Procurement - alternative methods

The following methods are discussed below:

• Negotiated contract
• Cost-plus contract
• Construction management
• Managing contractor
• Two-stage tender
• Alliancing
• Public Private Partnership (PPP)
• Design and construct
• Turnkey
• Early contractor involvement (ECI)

Negotiated contract

Tender by negotiation is a process whereby the architect, on behalf of the client, negotiates a price with a preferred contractor rather than calling tenders. The traditional relationship between the client and the architect is maintained, contract documentation is substantially or fully completed and a price is negotiated with one or more selected contactors. A traditional contract is signed when a satisfactory price is achieved and the architect administers the contract. Refer Acumen note Negotiated contracts.

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Cost-plus contract

Under a cost-plus contract arrangement the contractor is paid for the actual cost of the work (labour and materials) it carries out, plus an agreed percentage on those actual costs for the contractor’s margin for profit, preliminaries and corporate overheads. Cost plus is a contract form suited to circumstances where there is insufficient detail at the commencement of work for a final cost to be calculated. The traditional relationship between the client and the architect is maintained. However, contract documentation may not be fully completed and detailed due to complex latent conditions such as concealed structure and services. A management fee covering overheads and profit is negotiated with one or more selected contractors. A modified contract is signed with the successful contractor who builds the project using in-house and sub-contracted labour.

Depending on the form of cost-plus contract, the architect may not have a role to administer the contract and the contractor takes on this role. It is usual for the subcontractor tendering to be administered by the contractor but vetted and approved by the client and/or the architect. Note that different restrictions apply across states and territories that govern when a cost-plus contract is permitted or not. Refer Acumen note Cost-plus contracts: Considerations.

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Construction management

A construction manager has expertise in both building and management and is contracted to the client to provide management services only. The provision of materials and labour is through a series of separate contracts between individual suppliers and contractors and the client. The construction management organisation acts as the owner's agent to administer the separate contracts, plan and supervise construction, and manage the construction services provided by the design consultants, including the architect.

While the construction manager may be engaged when all design and documentation is complete, they are more often engaged during the design or documentation process to assess buildability and to endeavour to see that the design is tailored to meet the client's budget and other requirements. As a single overall tender is not necessary before work begins, an early start on site is possible by completing the documentation, tendering and letting contracts for the early trades while documentation for later trades is still in progress.

The construction manager is paid on a fee-for-service basis and has no vested interest in project finances and can provide independent advice to the owner as a consultant. The construction manager is not bound by the project budget and all risks are borne by the owner and the separate contractors.

The role of the architect and the relationship with the owner and the construction manager may be much the same as in traditional contracts between architect, client and contractor. It is more common, however, for the construction manager to take over some of the architect's traditional roles, such as certification, during construction. The architect and other design consultants may be novated to the construction manager. Refer also Acumen note Novation.

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Managing contractor

Managing contractor methodology is similar to Construction management; however, the contractor directly engages the subcontractors and is directly responsible for them.

The design team, including architect, is appointed prior to the managing contractor where their primary role is to create a design brief, documentation and specifications as a basis for the tender documentation to be issued to competing managing contractors (Office of the Victorian Government Architect 2023).

The contractor is usually engaged for a fixed price lump sum management fee. The model allows for the principal to obtain the contractor’s input on design-related items and to collaborate with design consultants engaged on the project, including architects and engineers.

This model is a type of Early Contractor Involvement (ECI) methodology discussed further in this note. The contractor is responsible for engaging its own subcontractors to carry out the construction works. The contractor, however, typically takes on more of a project management role, as opposed to carrying out the works itself. The principal can decide which subcontractors the managing contractor engages however, the contractor remains responsible for their work. The scope of the managing contractor’s engagement will depend on the project.

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Two-stage tender

A first-stage tender is sought using sketch plans and an outline specification and the selection of the contractor is based on the overhead and profit rate, resources, and site and management facilities offered. This form of contract may be beneficial where significant subcontract works have extensive lead times and procurement is required to commence prior to the completion of documentation.

The traditional relationship between the client and the architect is maintained. Documentation is developed with the contractor and principal subcontractors as part of the design team. The price is built up progressively from elemental subcontract prices prepared by the subcontractors. The design will be tailored throughout the process to meet the client's budget and other requirements. The design input from the contractor can be valuable, allowing a thorough analysis of buildability and providing a realistic basis for assessing the cost benefit of various aspects of the design.

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Alliancing

Alliancing is a collaborative method where multiple parties, including the client, designers, contractor and sometimes end-users, form an alliance to jointly deliver a project. The alliance leadership team, usually the principal, contractor and designer, seeks to implement joint governance and share the risks and the rewards that the project presents. This approach emphasises open communication, problem-solving and innovation, aiming to achieve project goals collectively. The alliance typically works under a single contract, encouraging a focus on project outcomes rather than individual interests. Refer Acumen note Project alliancing for more information.

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Public Private Partnership

The Public Private Partnership (PPP) is a contract between the public sector and the private sector where the government pays the private sector to deliver infrastructure and related services over a specified period (time frames vary). The private sector entity typically takes on responsibilities such as designing, financing, constructing, operating and maintaining the infrastructure over this period. Often these entities are a consortium of different skilled organisations who come together to deliver the project for the public sector. Architects often join a consortium, tendering to deliver the project during the bid phase. Once a bid is awarded, the successful architect continues to be engaged by the successful consortium (typically engaged directly by the Managing contractor). The public sector retains ownership and oversight. PPPs aim to leverage private sector expertise, innovation and funding to deliver efficient and high-quality infrastructure. Refer Acumen note Public Private Partnerships (PPP).

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Design and construct

In design-and-construct arrangements the client enters into one contract for the design and construction of a building or project with an organisation, generally based on a building company which provides both design and building services. A 'guaranteed price' is negotiated between the contractor and the client, based on the client's brief or requirements, previous projects of a similar nature, a risk assessment by both parties and a building margin.

The design team functions as a traditional design team, but with the contractor effectively acting as the client, interpreting the client's requirements against the known maximum cost. Both the design and construction will be tailored by the contractor to fit within the guaranteed price. In most cases the client is the contractor and it is the architect's duty to put the interests of the client (the contractor) in front of the interests of the building owner or occupier. Refer Acumen note Design and construct.

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Turnkey

The turnkey procurement methodology is a design and construct type methodology involving a single entity, usually a contractor or developer, being responsible for the entire process of designing, constructing and delivering a completed building to the client. This entity takes care of all aspects, from initial design to final construction, effectively providing a ‘key’ to a finished project. The client receives a ready-to-use building without the need for direct involvement in the construction process. This methodology suits clients who are after a low-risk option. Turnkey can be particularly beneficial for projects with well-defined or relatively simple requirements and a clear scope, as it shifts most of the responsibilities and risks to the turnkey contractor. However, it might not be ideal for clients who want more control over the design and construction process or for projects with unique and complex requirements that require specialised input.

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Early Contractor Involvement (ECI)

What is ‘early contractor involvement’?

An ECI (sometimes referred to as ‘ECE’ – early contractor engagement) is a procurement model that allows the contractor of a project to be involved in the early phases of design between parties such as the Principal and designers. It is usually a two-stage process.

In the first stage, the Contractor is engaged to prepare the preliminary design with the Principal. This is often looking at the ‘buildability’ aspects of the project and including the know-how associated with the actual construction and construction cost alongside the design process.

The second stage often involves a design and construct model, however, the Principal does not have to engage with the Contractor and can competitively tender the works to another Contractor, although often the relationships developed during stage one means the Contractor and Principal continue to work together through the project (Source: Morrissey and Wen, 2018).

Refer also two-stage tender method above.

The traditional relationship between the client and the architect is maintained. The architect will prepare the design brief and preliminary sketch design package and then seek the services of a selected contractor to assist in the preparation of cost schedules as well as provide guidance to assist the architect with further development of the design. For some projects, the early involvement of a contractor can be beneficial in ensuring budget is maintained and can also assist in fast-tracking of the project as any design ambiguities can be identified at an early stage. Refer also Acumen note Fast-tracked projects.

Through ECI methods, contractors may provide (to varying levels of detail) input on constructability, materials and budget considerations during the design phase. This early involvement helps identify potential issues and allows for adjustments to enhance efficiency and cost-effectiveness. Early identification of potential risks allows for proactive risk management strategies. Contractors can contribute insights into site-specific challenges, construction methods and challenges, and other factors that may impact the project.

ECI can be delivered in a number of ways including the contractor informally providing general advice without a contract in place or more formally through a specific contract that allows the provision of advice or any preliminary works such as to allow early works or the ordering of elements with long procurement timelines. These might be in the form of a two-stage tender, Construction management contract, Managing contractor contract or a Guaranteed Maximum Price (GMP) contract.

The ECI procurement model may be considered to not be as competitive as a traditional tender with the involvement of one contractor. However, it should be noted, the client is not contractually obligated to engage the contractor to build the works and can still procure the project as a competitive tender.

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References

• Morrissey, Michael and Wen, Mary Ann, Morrissey Law + Advisory, 2018, ‘Procurement models: What is early contractor involvement (ECI)?’, March 15th, 2018.
• Office of the Victorian Government Architect, 2023, Managing contractor case study.

Further reading

• Acumen note Case study: Nightingale 2.0 – Fairfield provides an example of the Nightingale Model procurement type for housing.
• Office of the Victorian Government Architect, 2023, Government as 'smart client' - Chapter 5 Procurement of buildings and infrastructure, updated 5 July 2023.

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