BUILDING VICTORIAS FUTURE BUILDING PROCUREMENT Choosing the best option for your next project

March 1996 Reprinted March 1997

Choosing the right procurement method is vital to the success of your next building project
Government agencies should be aware that a variety of procurement methods are available for acquiring a building facility. Your choice will be largely determined after assessing the:
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level of involvement required approach to the design solution time available for construction method of financing the project.
GOVERNMENT POLICY

The Victorian Government Code of Practice for the Building and Construction Industr y (the Code) emphasises the impor tance of selecting the appropriate procurement method and associated risk when acquiring a new building facility. The Code also requires standard forms of contract to be used in all legal relationships between:
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clients consultants contractors suppliers.

Non-compliance with the Code can lead to changes in agency procedures, reductions in agency delegations, individual disciplinary action and/or reduced tender opportunities.

Office of Building and Development

INFORMATION SHEET

LUMP

SUM

BACKGROUND

CLIENT evolves concept engages design consultant CONSULTANT develops concept documents project calls tenders engages contractor CONTRACTOR builds facility PAYMENT Client pays consultant and contractor separately

The purchase of ever yday items is relatively simple and usually involves some form of:
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evaluation selection payment.

However with the acquisition of a building or construction facility there are significant factors associated with your choice of procurement method which will impact on the success of your building project. These include:
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CONSTRUCTION

MANAGEMENT

having a clear understanding of project objectives and constraints

CLIENT evolves concept engages design consultant engages construction manager (CM) DESIGN CONSULTANT develops concept documents first packages documents subsequent packages

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defining the roles of the various contracting par ties considering the fair allocation of risks and obligations between the contracting par ties.

CONSTRUCTION MANAGER lets first packages lets subsequent packages

If these issues are managed properly, your project is likely to achieve its time, cost and quality objectives. If these issues are managed poorly, they may give rise to:
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PAYMENT Client pays consultant Client and CM agree on a payment method: Client pays trade contractors, suppliers and CM CM pays trade contractors and suppliers, Client reimburses CM and pays management fee Client pays CM warranted maximum price

claims and disputes additional costs delays in completion a failure to achieve project objectives.
RISK MANAGEMENT

DESIGN

AND

CONSTRUCT

CLIENT evolves concept engages design and construct contractor CONTRACTOR develops concept documents project builds facility PAYMENT Client makes progressive payments to contractor

Risk management is an impor tant aspect of the contracting process. It involves:

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identification, assessment and allocation of risk linking risk to obligation monitoring and managing risk consideration of investment return.

B U I L D O W N O P E R AT E T R A N S F E R (BOOT)
CLIENT evolves concept engages contractor/consor tium CONTRACTOR provides funding develops concept documents project builds facility owns and operates facility PAYMENT Client pays fee (which incorporates contractors finance and development costs) for the use of facility over an agreed period. Ownership of facility transfers to client at the end of agreed period.

Your risk management strategy will strongly influence your choice of procurement method.
Government and its agencies are long-term investors in infrastructure and tend to be risk averse. The management of public expenditure is an impor tant responsibility and unnecessar y risk-taking should be avoided. Never theless, undue risk aversion by an agency may result in expensive and/or unfavourable contract conditions. Professional advice should be sought to help you assess and manage the levels of risk on your next project.

LUMP

SUM

CONTRACTS

A schedule of rates is commonly used where the extent of works has not been or cannot be fully determined.

Clients using lump sum contracts generally engage consultants to Some uses include: design and document projects. The client then uses the
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ear thworks foundations below ground ser vices works maintenance period contracts.
CONSTRUCTION MANAGEMENT

completed documents as a basis for calling tenders. After an evaluation process, the client enters into a contract with a builder (generally a head contractor using a number of subcontractors) to construct the works for an agreed lump sum. Payment is usually made in progressive instalments. It is often the responsibility of the principal consultant (usually an architect or project manager), to manage the deliver y of the project within the specified time, cost and quality targets. Some advantages that lump sum contracts of fer are:
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Construction management is a fast track procurement method which enables work to begin on the early stages of construction while the design and documentation of later trade packages are being finalised.

a clear understanding of the end product before construction begins

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design advice, independent of the builder a relatively low risk to the client if the scope of the work is well defined and client variations are limited or excluded

A client engages a construction manager to organise, let and supervise trade packages.
Construction management is useful in volatile economic and industrial climates by helping to reduce the time and cost of project deliver y. Clients can modify specifications of later trade packages according to changing project requirements. In most construction management projects the client engages the consultants and is the Principal for all trade contracts. The construction manager seeks to achieve a smooth inter face between trade contractors. This is an impor tant factor as the successful completion of one trade package is, to a large degree, dependent upon the satisfactor y execution of preceding or related packages. The construction manager must program the works to ensure continuity and avoid possible delay claims against the Principal. Prospective clients should seek professional advice before entering any construction management contract. The conditions,

a relatively cer tain project end cost (subject to variations).

Lump sum contracts are widely accepted in the building industr y and are well suited to small, medium or single trade projects. Lump sum contracts are not currently favoured for ver y large projects. This is due to the extensive time required to complete documentation before any work can star t. Many government building works in Victoria have been delivered using lump sum contracts.

The preferred form of lump sum contract for Victorian Government projects is the Australian Standard AS2124-1992, General Conditions of Contract.
The Of fice of Building and Development has prepared special conditions applicable to government agencies using lump sum contracts (based on the National Public Works Council Special Conditions). These are available upon request.
SCHEDULE OF R AT E S

responsibilities and risks may var y significantly between construction managers. Construction management contracts may be:
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Direct Payment of Separate Contracts

The construction manager engages trade contractors and suppliers on behalf of the client. The client then pays the trade

This procurement method requires contractors to submit contractor/supplier directly and makes a separate management a schedule of rates in place of, or as a par t of, a lump fee payment to the construction manager. sum tender. The final cost is determined by multiplying the measured quantity of completed work (requiring detailed on-site measurements) by the rate stipulated in the contract.
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Cost Plus

The construction manager engages and pays trade contractors and suppliers on behalf of the client. The construction manager is reimbursed for costs by the client, and paid an agreed management fee.

Warranted Maximum Price

The construction manager under takes to manage and deliver the project by a cer tain date for a warranted maximum price. This includes the engagement and payment of all trade contractors and suppliers. The client may of fer incentives to the construction manager for early completion and/or finishing below the warranted maximum price.
DESIGN AND CONSTRUCT

B U I L D O W N O P E R AT E T R A N S F E R (BOOT)

BOOT is a relatively recent procurement method. Developers use their own funding sources to build a public facility in return for the right to operate it and charge a fee for its use. At the end of an agreed period the facility may rever t to the landholder, which would often be the Crown. This type of contract focuses on final ser vice deliver y

The client procures both the design and construction and relies upon the required per formance standards processes from a single contractor when using a design being properly documented. and construct contract. Building contractors involved in this type of development The contractor is responsible for the design, documentation are usually par t of a consor tium. The consor tium has and construction of the project, based on the client project responsibility for the design, construction and deliver y brief. of the project. In some situations, the client may par tially develop a Government and its agencies, as either direct or concept and require the contractor to complete the design indirect purchasers of ser vices from BOOT projects, and documentation. Fur ther, a client may even require the bear some level of financial and viability risk. contractor to engage the consultants involved in the early The BOOT process can be modified to suit par ticular design work. This can be achieved either through needs. A few variations already in use are BOT (Build, Assignment or Novation. Own, Transfer) and BOO (Build, Own, Operate).

The early involvement of the contractor in a Design and Construct project should help to improve the constructability of the facility.
Contracting par ties should be aware that:
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Leasing is another procurement option, but it is not addressed in this information sheet.
BUYER BEWARE

In all methods of building procurement it is the clients responsibility to define their requirements. Clients should be aware that problems may arise as a result of:
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the contractor bears a high level of risk due to the initial lack of project definition. The contract price often reflects a financial loading for this uncer tainty.

poor briefing poor documentation poor co-ordination client changes dif ficult site conditions.
TO FIND OUT MORE

the client bears a high level of risk with respect to finished projects fitness for purpose and level of quality. These outcomes will largely depend upon how well the clients project requirements have been defined and delivered.

WHERE

The preferred form of design and construct contract for the Victorian Government is the Australian Standard AS4300-1995, General Conditions of Contract for Design and Construction
Design and Construction is well suited to warranted maximum price contracts.

Depar tment of Infrastructure Building Services Agency Nauru House Level 11, 80 Collins St, Melbourne 3000 Telephone 03 9655 6304 Facsimile 03 9655 6416 Office of Building and Development Nauru House Level 12, 80 Collins St, Melbourne 3000 Telephone 03 9655 6462 Facsimile 03 9655 6427

Prepared by Of fice of Building and Development Production by Public Af fairs Branch Depar tment of Infrastructure

Reprinted March 1997

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