Procurement Methodologies for the Construction Sector

Written by Ting Houng Xue, DPSM

by Ting Houng Xue, DPSM

As competition in the construction market intensifies, establishing a procurement department is a key process for creating and managing contacts in construction projects. Purchasing activities cover the entire process from the determination of needs to the end of the project, and can become an ideal model for integrating the strategic direction of the organization.This article attempts to examine the best practices for procurement in the Construction sector. Let us differentiate the terminologies of PP Organogram.

The purchasing process refers to the purchase of goods, services and equipment from another organization in a legal and ethical manner. Purchasing involves managing the sourcing process, as well as the order management process. Procurement involves the strategic implementation of Purchasing.

Procurement’s active interaction with both internal customers and the external suppliers, through Supplier Relationship Management. The organogram outlines illustrate the difference between Procurement and Purchasing.

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Chart taken from SIPMM: https://sipmm.edu.sg/six-procurement-best-practices-construction-industry/

Procurement by Requirements

Procurement is the acquisition of suppliers that provide goods and services in accordance with the buyer’s requirements. Procurement activities are required to ensure timely and reasonable access to the required items. In the manufacturing business, the procurement department is particularly necessary, in this business, a large number of raw materials and components must be regularly obtained.

The main goal of the procurement department is to purchase items that meet the buyer’s quality specifications to create a delivery flow to the buyer’s premises to minimize the investment in raw material inventory, while still ensuring on-demand supply of goods and reducing the amount of cash invested in inventory.

The procurement department must know the suppliers of such goods in order to be able to make purchases without wasting time.

Mild Steel Hollow Section | Square, Rectangular, Circular | Metal ...
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Procurement Selection Criteria

Public agency satisfaction with buildings and the procurement methods adopted are a primary issue that is often raised when considering the delivery of a capital works. Therefore, it is important to evaluate the clients’ criteria, importance and then seek performance to meets the criteria. All public sector agencies require their construction to be completed on the time, within budget and to the highest quality. However, some the public sector agencies emphasize that certain criteria are more important than others. Although such standards can be widely used as a guide to help decision makers to initially understand the basic attributes of a specific procurement system.

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General Contracting

General contracting is a commonly and widely used form of procurement in the construction industry. There are three forms of general contracting, Lump Sum contract; Measurement contract; and Cost Reimbursement contract. When awarding a contract, price certainty can be ensured. Usually this method allows the client to obtain the best price through competitive bidding. It also makes the contract changes relatively manageable.

Men and woman meeting with Engineers and supervisors are standing reading the blueprints at the construction site.
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Design-Bid-Build

The traditional design-bid-build method aims to ensure the best price for a given construction project. The owner or owner’s representative works with the architect/engineer to design the project. The design plan is a public advertisement, inviting any interested contractors to bid. On the bid opening day, the construction contract will be awarded to the bidder with the lowest response. This method is favoured by contractors and designers because it allows open competition and can produce the best price. For relatively easy-to-understand and thoroughly designed projects, this process works well. However, if there is a critical time frame that needs to be met, or the project is particularly complex and the risks or variables are unknown, the public owner may prefer to use one of several alternative methods.

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Work Order Contract

The Work Order Contract method is a convenient method for public institutions to quickly and easily complete common small and medium-sized public engineering projects. The Work Order Contract procedure allows public agencies to establish work order contracts with construction contractors who will “apply” for various projects during the contract period. According to the Work Order Contract method, the public agency will issue a request for eligibility, and the contractor will respond by providing its eligibility and the price list for labour and materials provided by Work Order Contract. Contract Management assesses the qualifications of contractors and selects the most qualified finalists to submit final proposals for each project.

After Work Order Contract is in place, agents can call work orders contractors for small projects as needed. The work order contractor determines the scope of work, creates plans and specifications required to meet the licensing requirements, and determines the subcontractor to perform the work. The price of labour, materials and equipment is determined using the price list determined in the qualification requirements, and the contractor’s indirect costs are calculated using the price increase agreed by the contractor. Work order contract is a useful tool for purchasing managers to simplify various small public works projects. Although the work order contract process may not necessarily reduce costs, using this method can complete the work faster, reduce the predictability of costs and simplify the procurement process.

Value Source Selection

Procurement managers are familiar with the “most valuable” procurement in professional services, but this method is not common in construction procurement. In “Best Value Source Selection”, the contract will be awarded to the provider with the best combination of performance qualification and price. Value is obviously a subjective term, but it can be quantified by multiple weighting criteria and judged by a group of evaluators. It is important to determine the non-price criteria and their relative importance according to the context of the bid: project type, size, and required completion date.

A study in the Construction Management found that past success, financial stability, credit rating, experience, capabilities, management staff and management knowledge are the best predictors of project success, while safety records and business hours have the least impact. Another study in the same journal found that through linear regression, technical expertise, track record, business time, working methods and working capital greatly affected the contractor’s time, cost and quality performance. These non-monetary factors paint a larger picture for the purchasing manager and highlight the contractors who provide the highest reliability and experience for their prices. The selection of the best source of value can be completed in one or two steps for tendering and evaluation, and can even include prequalification of the contractor.

Happy professional construction engineers working with Corporate Colleagues Teamwork and equipment such as blueprint, Safety glasses and technology laptop on the table, Industrial Concept
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Conclusion

The management contract is the most suitable procurement method for the project. The procurement system allows customers to design facilities according to their own requirements and appoint management contractors to manage construction works on site.Using management contracts, price certainty can be achieved by carefully monitoring the cost of work package, so that buildings can be built within budget. In addition, the advantages of this procurement method can often meet the completion time of the project. Last but not least, since this is a prestigious project, this procurement approach ensures that the high quality and aesthetic standards required by customers are met.

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References

Chit Ngu Wah Christina, DPSM. (2020). “Essential Criteria to Evaluate Construction Supplier”. Retrieved from SIPMM: https://sipmm.edu.sg/essential-criteria-evaluate-construction-supplier/#Quality,_Cost,_and_Delivery_(QCD), accessed 20/06/2020.

Francesca Nicasio. (2019). “Supplier Relationship Management”. Retrieved from: https://www.vendhq.com/blog/supplier-relationship-management, accessed 20/06/2020.

Keith Jones. (2017). “Choosing the Right Construction Procurement Method”. Retrieved from: http://www.procureware.com/choosing-right-construction-procurement-method, accessed 20/06/2020.

Li Jieqi Gloria, DPSM. (2020). “Methodologies for Construction Procurement”. Retrieved from SIPMM: https://sipmm.edu.sg/methodologies-for-construction-procurement, accessed 20/06/2020.

Ng Shi Yun, PDPM. (2018). “5 Key Criteria for Supplier Evaluation in the Construction Sector”. Retrieved from SIPMM: https://sipmm.edu.sg/5-key-criteria-supplier-evaluation-construction-sector, accessed 20/06/2020.

Steven Bragg. (2019). “Purchasing Definition”. Retrieved from: https://www.accountingtools.com/articles/what-is-purchasing.html, accessed 22/06/2020.

Vivien Cheah Khar Wai, DPSM. (2019). “Six Procurement Best Practices for the Construction Industry”. Retrieved from SIPMM: https://sipmm.edu.sg/six-procurement-best-practices-construction-industry, accessed 22/06/2020.

About the Author:: Ting Houng Xue has several years of experience in the specialised field of procurement for the construction industry. She is a member of the Singapore Institute of Purchasing and Materials Management (SIPMM). She completed the Diploma in Procurement and Supply Management (DPSM) on June 2020 at SIPMM Institute.

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