A REPORT EXPLORING PROCUREMENT The Chartered IN THE INDUSTRY Institute of Building The Chartered Institute of Building (CIOB) represents for the public benefit the most diverse set of professionals in the construction industry.

Our Mission: We have over 46,000 To contribute to the creation of a modern, progressive, members around the world and responsible construction industry; able to meet the economic, environmental and social challenges faced and are considered to be the in the 21st century. international voice of the building professional, representing an Our 7 Guiding Principles: unequalled body of knowledge n Creating extraordinary people through professional learning and continuous professional development. concerning the management n Promoting the built environment as central to of the total building process. the quality of life for everyone everywhere. Chartered Member status is recognised internationally n Achieving a sustainable future, worldwide. as the mark of a true, skilled professional in the construction industry and CIOB members have a n Advocating exemplary ethical practice and common commitment to achieving and maintaining the behaviour, integrity and transparency. highest possible standards within the built environment. n Pursuing excellence in management practice, The Chartered Building Company and Consultancy and technological innovation rooted in Schemes (CBCs) are a vital part of the CIOB, providing the evidence based science. Institute’s members with a further business perspective. n Being socially responsible and working responsibly. To find out more about the benefits of either individual n Enabling our members to find an emotional resonance CIOB membership or CBC schemes go to our website with the Institute; their success is our success. www.ciob.org or call us on +44 (0)1344 630 700 today.

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© The Chartered Institute of Building 2010 INTRODUCTION

The Chartered Institute of Building is the leading INTRODUCTION P1 professional body for personnel in the global EXECUTIVE SUMMARY P3 construction management industry. Established BACKGROUND INFORMATION P4 in 1834, the CIOB continues to lead the way in CURRENT METHODS OF PROCUREMENT P4 establishing, promoting and maintaining standards THE ROLE OF THE CLIENT P8 of excellence in the sector. PUBLIC SECTOR AND VALUE FOR MONEY P10 SUICIDE BIDDING P12 The CIOB draws its members procurement in the construction COVER PRICING P13 from a wide range of professional industry through the views of RESULTS AND DISCUSSION P14 disciplines, from across the industry professionals. The CIOB METHODOLOGY AND DEMOGRAPHICS building and construction supply will use this research to raise P14 chains. These include clients, the awareness in the public and METHODS OF PROCUREMENT P16 consultants and contractors, as political arenas of the issues PUBLIC SECTOR PROCUREMENT P21 well as specialists in regulation, surrounding procurement in the CLIENTS IN CONSTRUCTION P24 research and education. industry, including the effects of ADVERSE PRACTICES IN PROCUREMENT P26 the recent spending review, and The purpose of this research is to provide recommendations on CONCLUSIONS AND RECOMMENDATIONS P28 CONTENTS to investigate the perception of how best to overcome barriers. INTRODUCTION

PROCUREMENT IN THE CONSTRUCTION INDUSTRY 2010 PUBLISHED DECEMBER 2010 01 02 OF AVAILABLE WORK RESULT IN A DECREASE SPENDING CUTS TO GOVERNMENT THE EXPECT 78% OF RESPONDENTS PROCUREMENT IN THE CONSTRUCTION INDUSTRY 2010 SUMMARY EXECUTIVE

EXECUTIVE SUMMARY highlighted issues over responsibility. All three of client requirements is a problem, and 34% who by 46% who are of the belief that alterations to arising during the procurement process, followed of communication is the most significant problem overruns. Half of respondents indicate that a lack procurement method directly led to the time terms of time. Of those, 49% believe the chosen have been involved on projects that overran in contributed to the cost overruns. Similarly, 94% that the chosen procurement method directly had been involved in those projects believed that overran in terms of cost. 57% those who 93% of respondents have been involved in projects of timeframes, or to a poor standard. in a project coming over-budget, outside leads to poor advice being taken and results in the construction industry, which often sufficiently knowledgeable about procurement 77% of respondents believe clients are not The findings from this survey indicate that improve construction procurement practice. as suicide bidding, and what can be done to in the future, prevalence of practices such the effects of spending cuts both now and of the client, current methods procurement, focus on the UK industry. It centres on the role procurement within the sector, with a particular industry professionals on the current state of This research examines the stance of construction a very low bid at tender stage. worrying statistic that highlights the dangers of selecting believe that “suicide bidding” exists within the industry, a is synonymous with a successful project. 82% of respondents with 87% of respondents the belief that good procurement delivery of a project on time, budget and to high quality, professionals view procurement as absolutely crucial to the The key findings from this report indicate that construction (CIOB) into procurement in the construction industry. This is first survey from the Chartered Institute of Building on communication. resulting in a greater emphasis between all parties, therefore more trust and openness Transparency will allow for benefit the construction industry. procurement process will a more transparent 64% of the sample believe sector procurement should be: the four key priorities in public According to respondents, feel it will reduce the cost. compared to the 10% who of the procurement process, will actually increase the cost 19% feel that the spending cuts work. In terms of procurement, result in a decrease of available Government spending cuts to respondents expect the Unsurprisingly, 78% of to integrate further. into the need for industry these issues are closely linked •Public accountability •Sustainability •Reduced cost of procurement •Standardisation 03 04 CURRENT METHODS BACKGROUND INFORMATION

1 The Royal Institution of Chartered Surveyors/ Surveyors/Davis The Royal Institution of Chartered 1 OF PROCUREMENT ‘Contracts in use: a survey of building contracts in use during 2007’ ‘Contracts in use: a survey on budget and to a high quality. ability of a project to be completed on time, and services, just to name a few, all affect the available technologies, finance, labour availability ground conditions, topography, logistics, weather, the complexity of projects. Influences such as procurement far apart from anything else, is The difficulty, and what sets construction industry innovative methods of procurement. on reducing this risk through the use of and academia have consistently focused a succession of ‘calculated risks’. Industry each method. Procurement is, therefore, know all the potential benefits or risks for experienced client or contractor does not method is difficult, because even the most Selection of an absolute optimal procurement strengths and weaknesses. has its own advocates and inherent Construction Management, etc) (Traditional, Design and Build, Each different type of procurement routes available for clients to select. of different types procurement industry alike. There are a number carefully calculated by clients and weaknesses, which must be has individual strengths and of considered risks – each method Procurement is essentially a series CURRENT METHODS OF PROCUREMENT (2007) most understood. Indeed, it is so long that it has become the used the Traditional process for the construction industry has procurement do. However, as all other methods of contract, has its weaknesses, construction using a lump-sum separation of design and can be described as the Traditional contracting, which method of procurement. (2007) RICS Contracts in Use survey method, according to the contractor. The most used of risk onto the client or that transfer varying levels of risks, has different methods Procurement, being a series 1 , is the Traditional industry to integrate further. against the requirement for may say that Traditional goes allocation of risk. Indeed, some of a say in the design, cost and contractor) do not have much delivering the project (i.e. disputes are common, and those construction processes means of separating the design and however, apparent. The nature Weaknesses with Traditional are, has responsibility for what. where they stand, and who sees each party knowing system, the Traditional method arise, as with any procurement complications will inevitably firmly with the contractor. While of subcontract packages lies responsibility for co-ordination the contractor for execution, so is responsible for design and the designer greatest strength – in understanding Traditional is its likely that the simplicity involved Sir Michael Latham 2 PROCUREMENT IN THE CONSTRUCTION INDUSTRY 2010 BACKGROUND INFORMATION The Latham Report’ (1994) ‘Constructing the Team – CURRENT METHODS OF PROCUREMENT ‘Constructing the Team’ set out in the Latham Report more integrated approach, as phase. Both would result in a on site during the construction stage, and the architect advising feasibility input in the design with the contractors giving teams working in partnership, and Build stage would see both two teams. Ideally, the Design of communication between the construction phase, or a lack changes to the design in this, and there can be numerous always as straightforward during the phase. It is not be informed of developments client, though the contractor will out by consultants hired the the design phase may be carried communication. Other parts of theory, allows for greater same contractor, which, in least in part) and built by the specified to be designed (at to understand – the project is the process is relatively easy lies with the contractor and with clients, as the risk primarily Design and Build is popular project manage throughout the and chain, and will co-ordinate to have a well established supply will be expected contractor’ Build system. The ‘prime extension of the Design and Prime Contracting is an . 2 aimed at how much money is spent on consultants found in its investigations, and criticism has been over-budget, as the National Audit Office has Many PFI projects have come in late and whether value for money is really being obtained. accountability difficult, and raises questions over the loss of control by public sector makes in their departments for other use. However, administrative work, and this frees up resources makes a profit on the fee, Government avoids and operation of the project. The private firm construction, financing, design, management over a set number of years to take on the entire agrees to pay a private firm an annual fee sum upfront for a new project, the Government PFI differs in that, instead of paying a lump PFI is a result of the shift towards privatisation. as road/rail infrastructure networks or hospitals, specifically for large-scale, high value projects such Government between 1997 to 2010. Designed PFI reached popularity under the Labour mid-1990s Government, by the then-Conservative debate as to its effectiveness. Launched in the Projects (PFI/PPP) has long been the subject of Private Finance Initiative/Public-Private Partnership and the supply chain, including subcontractors. design staff – the main risk lies in respect of incurred in respect of measured work and contractor is paid all actual costs, plus profits design and construction stages. The prime 05 BACKGROUND INFORMATION CURRENT METHODS OF PROCUREMENT (CONT.) BACKGROUND INFORMATION CURRENT METHODS OF PROCUREMENT (CONT.)

The CIOB believes partnering is the “most efficient way of undertaking all kinds of construction work including for both design and construction new buildings and infrastructure, phases, which opens the alterations, refurbishment possibility for disputes to arise. and maintenance”. Long-term (strategic) partnering Framework Agreements (FA) before any construction has even begun. 3 PFI commitments showcase the are template contracts that are has also been affected by the recent economic real benefits of the procurement agreed for a series of projects. downturn, raising questions as to its place, in method, although short-term An advantage to Frameworks is its current form, as a viable procurement option. (project-specific) partnering in their simplicity for the types of Revisions to PFI are likely needed in order to has also proved highly beneficial projects they are used on – there ensure large-scale projects can be financed on individual projects. is only the need to negotiate a firms who are unable to handle multiple projects privately in the future. 4 contract once for a series of due to limited resources, which restricts The principles of partnering projects. This is of benefit to competition. Essentially, FA are closed systems. The Latham Report Constructing the Team include a decision making the contractor/consultant who (1994), commissioned by the Government in the process, mutual objectives, initially agreed the contract, as Construction Management is not a widely used wake of a series of poorly-performing projects, and an overall improvement in they can repeat business with procurement method – its main reason for identified inefficiencies and a lack of trust between performance. As more projects the client. Disadvantages lie in existence is for use on large and/or very complex contractors and clients as a clear problem in are worked on in tandem, a the fact that this practice is a construction works, such as Heathrow Terminal 5, the industry. The Egan Report Rethinking greater understanding of how barrier to smaller construction where it was used to good effect. The system Construction, which followed in 1998 highlighted to accomplish best practice, works by having a construction manager as a partnering as key to ensuring the client’s needs reduce costs and attain value point of contact, who will typically be head of a were at the very heart of the construction for money is achieved. design team, who co-ordinates the project in process. As a result, clients, consultants, terms of the various construction operations contractors and their supply chains committed Management Contracting works on site. Construction Management is generally to working more collaboratively and in a strategic by having a contractor managing considered to be the least adversarial form of fashion. An increase in partnering between a series of ‘works’ contractors procurement, and is often used when design clients and contractors was one such fall-out. or subcontractors. Advantages needs to run in tandem with construction. 5 The CIOB describes partnering as “a management include early involvement in the approach used by two or more organisations to project, and the management Comparing which procurement method is ‘best’ achieve specific objectives by maximising the contractor can also appoint is nigh-impossible – there is no direct way to effectiveness of each participant’s resources”. trusted subcontractors they have measure, as construction projects are bespoke and Therefore, this strategic approach requires worked with previously rather differ substantially from project to project in many mutual trust and an open relationship between than risk an unknown factor. aspects. This is why education, advice and input at parties, and results in a combined drive to Disadvantages include the lack all stages of a project throughout the procurement OF PROCUREMENT (CONT.) PROCUREMENT OF CURRENT METHODS METHODS CURRENT achieve improvement and best practice. of a single point of responsibility process is absolutely vital to ensure success.

3 Sherman, J. ‘Millions of pounds wasted on private finance tendering’ The Times, 5 The Chartered Institute of Building ‘Code of March 8, 2007 Practice for Project Management for Construction 4 Gardiner, J. ‘PFI Alternatives: A change of routez Building, November 26, 2010 and Development’ 4th Edition (2010)

06 PROCUREMENT IN THE CONSTRUCTION INDUSTRY 2010 07 08 BACKGROUND INFORMATION

THE ROLE THE ROLE OF CLIENT OF THE CLIENT money and take into account risk accordingly. informed sufficiently, so as to ensure best value for works are educated and who need these one-off and needs. Therefore it is paramount that clients a particular time. It is entirely down to objectives satisfy the bespoke needs of particular client at products designed to general, they are all one-off Construction projects themselves are unique; in with its own procedures, priorities and attitudes. all work in quite separate departments, each where users, decision makers and financers may case, especially with large complex organisations other parties can refer. This is not necessarily the is one person or organisation to whom all team. However, the term ‘client’ implies that it and whose needs must be met by the project important perspective on project performance construction process, who provides the most They are therefore the sponsor of whole is a worthwhile investment. funding and be convinced that it be built, will have organised the thought about why the facility should has instigated the project, will have with a client. This is the party who All construction projects must begin PROCUREMENT IN THE CONSTRUCTION INDUSTRY 2010 VALUE FOR MONEY. TO ENSURE BEST AS SUFFICIENTLY, SO AND INFORMED ARE EDUCATED THAT CLIENTS... IT IS PARAMOUNT 09 BACKGROUND INFORMATION PUBLIC SECTOR AND VALUE FOR MONEY BACKGROUND INFORMATION PUBLIC SECTOR AND VALUE FOR MONEY

The 2012 Olympics, BSF, Crossrail, NHS projects and other, less high-profile works at local Government level sustained the industry enough to soften procurement process on the BSF the blow of the downturn and, programme. Value for money even during the tough economic must be defined clearly so that it climate, construction contributed does not automatically create the Public sector work 8% to the UK’s GDP. 6 assumption that the lowest bid (PQQs). Conversely, the severity accounts for should be accepted, especially of the spending review could approximately 40% of The advent of the with the focus now on austerity. result in a focus on lowest cost all turnover generated Comprehensive Spending Otherwise, industry and clients rather that greatest value. In Review (CSR) has seen spending risk poor quality projects that other words, the pressure to by the UK construction dramatically reduced, sparking will result in unplanned increases reduce spending could lead to industry. The public fears that construction could in cost and time, all of which less importance placed on quality sector has been widely be heading for a ‘double-dip’ contribute to a poor position and whole-life costs. credited for keeping recession. Government has for the construction industry. committed to investment in the Palaneeswaran et all (2003) construction from construction sector, specifically The recent National Audit Office found that best value on a entering into a far £3bn more than set out in early (NAO) report on the £3.4bn public project could ultimately worse situation than 2010, with most of this to be M25 widening scheme has be defined as improved it did during the start spent on infrastructure projects. highlighted procurement on maintainability and lower of the 2008 recession. However, approximately £20bn this PFI project as wasteful, operating costs, followed by of work will be lost in total, primarily as the contract was too earlier project completion. 8 largely through the 60% cut prescriptive and had little room Sustainability was seen as the in projects from the cancellation for manoeuvre. In addition, the eighth most important criteria of BSF and the 74% reduction in NAO states that the slowness for defining best value. the Department of Communities of taking the project forward Therefore, the whole-life and Local Government’s contributed heavily to the costs of the project must be (DCLG) capital budget. eventual 25% increase in cost. 7 considered thoroughly by the client before going out to tender. So what does this mean in terms The construction procurement Since 2003, the UK Government of construction procurement? process could be expected to has committed to reducing Fundamentally, Government become less expensive and the country’s carbon dioxide bodies are looking at how to wasteful as a result of the emissions by 80% (compared achieve best value for money spending review, with a greater to 1990 levels) by 2050, which from construction projects, emphasis on transparency and places far more emphasis on particularly in the wake of the e-procurement, and simplified the sustainability aspect of a

AND VALUE FOR MONEY FOR VALUE AND waste that emerged from the pre-qualification questionnaires

PUBLIC SECTOR construction project.

6 UK Contractors Group, ‘Construction in the UK 7 National Audit Office ‘Highways Agency: Economy – The Benefits of Investment’ (2009) ProcurementTHERE of the IS M25 A private NEED finance contract’ NovemberTO IMPROVE 2010 THE 8 Palaneeswaran et al, ‘Targeting optimum value inQUALITY public sector projects’ OFEngineering, Construction and Architectural Management, Vol 10, No. 6, pgsEDUCATION 418-431 (2003) AND TRAINING SCHEMES

10 PROCUREMENT IN THE CONSTRUCTION INDUSTRY 2010 11 12 BACKGROUND INFORMATION

Prior, G., ‘Clients beware of Connaught suicide bids’ 9 SUICIDE BIDDING blame-as-suicide-bids-cost-connaught/) 7 September, 2010 (http://www.constructionenquirer.com/2010/09/07/opinion-clients-share- or, in some cases, making a loss. only breaking even on a project staff to undertake, even if it means they have work for their skilled Companies do this simply to ensure the industry as ‘suicide bidding’. to obtain work is referred in lower than competitors in order The practice of bidding unusually SUICIDE BIDDING Construction Enquirer enter this arena willingly. the lowest bid. Regrettably, some clients certain degree of responsibility for accepting However, it can be argued that clients have a in part, lie with the company who bids so low. associated with the works. Responsibility does, the client, project, and all subcontractors company enters dire financial straits, this affects accounts. When the inevitable happens and use adversarial behaviour to increase their final have to resort suicide bidding and then To remain in business, some companies will as “abnormally low”. bid described by rival contractor Morrison City Council social regeneration project; a less than the nearest rival bid on a Norwich job losses, bid for a contract by nearly fifth administration and caused over 1,400 immediate , which recently went into 9 PROCUREMENT IN THE CONSTRUCTION INDUSTRY 2010 BACKGROUND INFORMATION COVER PRICING COVER PRICING cover pricing, and fined a total of £129 million. in 103 construction firms being found guilty of pricing practices in the UK, which culminated four-year investigation ending in 2008 into cover The Office of Fair Trading (OFT) conducted a will not always be getting with a cover priced bid. the outlook on value for money, which clients inflated. This harms competition levels and skews especially when more than one bid has been will be receiving a false indication of tender price, The obvious issue with cover pricing is that clients to work on future projects. and that they have the resources will still have seen their credentials the client will not select them, but the ‘serious’ bidder knowing that approximately 10% higher than usually increase their own price by bid for. The said contractor will contractors will place a serious require a base price that the other work in collusion to do this, as they tender stage to clients. Contractors is the act of placing a high bid at Cover pricing, a form of bid rigging, 13 RESULTS AND DISCUSSION 14 METHODOLOGY opportunity to openly express their opinions. questions in the survey, to allow respondents the There were both qualitative and quantitative public and wider industry. The survey was also open to the general informing them that the survey was online. An email was sent to 21,890 CIOB members their organisation. sector, and the number of employees within membership level, location, job level and questions regarding their age, gender, CIOB Respondents were asked general demographic the CIOB website (www.ciob.org). respondents could access through and 12 November 2010, which for four weeks between 18 October internet-based questionnaire; open The survey was conducted using an METHODOLOGY AND DEMOGRAPHICS Fig.1 W Other (9.3%) South West (9.1%) South East (18.3%) London (15.6%) East (4.5%) West Midlands (8.4%) East Midlands Yorkshire (5.8%) North West North East Wales (4.9%) (1.9%) Ireland (4.3%) Scotland (3.1%) Location (3.5%) (5.8%) (5.4%) RESULTS AND DISCUSSION of procurement. work in contracting and 4% the field a management position. 27% of respondents whom described themselves as employed in industry professionals, the majority (79%) of The sample consisted of 525 construction PROCUREMENT IN THE CONSTRUCTION INDUSTRY 2010 Fig.6 THE SAMPLE Fig.5 02 04 060 50 40 30 20 10 0 01 02 30 25 20 15 10 5 0 CLERICAL/ADMINISTRATIVE EDUCATIONALIST BUILDING CONTROL SUPERVISOR STUDENT RETIRED OTHER ENGINEERING SURVEYING Job level Sector: ARCHITECTURE AND DESIGN MAINTENANCE/REFURBISHMENT PROCUREMENT SITE MANAGEMENT CONSULTANCY HOUSING CONSULTANT GOVERNMENT/LOCAL GOVERNMENT QUANTITY SURVEYING OTHER MIDDLE/JUNIOR MANAGEMENT METHODOLOGY AND DEMOGRAPHICS PROJECT MANAGEMENT DIRECTOR/SENIOR MANAGEMENT CONTRACTING of the sample. and the South East, representing majority 34% of respondents are located in London for SMEs who employ fewer than 20 staff. employing over 501 staff, while 21% work 40% of the sample work for organisations CIOB Membership Level Fig.4 Gender Fig.3 Age Fig.2 in organisation Number of employees Fig.7 NON-MEMBER – FELLOW– MEMBER – INCORPORATE – ASSOCIATE – STUDENT – FEMALE – MALE – 61 AND OVER – 51-60 – 41-50 – 31-40 – 21-30 – 20 OR UNDER – MORE THAN 501 – 201-500 – 101-200 – 51-100 – 21-50 – LESS THAN 20 – 32.5% 30.5% 20.9% 6.7% 8.6% 94.8% 10.4% 5.2% 8.4% 10.9% 11.2% 52.5% 2.7% 12.6% 9.2% 21.2% 0.2% 0.6% 20.7% 40.2% Level CIOB M in o Num 15 RESULTS AND DISCUSSION METHODS OF PROCUREMENT RESULTS AND DISCUSSION METHODS OF PROCUREMENT

In terms of value, which is just one of many markers in judging a suitable procurement method, respondents highlighted the following key points:

On projects up to £5m, the Traditional procurement route is seen as most efficient and suitable, followed by Design and Build. Of the following procurement methods, which one do Frameworks and Partnering also feature highly. you perceive to be the most efficient and suitable for These four methods are all relatively simple the following scale of projects: to understand, and are preferred by clients on lower-value projects. Fig.2.1 Projects up to £5m

TRADITIONAL On projects between £5m-50m, Design and

DESIGN AND BUILD Build is seen as most suitable, followed by MANAGEMENT CONTRACTING Partnering. The Traditional method is seen CONSTRUCTION MANAGEMENT by over a fifth of respondents as suitable. PPP/PFI

PARTNERING

PRIME CONTRACTING On large-scale value projects, Partnering is

FRAMEWORK AGREEMENTS viewed as the most suitable and efficient (29%) OTHER – this is likely due to the fact that collaborative working practices and relationships associated The importance of procurement in 0 10 20 30 40 50 60 with Partnering are well-regarded on high-value, Of the following procurement methods, which one do you perceive to be the least efficient and suitable a project cannot be underestimated high-risk projects. Design and Build, PPP/PFI and for the following scale of projects: – an overwhelming majority (87%) Construction Management also feature highly, as Fig.2.2 Projects between £5m-£50m might be expected, particularly as the latter two Fig.3.1 Projects up to £5m believe good procurement to be methods are almost solely developed for use on

L TRADITIONAL synonymous with a successful project. high-value and complex projects. TRADITIONAL DESIGN AND BUILD DESIGN AND BUILD MANAGEMENT CONTRACTING This places even further emphasis on ensuring High value projects that use the Traditional MANAGEMENT CONTRACTING

OF PROCUREMENTOF CONSTRUCTION MANAGEMENT CONSTRUCTION MANAGEMENT PPP/PFI procurement route – and these do exist, Wembley the procurement method chosen and advice given PPP/PFI

PARTNERING to clients is entirely relevant to the needs of the Stadium being the most recent high-profile project PARTNERING PRIME CONTRACTING project. In this sense, Partnering has an important – are widely seen as the least suitable method to use. PRIME CONTRACTING FRAMEWORK AGREEMENTS part to play in ensuring good procurement is In the case of Wembley, the Traditional route allowed FRAMEWORK AGREEMENTS OTHER always associated with a successful project, as each little freedom to adapt to changes that arose in OTHER the design stage, leading to the project coming in party learns from mistakes and issues arising in 0 10 20 30 40 50 heavily over-budget and outside of its timeframe. 10 0 5 10 15 20 25 30 35 40

METHODS previous projects to achieve the highest standards.

Fig.2.3 Projects over £50m Fig.3.2 Projects between £5m-£50m Fig.3.3 Projects over £50m

Fig.1 TRADITIONAL 10 Limbrick, S. TRADITIONAL TRADITIONAL ‘Multiplex Do you believe that good DESIGN AND BUILD DESIGN AND BUILD DESIGN AND BUILD procurement is always MANAGEMENT CONTRACTING sues Mott synonymous with a MacDonald MANAGEMENT CONTRACTING MANAGEMENT CONTRACTING successful project? CONSTRUCTION MANAGEMENT for £253m CONSTRUCTION MANAGEMENT CONSTRUCTION MANAGEMENT

PPP/PFI over Wembley’ PPP/PFI PPP/PFI

PARTNERING Building, November PARTNERING PARTNERING 18, 2008 PRIME CONTRACTING PRIME CONTRACTING PRIME CONTRACTING

FRAMEWORK AGREEMENTS YES – 86.6% FRAMEWORK AGREEMENTS FRAMEWORK AGREEMENTS

OTHER NO – 11.7% OTHER OTHER I DON’T KNOW – 1.7%

0 5 10 15 20 25 30 0 5 10 15 20 25 30 35 0 10 20 30 40 50

16 PROCUREMENT IN THE CONSTRUCTION INDUSTRY 2010 17 RESULTS AND DISCUSSION METHODS OF PROCUREMENT (CONT). RESULTS AND DISCUSSION METHODS OF PROCUREMENT (CONT).

PPP/PFI is viewed by 29% of respondents as the procurement method that is most in need of restructuring. This may be 93% of respondents have been Fig.7 interpreted as due to the recent, and involved in projects that have What percentage of projects during your career have you been not-so-recent, high-profile failings of The Traditional method is seen by 18% as in overrun in terms of cost. This is involved in that have overrun in projects using the method, such as need of restructuring. The separation of the a worrying statistic in its own terms of time? M25 widening scheme. Excessive design and construction processes and disputes right, though one of no huge 0% – 5.1% that subsequently arise using the Traditional surprise to the industry. There 1-25% – 52.7% waste, coupled with the amount of 26-50 – 23.7% method go very much against the need for are many factors, some out of 51-75 – 12.6% time for projects to start, are two greater integration that has been set out control of the contractor, client, 75%+ – 4.5% weaknesses associated with PFI. in various industry reports. or indeed anyone, which can DON’T KNOW – 1.4% result in cost overruns. Of that Fig.4 However, respondent comments indicate 93%, the majority of cost believe projects were directly Fig.7a Of the following procurement methods, which one do you perceive to be the most in need of restructuring? that the problem may not lie with the overruns (53%) were on up to affected by the procurement Which procurement method was primarily used methods specifically, but with the lack of a quarter of projects. 59% of method (49% as opposed to on those projects that overran in terms of time? TRADITIONAL professional procurement expertise and respondents indicated the 57%). This is likely due to DESIGN AND BUILD advice in choosing which method to use. Traditional method was used on uncontrollable external factors TRADITIONAL MANAGEMENT CONTRACTING DESIGN AND BUILD CONSTRUCTION MANAGEMENT projects that overran. On such as adverse weather MANAGEMENT CONTRACTING PPP/PFI Respondents indicate that the most significant further analysis, in the cases affecting timeframes. Traditional CONSTRUCTION MANAGEMENT PARTNERING problem arising during the procurement process where respondents indicated procurement again proved the PPP/PFI PRIME CONTRACTING PARTNERING FRAMEWORK AGREEMENTS is a lack of communication (50%), followed by that 75%+ of projects they method most used (60%). PRIME CONTRACTING OTHER alterations to client requirements (46%) and had been involved in had FRAMEWORK AGREEMENTS DON’T KNOW issues over responsibility (34%). All three of overrun in costs, the The statistics above relating OTHER these can be mutually connected to the need for percentage of those using to cost and time suggest DON’T KNOW 0 5 10 15 20 25 30 greater integration throughout the construction the Traditional method that current procurement 0 10 20 30 40 50 60 70 80 Fig.5 process. Communication between industry, increased to 67%. methods are not entirely What do you view as the most significant problems arising during the procurement process? (select up to 3) consultants and clients is vital to achieving suitable to the construction best practice with regards to procurement, Overall, 57% of those who industry, and alternatives or ALTERATIONS TO CLIENTS’ REQUIREMENTS which in turn reduces the need to alter client had been involved in projects a greater understanding of DESIGN TEAM PROBLEMS requirements and clarifies which party has Fig.7b COST OF PROCUREMENT METHOD that went over budget believed procurement are necessary. In these instances, do you believe LACK OF COMMUNICATION responsibility for what. Other issues that were the chosen procurement the chosen procurement method SUPPLY CHAIN ISSUES seen as significant problems are those involved method directly contributed 37% specify that their directly contributed to the project ISSUES OVER RESPONSIBILITY overrunning in terms of time? COST CONTROL with the design team (32%), and design faults to costs overrunning. organisation has had to make DESIGN FAULTS (27%). Greater communication between alterations to contracts where CONTRACT TYPE

OTHER all parties during the procurement process In terms of time, the statistics a ‘less than ideal’ procurement DON’T KNOW will assist in eliminating these problems read similarly to cost, though route was selected, and did YES – 48.5% as compromises are found, and help there is a difference in the this by incorporating aspects of NO – 45.9% 0 10 20 30 40 50 to achieve value for money. number of respondents who another procurement method. I DON’T KNOW – 5.6%

Fig.6a Which procurement method was primarily used on those projects that overran in terms of cost?

Fig.6 Fig.6b Fig.8 TRADITIONAL What percentage of projects In these instances, do you believe During your career, where a during your career have you DESIGN AND BUILD the chosen procurement method ‘less-than-ideal’ procurement been involved in that have MANAGEMENT CONTRACTING directly contributed to the project route was selected, did your overrun in terms of cost? overrunning in terms of cost? company make alterations CONSTRUCTION MANAGEMENT to contracts in order to PPP/PFI incorporate aspects of another procurement route? PARTNERING 0% – 4.1% PRIME CONTRACTING 1-25% – 52.8% FRAMEWORK AGREEMENTS 26-50 – 18.8% YES – 37.0% OTHER 51-75 – 13.6% YES – 56.6% NO – 39.1% DON’T KNOW 75%+ – 7.8% NO – 37.1% N/A – 9.7% DON’T KNOW – 2.9% I DON’T KNOW – 6.3% I DON’T KNOW – 14.2% 0 10 20 30 40 50 60

18 PROCUREMENT IN THE CONSTRUCTION INDUSTRY 2010 19 RESULTS AND DISCUSSION PUBLIC SECTOR PROCUREMENT

Many respondents (64%) display the feeling that a more transparent procurement process will benefit the construction industry.

When asked for comments, the most common responses gave the impression that transparency would essentially build trust, facilitate communication and Fig.9 10) EU Will a more transparent increase information sharing public procurement process benefit the between all stakeholders, construction industry? including the general public. This communication, the lack of which has been highlighted in this report as a problem with YES – 64.2% NO – 20.8% current procurement practices, I DON’T KNOW – 15.0% will therefore lead to a more integrated approach to projects. However, while the majority believe they are 40% of respondents see the inappropriate to the industry, they concede EU regulations on public that the regulations are unlikely to be adapted procurement as inappropriate to suit construction’s needs. Therefore, instead to the construction industry, of being viewed as a barrier and disadvantage, the compared to 25% who EU regulations should be acknowledged using staff see them as appropriate. that are educated and trained in their application. Respondent comments indicate that the Official Journal of the Small and medium enterprises (SMEs) account PROCUREMENT European Union (OJEU) way for over 80% of all construction companies. of advertising work is unsuitable 58% of respondents signify that SMEs are at – many responses focus on how a disadvantage due to preferred bidders and UK-based work should be won partnering processes in procurement – this by UK-based contractors, is further backed up by research that shows and advertising to other EU SMEs do not have the resources to compete members instead results in a as competitively as larger contractors when it wasteful and drawn-out process. comes to the pre-qualification stage. 11 PUBLIC SECTORPUBLIC

11 National Federation Fig.10 Fig.11 of Builders g U regulations... ‘Procurement – Do you believe the current Do you believe the use of EU regulations on public preferred bidders and partnering the roadblocks to procurement are appropriate in the procurement process success’ (2010) to the construction industry? creates disadvantages for SMEs in the industry?

YES – 25.3% YES – 58.2% NO – 40.2% NO – 28.5% I DON’T KNOW – 34.5% I DON’T KNOW – 13.3%

PROCUREMENT IN THE CONSTRUCTION INDUSTRY 2010 21 RESULTS AND DISCUSSION PUBLIC SECTOR PROCUREMENT (CONT). RESULTS AND DISCUSSION PUBLIC SECTOR PROCUREMENT (CONT).

The recently announced cuts in the Comprehensive Spending Review indicate that there are some significant repercussions for the construction industry. Firstly, and most obviously, is the fact that spending from departments on sourcing products (i.e. procuring buildings in the case of the construction industry) will decrease. Respondents highlight this as the greatest The majority (62%) of respondents believe the effect the spending review will have on the use of preferred bidders and partnering, where a industry – decrease available work was far single contractor is going to be utilised to do work and away the most chosen option with 77%. on the clients behalf over a series of projects, Responses overwhelmingly focused on the does not create disadvantages in terms of diversity. negatives associated with the spending review, However, this may create grounds for disadvantage as may be expected. Indeed, almost double BIM does entail initial implementation costs and if a partnering agreement was to be established the number of respondents expect the cost would certainly require new skills and training between a client and a contractor who did not of procurement to increase, rather than in order to be put into practice effectively, have a pertinent diversity policy. decrease, as a result of cuts. Few responses although when output begins to recover indicated that the spending cuts will have sufficiently it could prove to be an opportunity Competition levels for contracts, particularly in consequences such as cutting waste from for companies to invest in BIM. the climate during the economic downturn when procurement, greater transparency or work has been scarce, are extremely high. Over the simplification of pre-qualification. The lack of standardisation is a key reason why a quarter of respondents highlight the fact that the the procurement process during the Building industry does not require further competition. Standardisation, reduced cost of procurement Schools for the Future (BSF) programme was and sustainability are the three criteria that widely criticised. Bespoke buildings that brought 55% of the sample designate simplified In theory, PAS91 will reduce the time and cost respondents feel should be a priority in public little benefit, other than for pure aesthetics, saw pre-qualification criteria as the key method to required to complete questionnaires from a sector procurement. Also featuring highly is costs rise to tremendous levels. Indeed, Paul increase competition; 22% see reduced contractor or supplier perspective, particularly public accountability, apprenticeships and lean Morrell has stated that by reducing the costs regulation as an option; while 18% believe useful for those without the resources to usually construction. Interestingly, and despite Chief of BSF in this sense, output could have been improved payment times are necessary. complete PQQs time and time again, such as Construction Advisor Paul Morrell pushing for increased by over 30%, resulting in a third SMEs. It will also reduce the time and cost for its implementation, Building Information Modelling more schools being built. The UK Government commissioned the creation clients, both when developing questionnaires (BIM) is one of the lowest choices selected by of a standard pre-qualification questionnaire in and when assessing responses. The fact that it respondents. This can be explained by the fact Sustainability, predominantly carbon reduction the form of a publicly available specification is a voluntary standard and still requires greater that it is currently not a priority for the industry measures, is now incorporated in all construction (PAS)91 in 2010. PAS91 is a voluntary measure exposure to achieve widespread use means – the cost associated with procurement and projects, of all size, type and value – it is therefore that provides a common set of PQQs for that PAS91’s effectiveness has not yet been standardising materials (i.e. reducing costs) is, encouraging to see 41% of respondents highlight contractors and suppliers. fully felt within the industry. justifiably, crucial in a time of economic uncertainty. it as a key priority.

Fig.14 Fig.15 Fig.13 What effect(s) do you believe the Government spending cuts Of the following, which, if any, do you believe should be prioritised in How can competition levels for contracts be improved? will have on procurement? (select up to 3) public sector procurement criteria? (select up to 3)

Fig.12 THE INDUSTRY DOES NOT NEED MORE COMPETITION SIMPLY PREQUALIFICATION STANDARDISATION

Do you believe the use of DECREASE AVAILABLE WORK REDUCED COST OF PROCUREMENT preferred bidders and partnering SIMPLIFYING THE PRE-QUALIFICATION CRITERIA in the procurement process REDUCE COST OF PROCUREMENT PROCESS PUBLIC ACCOUNTABILITY OFF-SITE MANUFACTURE creates disadvantages in terms REDUCED REGULATIONS INCREASE COST OF PROCUREMENT PROCESS of diversity/inclusivity in LEAN CONSTRUCTION REDUCED AVAILABILITY OF LARGE-SCALE PROJECTS the industry? WIDER AVAILABILITY OF E-PROCUREMENT BUILDING INFORMATION MODELLING (BIM) CANCEL EXISTING PROJECTS DIVERSITY IMPROVING PAYMENT TYPES REDUCE WASTE FROM THE PROCUREMENT PROCESS APPRENTICESHIPS GREATER TRANSPARENCY ON CONTRACTS AND TENDERS OTHER SUSTAINABLITY GREATER UTILISATION OF FAST-TRACK PROCUREMENT YES – 28.4% NONE DON’T KNOW NO – 62.1% OTHER OTHER I DON’T KNOW – 9.5% 0 10 20 30 40 50 60 0 10 20 30 40 50 60 70 80 0 10 20 30 40 50

22 PROCUREMENT IN THE CONSTRUCTION INDUSTRY 2010 23 RESULTS AND DISCUSSION CLIENTS IN CONSTRUCTION

Another option influencing client procurement method selection is their experience on previous projects, which is relevant when considering partnering as a procurement system.

77% of respondents believe clients do not have a sufficient There was a relatively even understanding of procurement spread of respondents specifying in the construction industry. Education-wise, best practice what they think influences client The simplest answer to tackle procurement case studies would procurement method selection. this, and one highlighted by the be key to raising awareness of This can suggest that all of the vast majority in an open-text how to procure a construction options asked in the question comment section, is to educate project, while information were as relevant as each other, clients, their procurement from independent organisations, though value for money, perhaps managers specifically, on how such as the CIOB, would more relevant than ever in the the construction industry works. be both well-respected and current climate, is the option Other responses, aside from informed by the Institute’s selected by 33% of the sample education, focus on employing highly knowledgeable as being the primary influence experienced construction membership base. for client selection. professionals in client procurement divisions; greater Educating clients is 32% see the client’s transparency on procurement absolutely vital to achieving requirement to complete options offered to the client a joined-up approach with a project on budget as the by consultants; and finally, greater understanding and primary factor, coming greater communication communication between ahead of completing on between all parties involved all parties in the

CLIENTS CONSTRUCTION IN time and to a high quality. in the construction process. construction process.

Fig.16 What do you believe to be the primary factors in influencing client procurement method selection? (select up to 3)

CLIENT REQUIREMENT TO COMPLETE PROJECT WITHIN BUDGET Fig.17 CLIENT REQUIREMENT TO COMPLETE PROJECT ON TIME Do you believe clients have a CLIENT LEVEL OF INVOLVEMENT IN PROJECT sufficient understanding of COST OF PROCUREMENT METHOD procurement in the QUALITY OF THE WORK construction industry?

VALUE FOR MONEY SIZE OF PROJECT CLIENT EXPERIENCE ON OTHER PROJECTS TYPE OF PROJECT

COMPETITIVENESS OF THE MARKET YES – 16.8% CLIENT TRUST OF EXTERNAL PARTIES

OTHER NO – 76.6% I DON’T KNOW – 6.6%

0 5 10 15 20 25 30 35

24 PROCUREMENT IN THE CONSTRUCTION INDUSTRY 2010 25 26 ADVERSE PRACTICES RESULTS AND DISCUSSION IN PROCUREMENT exist within the industry? ‘suicide bidding’ for contracts In your experience, does so-called Fig.19 ADVERSE PRACTICES IN PROCUREMENT I DON’T KNOW – NO – YES – 81.8% 7.5% 10.8% accepted. Value for money in if a bid other than the lowest is standard on time and budget, and a project delivered to high value for money can be achieved, Clients should be educated that a common sense approach. below second largest bid) i.e. bid is suspiciously low (>10% bid, predominantly when said not be seduced by the lowest recommends that clients should respondents. Ultimately, CIOB industry, according to 82% of that is prevalent within the Suicide bidding is a practice 2 http://www.oft.gov.uk/shared_oft/reports/Evaluating-OFTs-work/oft1240.pdf12 recent (June 2010) OFT evaluation. believed cover pricing was common in a a significant difference to the 13% figure that in this survey believe it is a practice that exists; still an issue in the industry. 45% of respondents Trading (OFT) into cover pricing, it appears is After the 2008 investigation by Office of Fair wary about accepting an abnormally low bid. financial status, then clients would be more if contractors can truthfully give a picture of their Transparency in the tender stage is also needed – as manufacturers and, of course, the client. with subcontractors feeling the pinch as well the supply chain and construction process, effects of suicide bidding are felt throughout be identified and refused to accepted. The basis of cost – unsustainable bids should quickly Clients should not accept a bid merely on the suitable information. the public benefit to ensure clients receive and the CIOB recognises its role as existing for construction must be understood fully by clients, surprising after the OFT’s investigation Therefore, these results can be seen as somewhat prevalent in times of sparse available work. Cover pricing, in theory, would become less construction industry? still prevalent in the believe it is a practice into cover pricing, do you by the Office of Fair Trading After the recent investigation Fig.20 I DON’T KNOW – NO – YES – 45.2% 26.1% 28.7% 212 PROCUREMENT IN THE CONSTRUCTION INDUSTRY 2010

27 19 CONCLUSIONS AND RECOMMENDATIONS

contributed to projects overrunning in terms of cost and time, suggesting that those methods • Clients should have a greater understanding are unsuitable for a modern, progressive of the procurement process in the construction construction industry. industry – the CIOB recognises that, in order •CIOB respondents have shown that to facilitate this, accessible information and standardisation should become a priority in guidance is necessary. 77% of respondents public sector procurement. Not only would have indicated that clients do not have a this decrease overall cost, but it could facilitate sufficient understanding of construction a more integrated supply chain and result in a procurement. In addition, the vast majority of decrease in waste. The BSF programme was comments from respondents have highlighted criticised heavily for some of its bespoke designs that clients are often unaware that accepting an that ultimately compromised the projects and uncharacteristically low bid (“suicide bidding”) drove up cost. If standardisation was set out at can have hugely detrimental effects on both tender stage and communicated effectively to projects and contractor, which filters down to contractors, projects could benefit immensely affect subcontractors and all involved in the from standardised costs and less risk throughout construction process. In the words of one the procurement process. respondent, we must “educate the [clients] Half of respondents have indicated that a who believe that buying a building is the • lack of communication is the most significant same as buying paperclips”. problem arising during the procurement process. •The CIOB supports the Government’s recent Greater integration and communication has announcement to simplify the pre-qualification been recommended for the industry as far back, questionnaires (PQQs) via the voluntary PAS91 officially, as the Latham report in 1994. 46% of standard. However, much more can certainly be respondents also highlighted alterations to client done to promote the standard in the short-term, requirements as the second-largest problem and simplify the PQQ process further in the long arising during the procurement process. This term. This is particularly prominent as 55% of can be mitigated with input from contractors respondents from this survey have indicated at the planning and design phases on the that simplified PQQs are vital to increasing feasibility of client requirements. competition levels for contracts. In addition,

RECOMMENDATIONS RECOMMENDATIONS Sustainability is now incorporated in construction waste from the procurement process, more • projects of all size, type and value – it is therefore significant than ever on the Building Schools unsurprising to see 41% of respondents highlight for the Future (BSF) programme, can be it as a key priority in public sector procurement reduced through simpler pre-qualification. criteria. The CIOB supports evaluating •The CIOB supports research into, and adoption bids based on, among other criterion, the of, innovative methods of procurement. sustainability criteria of contractors. This also The majority of respondents have indicated takes strides in cementing the Government’s that current procurement methods (most commitment to reduce carbon emissions,

CONCLUSIONS AND CONCLUSIONS prominently Traditional) have directly providing value for money in this sense.

28 PROCUREMENT IN THE CONSTRUCTION INDUSTRY 2010 29