Relationship Between Procurement Routes and Construction Contract Types

Topics: Contract, Construction, Project management Pages: 5 (1473 words) Published: August 8, 2012

Does a procurement route determine the type of contract to be used?

Procurement is the process of establishing the most appropriate method of managing the construction project and selecting the best team to design, deliver and sometimes operate the required facility. Procurement route: The term 'procurement route' is used to describe the often complex network of relationships which are formed between clients, consultants and construction companies, to enable a building project to be realized. It is important to distinguish the contractual relationships from managerial links, and in complex modern procurement systems this is sometimes far from easy. CONTRACT

From a Legal Point of View, a contract is a mutual agreement between two or more parties that something shall be done, an agreement enforceable at law.

According to FIDIC, a contract means the General Conditions, the Supplementary Conditions, the Specifications, the Drawings, the Bill of Quantities, the Tender, the Letter of Acceptance, the Contract Agreement, and such further documents as may be expressly incorporated in the Letter of Acceptance or Contract Agreement.

From my personal perspective, the procurement route determines the type of contract to use but to some extent. This means that the decision of the procurement identifies the contract structure and thus the contract type but is not the only factor in perspective when determining the choice of contract type to use; as there are other factors, such as risk, cost certainty, time, type of client, and many more other factors. According to Method of Payment, the agreement of how the owner will pay the contractor for work performed such as a lump-sum or cost-plus payment. The choice of contract flows from the procurement route chosen for the project. The choice of procurement route depends on the Client’s required balance of time/cost/quality and an analysis of how that can be achieved. This is in the context of the Client’s other requirements, not least being his required level of involvement in the design and construction process and the extent to which he may change his mind or wish to alter the specification during construction. Those considerations promote a useful set of criteria for selection of the type of contract.

EXAMPLES OF PROCUREMENTS ROUTES WHICH SUITE DIFFERENT CONTRACT TYPES Design and Build procurement route suites the lump sum/ fixed price contract type; This is because an integrated supply team (Design and Build contractor) is appointed to design and construct the facility and is paid a combined fixed price for both the components of the project.

Traditional method suites lump sum contracts, measurement/ Unit price/ Item wise contracts and cost reimbursement contracts; this is because the traditional route is the most common and bottom line route and thus for instance for the cost reimbursement contracts such as cost plus contracts where the contractor is paid for the actual cost of labour + materials + charges for overheads and profits – this to many clients seems to be simple type of contracting thus suiting the traditional method where the client (with his consultants) appoint a contractor for the construction works.

Two broad categories:
Price Given in Advance Contracts (Priced-based Contracts)
Cost Reimbursement Contracts (Cost-based Contracts)

Fixed price or lump sum contract; with this kind of contract the contractor agrees to do the construction and completion of the building at a designated time for a fixed price or lump sum.

Unit rate contract; this kind of contract is based on estimated quantities of items included in the project and unit prices which have been agreed to. the final price of the project is dependent on the...
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