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Procurement Methods in Construction
April 14, 2015
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Table of Contents
1. Introduction....................................................................................................................3
1.1. Procurement methods in Saudi Arabia.................................................................3
1.2. Procurement framework........................................................................................5
Figure 1.1 General procurement strategy and framework Al!"a#mi $
%c&affer, 2004'...............................................................................................................(
2. Design uild !inance and "#erate..............................................................................(
Figure 2.1. )*e +F- %odel Aou!akr, 2013'.............................................../
Figure 2.2. Adantages and disadantages of t*e +F- model packman,
2002'................................................................................................................................
$. Partnering relationshi#...............................................................................................10
%. &ffects of Cost risk on method of #rocurement ........................................................11
Figure 4.1. rocurement met*ods and cost risks %ila##o $ "ook, 2014'......12
'. Conclusions...................................................................................................................13
(eferences.........................................................................................................................15
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1. INTRODUCTION
rocurement in construction refers to t*e met*ods used to otain funding, goods, and
serices, for construction actiities. roect owners suc* as t*e goernments and priate
enterprises *ae finite funds, euipment, laour, and ot*er resources at t*eir disposal. )*e
limitation acts as a constraint for completing infrastructure, social deelopment, or deelopment
proects. "ence, t*e goernment uses different procurement met*ods, y inoling priate
enterprises to participate in t*e proect. riate enterprises inest in t*e proect, deploy t*eir
resources and e6pertise, and complete t*e proect as per t*e reuirement. 7n return, t*ey otain
reimursement, and if t*e goernment *as sufficient funds, it raises a tender in w*ic* different
contractors participate as per t*e contract terms. eeral types of procurement met*ods are
aailale. )*ese include custom uild, design and uild, design uild finance and operate,
emerging cost contracts, lump sum contract, partnering, and many ot*ers As*wort*, 2011'. )*is
paper e6amines important types of procurement met*ods. )*e paper also discusses ot*er
important terms related to procurement, costs, and risks.
1.1. Procurement methods in Saudi Arabia
audi Araia and t*e %iddle 8ast *ae seen a ery large amount of construction actiity.
A numer of world famous and iconic uildings suc* as t*e Al *ur 9*alifa, 9ingdom )ower,
+iamond )ower, %akka* &lock :oyal )ower, and many infrastructure deelopment proects
*ae een constructed in t*e kingdom. 7n 2014, audi Araia *as planned construction proects
wort* more t*an ;/5 illion audi Ga#ette, 2014'.
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t*e met*ods used are planned design, engineering procurement and construction agreements
8&', and uild only agreements =aweed, 2004'.
>esser restrictions are placed on audi contractors, and t*ese include capital reuirement,
owning euipment, rela6ation for t*e numer ualified engineers directly employed, and so on.
7nternational contractors must otain a foreign inestment license? t*ey must form different
corporate structures suc* as )emporary &ommercial :egistrations, >>&s, or =oint tock
&ompany. &ontractors are placed different grades suc* as Grade A, Grade , and so on up to
Grade +. Grade A is at t*e *ig*est leel, and Grade + is at t*e lowest. -t*er classifications
include &lass 7, &lass 77, &lass 77, &lass 7@, and &lass @. )*ese grades are ased on t*e si#e and
numer of proects completed, numer of full time workers employed, and certifications
otained y t*e contractors suc* as 7- 001, 7- 14001, and -"A 1001, etc. Anot*er ery
important aspect of procurement met*od is t*e proect financing. 7nternational anks and
financial institutions offer financing to construction proects y using conentional financing
proects. >ocal audi anks mandate t*at *aria compliant financing met*ods for priate sector
proect Al!"a#mi, 200'.
ome e6amples of procurement met*ods for pulic and priate sector proects are
discussed as follows. )*e Aldara "ospital proect wort* A: 404 million was initiated t*roug* a
oint enture etween BA8 goernment and a Greek contractor. )*e 9ing 9*alid 7nternational
Airport, )erminal 5 proect wort* A: 1.5 illion was completed as a oint enture etween t*e
audi goernment and a )urkis* contractor. =edda* &ornic*e, a mega proect wort* A: 1,/3
illion was taken up as a oint enture etween Amias :eal 8state Group and t*e B9 ased
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>amar 7nestment and :eal 8state +eelopment &ompany. )*e 9ing Fa*ad %edical &ity
"ospital proect wort* A: 522 million was taken up as a partners*ip enture etween B9
ased +rake $ cull and "atoor >eig*ton pecon. )*e Ara 9udai +eelopment proect wit*
A: 13 illion was awarded to t*e audi inladin Group on a design and uild asis "usein,
2014'. A large numer of smaller proects use similar procurement met*ods.
1.2. Procurement framewor
)*is section proides a rief discussion aout t*e procurement framework. )*e
framework is applicale to all met*ods of procurement, w*ic* will e discussed in t*e ne6t
sections. )*e procurement strategy is closely aligned wit* t*e proect oecties and framework.
)*e procurement strategy *as four steps, w*ere a numer of actiities are carried out. )*e steps
are initiated in t*e ealuation and definition p*ases of a proect. )*e four steps are data
gat*ering, preliminary screening, procurement options analysis, and t*e recommended deliery
model and procurement met*od Al!"a#mi $ %c&affer, 2004'. )*e following figure illustrates
t*e procurement strategy and framework for all types of proects.
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Figure 1.1 General procurement strategy and framework (Al-Hazmi & Mcaffer!
"##$%
2. D!SI"N #UI$D %INANC! AND OP!RAT!
)*e design!uild!finance!operate +F-' model, also called t*e pulic priate
partners*ip ' model, or t*e ulic Finance 7nitiatie F7', is one of t*e procurement
met*ods used y t*e goernment. 7n t*is model, t*e goernment is t*e proect owner and it floats
a contract initing priate firms to participate in t*e proect. )*e goernment may proide part of
t*e funds y using special purpose e*icles, or onds, funds, and t*roug* lotteries. )*e priate
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party funds eit*er t*e w*ole amount or t*e alance? it designs t*e proect, uilds it as per t*e
specifications, and t*en operates t*e completed infrastructure for a fi6ed amount of time. +uring
t*e time w*en it operates t*e infrastructure, t*e priate party earns income from t*e proect, to
recoup its inestment. After t*e fi6ed tenure e6pires, t*e proect reerts to t*e goernment. B9
uses t*is model e6tensiely and some e6amples of proects are t*e &*unnel )unnel >ink, t*e
>ondon Bnderground system, many C" proects to uild *ospitals, toll roads on t*e *ig*ways,
toke on )rent sc*ools, lackurn "ospital, and many ot*ers Aou!akr, 2013'. )*e following
image illustrates t*e manner in w*ic* t*e +F- model works.
Figure ".1. 'e )F* Model (A+ou-+akr! "#1,%
)*e +F- model starts wit* a contract etween t*e priate party and t*e pulic sector.
)*e terms of t*e contract can ary, ut t*ey generally indicate t*at t*e risk in designing t*e
proect as per t*e reuirement, constructing t*e facility, and operating it, rests wit* t*e priate
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2002'. ome of t*e enefits and possile risks t*at emerge from suc* met*ods are illustrated in
t*e following figure.
Figure ".". Adantages and disadantages of t'e )F* model (packman!
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&ommunity erices, s*ould consider t*is met*od of procurement, after carefully studying t*e
proect reuirements.
&. PARTN!RIN" R!$ATIONS'IP
atterning relations*ip, partnering, or alliance, is anot*er procurement met*od used in
construction proects. )*e met*od indicates a collaoratie approac* w*ere two or more parties
collaorate to design finance, construct, and operate a pulic or priate proect.
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commercial comple6 construction proect, t*e partners may decide to otain a s*are in t*e
income otained from selling or leasing t*e space. 7n addition, eac* partner is gien a certain
amount of t*e real estate, w*ic* *e can sell or lease. 7n ot*er cases, a partners*ip firm is formed,
and t*e partners otain euity, eual to t*e inestment :oe $ =enkins, 2003'.
eeral adantages and disadantages are eident in t*is type of procurement met*od.
)*e adantages are t*at t*ere is a pooling of resources, and eac* party contriutes in t*e form of
funds, design and proect management e6pertise. )*e proect *as fle6iility, in terms of proect
scope, features, design c*anges, procurement met*ods, and ot*er aspects. )*e main
disadantages are t*at t*e w*ole proect depends on trust and close relations*ip etween t*e
partners. 7f t*ere is fallout etween t*e partners, or if one partner ecomes insolent, t*e proect
will come to a standstill. Bnless t*e contract terms are clear, liailities of a partner are transferred
to t*e proect. )*is means t*at if a partner goes insolent, t*en t*e creditors can claim a transfer
of t*e partners*ip in t*e proect. artners*ip proects can deelop a lenient attitude and censure,
penalties in case a partner delays e6ecuting t*e assigned responsiilities are not enforced. )*e
met*od is not cost efficient since t*ere is no competition for t*e serices offered. A partner can
inflate t*e costs and ot*er partners often accept t*e inflated prices. )*is can proe detrimental in
t*e end 8&7, 2014'.
(. !%%!CTS O% COST RIS) ON *!T'OD O% PROCUR!*!NT
-t*er t*an t*e tec*nical and functional aspects of a proect, one of t*e constraints is t*e
proect cost, and t*e risk t*at it places on t*e procurement met*od. &onstruction proects face a
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numer of risks and t*ese include design risks, construction cost and uality risks, risks to
sc*edule, and risks of operating and maintaining t*e facility. 8ac* type of procurement *as its
own risk, and cost is a maor factor in determining t*e risk. 7f t*e contractor underestimates t*e
costs, t*en t*ere is a maor cost risk, and unless t*e contract allows for cost escalations, t*e
contractor ears t*e risk As*wort*, 2011'. )*e following figure indicates t*e different types of
costs risks t*at eac* procurement met*od faces.
Figure $.1. /rocurement met'ods and cost risks (Milazzo & Hook! "#1$%
)*e main reason for adopting a procurement met*od is to ring in e6ternal e6pertise into
t*e proect. :isk transfer is an added enefit, and t*e proect owner s*ould not force a *ig* cost
risk proect on a contractor, since suc* practices end up in failure. From t*e figure, it is clear t*at
t*e least cost risk appears in t*e alliance type of procurement met*od, since eac* partner s*ares
t*e risk. )*erefore, eac* partner is tasked wit* t*e successful completion of t*e proect. )*e
*ig*est risk is seen in t*e type of procurement, since t*e priate partner assumes t*e maor
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cost risk, w*ile t*e proect owner, typically t*e soereign, can remain on t*e sidelines. )*e
enefits from proects are rewarded solely to t*e priate partner, along wit* t*e risk. "ence,
t*e financial iaility and appetite for risk ecome t*e main determinants in proects
%asterman, 200('.
7n design and construct proects, t*e contractor ears all t*e risks. +epending on t*e
contract conditions, t*e proect owner may agree to coer certain risks suc* as increase in
material costs and ot*er factors. "oweer, t*e final offer from t*e contractor ecomes inding
and *e ears all t*e risks. 7n construct only met*ods, t*e proect owner and contractors s*are
some of t*e risks, for t*e completion sc*edule. Generally, t*e contractor *as to ear t*e risks of
laour and euipment costs. )*e proect owner ears t*e risks of material costs, or c*anges in
regulations. 7n construction management met*od, t*e contractor ears all t*e risks, w*ile t*e
proect owner is e6posed to some latent risks. "oweer, in managing contractor procurement
met*od, t*e contractor ears all t*e risks &*itkara, 2005'.
An important determinant of costs risks is t*e proect duration, and t*e inolement of
su contractors. >arge proects wit* duration of more t*an a year face *ig*er cost risks. )*e main
contractor w*o ids for t*e proect, su contracts t*e work to smaller contractors. 7n suc* an
arrangement, ot* t*e contractors s*are t*e reenue. "oweer, t*e su contractor *as less
argaining power, and if often suee#ed to offer etter margins, and t*e cost risks for t*e main
contractor are *ig* As*wort*, 2011'.
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+. CONC$USIONS
)*e paper e6tensiely discussed important construction met*ods, and t*e cost risk effects
on different met*ods. +F- proects are popular in 8urope and ot*er areas, w*ere t*e
goernments do not *ae sufficient funds and resources to take up pulic sector proects. )*e
priate partner assumes all t*e risks and responsiilities for design funding, and construction,
w*ile otain returns from operating t*e facility. )*e ot*er types of procurement met*ods suc* as
partners*ip would reuire sustantial outlay from t*e oroug* in terms of funding, and skilled
resources. "ence, t*e +F- met*od of procurement is recommended for -ld &ross oroug*
&ouncil, +epartment of &ommunity erices, since t*e oroug* does not *ae to otain funding
from t*e goernment, and all t*e e6pertise if proided y t*e partner. "oweer, t*e oroug*
must carefully define t*e reuirements, estimate t*e udget, identity t*e rig*t type of partner, and
ascertain t*e urden placed on t*e community.
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R!%!R!NC!S
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Georgetown, B9.
A+7, 2014.Illustrative Examples of PPP in the EU. Accessed 13 Coemer 2014 from
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paper201105134531.financial.instruments.ppp.infrastructural.de.euillustratie.e6amp
les.of.ppp.in.t*e.eu
Al!"a#mi. ). A. $ %c&affer, :., 2000. roect procurement system selection model.Journal Of
Construction Engineering and Management, 12( 3', pp. 1/(!14.
Al!"a#mi, ). A., 200.Proect procurement s!stem selection model "#ith particular reference to
$audi %rabia&. +octoral )*esis, >oug*oroug* Bniersity, B9.
As*wort*, A., 2011. Contractual Procedures in the Construction Industr!. BC7)8&E Cew
Dealand.
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ygalle, >. 8., =a*re, % and ward, A., 2010. artnering relations*ips in constructionE A
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&*itkara, 9. 9., 2005.Proect Management - Planning( $cheduling and Controlling. %cGraw
"illE >ondon.
8&7, 2014.)ong-term partnering* %chieving continuous improvement and value - %n ECI
handboo+. Accessed 12 Coemer 2014 from www.ciria.org
"usein, A., 2014. Construction and proects in $audi %rabia* overvie#. &onstruction and
proects %ulti!urisdictional Guide 201314, :iyad*.
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+issertation for %asters in cience, 9ing Fa*d Bniersity of etroleum and %inerals,
+*a*ran, audi Araia.
%asterman, =. ondon.
%ila##o, A. $ "ook, :., 2014.,uilding and Construction Procurement uide Principles and
Options. Australian rocurement and &onstruction &ouncil, Adelaide.
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:oe, . $ =enkins, =., 2003.Partnering and %lliancing in Construction proects. weet $
%a6well >tdE >ondon.
audi Ga#ette, 2014. Construction proects #orth ./012bn in $audi %rabia during 3456.
Accessed 12 Coemer 2014 from
*ttpEenglis*.alaraiya.netenusinessproperty20141111+uai!plans!(!mln!7-!
as!it!steps!up!tourism!pus*.*tml
packman, %., 2002. ulic!priate partners*ipsE lessons from t*e ritis* approac*.Economic
$!stems, 2(3', pp. 23301.
D*eng, =. :. $ >ewis, %.A., 200. )*e dynamics of contractual and relational goernanceE
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