Construction Procurement

Complex Property Development

Brian Greenhalgh, Graham Squires, Abdul-Majeed Mahamadu

• Publisher: Routledge
• Year: 2021
• ISBN:
  9781000508802
• Edition: 1
• Topic: Technology & Engineering
• Subtopic: Project Management in Engineering
• Index: Technology & Engineering

This book is an easy-to-read introduction to the principles and methods of building procurement and is aimed at first year students or non-cognate graduates starting out on a career in construction, property, quantity surveying and construction management.

The book starts with a brief introduction to the construction industry, including how the industry is organised into contractors, consultants and clients. After a discussion of the historical development of procurement methods, which show a steady shift of risk and responsibility towards the supply side (contractors), the various roles and responsibilities which must be carried out in any project are discussed in detail. The aim is to show the reader that procurement routes are effectively a permutation of these responsibilities between the various parties. The book then explains the various methods by which the contractor(s) are paid, either by pre-negotiated lump sums or by some form of cost reimbursement. Variants of these two systems are also discussed. Several chapters are given to the detailed discussion of the main procurement routes together with the appropriate standard forms of contract designed for that route. More modern developments such as Private Financing and PPP are discussed and a chapter covering emerging trends in procurement completes the book.

Containing discussion points, chapter summaries and case studies, this book is ideal for use in a variety of degree programs and courses across the built environment and engineering.

1Nature of the construction industry

DOI: 10.1201/9781003155355-1

The construction industry and projects forming the built environment involve many activities. According to Section 105 of the UK’s ‘Construction Act’ of 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 therefore very wide-ranging and important to all national economies and accounts for approximately 7 per cent to 10 per cent of Gross Domestic Product (GDP) in most countries. In the UK more specifically, it employs around 7 per cent of the workforce with an estimated workforce strength of 2.4 million as of 2019. Unemployment is often mirrored by falls in construction output, thus making the sector one of the most important during periods of recession. During the ‘credit crunch’ recession of 2008–10, only £258 million worth of deals were recorded in the construction sector for the first quarter of 2009 compared to £7.2 billion during the first quarter of 2007 – in other words a 96 per cent drop in activity was experienced across a two year period as the general economy moved from boom to slump. The industry however experienced a boom following the ‘credit crunch’ recession of 2008–10 recording one of the highest values of new orders in 2017, with total orders in excess of £70 billion. With projections of economic recessions due to the Covid-19 global pandemic, construction orders are likely to be impacted, although early statistics show some resilience.

The construction sector is investment-led, which means that when a client procures a building, they are buying an ‘asset’ that has the ability to generate funds into the future. Approximately 50 per cent of construction work comes from private clients and the remaining 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 construction 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 included the Private Finance Initiatives (PFI) and Public Private Partnerships (PPP), which delivered several projects in health, education, and transport from the 1990s until the initiative was discontinued in 2018. The evolution of PFI programmes and its discontinuation as well as its future are discussed in more detail in Chapter 11. The other major component of public construction output is infrastructure. For instance, the high values of construction orders in 2017 (over £70 billion) was largely driven by major transport infrastructure programmes including the High Speed Rail (HS2) programme. These distinct elements of the construction sectors synergistically work together for a functioning built environment. The infrastructure provides the necessary services for buildings and their occupants and for effective operations of facilities.

1.1 Construction and the development of property

Buildings are the bedrock of property development and are operated with the support of critical infrastructure services. The building construction sector 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. Further clients could be government departments who require various forms of infrastructure to support the residents and communities that they represent. Some of the key construction clients are house builders and developers, local government, Environment Agency, National Grid, Network Rail (soon to be Great British Railways), the National Highways (Formerly Highways England) Department for Transport, Department for Education, Department of Health and Social Care, water companies, private investors and major retailers. A more detailed discussion of the nature of clients in the industry is made in Chapter 2. Designers have an interest in the construction sector by determining the detail of what should be built, including the size, shape, specification and performance expectations 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 construction operations that inevitably contributes most to the development of land. These widespread activities of clients, designers, suppliers and contractors, who are all separate organisations with distinct cultures and financial objectives, 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.

1.2 The nature of procurement in the construction industry

A by-product of this level of complexity in construction procurement is the large number of commercial business transactions that need to be set up to support each and every project. The transactions themselves are not the distinguishing feature as virtually all economic transactions rely on being able to purchase numerous goods and services. In everyday parlance this is simply referred to as ‘buying’. In construction 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 approaches to procurement used in construction 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 mature competitive market. However, the procurement of construction is frequently more complicated, which 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. Over the past two decades the industry has also been responding to the climate change agenda with several initiatives being promoted for minimising the impact of construction on the environment. Key among these are new technologies and methods of construction. This has further exacerbated the unpredictability of delivery in terms of cost certainty and sometimes quality. These new, modern and green technologies are also not fully understood, thus creating uncertainties in relation to their performance and cost, especially over the lifecycle of a facility.

This book addresses how these problems of specification, price, project duration, innovation and value for money have been tackled by clients and suppliers of construction goods and services in both the public and private sectors. Studying this book will also help to make the sector more professional. The construction industry is characterised by a number of other issues including unethical practices, i.e., 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 progress...