8/21/2017

PM 5114 MANAGING
COMPLEX PROJECTS

LECTURE 2

Prof W Hauw
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PM 5114 MANAGING COMPLEX PROJECTS

LECTURE 2: PROCUREMENT STRATEGY

LECTURE 2 : TOPICS

1. Procurement- Definition
2. Procurement Options
3. Procurement Strategy Risk Typology
4. Development Risks
5. Design Risks
6. Price/Cost Risks
7. Construction Risks
8. Start-up & Operational Risks
9. Global Procurement Trends
10. Group Discussion on Mock Case Study

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PROCUREMENT STRATEGY

LEARNING OUTCOMES

1. To understand the Procurement alternatives practiced in the market

2. To appreciate the concept of Risk within the Procurement process
3. To appreciate Risks- development, design, price/cost, construction, start-up
and operational risks
4. To learn about Global Procurement Trends
5. To apply the knowledge and concepts acquired to a Mock Case Study

PM 5114 MANAGING COMPLEX PROJECTS

PROCUREMENT STRATEGY

LECTURE REFERENCES

Introduction to Building Procurement

Brian Greenhalgh and Graham Squires (2011)

Building Procurement, Alan Turner (1997)

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PROCUREMENT STRATEGY

PROCUREMENT -Definition

Procurement
Short definition: Procurement refers to the process of purchasing goods or services

Wilkipedia:
Procurement is the process of finding, agreeing terms and acquiring goods, services or works
from an external source, often via a tendering or competitive bidding process. The process is
used to ensure that the buyer receives goods, services or works at the best possible price when
aspects such as quality, quantity, time and location are compared.

PM 5114 MANAGING COMPLEX PROJECTS

PROCUREMENT STRATEGY
PROCUREMENT

Unpredictability as a new normal US Presidential elections and Brexit;

A new era of alternative facts, fake news and metaliteracy.

Disruption rearing its head under the guise of disruptive innovation

where new technology is significantly impacting the traditional way of doing
business.

A lot of the disruption in the procurement marketplace is coming from

bottom up. And not just technology is driving this its new business models
and sources of supply..technology building blocks, managed services, B2B
connectivity, industrial distribution and marketplaces, master data management,
receivables and payables, financing, crowdsourcing, analytics, new labour sources,
platform-as-a-service and app models..

Jason Busch, Founder, AZUL Partners Inc

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PROCUREMENT STRATEGY

PROCUREMENT

Singapore
Three main procurement options
Traditional Design-bid-build Contracts
Lump Sum, Measurement & Cost-plus
Design & Build Contracts
Turnkey, Full Design & Build, Develop & Construct, Partial Design & Build
Management Procurement
Management Contracting
Construction Management

Public Private Partnership

Partnership between government and private sector to finance, build & operate

* Complex projects have whole spectrum of building contracts and sub-contracts, supply
contracts, purchase orders, FF&E, OS&E, IT, maintenance contracts etc.
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PM 5114 MANAGING COMPLEX PROJECTS

PROCUREMENT STRATEGY

Choice of Procurement Considerations

Scope of Work
Nature of Project
Site Constraints
Contractor Selection Process
Timelines, Phasing and Early Start
Client Factors
Risk Allocation

Risk Considerations Identification, Analysis, Quantification, Mitigation & Allocation;

the acceptance of a contractual obligation brings about the uncertainty of not being able to
fulfill the obligation for various reasons

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PROCUREMENT STRATEGY

PROCUREMENT - Risk Typology

Broad Classification of Risks
Development Risks

Design Risks

Price / Cost Risks

Construction Risks

Start-up Risks

Operational Risks

PM 5114 MANAGING COMPLEX PROJECTS

PROCUREMENT STRATEGY
PROCUREMENT - Development Risks
1. Project Financing Construction Financing and Development
Financing

Difficult terms, grants of security interests, restrictions on sale of

project assets, remedies for defaults, step-in rights of financier ,
collateral requirements etc.

2. Change in Law New statutory or government policies affecting the

project development feasibility

3. Other Risks
Authority Approvals URA and BCA approvals, agency approvals,
change of use, building permits, TOP approvals etc.

Change in Market Conditions Global financial crisis, economic

recession, hostilities, civil commotion etc.

Change in Ownership and Stakeholders Direct impact from risk

re-allocation
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PROCUREMENT STRATEGY
PROCUREMENT- Design Risk
1. Fitness for Purpose Whether design responsibility is limited to
reasonable skill and care, or a guarantee of fitness for purpose

PSSCOC Design and Build 2014 Clause 4.1(2)(e)

The Contractor shall be fully responsible for the adequacy and integrity of the design
and the Works, and for the Works being suitable or fit in all respects for the purpose for
which the Works are constructed, and in accordance with the Employers Requirements

JCT Design and Build 1998 (Modified): Project Example

The Contractor shall be fully responsible for the suitability, adequacy, integrity,
durability and practicality of the Contractors Proposals and shall ensure that the
Contractors Proposals (including any further design which the Contractor is required to
carry out as a result of any Change in the Employers Requirements) meet the
Employers Requirements and is fit for the purposes expressly set out or described in the
Employers Requirements
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PM 5114 MANAGING COMPLEX PROJECTS

PROCUREMENT STRATEGY
PROCUREMENT- Design Risk
2. NSC concept in Design & Build Main Contractor takes over whole design
liability including that of all subcontractors.

PSSCOC Design & Build (Modified): Project Example

The Contractor shall be fully responsible for all nominated subcontractors including any
design work performed by nominated subcontractors and for any default or breach of
contract on any nominated subcontractors part, in the same way as the Contractor shall
be responsible for the Contractors own Plant, materials, goods or work, or those of other
subcontractors selected and engaged by himself, and the Employer shall in no
circumstances be liable to the Contractor for the default of any nominated
subcontractors

Adoption of Nominated Sub-Contractors vs. Named Sub-Contractors

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PROCUREMENT STRATEGY
PROCUREMENT- Design Risk

3. BIM Uncharted territory on design liability and intellectual property.

Particular Conditions to Construction Contracts and Service Contracts

Singapore BIM Guide of May 2012

Clauses 5 and 6 - Multiple parties work on the BIM model with no privity of contract
between the parties
Risk Allocation Clause 5.7
Each party shall use its best efforts to minimize the risk of claims and liability arising from the
use of or access to its Model or the Final Design Model. Such efforts shall include promptly
reporting to the relevant party and the BIM Manager any errors, inconsistencies or omissions it
discovers in its Model or the Final Design Model. However, this section shall not relieve any
party of liability for any of its Contribution.

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PM 5114 MANAGING COMPLEX PROJECTS

PROCUREMENT STRATEGY
PROCUREMENT- Design Risk
3. BIM Uncharted territory on design liability and intellectual property. (Contd)

Intellectual Property Rights Clause 6.1

Each party agrees to indemnify and hold such other parties harmless against
claims of third parties arising out of or relating to, claims or demands relating to
infringement or alleged infringement of expression contained in that partys
Contribution...

Onerous conditions to impose on parties

Potential shared liability on all parties
Contractor cannot rely on warranty & indemnity between consultants and
Employer

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PROCUREMENT STRATEGY
PROCUREMENT- Price/Cost Risks

1. Loss & Expense

Contractual Provisions for Loss and Expense
No provision for Loss and Expense in some contracts
Valuation of variations provisions prevail
Modified PSSCOC Clause An Example
The Contractor is not entitled to any addition to the Contract Sum, or any additional
payment (whether as damages or likewise) in respect of any cost, damage, loss or
expense suffered during or arising from the first 60 days of the aggregate extensions of
time to each and any Time for Completion, and the Contractor is deemed to have waived
all rights, claims and damages to which it might have become entitled in respect to
these extensions of time whether under the Contract or as a result of a breach of
the Contract by the Employer, its employees or servants or agent

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PM 5114 MANAGING COMPLEX PROJECTS

PROCUREMENT STRATEGY
PROCUREMENT- Price/Cost Risks
2. Cross Border Transactions
Added dimension of challenges arising here

Tax Cross border contracts, onshore and offshore split contracts,

import duty waivers, applicable VAT/GST, income tax, withholding tax,
tax concessions etc.
Foreign Exchange Forex rates differ between the state banks and
private banks, payment and contractual conversion method etc.
Governing Law - Applicability of local or foreign law, legal practicality
Language in Contract Controlling language of the Contract

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PROCUREMENT- Price/Cost Risks

3. Buyout Commodity Price Risk

Commodities / Materials

In-situ concrete, reinforcement steel, structural steelwork, architectural finishes,

furniture fittings and equipment etc. The Employer selects exclusive suppliers;
the Contractors must enter into supply contracts based on prescribed terms,
rates and prices.

Application of material fluctuation provisions (PSSCOC Option Module C

Fluctuations)

Adoption of Bulk Purchase Contracts, Bundled Contracts

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PM 5114 MANAGING COMPLEX PROJECTS

PROCUREMENT STRATEGY
PROCUREMENT- Price/Cost Risks

4. Limitation of Liability

Particular Condition An Example

The Contractor shall not be liable to the Employer for loss of revenue, profits or other
indirect and consequential economic loss or damage caused by any breach of contract
or negligence on the part of the Contractor in the execution of the Works except where
they are caused by the negligence, willful misconduct or other tortious conduct on the
part of the Contractor.

Trend towards more contracts having limitation of liability provisions

Eg. EPC and service contracts

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PROCUREMENT STRATEGY
PROCUREMENT- Price/Cost Risks
5. Other Considerations

Employers Requirements Completeness, adequacy and accuracy of brief

Develop & Construct Novation of design consultants crucial for transfer of

design liability to the Contractor

Guaranteed Maximum Price (GMP) Conceptually an all inclusive guaranteed

maximum price but feasible only if there are no changes anticipated, and there
are existing commercial relationships

Early Contractor Involvement (ECI) - Contractors early involvement in the

tender process, contributing to design and constructability of the project

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PM 5114 MANAGING COMPLEX PROJECTS

PROCUREMENT STRATEGY
PROCUREMENT- Construction Risks

Timely delivery Project delays, late completion, suspension of work on

site, acceleration measures

Quality and Workmanship Construction defects and latent defects

Changes Impact of change orders on time, cost and scope of contract

Risk Mitigation Payment retention, stage payment certification,

performance bond, construction insurances, parent company guarantees
and indemnities, material and workmanship warranties etc.

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PROCUREMENT STRATEGY
PROCUREMENT- Start-up and Operational Risks
Delay in startup Delay in obtaining operating licenses and permits

Working Capital Adequacy for initial operations

Business Interruption Operational breakdown, labour unrest,

unforeseeable events etc.

Building Defects Rectification schedule within Defects Liability Period

Latent Defects Effectiveness of joint/collateral warranties and

indemnities

Maintenance Agreements Inflationary price risks, choice of competent

service providers

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PM 5114 MANAGING COMPLEX PROJECTS

Global Procurement Trends

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Global Procurement Trends
Excerpt : Rider Levett Bucknall Research

Fully Documented Lump Sum Construction Management

International

Singapore Preferred method of contracting Not frequently used. Used successfully in MBS project.

Philippines Used regularly by developers Used regularly by developers

Hong Kong Used regularly in Hong Kong & Macau Not frequently used in Hong Kong & Macau

China Used regularly in China Not permitted in China

India Not frequently used Preferred method of contracting

UAE Preferred method of contracting Declining method of procurement. Has been used frequently in the
past prior to the GFC

United Regularly used method of contracting for Government projects. Declining method of procurement. Used frequently in past. Now
Kingdom clients wish to pass risks to the contractor

USA Not frequently used but a slight increase recently due to economic Not frequently used
situation
Australia Used regularly for government work. Less frequently used by Not frequently used. Occasionally on government projects
private sector

New Zealand Preferred method of contracting on most major and more complex Not frequently used
projects. 23

PM 5114 MANAGING COMPLEX PROJECTS

Global Procurement Trends
Excerpt : Rider Levett Bucknall Research

Management Contracting Design & Construct GMP

International

Singapore Not frequently used Not frequently used

Philippines Not frequently used Used occasionally for smaller projects

Hong Kong Not frequently used in Hong Kong & Macau Not regularly used in Hong Kong, tried in Macau but not successful

China Not permitted in China Not frequently used in China

India Regularly used method of contracting Not frequently used

UAE Declining method of procurement. Has been used frequently in Not frequently used
the past prior to the GFC

United Declining method of procurement. Still being used on large Emerging procurement method on private sector projects and
Kingdom projects increasing in use across all sectors

USA Preferred method of contracting Not frequently used

Australia Preferred use on some government projects Used regularly for all types and sizes of projects

New Zealand Not frequently used Increasing use of this contract on large industrial buildings etc. NZ
contractors not generally good at design management
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Global Procurement Trends
Excerpt : Rider Levett Bucknall Research

Design & Construct Lump Sum Alliance Contract

International

Singapore Used regularly in residential market Not frequently used

Philippines Not frequently used Used occasionally for Government projects

Hong Kong Used regularly in Hong Kong & Macau especially for Not frequently used
Government projects

China Not frequently used in China Not frequently used

India Emerging method of procurement especially in office Not frequently used although on trial for selected projects
fitouts and warehouses

UAE Not frequently used but clients now wishing to procure Declining method of procurement. Has been used frequently in the past
this way prior to the GFC

United Emerging procurement method on private sector Emerging procurement method on private sector projects
Kingdom projects
USA Not frequently used but more often than GMP Not frequently used

Australia Used regularly for projects Used for civil projects generally

New Zealand Increasing use of this contract on large industrial buildings Used for Civil projects only along with measure and value (cost plus)
etc. NZ contractors not generally good at design 25
management

PM 5114 MANAGING COMPLEX PROJECTS

Global Procurement Trends
Excerpt : Rider Levett Bucknall Research

PPP
International
Singapore Declining use since mid 2000's. Current perception is that it is inefficient and costly

Philippines Starting to be used on Government projects

Hong Kong Not regularly used in Hong Kong, currently being tried in Macau

China Not frequently used

India Regularly used method of contracting for Government infrastructure works (BOT/BOOT)

UAE Emerging method of procurement especially for hospital projects

United Emerging as a preferred procurement route, but Government trailing different forms of PPP. Also being
Kingdom considered in Eastern Europe

USA Not frequently used but may see an increase in use

Australia Preferred by government for social and infrastructure projects

New Zealand Starting to be used in NZ and being considered for some quake areas rebuilding work.
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Global Procurement Trends Excerpt : Rider Levett Bucknall Research
Fully Construction Management D&C D&C Alliance PPP
Documented Management Contracting GMP Lump Sum
Singapore X X X X
Philippines X X X
Hong Kong X X X X X
China X X X X X X
India X X X
UAE X
United
Kingdom
USA X X X X
Australia X
New X X
Zealand

Preferred method, emerging use Used regularly Declining Use Not Frequently Used X

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GROUP DISCUSSION
MOCK CASE STUDY #1

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PROCUREMENT STRATEGY

Mock Case Study #1- Vietnam Project

A Vietnamese land owner, Mr M, has a rectangular plot of land of size 1,650 m2 in the outskirts of Ho
Chi Minh City, Vietnam. The land is zoned as residential but there are existing illegal squatters living on
temporary housing on his plot. There is also a possible live sewer line partially running across the
corner of this plot.
You are a PM consultant, JLZ Consultants, acting for a Singapore developer, SRG Pte Ltd. SRG is new
to Vietnam and is not familiar with the local market.
SRG wishes to purchase the land from Mr M and develop a 10-storey block of apartments. Mr M has
however requested to jointly develop the property with SRD on a 50:50 basis. The total development
cost is US$ 20.0m, and initial equity funding is US$ 5.00m and the rest is to be financed via loan
facilities from a Vietnamese bank. Construction cost including authority fees, consultancy fees, site
supervisory costs etc is estimated at US$ 15.0m and land is valued at US$ 4.50m. Mr M has a relative
who is managing a construction contracting company, BCM Co Ltd, which is into building residential
properties in HCMC. BCM has requested to be involved in the construction of the apartments.
SRG has Singaporean shareholders who insist that all construction work for this apartment building to
be tendered. SRG has also engaged a Singapore architect and team of consultants to service the
project. SRG intends to sell these good quality apartments to mainly foreign purchasers. SRG appears
concerned about the quality and workmanship of contractors, and possible issues on defects with
buyers. The Vietnam property market is buoyant, the VND currency is stable, and SRG is anxious to
proceed quickly with this joint venture with Mr M.
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PROCUREMENT STRATEGY

Mock Case Study # 1- Vietnam Project

QUESTIONS (Reply not to exceed 3 slides/pages)
Group to bring a laptop and thumb-drive.

1. As the PM consultant, please advise SRG on the proposed procurement arrangement or

procurement alternatives to consider, given the circumstances. Provide also brief pros and cons of
your proposal.
2. How would you advise SRG on how to address the funding of the project, as Mr M has limited cash
funds?
3. List out 3 possible problems may be encountered by SRG in the development and construction of
the apartments. How could SRG do to limit or mitigate its risks against these problems?

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