Introduction to Building Procurement To my wife, Sheila, for her constant support, love and encouragement, Brian. To friends old and new, Graham. Introduction to Building Procurement Brian Greenhalgh and Graham Squires This edition published 2011 by Spon Press 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN Simultaneously published in the USA and Canada by Spon Press 270 Madison Avenue, New York, NY 10016, USA This edition published in the Taylor & Francis e-Library, 2011. To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk. Spon Press is an imprint of the Taylor & Francis Group, an informa business © 2011 Brian Greenhalgh and Graham Squires The right of Brian Greenhalgh and Graham Squires to be identified as authors of this work has been asserted by them in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. This publication presents material of a broad scope and applicability. Despite stringent efforts by all concerned in the publishing process, some typographical or editorial errors may occur, and readers are encouraged to bring these to our attention where they represent errors of substance. The publisher and author disclaim any liability, in whole or in part, arising from information contained in this publication. The reader is urged to consult with an appropriate licensed professional prior to taking any action or making any interpretation that is within the realm of a licensed professional practice. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Greenhalgh, Brian. Introduction to building procurement / Brian Greenhalgh and Graham Squires. p. cm. 1. Building materials --Purchasing. 2. Building--Estimates. 3. Construction industry. 4. Building materials industry. I. Squires, Graham. II. Title. TH435.G66 2011 690.068--dc22 2010029251 ISBN 0-203-88506-6 Master e-book ISBN ISBN13: 978-0-415-48215-8 (hbk) ISBN13: 978-0-415-48216-5 (pbk) ISBN13: 978-0-203-88506-2 (ebk) Contents List of figures vi List of tables vii Foreword ix 1 Introduction and nature of the construction industry 1 2 Clients of the construction industry 21 3 Historical development of building procurement systems 37 4 Roles carried out in a construction project 55 5 Tendering and payment 71 6 Separated procurement systems 94 7 Project-specific procurement: overlapping roles 110 8 Project-specific procurement: integrated roles 132 9 Long-term relationships: partnering 154 10 Long-term relationships: framework agreements 171 11 Public-sector projects 191 12 The selection of building procurement systems 206 13 Future trends 237 References and further reading 253 Index 257 Figures 1.1 Time, cost and quality relationship triangle 9 1.2 The supply of building projects 12 1.3 An increase in supply of building projects 13 1.4 Perfectly inelastic supply of building projects 15 1.5 Demand for building projects 15 1.6 A shift in the demand for building projects 17 1.7 Market equilibrium in the supply and demand for building projects 18 2.1 Categories of clients in the construction industry 25 2.2 Allocation of risk between client and contractor 31 3.1 Construction KPIs 52 5.1 Sample page from a bill of quantities 90 5.2 An example of a priced activity schedule 92 6.1 The traditional procurement system in simplified diagrammatic form 95 6.2 RIBA plan of work 98 6.3 The two-stage procurement system in simplified diagrammatic form 105 7.1 Management contracting relationships 112 7.2 Construction management contractual relationships 123 8.1 Contractual relationships in a design and build project 137 8.2 Contractual and functional relationships: package deal 145 8.3 Contractual and functional relationships: EPC/turnkey 147 8.4 Typical structure for a BOT project 148 8.5 Contractual and functional relationships: develop and construct 149 9.1 The partnering triangle 154 10.1 Example of framework agreements 171 11.1 Structure of PFI procurement 197 12.1 Standard m odel of decision-making 207 Tables 1.1 International building output growth 2002–8 3 1.2 Stages in a building project 5 1.3 Stages and action stages in a building project 6 1.4 Actions required during the stages of a building project 8 1.5 The time, cost and quality relationship 10 2.1 Example of construction output data 26 2.2 Example of a simple risk register 34 3.1 Trends in methods of procurement in the 1980s (by number of contracts) 43 3.2 Trends in methods of procurement in the 1980s (by value of contracts) 43 3.3 Trends in methods of procurement in the 1990s (by number of contracts) 48 3.4 Trends in methods of procurement in the 1990s (by value of contracts) 48 3.5 Trends in methods of procurement in the 2000s (by number of contracts) 49 3.6 Trends in methods of procurement in the 2000s (by value of contracts) 49 3.7 List of key performance indicators issued by M4I in 2000 51 4.1 The RICS formal cost estimating and cost planning stages in context with the RIBA Plan of Work and OGC Gateways 59 4.2 Roles in a construction project in various procurement routes 69 5.1 Uniclass building elements and work sections 89 6.1 Key similarities and differences between competitive dialogue and negotiation 107 8.1 Ranking of design and build proposals 139 9.1 Procurement options under the PSPC suite of contracts 168 9.2 Benefits and advantages of partnering approach 169 11.1 Hierarchy of pre-qualification assessment 192 11.2 Nine success factors for a successful evaluation system 193 11.3 Projects and programmes reviewed in the OGC Gateway process 194 11.4 OGC Gateway process review stages 195 11.5 Step-by-step guide to the PFI process 196 11.6 The benefits of partnering 202 12.1 The procurement process 213 12.2 Appropriateness of procurement routes to client objectives 215 12.3 Weighted selection model for choosing an appropriate procurement system 217 Foreword As this new text makes clear in its opening paragraphs, the construction industry is very important to an economy, and the data and facts referring to the UK could equally apply to many high-income economies. Indeed in most European countries and American states construction activities now account for approximately 5 to 10 per cent of a nation’s GDP and are typically responsible for the employment of millions of site labourers and professionals. Obviously these figures are sensitive to the general pattern of economic activity. For example, the £30 billion cuts in UK public spending announced in the first coalition budget in June 2010 (the week this foreword was written) could seriously jeopardise the volume of construction output seen in 2011 and beyond, especially as the government procurement arm, the Office of Government Commerce, was merged into the Cabinet Office as part of a cost-cutting efficiency drive in the very same budget! The central point made by this historical commentary on the current economic climate is that to make sense of it, at any point in time, requires economic literacy, and part of this inevitably means that you need to appreciate the nature of the economic transactions that underpin each and every new order for a constructed product. As this Introduction to Building Procurement makes transparent, the world of construction is complicated by the initial negotiation between client and contractors, as no two jobs are quite the same and as a consequence the quality of a project, the time it takes and the cost involved are often unknown variables at the start of the procurement process. As the authors perceptively state at the very beginning of their text: ‘From the client’s perspective the investment is unpredictable in terms of delivery, budget and the standard of quality.’ From my position as a construction economist the two subject areas appear inseparable, but as you can see there is too much to each specialism to fit comfort- ably into one tex t. As a comprehensive work on procurement, however, you will find it difficult to better what is offered in this book. The breadth of experience that it draws on is certainly unique, and together the authors have provided a detailed and clear exposition of construction procurement. The text began its life when Jack Masterman was studying for his PhD in the early 1990s; Brian Greenhalgh subsequently recognised from his significant experience in the industry and academia that this needed to be revised and extended to take account of the various developments of the twenty-first century. Graham Squires, at the other end of his career, contributes an energy and sense of purpose to help bring the long