Procurement and Supply Chain Management

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Module KB7035

Module Title Procurement and Supply Chain Management

Procurement and supply Chain Management Report

Name Dara Easwar Karthik

ID W19042969

Department of Mechanical and Construction Engineering

Northumbria University, Newcastle upon Tyne, NE18ST, United Kingdom

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Executive summary

This report presents information necessary to ensure efficient governance of the procurement

process in the $55 million construction of an autonomous but state-funded school in York, which

is being undertaken by a York-based parent-led educational group. In achieving this, the report

has developed a procurement plan that can be used in the project based on the characteristics

of the project and the needs of the client. Consequently, the report established Management

Procurement as the appropriate procurement arrangement suitable in this project as per the

client requirements, including the need for early delivery of the project and constant involvement

in the client in the project. Following this, the Management Contract under JCT is found to be

the most suitable standard form of contract that should be used in this project and the Two-

stage tendering strategy as most appropriate to achieve the most economically advantageous

tender. Since Management Contract requires the client to appoint a Management contractor, the

Prime cost plus management fee is found to be the most applicable mechanism for pricing in

this project. However, the report establishes that contractors, especially subcontractors and

suppliers could see financial challenges under COVID-19 situation under this form of contract

since the client cannot direct the contractors on what to do with the money they pay them.

Owing to this, the reportrecommends that contractors, suppliers and subcontractors be

encouraged to take advantage of the available funding opportunities by the government and that

the main contractor is encouraged to pay their subcontractors and suppliers on time to keep

them afloat.

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Contents

1.0 Introduction 4

2.0 Detailed procurement plan 5

2.1 Client's organizational characteristics and the client needs 5

2.2 Project characteristics 6

2.3 Most suitable procurement arrangement 7

2.4 Most suitable main standard form of contract 9

2.5 Most suitable tendering strategy 9

2.6 Mechanism for pricing and agreeing on the price for the project 10

3.0 Current situations 11

3.1 Impacts of COVID-19 on the client's procurement strategy 11

3.2 How to manage the COVID-19 issues to enable project success, business

benefits and overall ethical operations 13

Conclusion 13

References 15

Appendixes 18

Appendix 1: Selection of the most appropriate Management Contracting option in the Project 18

Appendix 2: Category groups planning in Procurement and supply chain process 19

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1.0 Introduction

The construction industry is one of the crucial industry for many countries, often contributing

about 7-10% of the Gross Domestic Product (Eriksson and Westerberg, 2009). However, many

projects tend to fail because of lack of proper procurement procedures and practices (Mabveka,

2018), which makes the procurement process very crucial for any given construction

project.Kafile (2018) and Tiwari et al. (2018) identified increment of project complications, ever-

changing customer's needs and expectations, vulnerability, absence of team integration and the

separation of outline plan from the construction as some of the procurement issues that

construction industry face. To address some of these issues and ensure efficient governance in

projects within the context of the construction industry, a systemic and holistic approach to

procurement procedures is very important (Eriksson and Westerberg, 2009).

Based on this background, this report seeks to present information necessary to ensure efficient

governance of the procurement process in the $55 million construction of an autonomous but

state-funded school in York, which is being undertaken by a York-based parent-led educational

group. The project involves the construction of 14 Classrooms, staff accommodation, laboratory

facilities, VR 3D printing and digital spaces, canteen and dining facilities as well as outdoor

learning and play area. This report is very important in this project because the leading

management team appointed by the parent-led educational promoters as a caretaker board of

trustee do not have wide knowledge and experience in the construction project despite being

involved in making a very important operational decision in the proposed construction of the

above school facilities. As such, this report presents information that will help the Board of

trustee in making appropriate decisions about the procurement processes in the project,

including information relating to how the current situations in the construction industry, such as

COVID-19 could be managed to ensure the project is delivered in the most efficient way

possible.

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2.0 Detailed procurement plan

2.1 Client's organizational characteristics and the client needs

Understanding the clients' organizational characteristics is a very crucial aspect in the

procurement process since clients are not a homogenous organized group of individuals or

organization and therefore different clients may have different needs and expectations that have

to be considered in the selection of procurement methods so that these individual needs and

expectations can be met (Masterman and Gameson, 1994). Mortledge et al. (2006) note that

this important because of the client's desired level of involvement in project and culture as well

as experience and knowledge influence the choice of procurement method. Thus, the client's

organizational characteristics are very paramount. In this project, the client characteristics can

be summarized as follows, which is based on a framework suggested by Ng et al. (2002);

Characteristics Description

Speed The client wants a speedy procurement process due to the desire that the

project must be completed as soon as possible, not later than May 2022

to enable the smooth opening of the school in September 2022.

Cost certainty The client has already secured a GBP55 million funds for the project.

However, the amount is non-negotiable budget, hence cost certainty is

very important for the client. The project has to be completed within the

budget.

Time certainty The client wants a timely completion of the project since any delay is not

acceptable because it will affect the reputation of the school and delay the

smooth opening of the school in September 2022.

Flexibility Flexibility in the project requirements is not a priority for the client since

new changes will result in additional funding, which is not available for the

client due to a fixed budget. However, the contractor has to ensure the

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project meets client design specifications and requirements.

Responsibility The client wants to be involved in the project and be informed about the

project over its lifecycle.

Complexity The design theme of the school has to be a natural-looking building with

the outside environment linking with the interior, taking into account the

several external access points and distinct outdoor learning and play

areas. Most importantly, the client requires the school plan to take into

account PV and other sustainable technologies, hence a bit more

complex.

Quality level The client demands first-class facilities that reflect the ambition of the

school as a modern provider of digital and health technology education.

Risk allocation The client wants to be aware of risks and uncertainties in the project

during the procuring process and how this impact the project success.

Price

competition

The client is concerned about value for money and therefore a price

competition in the award of the contract is important as this will allow the

client to compare different tenders and evaluate the one that is most

economically advantageous.

2.2 Project characteristics

According to Love et al. (2009), project characteristics in the construction industry is paramount

in the selection of procurement methods and is concerned with the size, complexity, location

and uniqueness of the project since these can have a significant impact on the project across

key aspects such as the time, cost and risk involved in the project. Most importantly, Love et al.

(2009) developed a framework upon which project characteristics in the construction industry

can be formulated, which is used in this report to establish the project characteristics as follows;

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Project title UTC autonomous and

state-funded school.

Project start date January 2021

Project value GBP55 million Project completion date May 2022

Contractor Not yet specified Opening of the project to

the public

September 2022

Project location York, in the UK. Project duration 70 weeks

Key project objectives:

 To develop first-class school facilities to offer Digital technologies and Health sciences

skills to about 430 pupils.

 To complete the project within the budget of GBP55 million.

 To complete the project within a period of 70 weeks to May 2022 to allow smooth

opening of the school in September 2022 and avoid the tarnishing reputation of the

school experienced by similar schools in the past where delays were forcing them to

postpone opening by one academic year or temporary accommodation.

 To maximize value for money at every stage of the project lifecycle.

Project constraints:

 A non-negotiable budget of GBP55 million

 A fixed project schedule of 70 weeks

2.3 Most suitable procurement arrangement

According to Love et al. (2009), three common procurement arrangement methods can be

employed in the construction industry: Design and Manage, Management Procurement, and the

Traditional Lump-sum procurement arrangement options. Considering the needs of the client in

this project and the characteristics of the projects as discussed above, the most appropriate

procurement arrangement will be Management Procurement. According to Love et al. (2009),

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this procurement is most appropriate to a company when there is need for an early start and

early completion of the project, the client and his advisers have insufficient management

resources, the project is organizationally complex thereby demanding multiplicity of consultant

and contractor organizations, and when maximum price competition is necessary for the work to

be carried out in the most economically advantageous way possible, which to be captured in the

client and project characteristics mentioned above. Under the Management Procurement

arrangement, there two options that will be available to the client: Management Contracting, and

Construction Management form of contracts. In selecting the most appropriate option among

these two, the client characteristics are considered using a scale of 1 to 5, where 1 is the least

important criteria and 5 is the highest criteria. The results are as summarized in Appendix 1 of

this report.

The results show that the most appropriate Management Procurement option that fits with client

requirements is the Management Contract (MC) option, with a score of 185 points compared to

Construction Management (CM) option, which has a score of 152 points. According to Love et

al. (2009), under the Management Contracting, the client will be required to appoint both an

independent professional team and management contractor who will be involved in the pre-

construction stages to provide the client with professional advice on the pre-construction

activities since the client has insufficient knowledge in construction project procurements and

management activities. During the construction period, they will take responsibility in ensuring

the project activities are executed as per the direct work contracts. As a result, it is possible to

make an early start on-site and attain early completion. However, for this type of contract to be a

success, there must be a collaboration and trust between the client, contractor and the design

consultants, hence this contract will ensure the client is fully involved over the project lifecycle to

make the project a success. According to Love et al. (2009), it is preferred that the contractor is

selected no later than the design stage. This is crucial since it will ensure that the contractor is

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involved in providing professional advice on design programme and participate in making

decisions on the other project activities such as the delivery of project materials and the

construction programmes. The role of the management contractor is to carry out the project

activities according to project specifications, project design and drawings, and as per the

contract cost plan prepared by the quantity survey (Love et al., 2009).

2.4 Most suitable main standard form of contract

The two most common standard form of a contract in the construction industry across the globe

and especially in the UK is the Joint Contracts Tribunal (JCT) standard and the NEC standard.

Since the proposed procurement arrangement is the Management Procurement and the most

suitable option under this is the Management Contract, the most suitable main standard form of

contract is JCT, particularly the Management Contract (MC11) according to Jctltd.co.uk

(2020).The MC11 has the same benefits as the Management Contract discussed above,

including the factor that the client will be required to appoint a management contractor to

oversee the entire work in the project and in doing so, the management contractor has to

collaborate and work together with the other contractors and the client to ensure the project is a

success, hence leading to a high to the very high involvement of the client in the project as

expected by the client (The Joint Contracts Tribunal Limited, 2011).

2.5 Most suitable tendering strategy

According to Martens and Smith (2018), from the point of the contracting authority, the most

economically advantageous tender is established based on the cost, using a cost-effective

approach such as life-cycle costing plus other criteria, such social and environmental aspects,

work environment, innovation, and best price-quality ratio. For this to be achieved in a given

project, they argue that there is need to ensure the possibility of effective competition and clear

criteria providing details of how the tenderers were evaluated against the criteria that the results

from the tendering process can be verified and ensure only the most economically

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advantageous tenderer is awarded contracts. There are three main types of tendering strategies

available in the construction industry: single-stage tendering, two-stage tendering, and

negotiated tendering strategy (Cicmil and Marshall, 2005). Among these tendering strategies

available, the most appropriate one that will ensure the most economically advantageous tender

in line with the requirement of the client and the procurement arrangement mentioned above is

the Two-stage tendering strategy. According to RICS (2017), this strategy is more appropriate in

situations in which there is a time-constrained since it enables design and tendering to overlap.

Since the "Concept design" of the proposed school project has already been completed but the

detail design of the project is yet to be started, using the Two-stage tendering strategy will

ensure that tendering and design can overlap to minimize potential delays in the const ruction

activities of the school owing to the time constraints required in the project. A key benefit of this

tendering strategy is that the design process of the project will benefit from the technical input of

a contractor in the later design stages. Instead of bidding for the entire project work, the

preferred contractor is selected in a competitive process and then joins the design team on a

consultancy basis using a pre-construction services agreement (PCSA). This ensures

collaboration between the design team and the execution contractors, which could address

technical design issues before the preferred contractor presents a bid for the execution of the

project (RICS, 2017). It is the competitive selection of the contractors in this tendering strategy

that will ensure the most economically advantageous tender is achieved as the criteria designed

by the client with help of independent professional consultant is followed in choosing the best

contractor.

2.6 Mechanism for pricing and agreeing on the price for the project

Several pricing mechanisms are commonly used in the construction industry, including cost

reimbursement, measurement contracts, and lump sum contracts among others (Love et al.,

2009). Normally, the pricing mechanism employed has to be consistent with the standard form

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of contract that is used and to ensure the pricing the contract specifications are compatible.

Since this project uses JCT Management Contact (CM11) form of contract, the pricing used

therefore has to be aligned with the requirement of this contract form. Since the contract

involves a Management contractor responsible for overseeing the overall works in the project,

there pricing has to take into account the fee due to the management contractor for the work

being done. As such, JCT recommends that the pricing mechanism used in this case be the

Prime cost of the Project plus a Management Fee for the management contractor (The Joint

Contracts Tribunal Limited, 2017). To successfully use this mechanism to pricing, the client will

need to have appointed the Management contractor, a Quantity Surveyor and Architect/Contract

Administrator. The Management contractor will be involved in ensuring teamwork between the

Quantity Surveyor, Architect/Contract Administrator and teams involved in the project, including

agreeing constructions methods, the work packages, and contract cost plan. Once this agreed,

the client should be notified by Architect/Contract Administrator that it is practical to undertake

the project and the client can choose whether the project should continue to the next stage or

not.

3.0 Current situations

3.1 Impacts of COVID-19 on the client's procurement strategy

COVID-19 has had unprecedented impacts in many industries across the globe and the

construction industry was not spared either. The industry is expected to see fall of about 20.6%

in output due to COVID-19 impacts on the industry, particularly due to lockdown and travel

restrictions as well as social distancing measures, which were some of the stringent measures

taken by the UK government to mitigate the spread of the virus (MacFarlane, 2020). The

implication of the COVID-19 is more apparent in the supply chain, especially because many of

the construction companies in the UK are small companies and may not have the capacity to

absorb some of the shocks in the industry, including the potential of financial stress due to lack

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of adequate financial reserves. For instance, Statista (2020) argues that about 93% of the

construction companies in the UK are small companies, with 7 or less number of employees.

With the COVID-19, these companies are more likely to face financial challenges due to

declined construction economic construction activities since they may not have adequate

financial reserves. Furthermore, the large companies, which often subcontract these small

companies are also facing financial constraints during this COVID-19 situation. A survey by

ONS BICS (as quoted by Falconer, 2020) shown that about 53% of the companies in the UK

construction industry argued that their cash reserves would only last up to six months. What this

means is that there is the possibility that the main contractors will benefit from the proposed

contract more than the subcontractors since the client does not have any capacity to dictate

how the subcontractors should be paid under the JCT Management Contract form standard

contract suggested in this report. As such, the subcontractors are at the risk of failing to paid on

time by the main contractors, hence they may delay the project due to lack of adequate

financing, affecting the client. Moreover, if a subcontractor becomes bankrupt, there would be a

need for the contractor to look for alternative subcontractors, which would further delay the

project if no immediate alternative. Things will be worse if the suppliers of the key products and

materials required in the project become insolvency, which will focus the contractor to also look

for an alternative.Furthermore, COVID-19 could also have a significant impact on the way the

project is delivered due to new stringent measures, such as social distancing measures which

may reduce the number of people required in the construction industry. This will have an effect

of increasing the number of hours required to complete a task at a given period, hence may

delay the project delivery.

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3.2 How to manage the COVID-19 issues to enable project success, business benefits and

overall ethical operations

The biggest issues that arise from COVID-19 is the possibility of contractor, subcontractors, and

suppliers becoming bankrupt, especially small companies which do not have sufficient financial

reserves. To address this, these stakeholders must take advantage of the financial assistance

that the government of the UK is providing to small and medium-sized business, such as the

Bounce Back Loan Scheme (BBLS), which targets SMEs, giving them loans of between 2,000

to 50,000 pounds in an attempt to cushion and enable them to transition to normal in the future

(Gov.uk, 2020). However, there are concerns that the government may run out of money if the

pandemic persists in future (Price, 2020), hence the need for SMEs to innovate and find ways to

generate more money. Unfortunate, there is no possibility that the client in the current project

could dictate how independent contractors should do with their money. However, the client with

help of the management contractors may work together with the main contractor to innovate and

find a way in which the subcontractors and the suppliers can be paid on time to sustain them

over the project life cycle. For instance, a project bank account can be developed where

suppliers and the contractors can be paid directly by the client on request and as per the

directions of the main contractor. This will ensure the main contractor does not exploit the

suppliers and subcontractors as well. Lastly, yet importantly, the contractors and subcontractors

must be encouraged to embrace a culture of working remotely and ensure they comply with

social distancing and other requirements to reduce exposure of workers to the virus, which

could delay the project further.

Conclusion

In conclusion, this report has presented a procurement plan that can be used to ensure the

construction of the state-funded school in York is made possible and delivered on time, and

budget. The report established Management Contract under JCT is the most suitablestandard

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form of contract that should be used in this project and identified the Two-stage tendering

strategy as most appropriate to achieve the most economically advantageous tender while

Prime cost plus management fee as the most applicable mechanism for pricing in this project in

line with the suggested standard for the contract. However, the report establishes that

contractors, especially subcontractors and suppliers could see financial challenges under

COVID-19 situation under this contract since the client cannot direct the contractors on what to

do with the money they pay them. It is recommended that contractors, suppliers and

subcontractors take advantage of the available funding recommendation by the government and

that the main contractor be encouraged to pay their subcontractors and suppliers on time to

keep them afloat.

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References

Eriksson, P. E., & Westerberg, M. (2009). Effects of procurement on construction project

performance. In International Conference on Management of Technology: 05/04/2009-

09/04/2009.

Price, D. (2020) 'We will run out of money' – why the COVID-19 rescue packages aren't

working. Retrieved from: https://www.constructionnews.co.uk/agenda/we-will-run-out-of-money-

why-the-covid-19-rescue-packages-arent-working-16-04-2020/

Gov.uk (2020) Apply for a coronavirus Bounce Bank Loan. Retrieved from:

https://www.gov.uk/guidance/apply-for-a-coronavirus-bounce-back-loan

Falconer, T. (2020) Shaky foundations: COVID-19 and the UK Construction Sector. Retrieved

from: https://www.ibisworld.com/industry-insider/coronavirus-insights/shaky-foundations-covid-

19-and-the-uk-construction-sector/

Statista (2020) Total number of construction firms in England as of the third quarter of 2018, by

employment size. Retrieved from: https://www.statista.com/statistics/564797/construction-firms-

size-region-england/

MacFarlane, I. (2020) Full impact of COVID-19 spells uncertainty for the construction sector.

Retrieved from: https://www.showhouse.co.uk/news/full-impact-of-covid-19-spells-uncertainty-

for-construction-sector/

Tiwari, S. T. S., Chan, S. W., & Mubarak, M. F. (2018, April). Critical analysis of procurement

techniques in construction management sectors. In IOP Conference Series: Materials Science

and Engineering (Vol. 342, No. 1, p. 012100).

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Cicmil, S., & Marshall, D. (2005). Insights into collaboration at the project level: complexity,

social interaction and procurement mechanisms. Building Research & Information, 33(6), 523-

535.

The Joint Contracts Tribunal Limited (2017) Deciding on the appropriate JCT contract 2016.

Retrieved from: https://www.jctltd.co.uk/docs/Deciding-on-the-appropriate-JCT-contract-

2016.pdf

RICS (2017) RICS Professional Guidance, UK. Tendering strategies 1st edition. Retrieved from:

http://www.trentglobal.edu.sg/wp-

content/uploads/2017/01/Tendering_strategies_1st_edition_PGguidance_2014.pdf

Martens, B. and Smith, R. (2018) Evaluation methodologies. Retrieved from:

http://www.ippa.org/images/JOPP/vol17/issue-1/Article_4_Stilger-et-al.pdf

The Joint Contracts Tribunal Limited (2011) Deciding on the appropriate JCT contract 2011.

Retrieved from: https://www.jctltd.co.uk/docs/Deciding-on-the-appropriate-JCT-contract-2011-

Sept-11-version-2.pdf

Jctltd.co.uk (2020) Contract families: Management Building Contract. Retrieved from:

https://www.jctltd.co.uk/category/management-building-contract

Kafile, M. (2018). Effects of procurement processes on project execution in a project

management company in Cape Town, South Africa (Doctoral dissertation, Cape Peninsula

University of Technology).

Mabveka, G. (2013) Project implementation failure: Procurement procedures a scapegoat.

Retrieved from:

https://www.researchgate.net/publication/237062917_PROJECT_IMPLEMENTATION_FAILUR

E_PROCUREMENT_PROCEDURES_A_SCAPEGOAT

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Love, R. P., Davis, P., Baccarini, D., Wilson, G., & Lopez, R. (2009) Capital Works

Procurement: The Selection of a Building Procurement Method. Research Project No: 2006-

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Masterman, J. W. E., &Gameson, R. N. (1994). Client characteristics and needs in relation to

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Mortledge, R., Smith, A., Kashiwagi, D.T. (2006). Building Procurement. Blackwell, Oxford, UK.

Ng, T., Luu, D., & Chen, S. (2002). Decision criteria and their subjectivity in construction

procurement selection. Construction Economics and Building, 2(1), 70-80.

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Appendixes

Appendix 1: Selection of the most appropriate Management Contracting option in the

project Selection criteria Client needs and

characteristics

Management Contracting

(MC)

Construction

Management (CM)

How important it is

to the client (1 to 5)

How important it is

to the MC (1 to 5)

Total

Score

How important it is

to the CM (1 to 5)

Total

Score

A B =A*B C =A*C

Speed 5 4 20 3 15

Cost certainty 5 4 20 3 15

Time certainty 5 4 20 3 15

Flexibility 3 5 25 5 15

Responsibility 4 5 20 4 16

Complexity 4 5 20 5 20

Quality level 4 5 20 4 16

Risk allocation 4 5 20 5 20

Price competition 4 5 20 5 20

Overall score 185 152

Ranking 1 2

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Appendix 2: Category groups planning in Procurement and supply chain process

Source : Futurepurchasing