Procurement Methods for Construction Projects: A Detailed Analysis

This report provides a comprehensive analysis of procurement methods in construction projects, with a particular emphasis on the Design Build Finance Operate Maintain (DBFOM) approach. It begins with an introduction to procurement as a systematic process for acquiring goods and services in construction, highlighting the importance of selecting the right strategy based on factors like cost, speed, quality, and risk. The report then delves into a critical literature review of the DBFOM method, explaining its characteristics, advantages, and disadvantages. It discusses how DBFOM involves a single contractor responsible for designing, building, financing, and operating a project, often through public-private partnerships. The report also examines the benefits of DBFOM for various stakeholders, including clients, contractors, and the supply chain, focusing on aspects such as cost certainty, quicker delivery times, and single-point responsibility. Furthermore, the report compares the DBFOM approach with other procurement methods, such as Design Bid Build (DBB) and Design-build, highlighting the differences in terms of cost competition, risk allocation, and decision-making processes. The report also suggests management systems to minimize partnership-related issues and concludes with a summary of the key findings and implications of the research.

Procurement Methods

TABLE OF CONTENTS
1) INTRODUCTION.......................................................................................................................3
2) CRITICAL LITERATURE REVIEW.........................................................................................3
Design Build Finance Operate Maintain Procurement method...................................................3
Range of benefits that the client, contractor and supply chain can expect to see when entering
into a partnering relationship.......................................................................................................5
3) ANALYSIS/ DISCUSSION........................................................................................................7
Comparison of Design Build Finance Operate Maintain (DBFOM) approach with other
procurement methods...................................................................................................................7
Explaining the consideration of cost risk affects the choice of method of procurement.............8
Suggesting management systems to minimize partnership related issues...................................9
4) CONCLUSION.........................................................................................................................10
REFERENCES..............................................................................................................................11

1) INTRODUCTION
In the field of building or construction project, procurement is identified as a systematic
process which is applied for purchasing different types of goods and services. There are many
different routes available by which the design and construction of building can be procured.
Selection of procurement strategy is carried out with reference to long term objectives of client's
business plan (Chasey, 2012). In this process, wide range of factors are considered in the
selection of procurement path such as cost, speed, quality and risk. All these elements are having
significant impact on the success of project.
The present study is going to discuss different kinds of procurement methods. In this
regard, this report is focusing on Design Build Finance and Operate method of procurement.
Therefore, it carries out detail assessment of pros and cons of Design Build Finance and Operate
method. This system also conducts a comparison of wide range of procurement tactics which are
applied in different construction projects. It also describes significant benefits which are
expected by the client, contractor and other individuals while entering in civil engineering
contracts.
2) CRITICAL LITERATURE REVIEW
Design Build Finance Operate Maintain Procurement method
Design Build Finance Operate Maintain (DBFOM) approach is identified as a
procurement in which public private partnership (PPP) is developed for handling wide range of
construction projects. In the context, the researcher Love (2010) has found that a single
contractor is appointed by public authority which is responsible for designing, building,
financing and operating of a project. All these practices are bundled together and transferred to
private sector partners. In these kinds of projects, long term relationship is developed among
different parties. It is evaluated that the most common element identified in all projects that cuts
across all DBFOM projects is that all these civil engineering projects such as highways, bridges
etc (Design Build Finance Operate Maintain Concession, 2015). are either partly or wholly
financed by debt leveraging revenue streams dedicated to the project. Wirtz (2009) has evaluated
that direct user fees (tolls) is termed as the most common revenue source. In addition to that
future revenues are leveraged to issue bonds or other debt that play an important role for the
generation of funds for capital and project development costs. As per the public interest of the
project, these construction projects are also supported by public sector grants in the form of
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money or other contributions. In certain cases, private partners are also carried out the equity
investments as well.
Advantages Design Build Finance Operate Maintain Procurement method
A range of organizations can function as the sponsor in DBFOM arrangements such as
department of transportation, toll authorities, transit agencies as well local government. The
investigation of Love (2008) has addressed that DBFOM concessions often extend for a period
of 30 to 50 years or even longer as per the competitive bidding conditions. In the contemporary
business environment, DBFOM procurements are playing an important role for developing and
operating surface transportation infrastructure to private sector partners Larsen (2008) has
addressed several positive aspects of Design Build Finance Operate Maintain procurement
process. This concept helps developers for speeding up all the processes related to design and
development. There is normally a much quicker delivery time than traditional procurement. This
is because a single contractor manages all operations related to funding, design, development etc
(Eriksson 2011). This thing influences a single point responsibilities in which contractor is
assigned for managing all the aspects of projects so as public authorities can easily take
appropriate information about the projects.
Pan (2008) evaluated that contractor is responsible for the design and construction
therefore contractor and its supply chain are involved in the production of the design so as both
departments influence acceptance of design along with high speed production. This approach
also provides significant benefits by providing cost certainty. This is because a single contractor
always tries to develop such design that would save cost, increase quality and profit margin.
This approach has been found very effective for reducing cost of the project (Regan, 2011). This
process has found very effective for lowering management cost along with consultation fees. It
also increases the speed of the project as per the requirement of project.
Disadvantages Design Build Finance Operate Maintain Procurement method
There are various negative aspects identified associated with DBFOM procurement. In
this context, Baldwin (2009) has argued that initial price may be higher as contractor may build
into his price which is considered as risk premium. Author further argued that client has less
control and influence over design matters. This is because there is only limited scope for the
client in order to implement changes in project as per his requirements (Gindlesperger, 2008).
Once the client's requirements and contractor's proposals have been agreed otherwise the costing
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of project may be increased. Lindberg (2008) has evaluated that avoidance of design quality
standards is also identified in these types of contract. This contractor tries to reduce cost of
construction by avoiding quality standards. In addition to that client has lack control over
architect because architect acts for the contractor not for the client. This element leads conflicts
among the client and contractor therefore check on quality at that level is not available to the
client.
Range of benefits that the client, contractor and supply chain can expect to see when entering
into a partnering relationship
In current market scenario the number client, contractor and supply chain mainly focuses
on partnership contracts for better accomplishment of goals or project. In the support of this, it
can be said that with an assistance of partnership projects in context of civil the client, contractor
and supply chain can attain various benefits. Client have number of expectations from these
kinds of partnership civil project is that project can be accomplished in systematic manner. As
per the view of Lam (2008) , it can be said that the partnership civil projects will allow client to
ensure about systematic purchasing regarding diverse goods and services which are essential for
better accomplishment of project. Client also expect that the number of ways can be spotted with
an partnership in context of design and construction of building.
Basheka (2008) has also stated that the long term projects can also be accomplished in
effective manner by entering into a partnering relationship in the design and construction of civil
engineering projects. Client also expect that the long term objectives of business plan can be
attained in less time period and low cost of operations. It is because it reduces the cost of
operations and increase the accessibility of human resource and other resources. Other than this,
it has also been spotted that the financial resources can also be attained in better way by focusing
on partnering relationship in the design and construction of civil engineering projects
(Migliaccio, 2009). For example, the builder is looking for civil project which requires high level
of investment then in this situation by entering in partnering relationship in the design and
construction of civil engineering project with the contractor the individual can easily allocate the
finance resources in better way.
As per the Abdelrahman (2008), contractor also have some expectations from the
partnership projects such as reduction in cost of purchase. Contractor expect that the building
material can be purchased in easy manner with an assistance of client. Moreover, another
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expectation can be that advancement in profit margin ratio by having operations in team. In the
support of this, Gordon Murray (2009) has also stated that contractor also expect that the long
term relationship is developed among different parties which will boost the business
opportunities and lead firm to impressive success. With an assistance of partnering relationship
in the design and construction of civil engineering project the supply chain can also be improved.
It provides easy availability of number of essential resources at very low cost. The completion of
civil project can also be take place in designed or framed time period. It plays important role for
generation of funds for capital and project development costs which is also beneficial for
effective supply chain. Moreover, Ng (2012) has stated that it also plays significant role for
developing and operating surface transportation infrastructure by the assistance of each partner.
Client, contractor and supply expects coordination from each other in order to meet the project
goals in effective manner.
Disadvantages of entering into a partnering relationship in the design and construction of
civil engineering projects
Other than this, it can also be argued that there are number of disadvantages of entering
into a partnering relationship in the design and construction of civil engineering projects which
can influence the business organisation operations in negative manner. In the support of this, it
can be stated that the partnership contract can face some legal issues due to some legal
conditions (Creese, 2009). In order to have partnership, it is necessary for all partners to follow
various legal aspects and meet the standards of governing authority. If partners are not following
the standards as per guidelines then overall project can face some legal issues. Moreover, the
issue regarding financial aspect can also be faced in process which will influence the overall
project in negative manner.
Furthermore, it might be possible that some partner like supply chain is offering bad
quality of raw material in order to earn more profit in unethical manner. It will reduce the
productivity of project and quality of final outcome which may influence in negative manner at
long term aspect (Larson, 2010). In the support of this, it can also be said that the business
changes in workforce needs can also influence overall project. Other than this, the accident due
to negligence of contractor can impact the overall project in negative manner and may lead client
to various legal issues.
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3) ANALYSIS/ DISCUSSION
Comparison of Design Build Finance Operate Maintain (DBFOM) approach with other
procurement methods
Comparison of (DBFOM) approach with other procurement methods provides detail
understanding of different concepts associated with procurement process. This comparison of
Design Build Finance Operate Maintain (DBFOM) and Design Bid Build (DBB) has addressed
that DBB procurement process is managed through Low bid construction cost competition. On
the other hand, Lifecycle & financing cost competition is applied in the DBFOM procurement
process. In the DBB, responsibilities of execution is mainly shared between designer and builder
along with owner holds significance responsibility for interface risk (TYPES OF
PARTNERSHIPS, 2015). On the other hand, DBFOM has all the responsibilities related to
execution. In this process of DDB procurement, owner decision and review process extensive is
identified in decision making framework and lack of timeliness adds cost and delays. In addition
to that time value of money is not apparent (Chasey, 2012). On other other hand, Owner
decisions and reviews (less changes) are more limited in DBFOM as well as time value of money
is addressed as a key diver.
In similar way, a Design-build is termed as very effective approach when private
contractor provides both design and construction of a project to the public agency. This type of
partnership plays important role to expect reduce time, save money, provide stronger guarantees
and allocate additional project risk to the private sector. This approach has played important role
for managing conflict by having a single entity responsible to the public owner for the design and
construction (Love, 2010). The public sector partner owns the assets so as they have
responsibility for the operation and maintenance. On other hand in DBFOM procurement
process, ownership on the project is managed by public authorities and other activities related to
operations and maintenance is scheduled by contractor.
In similar way, Design build operate is similar to DBFOM procurement process in which
a single contract is awarded for the design, construction, and operation of a capital improvement.
This approach has played important role for creation of single point of responsibility for design
and construction that has played important role to speed up project completion time by
facilitating the overlap of the design and construction phases of the project (Wirtz, 2009). This
method contains one contract for design with an architect or engineer, followed by a different
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contract with a builder for project construction along with the owner’s of the project. In this
process, contractor is not made any investment and all expenditures are bared by client company.
On the other hand, all financing relate operations are managed by contractor in Design Build
Finance Operate Maintain (Love, 2008). Therefore, a single contractor uses project financing
approach that provides needed cash flow support for efficient execution. Apart from that it has
been analysed that DBFOM procurement process has found very effective tool in order to save
capital of public from big investments.
The Design-Build-Finance-Operate-Maintain-Transfer (DBFOMT) partnership model is
is similar to DBFOM procurement process except that the private sector owns the asset until the
end of the contract when the ownership is transferred to the public sector. This is not possible in
DBFOM (Larsen, 2008). Furthermore, it has been analysed that BOO: Build-Own-Operate is
termed as great tool which a contractor constructs and operates a facility without transferring
ownership to the public sector. A Legal title on the project is remains with the private sector, and
there is no obligation for the public sector to purchase the facility or take title. A BOO
transaction has found very effective to qualify for tax-exempt status as a service contract if all
Internal Revenue Code requirements are satisfied (Eriksson 2011). In the contrary, DBFOM is
used to develop long term partnership project.
Explaining the consideration of cost risk affects the choice of method of procurement
Cost risks play important role in selection of different procurement methods. It is a
approach of quantitative risk analysis in which management attempts to estimate the frequency
of risks and the magnitude of their consequences. In the field of construction, cost risk is
influenced by several factors such as volume of investment, duration of project, efficiency of
contractor, revenue from project (Pan, 2008). All these elements are considered in selection of
procurement method. The analysis of project cost risk is carried out with the Work Breakdown
Structure (WBS), which is made up of Work Packages (WPs). WBS contains three- point
estimate for the cost of the planned work. The three estimates are the minimum, most likely, and
maximum values for each WP cost. The cost of project components (WPs) is replaced by a
probability distribution that plays important to determine uncertainties.
On the basis of these tools, public authorities and an individuals selects method of
procurement. In DBFOM procurement process, owner of the project rewards all responsibilities
to single contractor related to design, building, finance, operate and maintenance (Regan, 2011).
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Therefore, contractor always tires to reduce cost of project to increase in profit margin. In this
situation, cost risks may emerged due to avoidance of quality standards. Furthermore, a
contractor also increases pricing of projects due to high risk involves in project. This thing
influences overall cost of project for public authority due to addition of risk premium.
For developing of different partnership contracts associated with civil engineering
projects, public authority also uses Design build operate procurement method. In this context, it
has been evaluated that risk related to investment is mainly managed by client (Baldwin, 2009).
In this regards, the change in cost of finance has direct impact on costing of project. In this
method, a contractor follows the functions of design, constructions and operations. In this
process, a small delay in project as compared to deadline may influence cost of project and
owner has to provide extra funds in order to control delay. Apart form that it evaluated that this
method of procurement provides benefits to client when a civil engineering project is
accomplished with very less duration (Gindlesperger, 2008)). In the long term projects, this
approach increases cost risks for owners.
In the Design Bid Build procurement method, owner party provides opportunities to
contractor associated with development of unique design, bidding for project and building. In
this process, owner of the project needs to develop other contract for maintenance and has to
invest own sources of funds (Lindberg, 2008). These factors play important role in costing of
project. The maintenance of project also affects its efficiency which is also considered as an
important motivator cost risks. By considering different elements of cost risks, management
takes appropriate decisions regarding selection of procurement process.
Suggesting management systems to minimize partnership related issues
In order to overcome the issues and minimize the disadvantages the partners and
organisation can focus on various management systems. In other aspect, it can be said that while
entering in partnering relationship in the design and construction of civil engineering projects the
partners can focus on total quality management system. It is a system which will facilitate
partners to ensure about the quality of raw materials (Lam, 2008). It is considered as a structured
approach which provide better opportunities to improve the quality of products and services by
improved focus on continuous monitoring and feedback systems. During the operations in
partnership the client can hire a monitoring team which will ensure that the supply chain is
providing high quality raw material so that operations can be accomplished in efficient manner.
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Monitoring team can have regular feedback with workforce in order to understand their needs
and identify the issues regarding quality (Basheka (2008). It will also provide information
regarding diverse quality and work standards which can have better control over diverse
operational activities. Moreover, to minimize the other issues the client and management can
also focus on risk assessment system as it will provide better understanding about diverse risk
factors which can influence the success of civil project. In other aspect, it can be said that risk
assessment is a procedure which facilitates in effective identification of potential hazards which
can occur and influence the overall operations of civil project (Migliaccio, 2009). Furthermore,
it will also facilitate in creating better awareness among workforce regarding diverse operational
issues and risk. Management can also have cost saving by creating proactive activities within
work culture. Training and inspections can also be taken into account as per the consideration of
risk management outcomes.
4) CONCLUSION
On the basis of above assessment, it can be concluded that Design Build Finance Operate
Maintain procurement method has found very effective for building huge capital intensive and
long duration projects such as infrastructure projects. This report has addressed that a civil
engineering project is identified as successful project when its attained expectations of different
partners such as client, contractor etc. This investigation has found that evaluation of cost risk
associated with construction project is identified as a most important concept that influences
decisions related to selection of an appropriate procurement method.
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Online
Design Build Finance Operate Maintain Concession. 2015. [Online]. Available through:
<https://www.fhwa.dot.gov/ipd/p3/defined/design_build_finance_operate.aspx>.
[Accessed on: 27th November 2015].
TYPES OF PARTNERSHIPS. 2015. [Online]. Available through: <http://www.ncppp.org/ppp-
basics/types-of-partnerships/>. [Accessed on: 27th November 2015].
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