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which is a remeasurement contract, the rate in the bill will be multiplied by the quantity of that item fixed. In both cases, the basis of payment is the contractor’s estimate and the amount of money paid has no relationship with the contractor’s costs. This type of contract is known as a fixed price contract, even though it may have some cost reimbursable elements. Such elements could include fluctuations, which are often related to actual changes in market prices.
By contrast, a fixed fee prime cost contract will give detailed provisions for payment based upon the contractor’s actual expenditure. Even though the contract is based upon cost reimbursement, the contractor’s attendance and profit margin is based on a pre-determined proportion of the prime cost. As such, the calculation of that portion bears no relation to actual costs and is therefore of a fixed price nature. This demonstrates how each type of contract contains elements of the other.
The important point in terms of the distribution of risk is that, under fixed price arrangements, the contractor undertakes to submit an estimate for the work and agrees to be bound by that estimate. Thus, any saving over the original estimate will be to the contractor’s benefit, and any overspending will be the contractor’s loss. Under cost reimbursement arrangements, the employer takes the risk of the final price being different from the estimate, keeping any savings and paying for any increases.
The two aspects of cost-based pricing in a construction contract may be placed into a wider context. When leasing or purchasing a completed building or facility, the price tends to be related to value rather than cost. For example, in buying a house from a housing developer, the location of the property may have more of an impact on the price of the house than how much it cost to build. Indeed, the value of development land tends to be related to location. This kind of value-based pricing is closer to the way that almost any other price is determined. In markets for cars, computers, furniture and many kinds of plant and equipment, the price determination follows this same principle. The customer pays for these things on the basis of value, not on the basis of how much resource was used to make them. This shows the importance of distinguishing between cost, price and value. Cost is the amount has to be paid to buy something (e.g. the amount of money spent on supplies when making something). Price is an amount required as payment when selling something. Value is what something is worth to someone. For the manufacturer or contractor, the idea is that the price is higher than the cost, and that the value to the buyer is higher than the price. If either of these aspirations are not met, then someone in the transaction is going to be dissatisfied.
One final point in defining types of contract is that the phrase firm price contract should not be confused with fixed price contract. Firm price usually refers not to the method of calculating the price but to the absence of a fluctuations clause, increasing the chance of the final price being the same as the tender sum. While this section has dealt with the method of calculating the price, Chapter 15 deals with contractual provisions relating to payment.
7.3PROCUREMENT
Procurement is a concept that is curiously difficult to define. Part of this difficulty is that it means different things to different people, or even to the same people at
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different times. In common use, for example, to procure means simply to obtain. Thus, procurement may simply be the act of obtaining something. In commercial terms, it typically refers to the processes associated with buying things. Thus, many organizations have a procurement department with overall responsibility for dealing with purchasing and with supplier relationships. So, in this context, procurement refers specifically to the act of purchasing, involving a structured and deliberate approach to the market in order to develop close relationships with a specific group of suppliers, in return for favourable pricing and after-sales services. However, an organization’s procurement department rarely deals with construction projects. Constructed facilities and buildings tend to represent an extremely large proportion of an organization’s investment. The process takes a significant amount of time, a lot of management resources and usually a wide range of contracts with various consultants and suppliers of goods and services. Moreover, the success or failure of such a project may be critical to the success or failure of the organization. So in this sense, procurement involves capital planning, design, legislative approvals, selection and organization of a team of consultants, selection and organization of a construction team, commissioning, occupancy and eventual disposal. Much of this work has to be carried out in the context of policies and laws relating to health and safety, sustainability, acceptable business practices and so on. So, for some purposes, procurement means the act of obtaining or the act of buying. When we buy things that are important and expensive, the need to manage the buying activity leads to the need for applying resources to managing all of the related decision-making processes, as well as purchasing activities. For the purposes of this book, procurement is defined in Section 1.4. It covers the management of the processes involved in the acquisition of major capital items such as civil engineering structures and buildings, including organization, management, finance, design, construction, operation and disposal, within the relevant policy and legislative contexts. Specifically, procurement involves decisions in four areas: commercial issues of risk and finance, professional roles, contracting methods and tendering processes. These decisions affect and are affected by relational issues. Procurement methods are often closely associated with contracting methods, but there is more to procurement than contract methods.
7.3.1Contracting methods
It is important to understand the broad picture of responsibilities for each contracting method. If this is understood, then the remaining procurement decisions can be chosen in relation to the needs of a particular client. Many clients are reliant upon the advice they get from their consultants. That is, after all, why they appoint them. The power struggles between the professional institutions in construction shed light on the relative importance of each of the contracting methods. General contracting (GC) represents the traditional triumvirate of architecture, quantity surveying and building. It involves a particularly strong role for traditional quantity surveyors (QSs), and the specific documentation that is required for the QS role. Builders are also fairly comfortable with GC because they only have an obligation to build what is documented; therefore they have little liability, other than for decisions around materials and workmanship and for
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performance in relation to time, cost and quality. Typically, the architect’s role in GC provides the greatest scope for design leadership, especially given the architect’s certification role during the construction process (see Chapters 13 and 18).
Clearly, there have been many problems with GC. These have been documented over decades of UK government reports (as critiqued in Murray and Langford 2003). One possible way to overcome these recurrent problems is simply to turn the tables and have the contractor employ the architect (a typical design and build (DB) pattern). On the face of it, DB can make GC seem odd by comparison; in what other kind of purchase would you specify and pay for the labour and material content, rather than the value of the required performance? In DB practice, production exigencies prevail over design ideas, and therefore the ideal of equal status between builder and architect may not be achieved. Worse, the healthy debate between the opposing views may be quietly resolved within the DB organization, and conflicts are thus hidden from the client. One of the driving forces behind the development of construction management (CM) is to engender an open and participative process, where decision-making is overt. Participation is not possible in a hidden process. In terms of professional roles, CM balances the power struggle, and is supposed to give design exigencies equal weight with the production exigencies. The emergence of DBFO and subsequently the UK’s domestic implementation, known as the private finance initiative (PFI), moved the focus away from contracting and procurement methods to project funding. The utilization of private sector finance for public sector infrastructure led to some interesting and difficult contracts for financial aspects, but the underlying construction contracting and selection methods, though complicated, were essentially drawn from the same limited range of options that were familiar. Finally, for those clients, public or private, who wish to acquire real estate, there are many property developers willing to take on all of the risks of development and simply lease or sell a completed building to a client. While the idea of property development tells us little about contracting and tendering methods, or any of the other procurement options, it represents the greatest distance between the purchaser of real estate and those responsible for site processes. At the opposite extreme are sub-contractors and specialists whose business is solely based around construction sites. Figure 7.1 represents the myriad contractual connections through the various supply chains that connects these ends. This network of contracts is what ties together the different firms and organizations involved in a construction project. Each connection in Figure 7.1 requires a contracting method, a tendering method, a relationship to be managed and clear delineations of professional and commercial roles.
It is interesting to compare the complexity of Figure 7.1 to the straightforward arrangements usually used to describe procurement methods in Chapters 3–5 (Figures 3.1–5.1). Figure 7.1 unpacks a wide range of the contractual relationships in a project. It could be read anti-clockwise, commencing at the top. The end users, occupiers or tenants of a facility are often the justification for a construction procurement exercise. Perhaps they initiate it themselves, or perhaps someone else (government or developer) deems that there is an opportunity to do something that requires infrastructure or real estate. A construction client may be known as the
