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A study of procurement routes and their use in the commercial sector

Miss Joanne Larmour Thesis Interdisciplinary Design for the Built Environment June 2011 Word Count: 14,679

Abstract
The choice of procurement route may have a significant effect on the construction of a building project. Through a review of previous research on the history and use of different procurement routes, and analysis of procurement routes in use in the commercial sector, this thesis seeks to identify any trends and determine what, if any changes need to be made to improve procurement routes in order to improve construction. A summary of the factors which should be considered in the decision to choose a particular route is also included. In order to conduct analysis of the use of procurement routes, it is necessary to set certain constraints for comparison. This paper includes an analysis of the procurement of large scale, new-build commercial projects in Central London, completed within the last decade. Whilst the results are specific to this particular sector, some of the conclusions are relevant to client bodies across many sectors. It is of particular note that the sector analysed primarily includes experienced clients, and there ought to be a dissemination of knowledge of these clients and their practices to the inexperienced or one-off client in an attempt to improve the industry as a whole.

Contents
1. Introduction 1.1. Procurement History and Background 1.2. Analysis of recent projects and procurement data 1.3. Issues to be addressed for future procurement 2. History of Procurement in Construction 2.1. Procurement categories 2.2. Contract types 2.3. The evolution of procurement 3. What influences the procurement system chosen? 3.1. Project strategy 3.2. Client organisation 3.3. Financial objectives 3.4. Method of organising design and construction 3.5. Risk management 3.6. Project constraints 4. Limitations with existing procurement systems 4.1. Demand issues 4.2. Supply issues 4.3. Common issues 5. Trends in the UK 5.1. Contracts in Use 5.2. Trends from Contracts in Use 2004 5.3. Trends from Contracts in Use 2007 6. Trends in London Commercial Sector 6.1. Criteria for selection 6.2. Trends in the commercial sector 6.3. Cost and time analysis 6.4. Further analysis required 7. Client opinion 7.1. Procurement strategies 7.2. Market trends 7.3. Risk allocation 7.4. Preferred contractors 7.5. Use of contracts 7.6. Design stages 7.7. Sustainable design and cost 7.8. Off-site manufacture 7.9. Summary 8. Conclusions and recommendations for the future of procurement 8.1. Procurement history 8.2. Project strategy 8.3. Analysis in the commercial sector 8.4. Market influence 8.5. Industry problems to be addressed 3 5

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8.6. Conclusions Bibliography 41

Appendix 1 Data from Hibberd and Djebarni survey Appendix 2 Data from Masterman survey Appendix 3 Data from Contracts in Use 2004, and Contracts in Use 2007 Appendix 4 Client Interviews 2011 Appendix 5 Project data

List of Figures Figure 1 Procurement route characteristics ............................................................................... 8 Figure 2 Time/Cost/Quality model .......................................................................................... 12 Figure 3 Client Objectives (Hibberd and Djebarni study) ....................................................... 15 Figure 4 Client objectives (Masterman study) ........................................................................ 16 Figure 5 Risk Matrix (Cox and Townsend) ............................................................................. 19 Figure 6 Risk Management - The Mace Approach ................................................................. 19 Figure 7 Contract Options (Latham, 1994) ............................................................................. 20 Figure 8 Methods of Procurement by number of contracts (2007) ......................................... 25 Figure 9 Methods of Procurement by value of contracts (2007) ............................................. 26 Figure 10 Method of Procurement across ten years ................................................................ 29 Figure 11 Method of Procurement per year............................................................................. 30 Figure 12 Cost of Construction (/sq foot).............................................................................. 31 Figure 13 Construction Rate (sq foot/week) ........................................................................... 32

1. Introduction
The choice of procurement route may have a significant effect on the design and construction of a building project. This thesis includes a review of previous research on the history and use of different procurement routes and the factors which might be considered in the decision to choose a particular route.

1.1 Procurement History and Background


Procurement routes remained relatively unchanged for over 100 years prior to the Second World War, with the main forms being traditional or conventional routes. Post 1945 many newer forms of procurement emerged and the use of different procurement routes changed over time. The rise and fall of the economy during the next fifty years has seen a number of different procurement routes fall in and out of favour depending on trends in the industry and changes in the project team structure. Section 2 focuses on the classification and history of procurement from 1945 to present day. Four main procurement types are described; Traditional, Single Source, Management, and Partnering, although there are many variants within each of these classifications. It is clear that construction is a cyclical industry, and that this has an impact on procurement. Some of the trends in the different phases may partly be attributed to the rise and fall of orders in the industry. In general, a new procurement strategy appears to have been developed in order to solve the problems identified with the previous preferred route, but does not necessarily address all the problems a with previous route. Section 3 focuses on the factors which should be considered prior to choosing a procurement route. Some of these requirements can be linked to interview responses collected in Section 7 which allows conclusions to be drawn with regard to the relevance of these factors.

1.2 Analysis of recent projects and procurement data


In order to conduct analysis of the use of procurement routes, it was necessary to set certain constraints for comparison. Section 5 uses data produced by the Royal Institution of Chartered Surveyors to assess procurement trends across the UK. Whilst this data provides some interesting results, it relies on participation of clients and contractors. The surveys received generally cover between 10% and 20% of the total value of new orders in the UK, which should be borne in mind when using this information to identify trends. Section 6 therefore focuses on a specific sector, and project size to attempt to collect more directly comparable data. The information was collected for large scale, new-build commercial projects, in Central London, which have been completed within the last decade. The data from these projects is used to identify trends and determine what, if any, changes can be made to improve procurement in construction. From the analysis of commercial construction projects in London, two procurement routes dominate, Construction Management and Lump Sum Design and Build. Traditional or conventional contracting within the commercial sector has declined over many years, although is occasionally still used. The last decade encompasses a period of high demand during the construction boom of the early 2000s, followed by a sharp downturn and recession within the UK in the latter part of the decade. The opportunity to assess procurement routes during two very different types of 5

market conditions offers an insight into the decision making process involved in procuring a new building. What is clear is that there is no one route which is considered best practice for all clients. If the experienced developer client is taken as an example, the strategy adopted appears to be focused on knowledge of the route, and the particular client drivers which can be achieved within that route (e.g. cost certainty, or control of quality). These drivers vary depending on the client. There are increasingly opportunities for the client to choose a route which offers both cost certainty, and a good degree of control of design quality. For example the use of pre-construction agreements with a contractor for a defined period prior to moving to Design and Build, and a decision to take design of architecturally important elements to a later design stage, before moving to Design and Build.

1.3 Issues to be addressed for future procurement


One of the impacts of the move away from traditional contracts is the increasing fragmentation of the industry. It has become more common for certain packages to be subcontractor designed, resulting in a loss of skills within consultant practices. The fragmentation of the industry whilst enabling the development of specialist teams may preclude the use of some procurement systems in the future and may be detrimental to some projects. When choosing a procurement route, many factors must be considered depending on the type of client, development and mechanisms for funding the project. At the outset, before a procurement route is chosen, it is important that the client develops a project strategy. This would include factors such as identifying the objectives for the project, completion of a risk management process, relevance of timescale, degree of quality expected, and appropriate team structure.

2. History of Procurement Routes in Construction


In order to consider the history of procurement routes in construction we must first define what is meant by procurement routes. The Commission for International Building (Commission for International Building, 1992) defines procurement as a strategy to satisfy clients development and/or operational needs with respect to the provision of constructed facilities for a discrete life-cycle. Masterman (Masterman, 2002) argues that there is a need to accept that contemporary procurement routes can now embrace not only design and construction, but also financing, operating, facilities management etc, and therefore proposes this definition; A procurement system is the organisational structure adopted by the client for the implementation and at times eventual operation of a project. Whilst the whole project organisation process and its influence on procurement will be reviewed in the following sections, for the purpose of the analysis within this thesis, procurement will be considered as the route adopted by the client to implement the design and construction of a building project. Procurement routes have been categorised by many people, in many different ways, and with varying degrees of complexity. The Thinking about building report (NEDO, 1985) categorises procurement routes into four groups.

2.1 Procurement categories


Traditional single or two-stage tender This category is used to describe procurement which involves the clients design team producing a full construction design. The contractor will then tender for the construction of this package. Traditional procurement usually results in maximum cost certainty for a project with a fully defined project, but a long programme as design and construction are sequential. It is also inflexible in terms of design changes, which will can result in excessive cost and programme implications. Single Source D&B (direct, competitive, develop and construct) This category is used to describe procurement which involves contractor design and construction. It is generally associated with good cost certainty and a minimisation of risk to the client. This route is often associated with programme benefits as design and construction can be overlapped. There are many variants within this category, such as Direct (when the designer/contractor is appointed following appraisal, there is no price competition); Competitive (when the price and design proposal are submitted based on the employers concept design); Develop and Construct (part design to produce Employers Requirements, contractors complete and guarantee the design in competitive tender). Competitive is prevalent in current public procurement, for example the Building Schools for the Future programme. Develop and Construct is the most commonly referred to as Design and Build in the private commercial sector and will be used in that context for the remainder of this thesis. Management Management Contracting, Construction Management This category is used to describe procurement which involves a contractor providing management services. The two main variants of this are Management Contracting and Construction Management, which are both very different approaches. In Management Contracting, the contractor provides management services to control and coordinate all site 7

activities, sub letting works to suitable contractors on a competitive basis. In Construction Management the client enters into separate contracts with the construction manager, designers, and trade contractors. Construction Management is generally associated with programme savings, and a higher degree of control for the client in terms of design quality, but less cost certainty. Partnering Partnering involves two or more organisations working together to improve performance through agreeing mutual objectives, devising a way for resolving any disputes, and committing themselves to continuous improvement, measuring progress and sharing gains and pains. Examples include framework agreements and joint ventures. This is a relatively new form of procurement and although discussed in the Latham report in the 1990s, has taken a long time to come into general use. It is more commonly seen within large civil engineering projects, than individual building projects. The relationship between each route is summed up in the Construction Industry Board best practice guide to procurement. (Rowlinson, et al., 1999) The diagram below is an adaptation of the information within this guide.

Traditional

Management Contracting

Construction Management

Design and Build

Build Operate Transfer

Increasing integration of design and construction

Professional

Contractual

Construction Management

Management Contracting

Design and Manage

Design, Manage and Construct

Figure 1 Procurement route characteristics

2.2 Contract types


There are a variety of different forms of standard contract, some of which are specific to the procurement categories above. Those most relevant in the context of this thesis are: Joint Contracts Tribunal (JCT) 2005 suite of contracts including: - Standard Form of Building Contract, Revision 2, 2009 (SBC) - Management Building Contract (MC) - Design and Build Contract Revision 2, 2009 (DB) - Construction Management Appointment (CM) - Major Project Construction Contract, Revision 2, 2009 (MP)

New Engineering Contract (NEC) suite of contracts including: - NEC3 Engineering and Construction Contract (EEC) o Option A Priced contract with activity schedule o Option B Priced contract with bill of quantities o Option C Target contract with activity schedule o Option D Target contract with bill of quantities o Option E Cost reimbursable contract o Option F Management contract There are other standard forms related to different types of project and sector which are not covered in detail within this thesis.

2.3 The evolution of procurement


Pre-World War II (1939-1945) a majority of projects in the United Kingdom used traditional (or conventional) procurement. Post 1945 the variety of methods available increased, partly due to import from USA, and partly willingness to try something new due to frustrations of the poor performance of the construction industry (Masterman, 2002). Phase 1: 1945 - 1972 Sustained economic growth The Simon Report (Central Council for Building Works, 1944) strongly recommended selective bidding, and The Phillips Report (Ministry of Works, 1950) reiterated this recommendation and highlighted the need for cooperation between all parties in the construction process. By the 1950s negotiated tenders and Design and Build had begun to be used in a very limited scale by the private sector. The Emmerson Report (Ministry of Works, 1962) criticised the lack of cooperation between members of the project team and their clients, notably highlighting in no other important industry is the responsibility for design so far removed from the responsibility for production. The Banwell Report (Ministry of public building and works, 1964) included similar themes to previous reports, yet there was still a general failure to adopt alternative methods of tendering. Action on the Banwell Report (Economic Development Committee for Building, 1967) highlighted some progress, with the increased use of selective tendering becoming apparent. The early to mid 1960s was a time of economic expansion, rapidly developing technology, changing social attitudes, demand for more complex and sophisticated buildings, and the increased need from clients for faster completion at minimum cost. These factors generated considerable activity within the industry, a consequence of which was that the general standard of performance and organisation improved. (Masterman, 2002). In summary, this was a time of economic growth, with general use of conventional procurement methods, and only a small use of non-conventional procurement methods. Phase 2: 1973 - 1980 Recession This was a period of recession due to the unexpected and large price increases in crude oil, coupled with high inflation caused by the previous economic boom. Government sponsored studies during this period tended to be specific to individual sectors and only The Wood Report (Building Economic Development Committee, 1975; NEDO, 1978) specifically 9

examined purchasing polices and procurement practices in construction (within the public sector). In 1976 a private client body published a report for the first time. The Slough Estates Report (Slough Estates, 1976) found that the overall time to implement an industrial project in the UK was considerably longer than other countries, and the final cost considerably higher in all but one of seven other countries. The reason attributed to this was an unnecessarily lengthy and complex design and pricing process, and the time taken to obtain statutory permits. A number of other reports were also published around this time including Construction for Industrial Recovery (NEDO, 1978), and Royal Institution of Chartered Surveyors, UK & US Construction Industries: A comparison of Design and Contract Procedures. (Bennett, et al., 1979) As Masterman (Masterman, 2002) summarises, the theme of the 1970s reports reflected conservatism, as a diminishing number of clients were prepared to commit to projects in an uncertain economic climate. Phase 3: 1981 - 1990 Post recession recovery This was a period of post recession adjustment and recovery. Changes such as labour only sub-contracting emerged due to long term shifts in the structure of the industry. The British Property Federation (BPF) launched a new procurement system System for Building Design and Construction in 1983. (British Property Federation, 1983) The BPF concluded that many existing procurement systems were inefficient, could increase costs, and could cause and sustain confrontational attitudes between clients, consultants and contractors. Whilst this new system attracted much comment, there is little evidence to suggest it was adopted by many clients. There were also a number of government sponsored reports during the 1980s. Faster Building for Industry (Building Economic Development committee, 1983) provided statistics for the use of different procurement routes, with almost half of projects using conventional methods, about one third design and build, and the remainder other methods (including management). Faster Building for Commerce (Building Economic Development Committee, 1988) was specific to the commercial sector and stated that two thirds of projects used conventional procurement, one sixth design and build, and one sixth management. The 1980s also saw the emergence of an expert client sector with in-house resources to manage large projects. There was ongoing construction and therefore clients developed bespoke methods of procurement, mainly based on Construction Management, to ensure their needs were met. This client sector is typical of those interviewed in Section 7. Phase 4: 1991 - 2000 Recession and recovery The early part of this decade saw low economic growth, uncertainty in business and finance, social pressures and environmental issues emerge. In addition to government capital spending cuts, there was little enthusiasm for major projects in the private sector. The results were a major downturn in the construction industry with more than 500,000 construction related jobs lost, and more than 16,000 construction companies becoming insolvent. (Cox, et al., 1998b) In 1997 there were signs of recovery, but annual input was still 20% below 1990 levels. During such a volatile time there were two defining reports published; Constructing the Team (The Latham Report), (Latham, 1994) and Rethinking Construction (The Egan Report) (Egan, 1998) The Latham Report concentrates on a number of problems to be tackled including the clients role, management of the project process, fragmentation of the industry, competitive tendering, the reputation of the industry and barriers to attracting the best people. 10

The Egan Report focuses primarily on promotion of an integrated project process around four key elements; product development, project implementation, partnering of the supply chain, and production of components. Masterman (Masterman, 2002) suggests that the reason the Egan report was criticised upon publications, was for its provocation and unnecessarily hostile approach, and failure to address the needs of occasional/one-off clients and implementers of small to medium sized projects. This could be particularly relevant given that current figures show that in all sectors over 90% of projects are for a value of less than 5 million, and with the exception of public housing over 75% of new orders are for a value of less than 1 million (Office for National Statistics, 2010). There was a lot of government support for the implementation of Egans recommendations with a 500M programme of demonstration projects being established. This programme was implemented by Constructing Excellence in 1998, and continues today (Constructing Excellence, 2010). Between 1998 and 2007 there had been a total of six hundred and twelve demonstration projects (Olayinka, et al., 2007). These include projects such as Bleak Hill School, St Helens, which was chosen as a demonstration project for its pioneering approach to procurement, and Great Notley Primary School, Essex, which was selected for its sustainability and technology credentials. During this period the use of Design and Build procurement routes and Management procurement routes fluctuated, but with an overall increase compared to their use throughout the 1980s. There was also an increase in the use of partnerships and alliances, perhaps resulting from the Latham and Egan Reports. Phase 5: Sustained economic growth, followed by recession (2000-2010) This decade saw continued growth with major projects throughout the UK constructed in the first half of the decade. The financial crisis towards the latter part of the decade resulted in recession from June 2008 Dec 2009, the longest UK recession since the 1950s. During this decade, the growth period saw an increase in the use of Construction Management for large scale projects, and an increase in the use of Design and Build. This may partly be due to the requirement to bring new buildings to the market in very short timescales. The impact of the recession in the last few years of this phase is difficult to determine at present, however it appears to have caused an increase in use of Design and Build procurement routes, and a more competitive market for consultant fees. The results of this are likely to be felt over the next few years in various parts of the construction industry. This decade also saw a shift in the procurement route for public sector projects. The increased use of private finance to fund public projects, and a desire to meet the partnering aspirations of the Latham and Egan Reports have resulted in a change in the way in which public sector projects are procured.

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3. What influences the procurement route chosen?


There are many influences to the procurement route chosen, ranging from the structure of the client organisation, to risk management, to market trends. This chapter focuses on the influences related to the client organisation and project strategy. The conventional view is that the choice of procurement route is based around the traditional time-cost-quality model. COST

TIME

QUALITY
Figure 2 Time/Cost/Quality model

It is generally accepted that only two of the three criteria above can be achieved, and therefore the procurement route should be chosen to maximise the most important criteria. However, these very broad criteria are often used inappropriately to define project requirements. For this reason there are a series of pre-procurement strategies which should be followed to define, for example, the project requirements prior to choosing the preferred procurement route. These strategies are described in more detail below.

3.1 Project Strategy


There is often a misconception that a procurement route is chosen at the outset of the project, however Masterman (Masterman, 2002) argues that the project strategy needs to be defined before the procurement route is chosen. Only with the project strategy in place can the appropriate procurement route then be chosen. Latham (Latham, 1994) described a project strategy which requires the following steps: 1. The client perceives a need for new construction or refurbishment. 2. An internal assessment is made which considers benefits, risks and financial constraints. It lists options for carrying out the project. 3. Options are put in order of benefits and feasibility. 4. Client makes a decision in principle as to whether the project is necessary or feasible. 5. Client decides the project should proceed and roughly how much risk and direct involvement to accept. 6. The project and design briefs are prepared. Latham is also quite clear that if a client does not hold the necessary skills, then a project manager or clients representative should be appointed to liaise with the designers or contractors. Morris (Morris, 1994) identified a more comprehensive list of topics to be considered at the project strategy stage:

Role of client and third parties Client project objectives Financial objectives Legal and insurance issues 12

Project/work breakdown structure Method of organising design and construction Logistics

Employment and industrial relations Environmental issues Quality Safety Technical and design philosophy

Milestone schedule Risk management Project constraints IT Public relations/communication

Those considered directly relevant to the choice of procurement route are listed below and considered in further detail in this chapter.

Role of client and third parties Clients project objectives Financial objectives Method of organising design and construction Risk management Project constraints

Egan (Egan, 1998) describes the project strategy in terms of a process. An integrated project process should utilise the full construction team, bringing the skills of all the participants to bear on delivering value to the client. The process should be explicit, transparent, and easily understood.

3.2 Client Organisation


The role of the client and client objectives for the project are influenced by a number of factors such as the clients experience, the clients needs, and the clients attitude to construction. Types of client The characteristics of clients that are relevant to the procurement process are defined by Masterman. (Masterman, 2002) 1. Whether the organisation is publicly or privately owned 2. Level of knowledge and experience within the organisation related to construction projects 3. Whether the project is needed by the client to accommodate their own commercial activities, or whether the project is needed to lease/sell to others There are some very specific differences between typical public and typical private sector clients, those most relevant are listed below. Public Safeguarding of funds Risk averse Conservative policies Private Maximising profits External funders Aggressive policies

Public sector clients are often inexperienced one-off clients (for example a local authority project). As such they tend to be more risk averse. They are often required to justify costs and safeguard funds. Private sector clients are typically a mix of experienced and partially experienced clients. Experienced clients are more likely to have management teams in place which will broaden the choice of procurement routes available to them. 13

However, this delineation between public and private sector clients is becoming less relevant. The introduction of Private Finance Initiatives to fund public sector projects, and the increase in joint ventures or additional funders for private sector projects, has resulted in the characteristics above being present in many projects regardless of the client sector. Cox and Townsend (Cox, et al., 1998a) have a more idealistic view of the client (and indeed the rest of the project team). They argue that practitioners need to adopt a way of thinking, rather than specific practices, to attain better management. In other words, clients must choose wisely from a range of tools and techniques for each individual set of circumstances. It is perhaps most noticeable in the experienced client sector that clients aspire to the type of project leader described by Cox and Townsend. The external drivers for inexperienced or public sector clients may make it more difficult to adopt the way of thinking described. Client needs or objectives It is important that the clients needs or objectives are defined at the outset of the project strategy to ensure that the systems chosen throughout the process are tailored to meet those objectives, however these objectives can be difficult to quantify. Latham (Latham, 1994) defined client wishes as: Value for money Pleasing to look at Free from defects on completion Delivered on time Fit for purpose

Supported by worthwhile guarantees Reasonable running costs Satisfactory durability

These are fairly broad objectives with language which is open to interpretation. Bennett and Flanagan (Bennett, et al., 1983) propose an expanded list of typical client requirements which could be a starting point to help a client define their objectives for a particular project.

A functional building, at the right price Quality, at the right price Speedy construction A balance between capital expenditure and long term ownership costs Identification of risks and uncertainty Accountability (particularly in the public sector) Innovative design/high technology buildings Maximisation of taxation benefits Flexibility to enable design to be changed A building which reflects the clients activities and image Minimisation of future maintenance Ability to keep any existing buildings operational during construction Involvement in and need to be kept informed about the project throughout its life

One of the weaknesses of this type of list however is that there is no typical client. A public sector owner-operator will have different requirements to a private sector owner-operator client which in turn will be different to a developer only client. The Commission for Architecture and the Built Environment (CABE) focus more on the design aspects of requirements. Their procurement guidance very much focuses on the process of agreeing a procurement strategy, and therefore identifies the need of establishing 14

the vision and objectives at the outset of a project, p and communicating these hese requirements appropriately (Commission for Architecture and the Built Environment, 2009). 2009) It is also clear that often, particularly particul with inexperienced clients, the perceived objectives at the outset of a project are different to the actual objectives which only come to light as the project progresses and perhaps there are constraints which prevent a particular objective from being achieved. The difference between en perceived objectives and actual objectives is demonstrated through the work of Hibberd and Djebarni. Djebarni (Hibberd, et al., 1996) They used a series of questionnaires to obtain information from clients and consultants relating to procurement choice and satisfaction with method chosen. Respondents were asked to rank the criteria below for importance, on a scale of 1 to 10. The original data can be found in Appendix 1. The ranking has been reversed for the purposes of illustration (i.e. (i.e. on the bar chart below, 10 is most important, 1 is least important)

Rank Mean

10

Figure 3 Client t Objectives (Hibberd and Djebarn Djebarni study)

The results ts showed that predictable cost, accountability and speed of completion are the most important criteria. Working relationships and transference of risk were least important, yet risk is often perceived as the being one of the most important criteria. More than 50% were satisfied with h the current procurement route and most were dissatisfied with the previous procurement route used. 15

The paper coincided with a five year period which saw an increase in Design and Build but many respondents were still using traditional methods, which would align with the results that predictability of cost and accountability were most important. Its difficult to draw conclusions from the results relating to time as the different procurement routes result in time being perceived in different ways. A study by Masterman (Masterman, 1994) uses a similar set of criteria asking sixty client organisations to rank them in order of importance. The results are summarised in the chart below. The original data can be found in Appendix 2.

Certainty of final cost Certainty of completion date Active involvement Lowest possible tender Min design and construction time Minimise risk Single point of contact Value for money High Quality/Innovative architecture Accountability Ability to change design 0 1 2 3 4 5

Mean value Private Inexperienced Secondary Private Experienced Secondary Public Experienced Secondary Private Part Experienced Secondary Private Experienced Primary Public Experienced Primary

Figure 4 Client objectives (Masterman study)

Predictability of cost, and certainty of completion date (which the study recognized is different to speed of construction) are the most important criteria, however accountability is most important to experienced clients. The Masterman survey aligns with the Hibberd and 16

Djebarni research in relation to risk as both surveys show this to be a low priority for clients. One of the gaps in the Masterman survey is that inexperienced clients in the public sector are not represented. It is unclear if this is due to the experience of the specific respondents, or if it was felt that this set of clients did not exist frequently.

3.3 Financial Objectives


The funding mechanisms for a project can have a significant impact on the procurement. If a project is to be publicly funded, the procurement process must comply with EU procurement directives which set out a legal framework for public procurement (Office of Government and Commerce, 2008). Their purpose is to open up the public procurement market and to ensure free movement of goods and services within the EU. Where the regulations apply, a contract must be advertised in the Official Journal of the EU (OJEU), and certain procedures must be followed before awarding a contract. If a private sector client is in a joint venture with another funder, the funder may dictate certain requirements of the procurement route, for example to ensure cost certainty. Cost certainty is often considered one of the important objectives of a project. Depending on the client and their experience there are different routes to achieving cost certainty. The perception seems to be that a lump sum single source route will provide the best cost certainty, but this is not necessarily the same as best value. Those clients most concerned with quality and value may choose a route which allows for significant client input, but does not allow for a fixed price at an early stage, such as Construction Management. This is not to say that cost certainty is reduced, just that cost certainty will increase as the design progresses. The introduction of schemes such as Private Finance Initiative (PFI) has led to an increased interest in running costs or whole life costing and a different way of procuring projects.

3.4 Method of organising design and construction


Effective management of the design process is a crucial factor in the success of a project. Latham (Latham, 1994) identifies a series of roles and tools required to achieve effective management.

A lead manager who acts as the main point of contact is essential. To achieve coordination of consultants, a design responsibility matrix is recommended. This is an interlocking matrix contained within the consultant appointments to define responsibilities, and coordination for each design item. Definition of scope split between consultants and specialist contractors is also crucial. It is important that the client understands the design proposals, and that there is formal sign off of all stages, but with sufficient flexibility to accommodate the commercial wishes of the client.

Within the contracts for the project there are common features which are desirable whatever form is chosen. A general duty to trade fairly, with specific requirements relating to payment. Clearly defined work stages, including milestones, or other forms of activity schedule. Pre-pricing of any variation (The NEC contract has some good mechanisms in place for this). An adjudication system which is independent of contract administration. 17

3.5 Risk Management


Whilst risk is shown above as one of the least important criteria, it continues to be perceived as the single most important factor in choosing a contract or procurement route among many organisations. This misconception could be the result of inexperienced clients, or could simply be a misuse of the term risk. Risk can be defined as the exposure to loss or injury as a consequence of uncertainty, or as the chance of an adverse event occurring. There has been considerable research on the area of risk management. One of the most important facts which need to be understood by clients and other parties involved in the procurement process is that risk cannot be eliminated. The management process should allow for risk to be reduced, controlled or transferred, but it cannot be ignored. Cox and Townsend (Cox, et al., 1998a) argue that a risk management process is one of the most important prerequisites for effective procurement of a project. Risk analysis involves the identification, estimation and evaluation of risk, and risk management could be considered as the formation of suitable responses to the risks analysed, through planning, resourcing, controlling, and monitoring. Masterman (Masterman, 2002) maintains that whichever route is chosen, the principle of allocating risk to the party most capable of dealing with it at the minimum cost should always be followed. For example, risk due to environmental factors could be retained by the client, and managed by ensuring that site investigations are completed prior to contract negotiations. On the other hand logistical risks are likely to be best managed by the contractor who can plan activities and develop contingency plans to account for potential risks. So, the question could be posed What is risk in the context of construction projects? Perry and Hayes (Perry, et al., 1985) identify a series of factors which cause risk in construction: Physical Financial Environmental Legal Design Political Logistics Operational Some of the risks identified above can be quantified, controlled or minimised through the risk management process. The impact of a risk can be measured as the likelihood of a specific unwanted event and its unwanted consequences of loss (Godfrey, 1996). Simply put: Impact of risk = likelihood x consequence. Godfrey (Godfrey, 1996) argues that risk and opportunity go hand in hand. He identifies that there is usually a commerical benefit, or added value from the risk control measures taken. For example, the decision to use a hoist instead of ladders may be taken to reduce the risk of people falling. The added benefit could be that the hoist increases mobility and therefore their productivity.

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There are three basic approaches to risk according to Cox and Townsend (Cox, et al., 1998a): 1. Qualitative identify the most significant risks and provide management with a focus for appropriate action 2. Pragmatic Quantitative both qualitative and quantitative aspects of the approach 3. Precise Quantitative attempt to quantify risk in exact terms (e.g. impact = likelihood x consequence) The appropriate approach is dependent on a set of circumstances. This selection matrix explains the proposed method of selection.

Risk Complexity/ Magnitude

High
Medium

Pragmatic Pragmatic/ Qualitative Qualitative

Quantitative/ Pragmatic Pragmatic Pragmatic/ Qualitative

Quantitative Quantitative/ Pragmatic Pragmatic

Low

Low

Medium Value of Project

High

Figure 5 Risk Matrix (Cox and Townsend)

If risks can be quantified in financial terms, it is possible to provide a more effective approach to cost management. In other words, rather than one large number to account for risk, there is more discipline to the estimating process, and a differentiation between how much an item should cost to construct, and how much is apportioned to the management of risk. The risk management process can also be used to establish project priorities (and identify the real value criteria), roles in the process, and number/type of packages. Key issues for the contract strategy can then be addressed such as:

Division of responsibility Terms of payment Appropriate allocation of risk

Basis for contractor selection Degree of client control/involvement

Once the risks are identified a process of prioritisation and management should be adopted. The Mace Approach (Cox, et al., 1998a) is reproduced below.

Consequence of Risk

High Low

Medium Priority High Priority Contingency Low Priority Ignore Low

Manage

Medium Priority Manage out High

Probability of occurrence
Figure 6 Risk Management - The Mace Approach

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Latham however links contract options with the transfer of risk, and defines who holds different risks dependent on procurement route. The routes are categorised differently in this document, so the equivalent terms are highlighted to the left.

Management

Traditional

Single Source

Figure 7 Contract Options (Latham, 1994)

Lathams view is that management contracts result in all the risk being held by the client. The central options can be broadly classified as Traditional with the client retaining a degree of risk. A package deal and Design and Build are the procurement routes which are likely to transfer a majority of the risk to the contractor.

3.6 Project Constraints


Project constraints can encompass many aspects including physical, programme, funding, legal, and political. The project constraints should be identified and considered at the project strategy stage when setting out the project objectives. Physical constraints these can range from site constraints such as limited access or unknown ground conditions to planning restrictions. The key to managing physical constraints is to ensure that unknown aspects are either investigated early in the process, or identified as potential risks within the risk management strategy.

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Legal/political constraints this is often linked to the funding mechanisms for the project. If a project is publicly procured it must comply with the EU procurement rules which will therefore have an impact on programme and selection criteria for the project team. If a funding mechanism involves a separate party it may be that that party places certain restrictions on the procurement process to safeguard investments. Programme some projects are dependent on project completion dates, or in more complex situations, windows of opportunity for construction (e.g. construction on existing school sites may require certain activities to be limited to school holidays). This may have a knock on effect of either prolonging a construction programme, or accelerating a programme to the detriment of a particular quality aspect, or at a financial premium.

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4. Limitations with existing procurement routes


Existing procurement routes have a variety of limitations depending on the situation to which they are applied. Each new procurement route developed is often trying to solve a particular inadequacy of the previous preferred route, but a holistic view of the requirements of the procurement route do not seem to be incorporated. Cox and Townsend (Cox, et al., 1998a) argue that the current practice of benchmarking is not appropriate, as the concept of sustainable business success is ultimately based on being in possession of an inimitable or non-replicable, or unique series of resources or capabilities. They categorise problems into three types, demand issues, supply issues and common issues.

4.1 Demand Issues


Low and discontinuous demand - Construction is a cyclical industry and therefore must deal with periods of low demand and high demand. Briscoe (Briscoe, 1988) describes the limitations of both periods. During a period of low demand a suppliers workforce may not be operating at full capacity, and whilst a firm will seek to adjust this, the process of reduction of workforce takes time. The result is more cut-throat bidding and an adversarial culture to try to recover costs. In contrast, during periods of high demand a supplier may not have sufficient workforce, and hiring new direct labour takes time. The result is more use of sub-contracting, and often a reduction in quality and expertise of labour. Masterman (Masterman, 2002) also identifies that the change from a philosophy of confrontation to one of cooperation can only be achieved where clients have a consistent and long term demand for construction services and where there is a coincidence of interest among the participants within the supply chain. Frequent changes in specification Latham (Latham, 1994) argues that there are too many changes introduced when a scheme is already underway. He argues that this stems from an inadequate brief from the client, which subsequently requires detailed changes as the client decides what they really want. Change at a late stage has a much greater cost and programme implications. For some projects this cannot be avoided e.g. for a speculative development a pre-let may be secured during the design or construction period which is likely to result in design changes being required. The procurement route ought to allow for this scenario if appropriate to the project. Inappropriate Selection Criteria Cox (Cox, et al., 1998a) uses the following quote to illustrate his point: There is scarcely anything in this world that some man cannot make a little worse, and sell a little more cheaply. The person who buys on price alone is this mans lawful prey. It seems that only recently, construction clients have realised that value for money is not necessarily secured by competitive tender for the lowest price. This can also be linked to the problems with low demand. For example during a period of low demand the contractor may cut costs to win a bid, but then provide a lower standard of service which may result in additional fee claims, less trust, and higher capital costs. Inappropriate allocation of risk Latham acknowledged that no construction project is risk free. The risks though can be managed, minimised, shared, transferred or accepted. The client may make unfair allocation of risk, for example imposing risks upon the contractor which are best carried by the client, or not providing proper re-imbursement for the risks carried by the contractor. This can lead to a more adversarial culture.

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4.2 Supply Issues


Poor quality Latham argues that this stems from the low barriers to entry in general contracting (a construction firm can be established with no qualifications or experience and only a small amount of capital). Inefficient methods of construction Briscoe (Briscoe, 1988) argues that inefficiency in the UK is due to lack of industrial building methods. Latham (Latham, 1994) is also quoted saying standardisation, prefabrication, modularisation can bring about productivity improvements and savings of 30-60% costs. The industry is now making moves to implement some of the recommendations related to prefabrication. Laing ORourke have made a public commitment to use of design for manufacture and assembly components (Laing O'Rourke, 2010). The goal is to achieve 70% use of elements produced through Design for Manufacture and Assembly (DfMA) by 2012. They expect to see an associated 60% reduction in on-site labour, and 30% reduction in site programme. Poor public image The construction industry has historically had a poor reputation with both clients and the public. Latham considers the problem, and attributes it to the industrys lack of ability to attract and retain high calibre personnel. He also addresses lack of diversity, particularly related to women. Whilst much has been done to improve quality, productivity and value for money, the industry needs to attract and retain competent people. Since the Latham report many initiatives have been developed, particularly in relation to improving the diversity of the workforce, however improvements seem to be slow. The first annual statistics report published by the UKRC (Kirkup, et al., 2010) identified that there has been an improvement in the percentage of females entering engineering studies, however in 2008, women still only made up 6.9% of registered engineering professionals.

4.3 Common Issues


Poor management Good organisation and management are vital to ensure a firms structure and systems are set up to achieve the highest possible productivity (Briscoe, 1988). This applies to all sides of the industry (clients, designers, contractors). Clients must understand the industry and criteria which are important to have in a contractor. Contractors must understand the constraints of a project to ensure the systems are set up to address the particular circumstances for that project. Inadequate investment The lack of investment in training, research and development has an impact on quality in the industry. On-site, the decline in level of skills is partly due to availability of cheap, unskilled and temporary labour which suits the cyclical demand nature of the industry, but creates a disincentive to invest in training and skilled labour. On the subject of Research and Development, Latham quoted evidence from CIC discussion document (Working Party of the CIC Research & Development Committee, 1994) UK spending on construction research and its dissemination is substantially below that judged necessary by a succession of authoritative studies. Adversarial culture This has been recognised as a problem for many years. Cox and Townsend reference (Cox, et al., 1998a) The Chartered Institute of Purchasing and Supply (CIPS) arguing that this problem is prevalent at all levels, and the primary causes are: Lack of clear contract strategy Inadequate planning Improper assessment and inappropriate allocation of risk Insufficient preplanning Inadequate selection and adjudication of tenderers 23

Traditional contracts leading to conflict Vicious claimsmanship circle Payment problems

Many of these aspects were discussed in the previous section as pre-requisites for forming a successful project strategy, but it appears the absence of them leads to an adversarial culture. Fragmented industry structure Various recessions have forced an end to vertical integration by contractors. Many main contractors no longer undertake work directly and traditional craftsmen are in decline. There has been an increase in labour only subcontracting, buying in materials, and plant hire. This has resulted in reduced training and the symptoms of the decline in skills discussed above. In addition the move away from traditional procurement routes has resulted in the designers being further fragmented, as consultants become more specialised, and the development of specialist sub-contractors continues. This increased volume of interfaces can lead to inefficiencies, and less trust amongst design parties. This ultimately leads to increased cost and reduced efficiency. Rowlinson (Rowlinson, et al., 1999) identifies this problem when describing the project team as small groups of professionals working in different locations, on specialist tasks which are all interdependent. Whilst some of the limitations, such as fluctuating demand are difficult to tackle, issues such as changes in specification, inappropriate selection criteria, and risk allocation are problems which can be tackled through the procurement process and education of clients. In addition issues such as public image and investment and research and development are industry wide problems which are being actively tackled. There has been much improvement in the way organisations advertise positions, and equality and diversity policies are often published by organisations wishing to attract a diverse workforce. Initiatives such as the Considerate Constructors Scheme (Considerate Constructors Scheme Ltd, 2010) are also seeking to improve the image of the industry with the wider public. The issue of a fragmented industry is likely to continue to be a problem, and therefore future procurement routes will need to embrace this to ensure the industry can take advantage of the specialist skills developing instead of this being a barrier to efficient design and construction.

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5. Trends in the UK
There is a wealth of analysis available for the decades up to the late 1990s by various authors however there is limited information currently available on the most recent decade. The Royal Institution of Chartered Surveyors (RICS) have completed UK wide surveys of contracts in use within the industry since 1985, with the most recently available editions being Contracts in Use in 2004, and Contracts in Use in 2007.

5.1 Contracts in Use


The RICS Contracts is Use surveys, whilst not capturing the whole industry, can be used to provide a useful comparison of contract use across the years. The summary tables of Contracts in Use for 2007 (Royal Institution of Chartered Surveyors, 2007) have been used to create the graphs below. The original data which documents the results from each survey since inception can be found in Appendix 3.

60 50 Percentrage use 40 30 20 10 0 1985 1987 1989 1991 1993 1995 1998 2001 2004 2007 Year Lump sum Firm BQ Lump sum D&B Remeasurement Approx BQ Management Contract Partnering Agreement Lump sum spec & dwgs Target contracts Prime cost plus fixed fee Construction Management

Figure 8 Methods of Procurement by number of contracts (2007)

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60

50

40 Percentrage use

30

20

10

0 1985 1987 1989 1991 1993 1995 1998 2001 2004 2007 Year Lump sum Firm BQ Lump sum D&B Remeasurement Approx BQ Management Contract Partnering Agreement Lump sum spec & dwgs Target contracts Prime cost plus fixed fee Construction Management

Figure 9 Methods of Procurement by value of contracts (2007)

It is important to note that these surveys only capture between 10 and 20% of the total value of new orders in the UK. In addition the 2007 survey captured approximately half the number of projects compared to previous years, but almost double the value of projects, therefore a greater number of large value projects are included in the 2007 results. This will inevitably distort the figures and make comparisons per year more difficult. There are a few trends which can be identified across the years, such as the rapid decline in the use of Bill of Quantities from the mid 90s onwards (most notable when reviewing by value) and an associated increase in use of Lump sum Design and Build. Management Contracting continues to decline, but is still in use. The introduction of Partnering agreements in 2001 has seen a steady rise, although is still a small percentage of the overall contracts used.

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5.2 Trends from Contracts in Use 2004


Concentrating specifically on the 2004 surveys (Royal Institution of Chartered Surveyors, 2004), some trends can be identified which may be associated with the boom period in construction in the early part of the decade. It is clear that Design and Build became the single most prevalent method since the previous survey in 1995, previously it was Bill of Quantities. Whilst the number of contracts did not change significantly since 2001, the change in percentage by value was very large (4.1% of contracts, but 43% of value). The survey also identified that Design & Build seemed to dominate in London and South East England. One of the reasons for this may have been the relative period of construction boom in the early part of the decade which saw lots of private sector projects come to fruition. There was little evidence of two-stage tendering which was perhaps a result of the average value of projects recorded, as two-stage tendering is more likely to be used in large scale projects. The continued decline of Management Contracting was evident, although there was still some use. It would suggest the slight increase in the late 1990s was a blip in the trend, but the reasons for this are unknown. The 2004 survey also recorded a drop in the use of JCT contract forms, and associated increase in use of the NEC suite of contracts. This trend is likely to continue with NEC becoming the contract form of choice for public sector projects, although anecdotal evidence suggests this will not become widespread due to the perception of procedural requirements. 77% of NEC contracts captured in the survey used target cost with activity schedule, and 19% lump sum with activity schedule. It is unlikely that this will be able to be identified as a trend as the options used will be very dependent on the individual client requirements and the current economic situation. One of the interesting aspects to note is a rise in the use of Partnering agreements. Partnering first emerged in the surveys in 2001, and increased for the 2004 survey. The survey appears to show an increase in negotiated contracts rather than competitive tender through a number of ways (Construction Management, Partnering etc). This may be relevant to the research area in the next section, although the scale of project is quite different. Whilst this survey provides some interesting data, the average project value captured was 1.3M which is significantly lower than the proposed area of research in the next section, therefore it is unlikely that any results can be directly compared to each other.

5.3 Trends from Contracts in Use 2007


The 2007 survey (Royal Institution of Chartered Surveyors, 2007) is the most recent data available in this area, and will have captured projects just prior to the major recession in 2008/2009. Whilst the report is useful to provide an overview, there is a significant decline in the number of responses which will inevitably reduce the opportunity to identify trends. The interesting points which can be identified include the following:

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Smaller projects continue to be dominated by Plan and Specification procurement, and Lump-sum contracts, whereas larger projects prefer Construction Management or a form of Design and Build. The use of Bill of Quantities is still in decline with just 13% by value using this method of procurement, compared to 23% in 2004. The use of negotiated methods of procurement showed a further increase with Partnering agreements increasing to 15% by value which is big jump from the 2004 results. There was also an increase in two-stage tendering which may partly be due to the type of size of projects captured in the 2007 survey compared to previous years. It is therefore too early to tell if there will be a major impact on the market.

The 2007 survey confirms the continued decline of Management Contracting. Construction Management continues to be most prevalent for larger projects, which aligns well with the data captured in the next section. The use of contract types clearly shows a slow switch from JCT to NEC. The use of JCT shows a further decline from the 2004 figures. Design and Build with standard contract form is most popular, with Quantities form second. The intermediate form is more prevalent for smaller projects. The impact of the Major Projects form is also starting to be seen. NEC suite was strongly supported by Egan and Latham, but has taken a long time to become common use. The contract is now firmly embedded in the industry and the results of the survey clearly show an upward trend in use of NEC over the last six years. One of the concerns though will be industry familiarity with the NEC form and the potential for inappropriate use of options which is likely to emerge in the coming years. The 2007 survey overall reinforces the dominance of Design and Build in the middle market, and that JCT still dominates as a contract type, but the alternative forms are growing in use, particularly NEC.

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6. Trends in the London commercial sector


In order to analyse trends in the construction industry a confined research pool has been chosen. Using data from the projects such as size, cost, construction period it may be possible to identify some characteristics of particular procurement routes.

6.1 Criteria for selection


The chosen projects meet the following criteria: New build project Central London location Project completion between January 2000 and December 2010 Construction cost over 20 million Major use commercial There was some difficulty y in gaining accurate data for projects projects due to confidentiality issues. issue For this reason, only 23 projects were identified which w satisfy the criteria above and for which information was available. The information for the project was collated directly y from the clients interviewed in Section n 7, or from a leading cost consultant who ma anages this information for those clients. . The source data is available in Appendix 5. It should be noted that as the data is from a number of different sources, there may be some inconsistency in the way in which data such as cost or area was reported to the author.

6.2 Trends in the commercial sector


Figure 10 shows the distribution of procurement routes across the full data set.

13% 26% Two stage D&B 13% Design and Build Two stage Traditional 5% 4% JCT 98 with CDPS Construction Management CM bespoke

39%

Figure 10 Method of Procurement across ross ten years

This shows that Construction Management was the most popular route from 20012001-2010, with use on almost two thirds of the projects. Design and Build was also popular with use on a 29

quarter of the projects. Whilst this shows an interesting split, , it is likely to be specific to the commercial sector. It is also possible to look at the use of different routes across across the ten year period. Figure 11 compares the use of procurement routes per year.
4

Number of projects

Management Single Source

Traditional

0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Year of completion

Figure 11 Method of Procurement per year.

The results of 2003, 2004, and 2009 should be discounted as there was only one project in the data set completed ompleted in each of these years. years. There appears to be an increase in use of Design and Build during the later part of the decade, and a reduction in use of Construction Management, although with only a few projects completed in each year this may not be representative of the wider industry. This may be attributed to decline in the economy, and perceived need to gain cost certainty tainty early in the procurement process.

6.3 Cost and Time Analysis


The most useful comparisons which are likely to be of interest to a client are the cost of a project and time to construct the project. project Figures 12 shows cost of construction n per square foot, and Figure 13 shows time to construct per square foot and is referenced to the procurement route used.

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300.00 250.00 Cost (/sq ft) 200.00 150.00 100.00 50.00 0.00 Two stage Traditional JCT 98 with CDPS Two stage D&B Two stage D&B Design and Build Design and Build Two stage D&B Construction Management Construction Management Construction Management Construction Management Construction Management Construction Management Construction Management Design and Build CM bespoke CM bespoke CM bespoke CM bespoke CM bespoke CM bespoke Construction Management Construction Management

Project Procurement Route

Figure 12 Cost of Construction (/sq foot)

The cost of construction for each project varies. The cost per square foot ranges from approximately 150 per sq ft to almost 280 per sq ft. This large range is seen within the projects which were all procured through Construction Management. The large range which cannot be attributed to choosing a particular procurement route suggests there are other factors which influence the cost of the project, regardless of how it is procured. This could be factors such as complexity, quality required, or project constraints similar to those identified in section 3. As the data is also from a number of different sources, it is also possible that different costs have been included within the results which are not always considered to the shell and core costs. The results for these particular projects suggest that Construction Management (including CM bespoke) can achieve the lowest costs with the six lowest costing projects being procured through a form of Construction Management, but also highlight that other factors will influence the cost of a project.

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9000 Construction rate (sq ft/week) 8000 7000 6000 5000 4000 3000 2000 1000 0 JCT 98 with CDPS Construction Management Construction Management Construction Management Two stage Traditional CM bespoke Design and Build CM bespoke Design and Build Design and Build Construction Management Two stage D&B Two stage D&B CM bespoke Construction Management Construction Management CM bespoke Construction Management Two stage D&B CM bespoke Construction Management Construction Management CM bespoke
Project Procurement Route

Figure 13 Construction Rate (sq foot/week)

The rate of construction varies significantly within each type of procurement route. The rate of construction for Two Stage Traditional and JCT with Contractor Design Portions will be discounted as these include only one project and are not necessarily representative. The remaining results suggest that Construction Management and Two Stage Design and Build achieve a similar construction period. Design and Build (including two stage) could be considered the best performing route in terms of construction period, with most projects in the data set achieving almost 5000 sq ft per week. One of the benefits of Design and Build is often considered to be that the contractor has more control over the design and can therefore choose the optimum solutions to maximise on site efficiency, however the results are fairly inconclusive for this analysis.

6.4 Further analysis required


One of the difficulties with analysing the results in such a confined way is that often the balance between design requirements and construction requirements are not considered. It is not possible to ascertain from this data set whether there is a significant difference in the overall length of project. For example Construction Management will overlap the design and construction period, giving programme benefits which are not apparent in simply analysing the construction rate in isolation. The information on the stage at which each project was procured as Design and Build was not available which may also have an effect on both cost and construction rate. There does not seem to be any significant correlation between construction period and cost of construction which might have been expected, and in fact the construction period seems to vary much more widely than the cost of construction. Its likely that many other factors 32

influence the construction period such as site constraints, the proportions of the building, and the inclusion of significant substructure works. The results whilst not showing any conclusive trends broadly show that the procurement route does not have a significant effect on cost, but they suggest that Design and Build may have significant programme savings. There must therefore be other reasons for many projects being procured through a Construction Management Route. The client interviews in section 7 offer some insight into this apparent anomaly.

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7. Client opinion
As part of this research, clients in the London commercial sector were interviewed to gain their opinions on procurement routes. The author used industry contacts to set up meetings with five of the major developers who are active in the London commercial building market. For each client body, individuals who fulfil the Project Director role of commercial projects were interviewed (with the exception of Client Interview 4). The following questions were posed to each participant: 1. Does your organisation have a specific procurement strategy across all projects? 2. Given the current downturn in the market have you adjusted your procurement strategy? 3. How do you perceive the allocation of risk within procurement? 4. Where do you see the design portion best sitting? 5. Do you have preferred contractors you work with? 6. Do you have a standard contract agreement for all projects? 7. What are your thoughts on capital costs against running costs (whole life costs)? 8. What are your thoughts on sustainable strategies? Does your organisation have a strategy, and are you willing to pay more for sustainable design? 9. What are your thoughts on the use of off-site manufacture? The individual interviews can be found in Appendix 4, however some of the more interesting similarities and differences are highlighted in this section. It is important to note that each of the clients interviewed would be considered an experienced private client, and therefore the opinions and trends identified are specific to this client type.

7.1 Procurement strategies


Most interviewees had a preferred procurement route which appeared to be about familiarity of the process and specific requirements, however the preferred route differed between clients. The preferred routes identified by interviewees were either Construction Management or lump sum Design and Build. Only one interviewee mentioned a procurement route other than Construction Management or Design and Build and this organisation seemed to take a more individual approach to each project. Those with a preference for Construction Management tended to have a preference for control over the process and had an experienced client management team, or employed a third party to provide management services. Those with a preference for Design and Build discussed cost certainty and this was usually identified as the main reason for choosing this route.

7.2 Market trends


All interviewees concluded that whilst they had a preferred procurement route, market conditions can influence the route chosen for a specific project. Those with a preference for Construction Management tended to choose Design and Build only if market conditions made it a favourable option. One interviewee gave the example of a switch to Construction Management because the market conditions were very good for contractors, who as a result were quoting excessive lump sum prices which did not represent value for money.

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One interviewee felt that market conditions indirectly affected the choice of procurement route. For example the current downturn has required increased use of external funders, many of whom are more risk averse than developers and therefore insist on a lump sum agreement.

7.3 Risk allocation


The subject of risk allocation raised some interesting debate, however it is difficult to draw comparisons on this topic. The author suggests that there is the common misconception when discussing risk, as identified in section 3 which is also apparent in some of the interviews. The authors impression was that interviewees with a preference for Construction Management had quite a considered approach to risk management. The approach seemed to be that by retaining control of the process and having direct contact with trade contractors. This helped to avoid escalation of potential problems and early identification of new risks. This heavy involvement was more likely to enable the client to manage or reduce the impact of the risks identified. One of the interviewees stated that risk doesnt go away. This is an important message that all client organisations ought to understand. This same client also maintains that the client cant remove time risk. Whilst financial penalties can be levied against the contractor, ultimately the client will still have to suffer the time delay. Those interviewees with a preference for Design and Build consider this approach more appropriate to reduce risk to the client and transfer it to the contractor. The same interviewees identified some of the risks with Construction Management such as direct contracts with trades. If a particular trade contractor goes out of business the client must deal with the losses and the time and costs of the process to procure a new trade contractor. One interviewee stated that for large and complex projects the risk can be too uncertain to place a reasonable value against it in a lump sum agreement, therefore in these situations it would be best to choose a Construction Management route. Two interviewees identified two-stage tendering as an effective approach to risk management. The use of a pre-construction agreement and tendering of the major packages in the first stage can reduce the price allocated to risk for the final contract Those interviewees with a preference for Construction Management tended to have concerns in relation to risk within a Design and Build route due to the loss of control. One identified that the loss of direct contact with trades meant that problems were not identified early and often escalated significantly before ever reaching the client. The interviewee felt that the Design and Build route was prohibitive to good risk management. Most of the interviewees identified Construction Management as a better route for managing change regardless of their preference for a particular route.

7.4 Preferred contractors


Whilst not explicitly stated in all cases, the prevalence for good working relationships was clear. Three interviewees confirmed that a large part of the selection process involved assessment of the actual project team proposed by a contractor. This aligns with the views of Walker (Walker, 1995) who maintains that it is the relationship between team members and their subsequent performance that is the most significant factor in determining project success.

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It is however contradictory to the results of the some of the analysis by Hibberd and Djebarni (Hibberd, et al., 1996) referenced in section 3.

7.5 Use of contracts


The only real trend which could be identified was that all organisations interviewed had developed a bespoke contract which is a standard for them, but not necessarily an industry standard form. Some used a modified version of a standard form such as JCT, others had entirely bespoke contracts which have been developed over the years.

7.6 Design stages


A preference for design responsibility seems very much related to the quality aspects of a project. Those with a Construction Management preference identified that this route was good as the design team were under direct control of the client for the whole of the process. Those with a preference for Design and Build identified similar requirements, with one interviewee stating that finishes should be designed as fully and completely as possible prior to contract to retain as much control as possible. It is likely this similarity across all interviewees is due to the fact that the finishes and aesthetics of a building are a major factor in attracting tenants in the commercial sector.

7.7 Sustainable design and cost


All interviewees agreed sustainable design was important and that the procurement route did not adversely affect incorporation into design. Opinion on what contributed to sustainable design varied depending on the client. Some of the interviewees highlighted the issue that sustainable strategies are not necessarily measured in an appropriate way and that the label can be a selling point, but not necessarily a positive contribution. One interviewee summarises this by confirming that sustainable strategies should only be included if they actually contribute and are commercially viable. The same interviewee also had some specific ideas relating to sustainable strategies such as minimising energy before looking at renewable sources etc. Legislation was also indentified by some of the interviewees as being the most appropriate way of including sustainable strategies in projects. Regardless of client type (owner operator, developer only etc) all interviewees concluded that running costs were as important as capital costs, this is partly due to actual costs to the client and partly due to the need to market a building to tenants. What is interesting is that most organisations are only now starting to monitor energy usage for analysis. It is likely that in five or ten years there will be a significant pool of data available in order to conduct more research into this area.

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7.8 Off-site manufacture


Generally interviewees were positive about the use of off-site manufacture and its benefits, from a cost, quality and programme perspective. One interviewee suggested it was important that designs were developed to not preclude the use of off-site manufacture, rather than specifically trying to incorporate certain products at an early stage. One interviewee praised the Construction Management route for enabling product development through projects and provided examples from previous projects where the use of Construction Management enabled the development with a sub-contractor of off-site manufactured products which suited the specific needs of the client. These products were subsequently rolled out on a number of projects providing significant savings in time, cost, and a reduction of waste materials.

7.9 Summary
The purpose of conducting structured interviews with clients within a similar sector was to understand the drivers behind how buildings are procured from the clients perspective and identify if there were any similarities with the information extracted as part of the literature review in sections three and four. A number of themes can be identified: Knowledge of the process it was clear from most of the interviews that each organisation choose to have a preferred route which individuals were familiar with and therefore able to use to achieve the best outcome for the project. Risk management whilst the approaches to risk management varied between different clients, it was clear that there is a risk management strategy which influences the procurement route chosen. In general terms, those clients most concerned with cost certainty tended to choose the lump sum Design and Build route, choosing to move to contractor design at a relatively late stage (usually RIBA design stage D or E). Those clients most concerned with quality and control tended to choose Construction Management ensuring maximum client involvement, but an acknowledgement that the client retains more of the risk on the project. Programme as most clients choose the Construction Management or Design and Build route, there was little discussion about programme benefits. One client still occasionally used traditional procurement, however stated this was specific to certain circumstances and is only viable when programme considerations are not critical. Market influence all clients identified that regardless of the preferred route, the market conditions can have an influence on the chosen route for a project. For example in a period of high demand it may not be possible to achieve a reasonable lump sum price as the contractor will attach a large price to the risk portion of the cost, in such cases Construction Management may be the only available route to enable to client to obtain value for money. Conversely in a period of low demand, a client who normally uses Construction Management may choose lump sum Design and Build to reduce risk associated with trade contractors going out of business and to take advantage of lower bids as a result of market conditions. One client emphasised that whilst it is prudent to take advantage of market conditions, it is important that the supply chain is treated fairly to maintain good working relationships and avoid deterioration into the adversarial claim culture. This is an important point for procurement routes generally. Only by treating all parties fairly, can a project have any chance of a successful outcome.

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8. Conclusions and recommendations for the future


8.1 Procurement history
The form of procurement routes have changed significantly from 1945, continue to develop today and are likely to continue to do so. Prior to the Second World War most construction projects were procured under a traditional form. Post-Second World War, during a period of sustained economic growth, the use of negotiated tenders and Design and Build emerged. Over the years new or modified procurement routes have been developed primarily to solve the short comings of the previous route in use. There are now four broad categories for procurement, but with many variations within each category. All are in use to varying degrees, but some have fallen in and out of favour depending on the trends within the industry during a specific time. The most significant overhaul of the industry and how projects are procured could be attributed to two main aspects. Firstly, the emergence of the experienced developer client and secondly a desire as an industry to tackle the major problems identified in government reviews such as Latham and Egan in the 1990s. Latham and Egan reports have been hailed as the most significant reports on the change required within the industry in recent years. These reports, while focusing on the supply chain in the industry, identify a series of significant challenges in construction which need to be addressed.

8.2 Project strategy


A number of pre-procurement requirements were identified and discussed in section 3. The project strategy encompasses these requirements and includes setting roles and responsibilities within the project team and ensuring a risk analysis and management procedure is in place. If the potential risks can be identified and a management strategy put in place which is open and fair to all parties, then there is more chance of a project team as a whole being able to tackle the risks if they arise.

8.3 Analysis in the commercial sector


There has been a general move away from traditional procurement in which the design and construction phases are entirely separated, although this is still in use on some projects. There have been phases when routes such as Management Contracting have been in favour with the industry generally, but these seem to have been relatively short-lived trends. The data used for analysis in this thesis focused primarily on commercial office buildings in central London. The most commonly used routes for this sector are Construction Management and Design and Build. There is little evidence that these routes are varied for particular projects and in fact, knowledge of a system appears to be the overriding factor when choosing which route to adopt. Each experienced client had a preferred method of procurement and would only vary from this route for a specific set of circumstances. When Construction Management was the preferred route, this was typically because of the ability to have control over the process and therefore quality of design and construction. It 38

was also suggested that this is the best route for particularly large and complex projects which need a lot of front end design. However it was identified as a route which required experienced clients willing to manage risk. When Design and Build was the preferred route this was typically because of the need for cost certainty and some transfer of risk. It seems to be a good value route when demand is lower, but needs to be balanced with a fair price for all those involved.

8.4 Market influence


There is some debate as to whether market conditions influence the choice of procurement strategy. The interview results in Section 7 would suggest that it does. For example a client who usually chooses a Design and Build route, may be forced in times of upward market trends to change strategy and adopt an alternative approach in order to agree acceptable cost for the project, as with the supply side in demand they can apportion a high cost to risk within this procurement route which the client would have to pay. Conversely in times of downward market trends, the client who generally chooses Construction Management may choose to switch to the Design and Build strategy, firstly to take advantage of the competitive market, but also to guard against risk of many smaller trade contractors going out of business. Unfortunately market conditions all too often result in an unfair agreement for one party or the other. Some of the limitations highlighted in Section 5 such as loss of skilled labour, cut throat bidding leading to reduced quality and an adversarial culture are very much related to the problems of a cyclical industry.

8.5 Industry problems to be addressed


Fragmentation of the industry is a theme which has been discussed by authors such as Latham (Latham, 1994), Cox and Townsend (Cox, et al., 1998a), Masterman (Masterman, 2002). However a desire to make the industry less fragmented is somewhat unrealistic considering the way in which the construction industry has evolved over the last 20 years. The decline of traditional procurement has further fragmented the design process and the introduction of Design and Build has blurred the lines of design responsibility even further. Whilst it is not appropriate that we return to the traditional forms of procurement and try to stop the evolution of the industry, it is important that this newer structure of construction projects team is recognised and the procurement routes are modified accordingly. For example if the use of contractor design portions are to be utilised, the lines of responsibility need to be clearly defined at the outset and the contractor should be involved in the design process at the appropriate stage to ensure constraints which result in inefficient design are not imposed. Training within the industry was also tackled as an issue by Latham (Latham, 1994), Cox and Townswend (Cox, et al., 1998a) and others. This is linked to the issue of a fragmented industry, but is also affected by wider social and economic matters. Latham identified that there was a major problem with attracting and retaining the best in the industry. One of the key successes of a project team are individuals within client bodies, design teams, and construction companies who excel at managing the process required, regardless of the route chosen. There has been a lot of work in the last ten years to improve the diversity of the industry. Many companies have a diversity team and the introduction of role models and specific events to attract young people into the industry have emerged. This can only serve to improve the construction industry, but it will take time to see the results.

39

The key to improving the industry may be to tackle the problems identified above during times of upward market conditions when perhaps many parties can see the benefits.

8.6 Conclusions
The conclusion that may be taken from this thesis is that there is no best practice solution for procurement of construction projects. Cox and Townsend (Cox, et al., 1998a) are very much of this view, but for slightly different reasons. Their argument is that the essence of better practice, is the ability to know the full range of tools and techniques that are available to allow individuals (or companies) to leverage their business position effectively. They argue that for every project there is a different set of circumstances for which a particular procurement route will achieve desirable results. Rowlinson (Rowlinson, et al., 1999) is also clear that the view that a best solution exists can be detrimental to the process. All key issues and participants need to be defined before a suggested procurement route can be devised. In fact, whilst the author agrees with the theory that there can only be better practice, it is clear from the client interviews that knowledge of a process, whatever that process is, seems to be the simplest way to achieve the best outcome for a project. Whilst the private developer client appears to have settled on a process which is successful, it would be desirable if those projects with a one off client, particularly those in the public procurement sector could take some of the ideas of the experienced clients and put them into practice to achieve successful projects which represent value for money. It is likely that procurement routes will continue to develop and change as the industry does, and that there will never be a perfect formula which works for every project. Only by understanding procurement routes, establishing an experienced project team and ensuring fair trading mechanisms for all parties can we begin to improve the image of the industry by producing successful, value for money projects in a non adversarial atmosphere. It is important that some of the wider industry issues identified above are tackled to ensure that procurement routes develop in a way which improves the industry as a whole.

40

Bibliography
Bennett J and Flanagan R For the good of the client [Journal]. - [s.l.] : Building, 1983. Bennett J. [et al.] UK and US Construction Industries: A comparison of Design and Contract Procedures [Report]. - London : Surveyors Publications, 1979. Briscoe G The Economics of the Construction Industry [Book]. - [s.l.] : Mitchell/Chartered Institute of building, 1988. British Property Federation Manual of the BPF System for Building Design and Construction [Report]. - London : British Property Federation, 1983. Building Economic Development Committee Faster Building for Commerce [Report]. London : National Economic Development Office, 1988. Building Economic Development committee Faster Building for Industry [Report]. London : National Economic Development Office, 1983. Building Economic Development Committee The Public Client and the Construction Industries (The Wood Report) [Report]. - London : National Economic Development Committee, 1975. Central Council for Building Works The Placing and Management of Building Contracts (The Simon Report) [Report]. - London : HMSO, 1944. Commission for Architecture and the Built Environment Client Briefing: Agreeing a Procurement Strategy [Report]. - London : Commission for Architecture and the Built Environment, 2009. Commission for International Building The International Commission for Building [Conference] // W92. - 1992. Considerate Constructors Scheme Ltd [Online] // The Considerate Constructors Scheme. Considerate Constructors Scheme Ltd, 2010. - http://www.ccscheme.org.uk/. Constructing Excellence Demonstrations | Introduction [Online] // Constructing Excellence in the Built Environment. - 28 February 2010. - 23 April 2011. http://www.constructingexcellence.org.uk/resources/demonstrationprojects/default.jsp. Cox A and Townsend M Stategic Procurement in Construction [Book]. - London : Thomas Telford, 1998a. Cox A. and Thompson I. Constructing for Business Success [Book]. - London : Thomas Telford, 1998b. Economic Development Committee for Building Action on the Banwell Report [Report]. London : National Economic Development Office, 1967. Egan J. Rethinking Construction [Report]. - London : HMSO, 1998. Godfrey P S A guide to Systematic Management of Risk from Construction [Report]. London : CIRIA, 1996. Hibberd P. and Djebarni R Criteria of Choice for Procurement Methods [Conference] // Cobra '96. - University of the West of England : [s.n.], 1996. Kirkup G [et al.] Women and men in science, engineering and technology: the UK statistics guide 2010 [Report]. - Bradford : The UKRC, 2010. Laing O'Rourke Infoworks, Issue 2 [Online] // Innovation Focus. - Laing O'Rourke, 2010. http://www.infoworks.laingorourke.com/Issue1/Pages/innovation.aspx. Latham M. Constructing the Team [Report]. - London : HMSO, 1994. Masterman J. W. E A study of the bases upon which the clients of the construction industry choose their building procurement systems [Report]. - University of Manchester : unpublished PhD Thesis, 1994. Masterman J.W. E. Introduction to Building Procurement Systems [Book]. - London : [s.n.], 2002. Ministry of public building and works The Placing and Management of contracts for building and civil engineering work (The Banwell Report) [Report]. - London : HMSO, 1964. Ministry of Works Report of the Working party on the Building Industry (The Phillips Report) [Report]. - London : HMSO, 1950. Ministry of Works Survey of problems before the construction industry (The Emmerson Report) [Report]. - London : HMSO, 1962. 41

Morris P W G The management of projects [Book]. - London : Thomas Telford, 1994. NEDO Construction for Industrial Recovery (Graves Report) [Report]. - London : H.M.S.O, 1978. NEDO Thinking about building - a successful business consumer's guide to using the construction industry [Report]. - London : Building Economic Development Committee, 1985. Office for National Statistics New Orders in the Construction Industry, Additional Annual Tables 2010 [Document]. - [s.l.] : Office for National Statistics licensed under the Open Government Licence v.1.0., 2010. Office of Government and Commerce EU Procurement guidance, Introduction to the EU procurement rules [Report]. - Norwich : Office of Government and Commerce, 2008. Olayinka R and Smyth H Analysis of Types of Continous Improvement: Demonstration Projects of the Egan and Post-Egan Agenda [Conference] // COBRA. - Atlanta : Royal Institure of Chartered Surveyors, 2007. Perry J G and Hayes R W Risk: A guide to the systematic management of risk from construction [Report]. - London : CIRIA, 1985. Rowlinson S and McDermott P Procurement Systems, A guide to best practice in construction [Book]. - London : Construction Industry Board, 1999. Royal Institution of Chartered Surveyors Contracts in Use [Report]. - London : RICS, 2004. Royal Institution of Chartered Surveyors Contracts in Use [Report]. - London : RICS, 2007. Slough Estates Industrial Investment. A case study in factory building [Report]. - London : Slough Estates, 1976. Walker D T H The influence of client and project team relationships upon construction procurement performance [Journal]. - [s.l.] : Journal of Construction Procurement, 1995. Vol. 1. Working Party of the CIC Research & Development Committee Private Funding for Construction Innovation and Research - Options for a National Initiative, a Discussion Paper [Report]. - [s.l.] : CIC, 1994.

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Appendix 1 Data from Criteria of Choice for Procurement Methods

43

Client Objectives (Hibberd and Djebarni study)


This base data was used to create Figure 2, page 15. For the ranking in this table, 1 is the most important, 10 is the least important. The ranking has been reversed in Figure 3, page 15 from those shown below to aid graphical representation. Selection Criteria Accountability Design input Dissatisfaction with previous procurement process Knowledge of process Predictable cost (predictability of cost) Punctuality Speed in commencement (Total design time) Speed in completion (Total construction time) Transference of risk Working relationships Mean 6.99 4.83 5.58 Rank 2 7 5

5.37 7.08 5.79 4.98 5.82 4.12 4.44

6 1 4 8 3 10 9

(Hibberd, et al., 1996)

Appendix 2 Data from A study of the bases upon which the clients of the construction industry choose their building procurement systems

44

Client Objectives (Masterman Study)


This base data was used to create Figure 4, page 16. The mean values only have been used to show order of importance of client objectives, with the highest mean values representing the most important objective.
Clients needs Public Experienced Primary Mean/Rank 5.00 =1 5.00 4.50 4.25 4.25 4.25 4.25 3.75 =1 3 =4 =4 =4 =4 =8 Public Experienced Secondary Mean/Rank 5.00 =1 4.00 5.00 5.00 5.00 3.00 3.00 3.00 6 =1 =1 =1 =7 =7 =7 Private Experienced primary Mean/Rank 4.00 =4 3.00 4.00 5.00 4.00 3.00 4.00 5.00 =10 =4 =1 =4 =10 =4 =1 Private Experienced Secondary Mean/Rank 3.50 =6 4.45 4.17 3.55 4.17 3.00 3.08 3.50 1 =2 5 =2 10 9 =6 Private Part Experienced Secondary Mean/Rank 4.35 3 3.69 4.18 3.75 4.83 3.54 4.14 3.46 7 4 6 1 8 5 9 Private Inexperienced secondary Mean/Rank 4.62 1 3.00 3.59 3.94 4.27 3.59 3.75 3.88 10 =7 4 3 =7 6 5

Certainty of final cost Accountability Value for money Lowest possible tender Active involvement Single point of contact Minimise risk Min design and construction time Certainty of completion date High Quality/Innov ative architecture Ability to change design

3.75

=8

5.00

=1

5.00

=1

4.17

=2

4.46

4.35

3.25

10

2.00

11

3.50

=8

2.67

=11

3.15

11

3.13

2.75

11

3.00

=7

3.50

=8

3.17

3.29

10

2.89

11

(Masterman, 1994)

Appendix 3 Data from Contracts in Use 2004 and Contracts in Use 2007

45

Methods of Procurement by number of contracts


This table is taken directly from the published data referenced, and used to create Figure 8, page 25. Type contract of 1985 % sum 42.8 47.1 3.6 2.7 2.1 1.7 1987 1989 % % 35.6 39.7 55.4 3.6 1.9 2.3 1.2 49.7 5.2 2.9 0.9 1.4 0.2 1991 % 29.0 59.2 9.1 1.5 0.2 0.8 0.2 1993 % 34.5 45.6 16.0 2.3 0.3 0.9 0.4 1995 % 39.2 45.6 11.8 2.1 0.7 1.2 1.3 1998 % 30.6 43.7 20.7 1.9 0.3 1.5 0.8 2001 % 19.6 62.9 13.9 1.7 0.2 0.6 0.4 0.6 2004 % 31.1 42.7 13.3 6.0 2.9 0.2 0.2 0.9 2.7 2007 % 20.0 47.2 21.9 4.5 1.7 0.5 0.7 1.1 2.4

Lump Firm BQ Lump sum spec & dwgs

Lump sum D&B Target contracts Remeasurement Approx BQ Prime cost plus fixed fee Management Contract Construction Management Partnering Agreement

(Royal Institution of Chartered Surveyors, 2007)

Methods of Procurement by value of contracts


This table is taken directly from the published data referenced, and used to create Figure 9, page 26.

Type contract

Lump Firm BQ Lump sum spec & dwgs Lump sum D&B Target contracts Remeasurement Approx BQ Prime cost plus fixed fee Management Contract Construction Management Partnering Agreement

of 1985 % sum 59.3 10.2 8.0 5.4 2.7 14.4 -

1987 % 52.1 17.7 12.2 3.4 5.2 9.4 -

1989 % 52.3 10.2 10.9 3.6 1.1 15.0 6.9 -

1991 % 48.3 7.0 14.8 2.5 0.1 7.9 19.4 -

1993 % 41.6 8.3 35.7 4.1 0.2 6.2 3.9 -

1995 % 43.7 12.2 30.1 2.4 0.5 6.9 4.2 -

1998 % 28.4 10.0 41.4 1.7 0.3 10.4 7.7 -

2001 % 20.3 20.2 42.7 2.8 0.3 2.3 9.6 1.7

2004 % 23.6 10.7 43.2 11.6 2.5 <0.1 0.8 0.9 6.6

2007 % 13.2 18.2 32.6 7.6 2.0 0.2 1.0 9.6 15.6

(Royal Institution of Chartered Surveyors, 2007)

Appendix 4 Client Interviews 2011

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Client Interview 1: Date of interview: March 10th 2011, 9am Does your organisation have a specific procurement strategy across projects? Yes, Construction Management (CM) is our default procurement route. However the funder for a project can sometimes influence the chosen procurement route. For example, on recent projects funders have been more likely to request a guaranteed maximum price (GMP). We have on some occasions managed to persuade the funders that this is not the route to choose. We do this by comparing the GMP with the CM price at each stage. If they diverge in such a way that the CM price is significantly lower than the GMP for early packages this can be persuasive. Given the current downturn in the market have you adjusted your procurement strategy? We occasionally use design and build, which is a completely market driven decision. We will use the market to gain the best value for money for a project. Construction Management is still the preferred route in the current market however it is only sensible if the CM companies still breakeven. Our strategy is to ensure the supply chain is treated fairly to safeguard the project. (i.e. if the CM doesnt breakeven there is potential for a lower level of service). How do you perceive the allocation of risk within procurement? Risk doesnt go away, its just transferred between parties. Ultimately as a client we cannot remove time risk. Through the contract this risk could be transferred to the contractor, however if there is a delay, whilst the contractor may have to pay financial penalties, the client still suffers the time delay. Where do you see the design portion best sitting? Our preference is to retain the design team under direct contract as the CM route. If design team are novated under D&B its likely that any further design work required (e.g. changes for fit-out if a tenant is secured) come at a cost premium A word of warning though: CM is only suitable for the experienced client. A large degree of client input is required due to direct contracts with the different trade contractors. The client therefore needs to have good knowledge of the industry, processes etc. Do you have preferred contractors you work with? Yes, we have 3 preferred CM contractors. For us its all about the project team, not necessarily competitive tender. We may ask two or three contractors to put a proposal forward for a project, but what is important is seeing the proposed project team in action. We like to use those we know from previous projects, or for newer teams review them in action on a current project. Do you have a standard contract agreement? We have basic agreements in place with all preferred contractors which will be adjusted as necessary for the project. Legal appointments are 90% agreed between the parties as standard. There are frequently some additional requirements added to satisfy the funder, or account for a tenant. We generally use the Major Project form of contract. What are your thoughts on capital cost against running (whole-life costs?) Both are important but to understand why you need a bit of history.

We were an owner-developer with subsidiaries which dealt with tenant fit out, and facilities management respectively until the recession of mid 1990s. At this time the subsidiaries and most properties were sold off to deal with the recession. We have always had an interest in the long term running costs, and this has been retained although we are no longer owners. We often use the facilities management organisation to provide a review at Stage D design to ensure the FM requirements of a building have been incorporated. Post Occupancy Evaluation (POE) would be an ideal way to gather info, but it doesnt seem to happen enough in the industry. Agreed it is much harder to complete POE unless you are the owner of the building. For those which we do own were completing POE on both a technical and social level. What are your thoughts on sustainable strategies? Does your organisation have a strategy, and are you willing to pay more for sustainable design? Yes we have a published strategy which sets criteria and measurement requirements for all projects. We are starting to gather more data in relation to sustainability. Example waste recycling. Contractors are probably ahead of developers with monitoring of this, but the question we should be asking is how do we reduce the amount of waste produced in the first place? Example We have set a general target of achieving 20% better than Part L, however with the recent changes in legislation this is becoming harder. What are your thoughts on off-site manufacture? My personal view is that the mechano kit style of off-site manufacture is the best approach. There is no point transporting a box full of air, but transporting completed walls, floors etc which can be connected together have benefits. Benefits of off-site are primarily quality control. By working with familiar suppliers, we have more influence over the developments of pre-fabrication and can suggest products to focus on. An example is the challenge set to a toilet fit out contractor to develop service pods for toilets. This has resulted in huge time savings which is now utilised on many projects. Ease of construction is important to us due to the time and cost benefits usually achieved. We are much more able to do this type of work under a construction management route as we have a direct link with the trade contractors.

Client Interview 2: Date of interview: March 14th 2011, 3pm Does your organisation have a specific procurement strategy across projects? We are entirely a cyclical industry which is market driven. In the current climate we have a preference of fixed price design and build Given the current downturn in the market have you adjusted your procurement strategy? D&B fixed price wherever possible. As a business, cost certainty if very important to us and we believe this gives us cost certainty. There are exceptions though, large and complex projects often go Construction Management route. As an example on one project recently completed, the D&B contractors where quoting a risk budget of approx 20% due to complexity of the project. This wasnt good value for money, so Construction Management route was chosen, and worked well for the project (on time, in budget). Equally in boom times contractors can afford to increase prices for risk etc, and therefore the client gets less value for money from a Design and Build route. How do you perceive the allocation of risk within procurement? We like to eliminate risk, hence our preference for lump sum. As a business we dont like Construction Management due to the risk for example if a contractor goes bust, the client must deal with consequences, whereas with D&B the contractor picks up any cost. CM is however good for big complex projects as sometimes the risk in these cases is too uncertain to cost. Where do you see the design portion best sitting? Normally we would develop a scheme to Stage D/E then go D&B, sometimes with novation of the design team, sometimes not. The last 2 projects weve taken more of a chance due to the recession and gone D&B at stage C/D. Generally we use novation to retain consistency of design, but sometimes contractors have a proposed team for a specific reason e.g. good delivery architects. Do you have preferred contractors you work with? Yes, we generally only ask 3 or 4 contractors to price a project. We sometimes use pre-construction agreements, but Im not a personal fan. Do you have a standard contract? Yes we have a consistent contract wherever possible. Its a modified version of JCT. What are your thoughts on capital cost against running (whole-life costs?) We have a whole range on our portfolio, so both are important. Develop & own Develop & trade Develop & manage We often have to hold buildings for a time, so running costs are important. Generally high quality is important as its easy to let, however the specification (and therefore cost) is usually market driven. Internal Rate of Return (IRR) is very important this is what your money is earning you, which is very time dependant and can influence construction programme required.

Construction time period can be critical for a pre-let. Design period is not generally such an issue What are your thoughts on sustainable strategies? Does your organisation have a strategy, and are you willing to pay more for sustainable design? We strongly believe in incorporating sustainable strategies into our projects. Yes, it costs more in capital, but the tenant gains. (e.g. put lots of PVs on the building, costs money, but tenant sees benefits hard to charge a premium for this). Legislation is much easier as it puts all developers on a level playing field. What are your thoughts on off-site manufacture? (not discussed) Final thoughts: All projects are D&B at present which is entirely market driven, we have no doubt this will change in the future.

Client Interview 3: Date of interview: March 16th 2011, 4pm Does your organisation have a specific procurement strategy across projects? Yes, our strategy is, D&B, single stage competitive tender, transfer of risk. We generally design everything visible to Stage E for cost certainty. Services usually performance spec. Given the current downturn in the market have you adjusted your procurement strategy? Were still using D&B however in the current market this can go wrong. If a tenant (or we) make a late change we pay a premium for these changes. In retail for example, repeat business from tenants is very important, therefore the developer will concede late changes and pay for them. How do you perceive the allocation of risk within procurement? Market risk this is something the client cant deal with. In D&B the risk is transferred to the contractor at a certain point in time. Value we have little control over (dependent on market), costs we can control. Risk reduction prior to and during the tender process. On 2 stage tenders: 1st stage contractors price overall project (packages tested but not tendered). Contractor selected on a pre-construction services agreement for 6-9 months. Contractor during this time tenders approx 80% of project and must take the risk on final 20% to give the client a lump sum. We operate a risk schedule which is shared with the contractor throughout the tendering process. The intention is to eliminate risks where possible and identify residual risks to the contractor prior to contract agreement, Where do you see the design portion best sitting? For architecture, up to Stage E with client is best, then switch to D&B. For Structure and Services Stage C (or less) with client. Contractors often propose alternatives to engineering and start from scratch to use their preferred construction methods. We often novate and retain a compliance team. One of the problems with the D&B process is that often the contractor proposes a list of VE items which we agree to that can be taken after contract, but planning constraints or programme constraints then prevent the contractor taking these savings which can cause problems. Do you have preferred contractors you work with? Yes, there four main contractors we would consider for large >100M projects in UK. Normally ask 3 to competitively tender, then continue negotiations with two. Selection criteria for contractors is wide ranging and strict: Money, Programme, Team (individuals), Contract conditions, sustainability, community relations, Corporate Social Responsibility, H&S strategy, and in this market financial integrity. Do you have a standard contract? Shared savings pre-contract sometimes used.

What are your thoughts on capital cost against running (whole-life costs?) In retail we retain centres for their design life. An additional engineer specification is imposed on tenants to ensure equipment meets the FM requirements. Dept stores do all their servicing. Small units are provided with a route to the roof, and power/water, and sprinklers. Benefit capital costs are lower, and running costs reduced as retailers (tenant) is responsible for the servicing of equipment etc. Part L is proving an issue requiring a change of strategy. Part L is pushing towards centralised plant, but retailers are unwilling to pay for this. We have produced a Low Carbon Fit out guide in an attempt to educate retailers. What are your thoughts on sustainable strategies? Does your organisation have a strategy, and are you willing to pay more for sustainable design? We have a corporate strategy to implement sustainable strategies. We have set targets such as BREEAM very good for all projects. This is much harder now as BREEAM considers whole development, but retailers wont cooperate. Legislation is the only way forward, and we can see this happening to make retailers fall in line with the requirements. We believe retailers are committed at corporate level, but not at operational level. Yes we definitely pay more for sustainability. There is a specific line in the funding structure for environment and Corporate Social Responsibility. What are your thoughts on off-site manufacture? Its a good idea. Some supermarkets are already acting on this. For example supermarkets made of timber glulam frames. A kit of components manufactures off site and constructed quickly on site. Use of precast systems is another example of off-site being utilised. Final thoughts: Negotiation route probably wont happen, we will continue to use the current strategy. Weve tried target cost didnt work well Weve tried open book better, but still not enough trust

Client Interview 4: NB: This was not a full interview, but a general discussion with head of procurement rather than project directors. Date of interview: March 22nd 2011, 9am Does your organisation have a specific procurement strategy across projects? Yes achieve planning before procurement. Then procure under D&B. Reduces risk and means we are ahead of the market. Do you have preferred contractors you work with? Yes, three main contractors, they all know the terms of our contracts Do you have a standard contract agreement for projects? Yes we have a consistent contract wherever possible. Its a modified version of JCT. CM contracts all grew out of the Broadgate development Cyclical industry. When the market is rising its better to go CM route. When the market is in decline and at a low its best to go D&B lump sum Stage D+ Procurement time for a average 150M project, a 5 month procurement period maximum to agree contract. (In reference to public sector projects, this is much faster)

Client Interview 5: Date of interview: March 24nd 2011,2pm Does your organisation have a specific procurement strategy across projects? Yes, however we are fairly flexible. Typically we use CM for larger projects. Sometimes use two stage lump sum, sometimes traditional. More recently weve started using single and two stage D&B, but this is relatively new. Given the current downturn in the market have you adjusted your procurement strategy? Depends on the project. One project we bought the site from a contractor developer with the agreement that the contractor would build D&B from a certain stage On another project weve just recently agreed to D&B for significant reasons. Originally CM, but project stopped in recession. Start up is a JV with a funder. An acknowledgement that the funder is sharing the risk and requires more cost certainty, therefore we have agreed D&B route. How do you perceive the allocation of risk within procurement? We have concerns about D&B due to the loss of control. CM is better for flexibility, programme benefits, and change Traditional can still be used if circumstances are right Management we prefer the ability to manage the process with CM. This is usually done by a third party development manager Where do you think design best sits? For finishes best to develop design as far as possible with design consultants. For engineering this could be contractor designed at an earlier stage. Retail lots of D&B and early contractor appointment Commercial Stage E for certainty of scheme Engineering could be performance spec Do you have preferred contractors you work with? Yes, we have three preferred CM companies that we use. We look at lots of things the actual project team, H&S attitude, CSR, supply chain auditing etc. What is the relationship are we an important client to them Do you have a standard contract agreement? Yes, bespoke been developed over the years What are your thoughts on capital cost against running (whole-life costs?) Costs for CM generally ok, but programme is usually the main driver Capital and running costs important weve only started monitoring this more recently. Running costs are important as generally the tenant pays and if services charges are too high, then you cant get tenants in What are your thoughts on sustainable strategies? Does your organisation have a strategy, and are you willing to pay more for sustainable design? Yes, sustainable strategy, but only if they actually contribute and are commercially viable. As a general rule our strategy is to minimise energy use in the first instance, then look a renewable etc.

What are your thoughts on off-site manufacture? Lots of benefits such as programme and quality. We must design building to not preclude use of off-site manufacture elements.

Client Interview 6: Date of interview: March 25th 2011 , 9am Does your organisation have a specific procurement strategy across projects? Yes, we are dealing primarily with a multi-phase long project, so the development strategy is important for why procurement route chosen. Buildings were delivered to demand, not as speculative developments. The same model spec/brief is fine tuned to the tenants requirements. Procurement strategy therefore had to be flexible. CM was preferred route for each building, but also used two stage and single stage traditional lump sum for some projects. Funding primarily from one bank. First projects were two stage contracting, but moved to CM for larger projects, and as funders trust in the development increased. Potential problems with CM include risk of scope gaps, but easier to manage change. Given the current downturn in the market have you adjusted your procurement strategy? (not applicable) How do you perceive the allocation of risk within procurement? Lump sum traditional if the design is fully completed first. Not good for changes, no good if design isnt fully resolved. D&B one of the issues is lack of access to the real problems i.e. a trade contractor problem can escalate and become programme critical if not identified to the client early enough. CM shortens the communication chain, and gives more access to the real problems. It also takes out the commercial interest. Where do you think design best sits? (not discussed) Do you have preferred contractors you work with? Yes, we typically used the same steel and concrete contractors for each building. Benefit that the teams knew each other and therefore lessons learned were used to influence the next project. One CM contractor used throughout the process good relationship developed, and therefore maintained throughout. Do you have a standard contract agreement for projects? Yes, Bespoke CM, consultant, and trade contracts. JCT by exception What are your thoughts on capital cost against running (whole-life costs?) Cost model for buildings depends on tenant occupancy. If a building is 100% occupied, the tenant will manage the running costs and maintenance. If there is multi occupancy, estate management will manage running costs and maintenance. At development it is still often debated high running costs will put tenants off, therefore its good business sense to reduce running costs. What are your thoughts on sustainable strategies? Does your organisation have a strategy, and are you willing to pay more for sustainable design? Balance is to have low capital cost which doesnt preclude the options to reduce energy usage. Yes, it matters. A great deal is actually about common sense, but increasingly meeting legislation. BREEAM ratings one good example is that a tenant wanted to reach BREEAM outstanding, so we made changes to the base build design in order to facilitate this.

CM is good for this as we had access to suppliers to have the right conversations to make changes for the better. The key to sustainability is flexibility for improved technology or change in technology And what are your thoughts on off-site manufacture? (not discussed) Final thoughts: Its the clients job to build a team You need the right individuals on top of the base answer

Client Interview 7: Date of interview: Wednesday 5th May 2011 Does your organisation have a specific procurement strategy across projects? No, we look at each project and the circumstances individually. The type of project, funder, programme requirements, market conditions all impact on the way in which we procure a building. In the last ten years, many of our projects have been procured under a hybrid of construction management and lump sum design and build agreement. Given the current downturn in the market have you adjusted your procurement strategy? The market conditions definitely influence our procurement strategy. In the current conditions were more likely to choose a lump sum design and build route, although this is not necessarily our preference. How do you perceive the allocation of risk within procurement? Our strategy is to minimise risk by ensuring that as much as possible cost can be predicted, however its dependent on the circumstances of a particular project and what the drivers are. For example, on one project we had a pre-let and therefore a defined deadline for completion of the building. This made it necessary to use a hybrid Design and Build route, due to the programme constraints only about 85% of the packages were secured at the time of contract, which left 15% in provisional sums, we generally prefer to have approx 95% of packages secured. Reduction of risk has become very important to funders and therefore we need to choose a route that provides this comfort to secure funding for a project. Where do you see the design portion best sitting? Its best to design as much as possible to a late stage, and where contractor design portions are required, bring those trades into the project team as early as possible. Do you have preferred contractors you work with? Yes, although the situation has changed significantly in the last 10 years. For a design and build route, mid 2000s there was only a limited number of main contractors who could take on large scale commercial projects, it was therefore important to develop good relationships with those contractors. Do you have a standard contract agreement? Yes, but its a modified version of JCT for design and build contracts. What are your thoughts on capital cost against running (whole-life costs?) Both are important. Whether the project is speculative for development for a pre-let tenant, the ability to offer low service charges is a benefit. What are your thoughts on sustainable strategies? Does your organisation have a strategy, and are you willing to pay more for sustainable design? Yes, we have a strategy across all projects. Many of our major projects have incorporated innovative environmental strategies in the last ten years, and we continue to support use of new design developments to improve the sustainability of buildings. What are your thoughts on off-site manufacture? Not discussed.

Appendix 5 Project Data

47

A study of procurement routes and their use in the commerical sector Appendix 5 - Selected Project Data - Central London Jun-11

This information was collected either directly from the clients interviewed in Section 7, or from the Cost Consultant the client referred the author to. Projects 4 to 20 were issued to the author in an non-identifiable form from a leading cost consultant who collates information for the relevant client for benchmarking. As projects 4 to 20 are from the same source, the author is confident that these can be directly compared as the information is consistently collated. The remaining projects may introduce some inaccuracies as these are from a variety of sources and therefore consistency cannot be guaranteed (for example, shell and core cost definition may vary according to the client). Completion Date Dec-03 Sep-10 Feb-10 Oct-05 Oct-05 May-07 May-07 Jun-06 Mar-05 Jun-02 Jan-05 Oct-08 Sep-08 Jun-07 Jul-06 Nov-04 Jan-05 Sep-02 Sep-01 Nov-01 May-08 Aug-07 Jul-09 Total length of Construction Cost weeks /sq ft 152 150 169 134 120 124 124 108 82 90 100 178 98 122 75 109 116 72 79 82 125 190 99 198.67 208.22 227.69 208.75 144.45 184.00 168.24 179.94 168.29 156.78 155.61 277.78 263.36 203.44 170.66 146.80 155.61 189.11 178.01 184.83 181.82 173.30 247.74

Project 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

Gross Floor Area sq foot 750,000 730,000 650,000 602,000 560,600 200,000 369,700 177,000 205,000 225,800 729,400 320,500 205,800 569,700 212,700 228,200 729,400 181,900 355,600 334,900 1,100,000 1,200,200 645,834

Net Floor Area sq foot 550,000 560,000 451,000 398,000 417,200 121,400 257,000 132,000 138,000 162,100 495,100 222,300 129,400 422,300 160,300 179,500 495,100 121,100 249,000 207,400 692,000 753,400 541,000

Efficiency 73 77 69 66 74 61 70 75 67 72 68 69 63 74 75 79 68 67 70 62 63 63 84

Construction Procurement Route Two stage D&B Two stage D&B Two stage D&B CM bespoke CM bespoke CM bespoke CM bespoke Two stage Traditional JCT 98 with CDPS CM bespoke CM bespoke Construction Management Construction Management Construction Management Construction Management Construction Management Construction Management Construction Management Construction Management Construction Management Design and Build Design and Build Design and Build

Total Cost Pounds 149,000,000 152,000,000 148,000,000 125,670,000 80,980,000 36,800,000 62,200,000 31,850,000 34,500,000 35,400,000 113,500,000 89,030,000 54,200,000 115,900,000 36,300,000 33,500,000 113,500,000 34,400,000 63,300,000 61,900,000 200,000,000 208,000,000 160,000,000

Time sq ft/week 4.934E+03 4.867E+03 3.846E+03 4.493E+03 4.672E+03 1.613E+03 2.981E+03 1.639E+03 2.500E+03 2.509E+03 7.294E+03 1.801E+03 2.100E+03 4.670E+03 2.836E+03 2.094E+03 6.288E+03 2.526E+03 4.501E+03 4.084E+03 8.800E+03 6.317E+03 6.524E+03

Source Client A - direct Client A - direct Client A - direct Client B - Cost Consultant A Client B - Cost Consultant A Client B - Cost Consultant A Client B - Cost Consultant A Client B - Cost Consultant A Client B - Cost Consultant A Client B - Cost Consultant A Client B - Cost Consultant A Client C - Cost Consultant A Client C - Cost Consultant A Client C - Cost Consultant A Client C - Cost Consultant A Client C - Cost Consultant A Client C - Cost Consultant A Client C - Cost Consultant A Client C - Cost Consultant A Client C - Cost Consultant A Client D - direct Client D - direct Client E - direct