual relations with other participants. Failure to recognize this responsibility by the owner often leads to undesirable results. Various forms of procurement were developed in accordance with the allocation of degree of risks. This is detailed in subsequent heads.

7) Involvement of owner
Involvement of owner during construction the one factor which some of the owners prefer to have. The different forms of procurement developed also offers different levels of involvement by the owner.

8) Different forms of procurement

Any procurement of construction involves two main activities, namely, design and execution. In general, there are many ways to decompose a project into stages. The most typical ways are: Sequential processing whereby the project is divided into separate stages and each stage is carried out successively in sequence. Parallel processing whereby the project is divided into independent parts such that all stages are carried out simultaneously. Staggered processing whereby the stages may be overlapping, such as the use of phased design-construct procedures for fast track operation. It should be pointed out that some decomposition may work out better than others, depending on the objectives of the owner. There are two basic approaches to procure a construction, even though, many variations may exist as a result of different contractual relationships adopted by the owner and contractor. These basic approaches are divided along the following lines: (i) Separation of organizations. Numerous organizations serve as consultants or contractors to the owner, with different organizations handling design and construction functions. Typical examples which involve different degrees of separation are: Traditional sequence of design and construction Construction Management Method (CM method)

(ii)

Integration of organizations. A single or joint venture consisting of a number of organizations with a single command undertakes both design and construction functions.

Owner does all work with in house facility. As a Turnkey contract in which all work is contracted to a vendor which is responsible for delivering the completed project A system in which the contractor or a vendor operations and maintenance for a certain period of time, on behalf of the owner to attain revenue out of the facility and transfer the facility to the owner after the tenure. (BOOT, BOT, BOO etc) a) Traditional Designer-Constructor Sequence In Traditional Designer-Constructor Sequence, the owner employs a designer/ design firm which prepares the detailed plans and specifications for the contractor. The designer/ design firm also acts on behalf of the owner to oversee the project implementation during construction. The contractor is responsible for the construction itself even though the work may actually be undertaken by a number of specialty subcontractors. Figure 2 shows the relationship between the designer, owner and the contractor.

Figure2:AtraditionalContract

In a traditional contract, the designers role is to advice the owner only, since there is no contractual relationship with the contractor.

If a construction is procured in this way, risk on cost is partially shared by the owner and the contractor, since rate is agreed for each work. The certainty of the final construction cost depends on the accuracy of the estimate prepared by the designer. However, there is flexibility for the quantity of work to be executed, and the possibility of client involvement in the contract. b) Construction Management Method (CM Method) Construction Management method refers to a construction management team consisting of a professional construction manager and other participants who will carry out the tasks of project planning, design and construction in an integrated manner. Contractual relationships among members of the team are intended to minimize adversarial relationships and contribute to greater response within the management group. A professional construction manager is a firm specialized in the practice of professional construction management which includes: Work with owner and the designer/ design firm from the beginning and make recommendations on design improvements, construction technology, schedules and construction economy. Propose design and construction alternatives if appropriate, and analyze the effects of the alternatives on the project cost and schedule. Monitor subsequent development of the project in order that these targets are not exceeded without the knowledge of the owner. Coordinate procurement of material and equipment and the work of all construction contractors, and monthly payments to contractors, changes, claims and inspection for conforming design requirements. Perform other project related services as required by owners.

Depending on the contractual relationship with Owner, Designer/ Design firm and sub contractors, the Construction Management procurement can be as shown in Figures 3, 4 and 5

Figure3ContractualrelationshipinConstructionManagementmethodofprocurementinwhichConstruction ManagerhascontractualhascontractualrelationwiththeOwneronly.

Figure 3 shows a form of CM method of procurement, in which, contractual relationship is with the Owner only. In this type of procurement, the role of a Construction Manager is an advisor to the Owner. In this type of procurement, the risk on cost is solely vested with the owner, since, the execution is done by sub contractors, mostly labour contractors. Vendors are contracted directly for supplying materials. Even though there is risk on cost, there is possibility of cost reduction by the elimination of contractors, who often employ sub-contractor and charge a premium over sub-contractors rates. Regarding the possibility of involvement by the Owner, CM method procurement offers excellent opportunity to get involved in the construction

Figure4 Contractual relationship inConstruction Management method of procurement in whichConstruction ManagerhascontractualrelationwiththeOwner,DesignerandSubContractor.

Figure 4 shows another method of CM method in which the Construction Manager has contractual relationship with other parties. Here, the construction manager will get a better opportunity to get control over other personals involved. This is advantageous to owners having less experience and wants less involvement. CM method of procurement can be done by the owner with a single contractual relationship with the Construction Manager. This may find similar to a turnkey contract, but, in turnkey contract, the contractor is committed to a certain amount. In this method of CM method of procurement, the Construction Manager does work of a turnkey contractor for a service fee. In a turnkey contract, if the risk is vested with the contractor, in CM method, the risk has to be borne by the Owner himself.

Figure 5 Contractual relationship in Construction Management method of procurement in which Owner has contractualrelationwiththeConstructionmanageronly.

c) Integrated organizations Some owners wish to delegate all responsibilities of design and construction to outside consultants in a turnkey project arrangement. A contractor agrees to provide the completed facility on the basis of performance specifications set forth by the owner. The contractor may even assume the responsibility of operating the project if the owner so desires. The other side of an integrated organization is that the Owner does the design and construction with his in house facility. In this approach, an owner must have a steady flow of on-going projects in order to maintain a large work force for in-house operation. The risk on cost is vested with the contractor in turnkey project, where as, the owner takes the whole risk if done in house. In house design and construction offers absolute freedom for the owner to get involved in a construction project, but, a turnkey project offers no chance to intervene in any matter once contract is executed. The latest construction procurement using BOOT, BOT or BOO offers opportunity to the client to procure construction even though he has shortage of funds. However, these methods have very little opportunity for Owners to have involvement.

9) Selection of a suitable procurement method

In the preceding sections, it has been stated that owners are different depending on the experience in

construction and the industry they are in. Objectives of each client are different in terms of cost, time, and quality. Risks on these objectives are to be suitably managed by selecting suitable method of procurement. The following chart (Figure 6) gives a picture on risk; whether the risk to be borne by the owner or the contractor.

Figure 6: Different types of procurement, risk and flexibility for the Owner Owners considering a construction project are likely to want a solution which will meet their objectives. Taking impartial professional advice is useful, though there is no standard method of obtaining such advice. The type of professionals who could help an occasional client with impartial advice are the personals involved in construction industry itself, provided they are not to be involved in the construction project itself. Figure 7 and Figure 8 are other guidelines that indicate the share of risk to be taken by the contractor and the Owner and level of involvement in construction by the Owner.

Figure 7 Share of risk

Figure8LevelofinvolvementbytheOwner

10)

Managing Risk and cost involved.

There are many different types of strategies for managing risk. Often these are managed by the following methods. (i) By accepting the consequences of a risk and budgeting for it. (2) By transferring the risk to another party. In either case, cost is involved. Transfer of risk on time, quality or cost to a contractor attracts cost to the Owner.

11)

Successful Procurement of Construction

Procurement of construction is considered to be successful, if objectives set by the owner are achieved to their satisfactory limit. Objectives of any construction can be grouped in terms of time, cost and quality. Having set the objective, the Owner has to select the most suitable procurement route depending on the risk. It can be seen that selection of suitable procurement will enable an Owner to attain his objectives to his satisfactory level. Such procurements are considered as successful procurement.

Conclusion
Earlier, procurement of construction had only one route; to design first and select a contractor to execute it. An insight into various aspects like objectives of owners, risks to be borne by owners, and degree of involvement required by the owners, several methods of procurement have been developed and being practiced in India. An Owner has to select appropriate procurement method to procure a construction successfully. A successful construction procurement is the one in which an Owners objectives are attained to a level to the satisfaction of an Owner.