Introduction to Building Procurement

Brian Greenhalgh, Graham Squires

• Publisher: Routledge
• Year: 2011
• ISBN:
  9781134016839
• Edition: 1
• Topic: Technology & Engineering
• Subtopic: Construction & Architectural Engineering
• Index: Technology & Engineering

The procurement stage of the building process is critical to the success of any building project, and as such must be understood by everybody entering the industry. Introduction to Building Procurement is designed to familiarize the novice with the principles and methods of building procurement, starting at the most basic level.

With chapter summaries and tutorial questions provided throughout the book, the reader will get to grips with the following topics:

• the structure of the construction industry
• the nature of clients
• the historical development of building procurement methods
• the roles and responsibilities carried out in any project.

Having developed the necessary background knowledge, the reader is then introduced to the more complex aspects of procurement in detail, such as:

• methods of paying contractors
• the main procurement routes in use
• standard forms of contract.

The concluding chapter discusses emerging procurement trends, and speculates on future developments to bring the reader right up to speed with the modern industry. With its clear layout and highly accessible approach, Introduction to Building Procuremen is the perfect introductory text for undergraduate students and professionals starting out on a career in quantity surveying, construction project management or construction commercial management.

1
Introduction and nature of the construction industry

The construction industry and projects forming the built environment involve many activities. According to Section 105 of the Housing Grants, Construction and Regeneration Act (1996), a construction project can refer to any building activity that includes alteration, repair, erection, demolition, maintenance, painting, land clearing, earth moving, grading, excavating, trenching, digging, boring, drilling, blasting, concreting and installation of machinery. The construction sector is very important to both the UK economy and other Western economies, as in most years it accounts for approximately 8–10 per cent of gross domestic product (GDP). In the UK more specifically the construction sector employs around 1.5 million people. The falling value of building procurement has been mirrored in the slow down of building activity since the most recent recession. In the first quarter of 2009 only £258 million worth of deals were recorded in the building sector compared to £7.2 billion during the first quarter of 2007. Future upturns in the economy will no doubt see a return to growth and procurement in the sector, although a return to the levels of output experienced prior to recession is uncertain. As a result, the significance for building procurement during negative or slow economic growth will be its drive for efficiency, effectiveness, and value for money.

The construction sector is to a large extent investment-led, which means that when a client procures a building, they are buying an ‘asset’ which has the ability to generate funds into the future. Approximately 50 per cent of building work is generated from private clients and 50 per cent from central and local government, so it is inevitable that the industry’s output will fluctuate in accordance with the economic and political cycles. It is generally acknowledged that cycles in building activity show far greater amplitude than cycles in other business activity over the same period of time. For instance, the industry took a distinct upturn in the late 1990s in response to government infrastructure investment programmes. Government-developed investments were those such as the private finance initiatives (PFIs) in health, education and transport. These PFI programmes are discussed in more detail in Chapter 11.

The building construction industry covers a wide range of business activities that are brought together by a common interest in the development of land and real estate. The sector comprises a variety of interests that include clients, designers, suppliers and contractors. Clients can be industrial firms and commercial property developers who determine what should be built and where. Others might be government departments who require various forms of infrastructure to support the residents and communities that they represent. Some of the key building clients are the Environment Agency, British Waterways, British Energy, Railtrack, the Highways Agency, port authorities, water companies, major retailers and house builders. A more detailed discussion of the nature of clients in the industry will be found in Chapter 2. Designers have an interest in the building sector by determining the detail of what should be built, including the size, shape and specification of the finished article. Suppliers provide materials and components via the processes of extraction and manufacture. However, it is the business activities of contractors in carrying out building operations that inevitably contribute most to the development of land. These widespread activities of clients, designers, suppliers and contractors demonstrate the fragmented nature of the construction industry. Within this context of fragmentation the complex nature of procurement in the construction industry will now be introduced.

1.1 The nature of procurement in the construction industry

A by-product of this level of complexity in building procurement is the large number of business transactions that need to be set up to support just one project. The transactions themselves are not the distinguishing feature, as virtually all economic transactions rely on the purchase of numerous goods and services. In everyday parlance this is simply referred to as ‘buying’. In building circles, however, the purchase of goods and services is commonly referred to as procurement, and the design and operation of efficient mechanisms for procuring goods and services has become an important area of study. Indeed, there are enough systems of procurement used in building to fill a textbook.

Buying standardised goods and services is a relatively straightforward exercise, as a standard bidding or tendering process can be normally relied upon to produce an efficient outcome in a competitive market. However, the procurement of building is frequently more complicated. This complexity is often due to the unknown variables at the start of the project such as the quality of the job, the time it will take to complete, and the cost to the client. From the client’s perspective the investment is unpredictable in terms of delivery, budget and the standard of quality. For example, a high-quality polished timber or steel façade may entail a cost that is unknown when the work commences and may require a special skill that is not fully understood by the client. Further unpredictability may occur if the work takes a considerable amount of time to prepare and if the quality of the end product is not easy to verify or quantify.

This book addresses how these problems of specification, price, project duration and value for money have been tackled by clients and suppliers of building goods and services in the public and private sectors. Those who can learn from textbooks like this will also help make the sector more professional. The building industry is characterised by a number of irregularities, such as collusion, less than rigorous tendering and poor workmanship. For instance, there is considerable potential for those involved in the procurement process to favour certain suppliers, so by focusing attention on the problems and irregularities of the sector, a progressive shift in the ‘nature’ of the profession will improve both the level of professional competence and actual work carried out in it.

1.2 The structure of the building industry

1.2.1 The building industry in the economy

Building output in the UK increased each year between 1995 and 2010, benefiting greatly from the expansion in the UK economy in that period. Activity in building was especially robust between 2000 and 2004, with annual expansion averaging over 4 per cent. However, output fell in 2005, mainly because of a depressed housing market and reduced spending in the public sector as a result of financial constraints. This depressed trend continued in 2010 and was dampened further by cuts in the public sector.

Historically, building (excluding new housing) has grown in line with GDP but with much sharper peaks and troughs – particularly in the late 1980s and early 1990s. However, since 1995 this relationship appears to have changed, and the industry has become slightly counter-cyclical. This reversal may be due to the emergence of longer-term initiatives such as facilities management (FM) and PFI that have had the effect of smoothing out the cycles. Greater London, the south-east of England and the east of England have enjoyed growth in output since the mid-1990s. However, building output in Greater London fell in real terms by 5 per cent between 2003 and 2005. This was partly due to a reduction in major infrastructure projects and has since been reversed following the award of the 2012 Olympics to London.

1.2.2 Absence of strong overseas competition

The UK’s building industry is geographically offshore from mainland Europe, and therefore does not experience the full effects of cross-border competition on its domestic market. The historical absence of strong overseas competition in the domestic market (outside building products) has resulted in a culture that does not perceive the imperative for change. This is in contrast to experience gained by other, more internationally competitive UK industries in the post-war period. The gap between the best, which is world class, and the average is thought by some to be too great (Department of Trade and Industry 1998). This domestic focus in the nature of the UK building industry is apparent in the many UK controlling bodies and societies that shape its development.

1.2.3 Key shapers

In the UK, the Communities and Local Government Department (CLG) heavily influences planning and building policy. As far as building procurement is concerned, CLG affects activities such as the planning system, decisions on planning applications and appeals, and building regulations. In England, local authorities are appearing to have

Table 1.1 International building output growth (percentage on year ago) 2002–8

more powers in providing regulatory control in planning and building. Scotland, Wales and Northern Ireland also have their own systems, regulated by their Parliaments or Assemblies. Bodies such as the British Property Federation (BPF) represent the owners and investors in commercial and residential property. Property assets held by BFP members are currently worth over £70 billion, so it plays a leading role in representing the interests of the clients of the building industry, and liaises closely with the government via its building committee.

The various professional institutions play a key role in both representing their members and influencing policy. In the construction industry, the main bodies are: the Royal Institute of British Architects (RIBA), the Royal Institution of Chartered Surveyors (RICS), the Chartered Institute of Building (CIOB), the Institution of Civil Engineers (ICE) and the Chartered Institute of Building Services Engineers (CIBSE). These are the most senior institutions as they have ‘Royal Charter’ status and therefore have access to government decision-makers, although there are many other institutes representing more specialist areas of the industry.

Overarching these specialist bodies is the Construction Industry Council (CIC), the representative forum for many of the professional bodies, research organisations and specialist business associations in the construction industry. It is designed to provide a single voice for professionals in all secto...