Methodologies for Construction Procurement

Written by Li Jieqi Gloria, DPSM

by Li Jieqi Gloria, DPSM

The procurement function in the construction industry has resisted change for many decades. But in recent years, new trends have proven a force to be reckoned with, as many organizations begin adopting and embracing new strategies in a bid to stay competitive. We explore current methods that are in practice and also the new wave that sees many procurement departments rushing to implement.

Purchasing by Requirements

Purchasing by requirements is done by collating specification details and quantity of the desired item. Uncommon items that do not require keep stock or advance orders can be purchased this way. The buying organization benefits through the use of competitive bidding from suppliers, where the price is king. This method of procurement allows the organization to reduce their wastage and to increase their efficiency.

Speculative Purchasing

Speculative purchasing is also known as ‘buying long’ or ‘forward buying’. This means that an organization will buy more quantity than needed of an item as it expects a rise in the price. The positive outcome is the organization can avoid stock-outs or having to pay more for a sudden increase in cost.

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Image taken from https://www.comunicaffe.com/coffee-futures-move-speculative-buying/

However, the organization will then be faced with higher storage costs and damage or obsolete costs.Material/product wholesalers or dealers use this method to maximise their profits as they purchase items in large bulk quantities at a negotiated price and then sell those items at a higher price.

Scheduled Purchasing

As the name suggests, purchasing is scheduled according to requirements from the department or organization. The supplier is given probable time to prepare and arrange for delivery. It is good to note that this schedule given to the supplier is not a contract, it is more like a verbal agreement made between the supplier and the purchaser as a form of terms and conditions for the purchase.

The main aims achieved through the use of this method are as follows:

  • The purchaser keeps minimum inventory in its storage.
  • The purchaser gets fast service from the suppliers when it needs replenishment of stocks.
  • The purchaser receives quality goods while enjoying low prices from suppliers.

Contract Purchasing

Contract purchasing can also be called ‘Long term contract’ or LTC in short. This method is useful when procuring materials or products in bulk for large construction projects like the development of private residential homes or commercial buildings, as the supplier will supply the items at a future date periodically.

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Image taken from https://www.capitalmarket.com/News/Debt-Market-News/Morning-Bells-Bond-yield-edges-up/1156972

The purchaser will receive a regular supply of goods at an agreed price for a fixed duration as stated in a contract signed with the supplier. The contract will contain details like milestone payment with interest, final payment and legal ownership of the items. There are also other terms and conditions that both parties have to abide by. In this way, the purchaser does not have to spend much time to source for multiple suppliers and the selected supplier will be able to provide and deliver the necessary items to the purchaser’s door.

General Contracting

Traditional contracting or general contracting is a popular and widely used form of procurement in the construction industry. There are three forms of general contracting, namely the Lump Sum contract; Measurement contract; and Cost Reimbursement contract. Price certainty is assured when the contract is awarded and usually this form allows the client to achieve the best price through competitive tendering.

Design & Build Projects

Design & Build allows a single point of responsibility as the contractor has a direct contract with the client. This brings about ease of communication because the client only needs to liaise with one party. Other benefits also include a reduction in project duration due to early commencement on-site and overlapping of design and construction activities and improved constructability because of contractor’s input.

Image taken from https://trentcotney.com/construction/types-of-joint-ventures-in-the-construction-industry/

Management Contracting & Construction Management

Management contracting and construction management (CM), are two very similar approaches thus they are often confused with each other. Both require the hiring of management personnel on a fee basis to prepare and oversee pre-construction and construction activities.The main difference between the two is the contractual relationship with the client. For management contracting, the managing contractor is in-charge of issuing contracts directly to sub-contractors. While on the other hand, for CM, the client places contracts directly with sub-contractors instead as the construction manager only acts as an agent.

Guaranteed Maximum Price

Guaranteed maximum price (GMP) typically involves a two-stage process. The first stage consists of the pre-selection of the contractor and a discussion of early-stage design with the architect. The second stage will be the finalization on the maximum guaranteed price with the client, meaning to say that there will be a ceiling price set in place which the client will be responsible for. Any amount incurred thereafter will be covered by the contractor. A dispute resolution clause should be included in the contract in case any conflict arises. GMP does not have any standard form and may be coupled with other types of contracts like lump sum or cost-reimbursement, depending on the project requirements.

Capped ceiling price certainty allows an acceleration of the project timeline by tapping on the contractor’s experience and expertise while ensuring that he does not feel exposed to an increased risk, which may result in the contractor placing a higher bid price. Transparency is also vital when it comes to cost reporting, else the client will end up paying for unnecessary inflated cost and not with savings that can also be shared with the contractor.

Joint Venture Projects

A joint venture usually involves two or more parties coming together for a large-scale construction project. This is the most common method utilized to share risks and profits, pool in different resources such as expert knowledge, raw materials or capital. The corporate joint venture, partnership and cooperation agreement are three main variants of joint ventures. However, there are other forms of international joint ventures; namely, low-equity joint ventures, coproduction arrangements, BOT (Build, Operate, Transfer) contracts and international subcontracting.

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Digital Procurement

Existing digital procurement or e-procurement systems such as e-catalogue, online ordering, reverse auctions and web tendering help to facilitate the end-to-end procurement process, also known as procure-to-pay or PTP for short. But measures still have to be taken to incorporate and streamline the entire process function.

The diagram below shows a strategic roadmap covering seven clear and defined steps that can be taken to achieve digital procurement. Every step is crucial to getting a successful implementation.

Image taken from https://sipmm.edu.sg/strategic-roadmap-digital-procurement/

Conclusion

Even though the construction procurement is slower on the implementation of digital technologies as compared to other industries, it is never too late to do so. The procurement function has gained notable attention over the past decade, with organizations placing more emphasis on its importance and benefits to the organization’s overall operations. Organizations currently utilizing traditional procurement methods can look to integrate at one digital tool into their system and implement a new procurement strategy to better position themselves in the market and give them an edge over competitors.


References

KPMG. (2017). “Joint Venture Advisory Practice”. Retrieved from: https://assets.kpmg/content/dam/kpmg/sg/pdf/2017/07/JointVenture-10.pdf, accessed 21/03/2020.

Peter Davis, et.al. (2008). “Building Procurement Methods”. Retrieved from: http://www.construction-innovation.info/images/pdfs/Research_library/ResearchLibraryC/2006-034-C/reports/Report_-_Building_Procurement_Methods.pdf, accessed 16/03/2020.

Saurabh Mani, ADPSM. (2020). “Blockchain Technology for the Construction Sector”. Retrieved from SIPMM: https://sipmm.edu.sg/strategic-roadmap-digital-procurement/, accessed 21/03/2020.

Singapore Contractors Association Limited. (2007). “An Overview of Guaranteed Maximum Price (GMP) Contracts”. Retrieved from: http://channeo.sg/pdf/Article20071023.pdf, accessed 16/03/2020.

Tai Cheoh Wei, GDPM. (2019). “Blockchain Technology for the Construction Sector”. Retrieved from SIPMM: https://sipmm.edu.sg/blockchain-technology-construction-sector/, accessed 21/03/2020.

UKEssays. (2018). “Construction Procurement Methods Compared”. Retrieved from: https://www.ukessays.com/essays/construction/procurment-systems-used-in-malaysia-construction-essay.php?vref=1, accessed 16/03/2020.

Xavier Nougès, et.al. (2017). “Digital Procurement: From Myth, To Unleashing The Full Potential”. Retrieved from: https://www.oliverwyman.com/content/dam/oliver-wyman/europe/france/fr/Publications/Digital_Procurement.pdf, accessed 18/03/2020.

About the Author Gloria Li has several years of experience in the specialised field of procurement, specifically in the construction industry. She holds a Bachelor’s Degree in Business Administration from the University at Buffalo-SUNY (United States). Gloria is a member of the Singapore Institute of Purchasing and Materials Management (SIPMM) and she completed the Diploma in Procurement and Supply Management (DPSM) on March 2020 at SIPMM Institute.

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