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1.

0 Introduction
According to Business Dictionary (n.d.), procurement can be defined as the act
undertaken to obtain or buying goods and services in a business. But in the construction
industry, construction procurement is the process of identification, selection and
commissioning of the contributions that require for the delivery project of the creation of
new building, alteration of an existing building and etc. (Akram, & Zareba, 2012).
Besides, the procurement method is also used to describe the relationships that formed
between clients, consultants and construction companies (Lupton, Cox, & Clamp, 2009).

Commonly, there are a number of different types of procurement strategies


available in the construction projects. For example, the various procurement methods
include traditional method, design and build, management contracting, construction
management, design and manage, build, operate and transfer.

Design, bid and build is a traditional method of construction project delivery


involving the selection and award of the professional design services followed by a
separate process for construction services once design documents are complete (Design-
build, 2005). While management contracting is a procurement route in which the works
are constructed by a number of different works contractors who are contracted to a
management contractor (Management contract, 2016). Other than that, build, operate and
transfer is a type of arrangement in which the private sector builds an infrastructure
project, operates it and eventually transfers ownership of the project to the government.
In many instances, the government becomes the firm's only customer and promises to
purchase at least a predetermined amount of the project's output. This ensures that the
firm recoups its initial investment in a reasonable time span (“Build-operate-transfer”,
2016).

It is necessary for the parties who involved in the construction industries to


understand the procurement strategies. It is because each project procurement method has
its own strength and weaknesses which must be consider carefully by the clients and
construction parties (CIOB, 2010). Thus, it is essential to introduce the various
construction procurement strategies for construction clients, especially non regular

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purchasers. Once the occasional clients understood the procurement process, they can
select the most appropriate procurement strategies for the building projects so that it can
complete smoothly.

In this assignment, we are going to describe more about the strategies of the three
common construction procurement which are “Design, Bid and Build contract”,
“Management Contracting”, and “Build, Operate and Transfer”. Moreover, we will
discuss the roles and responsibilities of relevant parties such as client, contractor and
project manager who involved in each strategy. In addition, the advantages and
disadvantages will be discussed in each strategy. We will go through the factors that may
influence the client’s decision on the selection of three methods of construction
procurement as mentioned above.

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2.0 Design, Bid and Build Contract
2.1 Descriptions of Design, Bid and Build
Design, bid and build is a traditional contracting method in which the design and
construction phases of a construction project are bid and performed by two independent
contractors under two distinct contracts (Patrick, n.d.). In this traditional method of
project delivering, a design team of architects and engineers is hires to work with an
owner to develop plans for a building to fit the goals, budget and aspirations of the owner
(“Design-Bid-Build”, n.d.). Based on the completed construction plans, a contractor is
selected through a bidding process to build the building for a set price. However, the
contractor with the lowest construction cost will be chosen (“Design-build”, 2015).

Furthermore, there are some variables need to think when considering the design,
bid and build method. First, the design and construction phases must be well planned,
since the phases occur separately. However, lack of coordination can prolong a project
(Andre, 2012). Second, owner manages the design and construction contracts separately.
Meanwhile, there are two parties coordinating efforts with versus one with other delivery
method (Hirschfeld, 2010). In addition, owner holds all the risks in the project and costs
are based on a flat fee, which does not reflect savings for work that was completed for
less than the original quote (“Construction pricing”, n.d.). The construction team bases
bids on the lowest bidder versus other delivery methods where the owner is given
recommendations and has voice in this process (“Bidding & contract”, 2013).

Examples of Design, Bid and Build Projects (Design-bid-build, 2016)

• Citrus College – Fine Arts Complex (U.S)


• Corona del Mar High School – Theatre Complex (U.S)
• University of California – Riverside Boyce and Webber Hall (U.S)
• Pan Pacific Park Recreation Center (U.S)
• El Camino College – Shops Building Replacement (U.S)

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2.2 Process of Design, Bid and Build
BID / AWARD OF
CONTRACT
DESIGN
TEAM
General contractor
RETAINED
hired SINGLE
ED
DESIGN CONTRACT

Owner’s Schematic Design Construction Construction


program design development documents

Owner’s Owner’s Owner’s Owner’s review


review and review and review and and approval. Certificate of
approval approval approval Architect obtains substantial
building permit completion

Final completion

Figure 1: Stages involved in the Process of Design, Bid and Build

Source from: “Design-bid-build” (n.d)

Stage 1: Design Phase

In the design phase, the owner retains an architect (or consulting engineer for
infrastructure works) to design and produce bid documents, including construction
drawings and technical specifications (Principles of construction, n.d.). For building
projects, the architect will work with the owner to identify the owner needs, develop a
written program documenting those needs and then produce a conceptual or schematic
design. This early design is then developed and the architect will usually bring in other
design professionals such as mechanical, electrical, structural engineers, etc. to help
complete the construction drawings and technical specifications. The finished bid
documents are coordinated by the architect and owner for issuance to general contractors
during the bid phase (“Non-residential”, 2016).

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Stage 2: Bid Phase

In the bid phase, the various general contractors bidding on the project obtain
copies of the bid documents and then put them out to multiple sub-contractors for bids on
sub-components of the project. Questions may arise during the bid period, the architect
will typically issue clarifications or corrections to bid documents in the form of addenda.
Once bids are received, the architect typically reviews the bids, seeks for any
clarifications required of the bidders, ensures all documentation is in order and advises
the owner as to the ranking of the bids (“Defining the architect”, 2007). However, the
project is typically awarded to the general contractor with the lowest bid (“An owner”,
n.d.).

Stage 3: Construction Phase

In the construction phase, once the construction of the project has been awarded
to the contractor, the bid documents such as approved construction drawings may not be
altered. During construction, design changes are necessary, whether initiated by the
contractor, owner or discovered by the architect. The architect also acts as the owner’s
agent to review the progress of the work as it related to pay requests from the contractor
and to issue the site instructions or other documentation necessary to facilitate the
construction process and certify that the project is built to the approved construction
drawings (Construction, 2016).

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2.3 Roles and Responsibilities of the parties involved in the
contract

Owner

Contractor
Architect / Engineer
(responsible for
(responsible for
performance and trade
design)
contract)

Sub-contractors

Figure 2: The contractual structure in design, bid and build contract

Adopted from: Building value (2010)

Owner

In design, bid and build contract, it is the owner’s duty to decide the scope,
program and budget for a project prior to design. During design and construction, the
owner will monitors the project’s progress and quality and makes periodic payments to
design and construction practitioners (An introduction, n.d.). When the owner issues the
construction documents to the bidders, the owner implies that the plans and the
specifications are reasonably sufficient for the contractor to follow and use to complete
the project (Avalon, n.d.). If the drawings and specifications contain errors that cause the
contractor incur extra cost, the owner is responsible for the extra costs (Lozowicki &
Turaids, 2016). Meanwhile, when the owner issues the construction documents to the
competing contractors, the owner will asks the contractors to assume the package is
correct and complete that they need nor include an allowance for the possible unknown

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costs due to the errors or omissions in the construction documents (“Construction
pricing”, n.d.). Allowances for unknown costs would result in a higher bid based on
guesses. Instead, it is the owner’s interests to agree to bear the risk when such problem
inevitably arise.

During the design and documentation phase, the owner is responsible for
providing its requirements to the designer and providing timely responses to the
designer’s submissions. Similarly, during the construction phase, the owner’s duties
executed by its agent, the designer, include timely responses to the contractor’s
submittals, requests for the information and proposed changes or claims. In addition, the
owner is ultimately responsible for interpreting the requirements of the contract, the
drawings and specifications usually relying on the expertise of the designer (Berman &
Prezioso, 2008).

In the bidding phase, although the designer may advise the owner about the bids
received, but only the owner can accepts a bid and selects a contractor. The owner will
award a contract to the responsive contractor that submits the lowest lump sum price to
complete the work in accordance with the construction documents (Delivery methods,
2014).

Architect

A designer’s duty is to translate the owner’s needs and requirements into


drawings and specifications to be used during construction (Design development process,
2009). During the construction phase, the architect may assists the owner with such
services as monitoring the progress if the work, verifying the specified level of the
quality is being achieved and certifying payment applications. The architect should
provide unbiased interpretations of the contract documents and give additional
instructions as needed to enable the contractor to perform the work (Article 1, n.d.).

During the design phase, the designer’s responsibilities are to the owner. The
designer has the contractual and professional relationship with the owner and no
contractual relationship with the contractor. The designer must performs design services
in accordance with the requirements of its contract with the owner. The contract may

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imposes requirements concerning a schedule, costs or approval. These contractual duties
may be in addition to the designer’s professional standard of skill and care (Bergeron,
n.d.).

Contractor

The contractor’s duty is to construct the project according to the designer’s plans
and specifications, within the time and price specified in the contract (Demkin, 2008).
This should be done without sacrificing either the quality of the work or the safety of the
workers. The contractor has complete the responsibility for achieving the quality level
required in the documents and for safety. It is important that contractor’s obligation is to
satisfy the minimum requirements of the drawings and specifications (Bender, 2007).

In the bidding process, the owner asks for the lowest possible price to perform
only those things that are absolutely required by the drawings and specifications. Thus,
the contractor is obligated to satisfy those minimum requirements (“Contractor’s
reasonable”, 2009). Furthermore, the contractor has a contract only with the owner but
has no contract with the designer. The contractor’s responsibility is to comply with the
requirements of the contract with the owner (“General conditions”, n.d.).

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2.4 Advantages and Disadvantages of Design, Bid and Build

Advantages
 Competitive bidding results in lowest costs
The contract is awarded to the bidder who offers to construct the building for the
lowest price. This competition motivates the bidders to offer the lowest price because
they know the price is the only basis for award of the contract. Since that the building
agency wants is fully defined by the detailed working drawings and specifications,
bidders do not need to increase their bids to cover the contingencies that might arise if a
building is not fully defined (Masucci, & PE, 2008).

 Easy to manage
Design, Bid and Build is known as easier to manage if compare to other
procurement method. It is because the scopes and stages are rigidly defined. In addition,
the design team and contractor team are separated, they direct contact with the owner.
Therefore, the owner has a greater degree to control the over process (Sierra, n.d.).

 Allows more firm to bid


The owner hired and work with their desired architects. In addition, they get to hold
a multi-bidder competitive selection that is based on lowest cost. It is because all the
builders are basing their price on the same construction documents. Thus, the price the
builder bid is the price they are held to (Design/Bid/Build, 2016).

Disadvantages

 Difficult to reduce the time


It is difficult to reduce the time required by the both design and construction. The
process is sequential and linear from design stage to procurement stage then last
construction stage. There is no chance to overlap the tasks and thus reduce the overall
time. This will cause the raise of interest expenses on construction loan and other costs.
In addition, it may exposes the project to risk of inflation. Hence, the time element
problem always become the primary reason that the client refuses in use of the design,
bid and build method (“Understanding project”, n.d.).

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 Contractor does not enter the process until the design complete
The design not usually reviewed for constructability before it is finish. Design
features could have been built more effectively and economically often result in higher
costs. Some of the design firm solving this problem by hiring pre-construction
consultants or having construction professional. Although this will brings benefit to the
project but it is not effective as having design reviewed by the contractor (“The
traditional”, 2013).

 Lengthy process
It places the owner in the middle of disputed between the contractor and design
professionals, the cost of the construction is unknown until the bids are finalized and it
intensifies the potential for change orders. The process requires a significant economic
commitment by the owner at the front end of the project by requiring the owner to
complete the design before bidding the construction of the project. It is because the plans
and specifications are completed prior to bidding the construction phase, there is a
potential that bids for construction may exceed the owner’s budget. Hence, it requires
the owner to either redesign or abandon the project.

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2.5 Factors that may influence the client’s decision on the section
of the method of construction procurements

One of the factors that affect the client decision in selecting traditional method is
the client experiences. Most of the client especially inexperienced client will choose this
method. Inexperienced client is the one who has no recent and relevant experience of the
construction buildings. In addition, traditional method is a low risk option that can
minimize the client’s exposure to the risks of overspend delays or design failure.
Therefore, the inexperienced client will choose this strategy (Masterman, & Gameson,
n.d.).

Furthermore, clients who possess a strong desire to control the design and
construction process or have the funds in place to hire sufficient personnel or a firm to
closely watch the process may be more suited to the design, bid and build process (“An
analysis”, n.d.). Moreover, the designers and contractors are appointed separately in
design, bid and build method, therefore it is generally better for simple and predictable
projects. It is also easy for the client to control the projects throughout the project
delivery (Building procurement method, 2008).

Another factor that will affect the client’s decision is the budget problem. Client
needs to determine their budget before design stage to evaluate the project feasibility and
the risk (“An owner’s”, 2012). By using this traditional method, various contractors
bidding on the project and submit their “tender price” during the bid phase. Therefore,
client can selects the contractor to build the project with the “tender price” which near to
the established budget, but normally client will chooses the lowest one.

Besides, time factor will lead to the client selection of design bid build strategy.
Although design, bid and build is identified as the slowest project delivery approach,
however, it provides clear accountably, better design and construction control by the
client. Furthermore, since the pre-contract stage is longer, both the client and project
teams have more time to scrutinize and review the design before construction. Thus,
clients are more prefer to this method under these situation (Rashid, Taib, Ahmad, Ali, &
Zainordin, 2006).
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3.0 Management Contracting
3.1 Descriptions of Management Contracting
Management Contracting is an agreement between the investor and owner of a
project. A management company was hired to oversee and coordinating the contract with
the condition and duration of the agreement, and the method of computing management
fee. The managing contractor was hired in which he responsible for the management of
the work. Furthermore, he will approaches the design consultant who will be the one
preparing and documenting the design. After that, the managing contractor will arrange
the work to the sub-contractor (Management contract, 2016).

Management Contracting is suitable for the large and complex projects


(Management contracting, 2013). The purpose of management contracting is to minimize
the time and risk that will bear by the client and in the meantime without overlooking the
quality of the goods (“The management”, 2013).

In establishing the management contracting, crew should be in touch with the


client first in order to understand their needs, motive and goals which they want to
achieve. This is to ensure that the design team knows where to start and planning for the
budget, material needed and the design of the project (“The management”, 2013). The
essential core of this strategy is to understand the client’s needs, such as how much they
willing to pay for this project, which level of quality they wish to get, and how long will
it takes (Miller, Furneaux, Davis, Love, & O‘Donnell, 2009)

At the beginning of the project, client will not fully understand the process and
situation until the end of the project. This is because there might be some information
added to the project or any accident happen during the construction. In addition, it will
cost an amount of the money. For example, the material will have some defects and it will
need to repurchase the new batch of material. It is to ensure the safety and quality of the
project (Management Contract, n.d.). The crew will need to recall what the client wishes
to achieve in the first place wherever it is necessary. Then, the crew will seek for the
professional opinion from the consultant which might cause the changes in the payment
due to the consultation fee. After the complete project had been presented to the client,

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the client will see whether the project reaches the requirement of them and do they satisfy
the services and product of the firm or not during the feedback period (“The
management”, 2013).

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3.2 Process of Management Contracting

Handover &
Inception & Maintenance
Feasibility
Tendering

Design Construction

Figure 3: Stages involved in the Process of Management Contracting

Adopted from: KJ (2012, p. 103)

Stage 1: Inception and Feasibility

In the inception and feasibility stage, it is incumbent for the employer to appoint
the members of the professional team to enable the users’ requirements to be formalised
into a proper project brief and a preliminary cost plan to be drawn up prior to the
appointment of the management contractor (“Management contract”, 2015).

Stage 2: Design

The professional team develops the project brief and prepares the project
drawings and specifications which describe the scope of the project. The quantity
surveyor will draws up the preliminary bills of quantities and tender documents for fee
tender. Either on a competitive or negotiated basis a management. The employer and the
selected contractor will enter into a management contract. The professional team
develops and finalise the tender documents for use in the various works contracts with the
input of the management contractor. Since some of the works contracts may be awarded
during the construction period, this process is an ongoing activity dictated by the agreed
programme of appointing the various works contractors. Moreover, the quantity surveyor
accordingly revises his contract cost plan (“Management contract”, 2015).

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Stage 3: Tendering

The work under the project will be split into works packages and the actual
construction will be undertaken by these works contractors who contract separately with
the management contractor to carry out and complete it. Once the management
contractors completes his pre-construction scope of services, the parties may either
proceed with the construction stage services or terminate their agreement. In addition, the
management contractor will be reimbursed for his pre-construction services if the parties
decides not to proceed (“Management contract”, 2015).

Stage 4: Construction

The management contractor will be given possession of site on the date of


possession expressly stated in the management contract. It is necessary for the
management contractor to obtain the permits and approvals. During this stage, the
management contractor’s duties include coordinating, monitoring and controlling of the
various packages, providing, equipping, maintaining and removing common user site
facilities, etc. Other than that, management contractor will undertakes the contract
administration and carry out the project finance (“Management contract”, 2015).

Stage 5: Handover & Maintenance

The main contractor’s role will be undertaken by the management contractor so


long as this is the tandem with his scope of service. However, the management contractor
is not responsible for the prime cost of the project if it exceeds the contract cost plan total.
The management contractor will undertake all the testing, commissioning and training of
the project. It is necessary for the management contractor to obtain all the authority
approvals. Then, the project is handover to the employer (“Management contract”, 2015).

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3.3 Roles and Responsibilities of the parties involved in the
contract

Employer

Design Consultants
 Architectures
 Quantity Surveyors
Managing
 Engineering
Contractor

Work Contractor Work Contractor Work Contractor

Figure 4: The contractual structure in Management Contracting

Adopted from: Australia (2014)

The employer has direct contracts with the professional team members under the
professional services agreements. Under these contracts, these various members of the
professional team have direct contractual rights and obligations against the employer and
vice versa. In a similar manner, the management contractor and employer have a direct
contract too. They are responsible in labelling the management contract, defining their
respective rights, duties and obligations (Lam & Chan, n.d.).

In management contracting, contractor will not do the work, but he was employed
to make the arrangement of the work and supervising the whole process during the
project period. Besides, if there are any changes or opinion, the client wish to add on he
will in touch with the contractor. In addition, the contractor will make the arrangement to
fulfil the requirement of the client. Management contractor is responsible administration
for the work. Hence, the contractor and the management contractor will not bear any
consequences which caused by the work contractor. Apart from that, contractor also has

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the responsibilities to inform the consultant about the progress of the project from time to
time in order to avoid some unnecessary loss (“The management”, 2013).

In addition, consultant also plays an important roles in the construction projects.


The roles and responsibilities are different to each other according to the stage of the
project. In the early stage, the consultant will responsible for administer the contract and
must promptly inform the owner about the date of the receipt of the contractor’s
application for payment. Next, the design stage where the consultant determines the
feasibility of the project from its artistic, technical, logistic and financial view. The
consultant will creates the design based on these view and seeks for approval from the
client. It is to ensure that the design meets the client’s requirements. There are a lot of
things that the consultant needs to consider during the design stage. Moreover, it is to
make sure that the estimation of the cost is accurate so that the client no need to spend the
unnecessary money.

Furthermore, the consultant may responsible for the interior design development
and promotional presentation during the design development stage. The consultant is also
responsible to make decision on which the permit or licence that need to be obtained for
the project (Ip, n.d). However, the consultant is responsible for the specification, plans
and drawing that related to the project. The specification will be presented in writing
form while the plans and drawing will be presented in images form. This is to ensure that
the contractor how the work should be constructed and beware on the detail that need to
pay attention with. (Lupton, Cox, & Clamp, 2009)

Each work contractor has a sub-contract with the management contractor, which
contract governs, their respective rights, duties and liabilities. Under the doctrine of
privity of the contract, there is no direct contractual linkage of rights and obligations
between either the works contractors and the employer or the works contractors and the
members of the professional team (Thomas, Feldman, Wilshusen, Dallas, & Texas, 2016).

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3.4 Advantages and Disadvantages of Management Contracting

Advantages
 Better communication lines
In management contracting, management contractor was brought into the project
at a very early stage. This making him an integral number of the project team. Moreover,
the management contractor contributes to the reduction of organisational tensions,
leading to a more peaceful working environment for the betterment of the project. The
management contractor also in coordinating the various works contractors, providing the
intermediary linkage between these contractors and the other professional team. Actual
experience with such contracts has shown a better line of communication between the
parties (Contract management, n.d.).
 Shorter project period because speed increased from inception to completion
One of the characteristics of management contracting is the overlapping nature of
the critical stages of the project life cycle, such as design, tendering and construction.
This approach permits to be realised a relatively early start of the project on site such as
the enabling works can start on site while the design is still being undertaken by others.
Due to the concurrent design and construction stages as well as the overlapping of the
various works contracts, the overall project period is reduced, permitting early occupation
by the employer. Moreover, the equipment, plant and materials with long lead times such
as lifts and chillers can be ordered in advance. It is to ensure that the availability in time
for the programme completion (Procurement systems, 2015).
 Greater flexibility for changes
The changes in the employer’s requirements of the contract should be minimised
or avoided at all costs due to the adverse contractual implication, at least, in terms of time
and cost. However, the method of the contract procurement selected should be able to
accommodate these changes as far as minimal an impact on the contract price and time
period as possible. Owner can add changes to the design anytime and it will not affect the
progress of the construction. This flexibility is submit to an appreciable degree by
Management Contracting through various features. In Management Contracting, the
employer can finalise projects and contract them out earlier if the requirements are

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clearly defined. Thus, for the works which are undecided or unsure as to his exact
requirements or for which anticipates possible changes as the works proceeds (Davis,
Love, & Baccarini, 2008).

Disadvantages
 Lack of certainty of price
Management contracts are in essence cost reimbursement types of contract. For
example, the management contractor is reimbursed prime cost plus management fee. The
basis of remunerating the contractor is the estimated cost plan which in most instances is
taken as contract cost plan. The employer is hampered by the fact that he is not certain of
his financial commitment at the very outset. There is no lump sum contract price for the
employer’s consideration. The final contract sum can be established with any certainty
only when the last of the works contractors are on board (Davis, Love, & Baccarini,
2008).
 Coordination problems
A management contract generates a multitude of works contractors not
withstanding any attempts to minimise the number of packages. Such an arrangement
give rise to several problems. This includes poor definition of limits of works for the
individual works contracts. In addition, it results in relatively higher number of disputes
and claims arising. Coordination issues of the works on the ground resulting in poor work
integration, security problems, etc. The ideal objective is the seamless integration of all
the works contracts to realise the project objective of the cost, quality and time (Davis,
Love, & Baccarini, 2008).
 Limited employer’s involvement
A relook at the organisation structure, it will reveal that once the various contracts
are in place, the employer’s direct involvement in the activities pattern of the project
fades away. It saves for approvals and the disbursement of the payments. At the pre-
contract phase, the main players are the members of the professional team and the
management contractor. However, once the construction commences, the employer is
generally reduced to a mere by-stander. The contract is administered on his behalf by his
professional team who incidentally issue the instructions, undertake valuations, inspect

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the works, etc. The management contractor manages the works contractors who are in
fact his sub-contractors. In essence, he acts as the intermediary player between the
employer and the works contractors. The employers only steps in when the works are
completed and handed over to him (Davis, Love, & Baccarini, 2008).

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3.5 Factors that may influence the client’s decision on the section
of the method of construction procurements

This procurement strategy is the best suit for complex building. Client will selects
this type of procurement strategy when they intend to build a complex building. It is
because the complexity project may cause the scope of the project uncertain. Since the
contractor involved in the project at an early stage, the contractor can use his expertise to
develop the design, his knowledge and skill to plan the project (Tsirogiannis, & Misko,
2009).

Besides, the stakeholder interfaces are complex involved in a construction project


and the specialist handling is required. In management contracting, the contractor act as a
principal who was the only person contact with the client. Therefore, client will hired
main contractor to help them to manage the overall construction process. Thus, the
process of management contracting is suitable in this situation especially when the client
wishes to take advantage of the expertise and skill of contractor to manage the contract
(Tsirogiannis, & Misko, 2009). Moreover, the management contractor is responsible in
conjunction with the professional team for the splitting of works appropriately
(“Management”, 2013).

If the project delivery time frames are constrained, the client may select this type
procurement method (“Building”, 2014). In management contracting, contractor is
responsible to achieve the completion of the project within the required completion date
by using his knowledge and experience to better manage the design and construction of
project, thus making the construction time shorter compared to other procurement type.
Again, this method is suitable for fast-track complex projects where minimal design
information is available at the start of the project (RICS, n.d.).

Moreover, client might choose management contracting method based on the


standard of quality. The management contractor involved is responsible and tends to be
more serious with the standard of quality of work that carry out by the package contractor.
As a result, high quality of work will be performed with proficient experience of
contractor. For example, their knowledge and experience will made them more adept in
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selecting the materials and components of the right type and quality. Furthermore, client
will select management contracting method as it provides better standard and quality of
the completed construction products (Rashid et al., 2006).

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4.0 Build, Operate and Transfer
4.1 Descriptions of Build, Operate and Transfer

Build Operate Transfer

The definition of Build means set-up the facility and infrastructure, staff the
development center and establish the knowledge transfer. Operate means manage the
offshore organization such as program management, development, maintenance,
enhancements, and product support. Transfer means register a new offshore subsidiary
for the government, transfer assets, and handover operations (“Build-operate-transfer”,
n.d.).

Build-Operate-Transfer (BOT) is a major start up business venture where the


private organizations undertake the development and operation of a facility that normally
done by the government. In addition, it is also a private party or concessionaire that
retains a concession for a fixed period from a public party, called principal, for the
development and operation of a public facility. It is responsible for financing,
construction, operation and maintenance of the facility for agreed duration called
concession period. During this period, the private party has the responsibility to raise the
finance for the project and is entitled to retain all revenues generated by the project and is
the owner of the regarded facility (Bol, Huijbregts, Klein, Menheere, Paul, Pollalis, &
Verhoeven, 1996).

The private company then builds the project to the specifications agreed, operates
and manages the project for a number of years after its completion. This gives the private
company the chance to recoup its construction costs and make a profit out of the proceeds
coming from the operation and commercial exploitation of the project. At the end of the
concession period, the rights of the project company in the project are transferred to the
government or its designee, normally free of any charge. Then, the government is free to

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operate by itself or contract its operation to another contractor (Argyris, Kostantinos, &
John, 2003).

Therefore, build-operate-transfer can be seen as a developing technique for


infrastructure projects by using the private initiative and funding. Such infrastructure
projects include a wide array of public facilities with the primary function as to serve the
public needs, to provide social services and promote economic activity in the private
sector. The most common examples are roads, bridges, water and sewer systems, airports,
ports and public buildings. In addition to government, the private sector may initiate
build-operate-transfer projects when there are limited funds available and there are no
enough resources to execute successfully a required building project (“Build-Operate-
Transfer”, n.d.).

Examples of Build, Operate and Transfer Projects (Assaf, 2003)

 Taipei Mass Rapid Transit System (Taiwan)


 Kansai International Airport (Japan)
 North-South Toll Express Way (Malaysia)
 Bangkok Elevated Road and Train System (Thailand)
 Channel Tunnel (France, United Kingdom)

24
4.2 Process of Build, Operate and Transfer

Preliminary study
- Initiative
- Feasibility study
- Preliminary concession agreement

Selection
- Pre-qualification
- Investors, proposals
- Preliminary works (designer, etc)
- Evaluation of proposals
- Revise concession agreement

Project implementation
- Final work (design, etc)
Time

- Final concession agreement

Construction
- Execution
- Delivery
Concession period

Operation
- Maintenance and operation

Transfer
- Transfer

Figure 5: Stages involved in the Process of Build, Operate and Transfer


Source from: Moloigaswe (2013)

25
Stage 1: Preliminary study
The preliminary study usually takes place prior to the involvement of the
concessionaire. Feasibility studies are necessary to prove the forecasted success of the
project, in order to attract private funding. Alternatively, a private project may identify a
need and initiate the build, operate and transfer project in such case, the preliminary study
is conducted by the private entity with limited government involvement (“Build operate
transfer, 2015).
Stage 2: Selection
The selection process depends on who initiates the project. In a public selection
process where the initiative is coming from the public sector (government), a request for
qualification is distributed. After receiving applications, the government selects a few
consortia to submit proposals (request for proposals) and from these a concessionaire is
chosen. During this process, the consortia will group interested parties as required for the
efficient and adequate execution of the project. Alternatively, in a speculative selection
process, the private sector initiates the project and contacts the appropriate government
agency for approval. The project is granted after proper negotiations (“Build operate
transfer, 2015).
Stage 3: Project Implementation
After the concession has been granted, the consortium will then develop a specific
work program, including drawing up project designs and detailed engineering, obtaining
necessary legal permits to facilitate the project, etc. It is during this phase that potentially
conflicting or competing interests of all stakeholders (e.g. communities affected,
environmental issues) are balanced to ensure support or acceptance to the project and its
speedy completion (“Build operate transfer, 2015).
Stage 4: Construction
After satisfying the necessary legal, environmental and social requirements, the
construction of the infrastructure facility begins. This is usually undertaken by the
contractor who has also hired the construction crew, suppliers and technical and project
management consultants (Moloigaswe, 2013).

26
Stage 5: Operation
After the facility is built, the concessionaire designates an operator to operate and
maintain the facility. The operation lasts until the termination of the concession period
(Moloigaswe, 2013).
Stage 6: Transfer
Upon completion of the cooperation or concession period, the ownership of
facility and all its assets is then transferred to the host government. Transfer can also be
done prior to the expiration of the concession period but the concessionaire has to be
compensated properly for the investments made in the project. The government may then
operate the facility itself or decide to hire an independent operator (Moloigaswe, 2013).

27
4.3 Roles and Responsibilities of the parties involved in the
contract

Government

Operator Concessionaire Investors

Contractor

Figure 6: The contractual structure in Build, Operate and Transfer Contract

There are five major parties involved in the build, operate and transfer projects.
Figure 1 shows the typical structure. All of the parties have the particular reasons to be
involved in the projects. The major parties of build, operate and transfer projects usually
include the government agency, contractor, concessionaire, investors and operators.
Government agency
In a build, operate and transfer project, the principal is usually a government
agency, a local or federal government body that recognizes the need for a public facility
but is unable to financially support the project. The government agency is thus forced to
look for alternative options. The governments may draw up lists of infrastructure
investments in accordance to their overall economic and development plans. If it is
constrained to fully financially support the investments, the government then solicits
proposals from private companies to implement these plans. The usual mode is via a
competitive tender of infrastructure projects.

28
However, depending on the BOT law of a country private participants may submit
unsolicited proposals to undertake a specific infrastructure project. The government
either approves or disapproves the unsolicited project proposal. Upon approval of a
solicited or unsolicited project, the host government typically grants the private company
a concession that may last anywhere from ten to fifty years or more. The principal takes
ownership of the facility and the assets after the concession period. Sometimes they
provide a portion of the required financing or provide guarantees, subsidies or similar
support to make the project more attractive and viable to private investors (Khan, Jamil,
& Sattar, 2008).
Contractor
BOT projects involve large-scale building and construction of a facility. The
concessionaire commissions a contractor with the construction of the facility. In most
cases, the contractor is part of the concessionaire’s consortium and involvement is
favoured by all concerned parties. During the early stages of the process the contractor’s
involvement assures the consortium of the most effective and efficient design and
execution of the project. Ultimately, the contractor is responsible for the construction of
the project and for hiring subcontractors, suppliers and consultants (Bol, Huijbregts,
Klein, Menheere, Paul, Pollalis, & Verhoeven, 1996).
Concessionaire
The role of the concessionaire is on the financing and development of the project
and they source their funds from both sponsors and lenders. Finally, the contractor builds
the facility which is subsequently managed by the operator.
After the identification of the need for the facility, the government, following a
due process, will grant a concession to the concessionaire which is usually a group of
companies interested in undertaking the design, finance, construction and operation and
maintenance of the infrastructure project or facility on behalf of the principal. The
concessionaire is the owner of the facility during the concession period and realizes
profits on the initial investment through the usage of the facility. The property rights of
the facility (or the assets) rest with the concessionaire during the specified concession
period wherein the private investors/owners try to recover their investments and earn
profits (Bol, Huijbregts, Klein, Menheere, Paul, Pollalis, & Verhoeven, 1996).

29
Investors (Shareholders and Lenders)
Financing is supplied by the private sector and the investors include both
shareholders and lenders. The shareholders invest money in exchange for equity, and
lenders provide credit financing to the consortium which negotiates with the principal for
certain guarantees or credit enhancements to the make the project attractive to the lenders.
Lenders may include banks, insurance companies and bond holders. There are two broad
categories of equity providers, first is those that have a direct interest in the operation of
the project such as contractors, operators or the host government itself. Second are those
that are solely involved as equity investors such as public shareholders and other
institutional investors (Levy, 1996).
Operator
After completing the construction of the infrastructure facility, the concessionaire
then secures the services of the operator to manage and operate the facility. Similar to the
contractor, the operator is usually part of the concessionaire’s consortium, because of the
critical role in the revenue stream. In addition, the importance of operating knowledge for
programming, financing, design and construction is required. The operator is oftentimes
one of the entities in the consortium which has an intimate knowledge of the business and
the local environment. (Bol, Huijbregts, Klein, Menheere, Paul, Pollalis, & Verhoeven,
1996).

30
4.4 Advantages and Disadvantages of Build, Operate and Transfer
Advantages

 The private firms are more efficient, hence the project or service can be delivered at
a lowest cost
Build, operate and transfer method is efficient. The development of the projects
that would have to wait and compete for, scarce sovereign resources are accelerated. It is
suggested that the private sector may make a better evaluation in terms of the realization
of which project would be more feasible and it shall realize that the project’s design,
building and operation are more efficiently, and it is considered that the economic
efficiency shall thus increase (“The build”, n.d.). In additions, the use of private sector
capital, initiative and know how to reduce the project construction costs, shortens the
schedules and improves the operating efficiency. Hence, projects or services can be
delivered at lower cost (Kambaliya, 2015).
 Decrease of public share in infrastructure investments
Private sector invests directly in the development of infrastructure, thereby
reducing the public borrowing and direct spending. Hence, it may improve the host
government’s credit rating. It increase in the country’s international trustworthiness due
to the unnecessary public debt (“Concession models”, n.d.). Thus, the state shall get away
from the financial pressure which regarding to the realization of infrastructure
investments. This circumstance shall have favourable influences on the budget (“The
build”, n.d.).
 Increased financial opportunities
Build, operate and transfer projects increased the financial opportunities,
unaffected national treasury foreign debt stock. Thus, the foreign capital flow positively.
In addition, it also creates business opportunities for the local private sector, create
employment avenue as well as attract substantial foreign direct investment (“Concession
models”, n.d.). It creates the opportunity to establish a private benchmark against which
the efficiency of similar public sector projects can be measured and the associated
opportunity to enhance the public management of infrastructure facilities. (Kambaliya, S.
2015).

31
Disadvantages

 Build, operate and transfer model required a complex and long process
The model features a quite complex and sophisticated structure. Many parties
have to negotiate and reach an agreement on a great number and variety of documents.
Whereas, this might takes a certain time, money and requires people trained and
concentrate on this matter.
 Transaction costs of build, operate and transfer are high.
The cost of build, operate and transfer projects is much higher in comparison to
any projects which realized by budgetary or credit means. This model is more expensive
than any investment by means of domestic and foreign resources that provided by the
public. It shall be strived to obtain the profit and gained both investment stage as well as
at the operational stage, at the top points. The ability to draw this profit to a reasonable
level is closely related to the skill of the team that conduct the negotiations in the public.
 Investment increase
The investment of build, operate and transfer model to be made reaches a very
high amount. Its return is very long due to the fact that the other parties in the contract
who are administration, especially the foreign capital shows very much sensitivity
regarding political and economic stability for making an investment (“The build”, n.d.).

32
4.5 Factors that may influence the client’s decision on the section
of the method of construction procurements

The involvement of private sector and experienced commercial lenders ensures an in-
depth review as an additional sign of project feasibility. Jad (2005) stated that, “BOT are
financed on a project finance basis with limited resource where lenders provide debt to
the concession company solely based upon expected cash flow or revenue generation
capacity of the project”. Therefore, client will selects this method so that the project can
go smoothly with low risk of financial problem.

One of the factors that lead the client to choose build, operate and transfer
method is unnecessary for the public sector (government) to invest its own money while
the project still can take place even if the government budget is limited (Menheere, &
Pollalis, 1996). It is because the private sector is responsible to raise the finance for the
project. The private sector is allowed to charge facility users appropriate fees during the
operating period. The revenues are intended to cover operating costs, repayment of debt
principal, financing costs (“Concession”, 2015). Thus, client can inherit the ownership of
the project after concession period.

In addition, the risk in build operate and transfer is spread to various party
involved (“Build operate transfer”, 2013).Private sector assumes a lot of risk which
involve political risk in developing the countries such asthe possibility of political change,
technical risk such as unforeseen soil condition, and etc. Public sector will therefore
choose this method since the risk is transferred to private entity (Build-operate-transfer,
n.d.).

Last but not least, by using build operate and transfer method, it allows
government to utilize private sector’s technology in a construction project. According to
Adnan, Amalina, Yaman and Rosman, (2014), one of the reason adopting build operate
and transfer method is help in facilitating transfer of technology. Transfer of technology
is defined as the process of transferring skill, knowledge and technologies in order to
develop into new products. Therefore, client will choose this method because the

33
technology transfer is known as critical success factor to a build operate and transfer
project (“Critical”, 2013).

34
5.0 Summary of Comparison
Table 1 below shows the comparison between design, bid and build, management
contracting, build, operate and transfer.

Management Build, Operate and


Design, Bid and Build
Contracting Transfer
Most suitable Clients who wants to Experienced clients Public sector
clients control over the government
design and quality
Project Types Full tender Complex and large Large scale of
documentation scale projects infrastructure project
available before the
contract
Main parties Owner, architect and Owner, managing Government, operator,
involved contractor contractor and design investor,
consultants concessionaire and
contractor
Summary Better method for cost Better method for time Better method for cost
and quality and quality use of private capital

Table 1
Adopted from: Fox (2015)

35
6.0 Conclusion
Through this assignment, we have learned and understand more about the three
strategies of the construction procurements which are design-bid-build, management
contracting, and build, operate and transfer.

However, we can conclude that each procurement strategy has its own
characteristics and function. Every parties involved might not carried the same roles in
each strategy. For example, in design, bid and build, the client needs to bear the risk of
the cost. Whereas in build, operate and transfer, the financial risk is assumed by the
private sector but not the client. Moreover, there would be advantages and disadvantages
in the use of any method (“An owner’s”, 2012).

On the other hand, none of these delivery methods is right for every project. For
example, due to the complexity of the project, management contracting is more suitable
to be used than the design, bid and build method. According to Tsirogiannis and Misko
(2009), “tender prices under a traditional form of delivery are likely to include
contingencies for a number of risks that may not eventuate”.

In addition, in order to decide which procurement strategies are suitable to the


project, some important factors should be considered such as client’s objectives, the
payment route intended, how design and construction obligations are to be allocated and
which party is able to accept the specific risk such as time cost and quality (Fox, 2015,
p.5). Lastly, the owner needs to select procurement strategies carefully based on the
project requirement, goals and potential challenges (“An owner’s”, 2012).

36
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