Construction procurement strategies and contracts

Collaboration models: which activities are typically included and what type of contracts (delivery models and payment mechanisms) are used? What is a partnering charter?

- Relationship-building activities - workshops with team-building activities etc - Partnering charter - "Samarbetsavtal"? "A partnership charter is an agreement between the parties to a construction contract designed to ensure that each party acts according to stated principles intended to achieve the successful delivery of the project" - Communication to support creative interaction - Joint risk management - Systems for following up goals and collaboration - A conflict management system - Often: Monetary incentives ("carrots" for collaboration and innovation), open books

The (general) procurement process: terminology, stages

1. Buyer/Client assesses needs and decides contracting/procurement strategy 2. Client prepares tendering documents/bidding documents with specifications and requirements. Qualification and evaluation criteria are often specified, in public contracting always. 3. Potential tenderers/bidders are invited, or the call for tenders is published. 4. Suppliers respond with a tender/bid, including information requested in the tendering documents (price, competence, design, processes, systems, etc.) 5. The client evaluates the tenders according to the criteria and signs a contract with the company offering the most advantageous tender

Delivery model: DBB/traditional conditions of contract (2): General contracting

A general contractor (most often the building contractor) assumes responsibility for all construction works: procures and coordinates subcontractors

You do not need to understand prime cost contracts (but the prime cost payment principle, which is something different)

Cost reimbursable: the contractor is reimbursed for actual costs. Also called prime cost principle. Often includes a fixed part (fee) covering site facilities, overhead, profit, etc. Requires auditing and value engineering, cost risk with client. GPT: The Prime Cost Payment principle is a common method of payment used in the Swedish construction industry. Under this principle, the construction contract specifies a set of items that the contractor must purchase from suppliers, such as materials, fixtures, and fittings. The contractor will then purchase these items and provide the receipts to the client as evidence of their costs. The client will reimburse the contractor for the actual cost of these items, without any markup or profit margin. This means that the contractor is only paid for their direct costs, and not for any additional costs or overheads. The Prime Cost Payment principle is often used in construction contracts when the final cost of the project is uncertain or when the client wants greater transparency over the cost of materials and fixtures. It can also be used when there is a risk that the contractor may inflate the cost of materials to increase their profit margins. In Sweden, the Prime Cost Payment principle is commonly used in construction contracts, and it is regulated by the AB 04 General Conditions for Construction Contracts, which sets out the rules and procedures for using this payment method.

Delivery model: Design-Bid-Build, or traditional, conditions of contract

Design-Bid-Build, or traditional, conditions of contract (1) Client appoints design team, the contractor is only liable for the execution. In some countries (not Sweden) the Architect/Engineer oversees construction. Swedish contract: AB04 (here called performance contract). Corresponds to FIDIC Red Book.

Delivery model: Design-build contract

The client engages a contractor to be responsible for both design and construction. Ideally based on functional/performance specifications (then called turnkey). The contractor procures design consultants, but the client's consultants can also be novated. Swedish contract: ABT 06 (Totalentreprenad). Corresponds to FIDIC Yellow Book.

Target cost contracts: be able to explain in words (using correct terminology) and illustrate with figures, perform simple calculations of gains/pains, understand the drivers to raise/renegotiate target cost.

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The different types of tendering/bidding documents

• DBB: "Allmänna bestämmelser för byggnads-, anläggnings - och installationsentreprenader (AB 04)" of 2004 (General Conditions of Contract for Building, Civil Engineering and Installation Work) • DB: "Allmänna bestämmelser för totalentreprenader, avsedda för byggnads-, anläggnings- och installationsarbeten (ABT 06) of 2006 (General Conditions of Contract för Building, Civil Engineering and Installation Work performed on a package deal basis). • Consultancy contracts: "Allmänna bestämmelser för konsultuppdrag inom arkitekt- och ingenjörsverksamhet (ABK 09) of 2009 (General Rules for Consulting Works in Architectural and Engineering Activities)

The components of a procurement strategy

• Delivery model/system (traditional/DBB, DB, management, etc.) - Related to Conditions of contract: AB, JCT, NEC, FIDIC, PPC 2000, FAC 1 etc. - In Sweden only AB/ABT= DBB/DB (used for single projects and programs/frameworks • Reward/payment/pricing mechanism (contract type): Fixed price/lump sum, cost reimbursable, unit prices, target cost, bonuses/penalties, Whole Life Costs • Contract award method (open, selective, public, etc.) • Collaboration model (collaborative tools and activities)

Payment principles 1: Price-based

• Lump sum/fixed price: the client pays a fixed price to the contractor irrespective of the actual cost. Cost risk with contractor. • Schedules of rates, unit prices, remeasurement: contractors tender fixed prices per unit of work or activity. Facilitates valuation of limited variations. • Bills of quantities (UK): the client develops a list of quantities and assumes risk for errors. Regular payment based on valuation of quantities by quantity surveyor.

Payment principles 3: other incentive models

• Schedule incentives: bonus for early (or timely) project or task completion. (Negative: liquidated damages) • Performance incentives: bonus for meeting specified performance targets. • Relational/behavioural: bonus for achieving relational or behavioural goals. Often in partnering projects.

Payment principles 2: cost-based

• Used when uncertainty is high or when cost of contract is less important • Fee-based contracts: fee per hour, or percentage of construction costs. For design consultants and for contractors in early stages of partnering. • Cost reimbursable: the contractor is reimbursed for actual costs. Also called prime cost principle. Often includes a fixed part (fee) covering site facilities, overhead, profit, etc. Requires auditing and value engineering, cost risk with client. • Guaranteed maximum price (GMP): the contractor is reimbursed for actual costs up to an agreed maximum price (sometimes with sharing of underruns) • Target cost contracts with a gainshare/painshare formula: A cost reimbursable contract where cost overruns and underruns relative to an agreed target cost are shared between the client and the contractor. Allocates risks more equally between partners. Often used with partnering.