What are the most popular methods of procurement?
Construction (2nd edition)
All the standard international procurement models are commonly used in Australia (i.e. construct only, Design and Construct, Construction Management, EPC, EPCM). Early Contractor Involvement procurement models are increasingly used.
In public construction projects, for a long time the most popular form of procurement was the so-called “openbare aanbesteding” / “adjudication publique”, meaning an open public tendering on the basis of the lowest price as sole determining criterion. However, given the fact that such tendering procedures do not allow the contracting authority to take into account quality elements, over the last years, and also under the influence of the EU, contracting authorities tend to award contracts based on the most economically advantageous tender based on criteria of price and quality.
In China, the traditional design-bid-build (DBB) method is commonly used in general commercial construction, and the general contracting method, which includes Engineering, Procurement and Construction (EPC) and design-build (DB), is more popular for energy and petrochemical projects. Yet considering the government’s strong advocacy of general contracting, it is believed that before long the general contracting method will have an extensive application on China’s construction market, especially in state-funded projects.
Infrastructure projects are projects of large scope in the area of public interest and importance, such as e.g. transport, energy, environmental protection etc. and therefore in the domain of public entities as employers.
The procurement of goods, services and works by public entities is prescribed by the Public Procurement Act which transposed Directives 24/2014 and 25/2014 into the Croatian legislation.
Contracting authorities may freely choose between an open and restricted procedure. In order for the contracting authority to use other public procurement procedures (competitive procedure with negotiation, competitive dialogue, innovation partnership and negotiated procedures without prior publication of a call) certain legally prescribed terms have to be met. In its report for 2017 published on 1 June 2018, the Croatian Bureau of Statistics established that the open procedure is the most common (89.14%), while according to the number of contracts, the competitive procedure with negotiation is the least used, and the competitive dialogue has not been used at all.
Procurement by private parties is only bound by the genral principles of civil law, notably the BGB. Procurement by public authorities usually is generally guided by the rules of the European directive 2014/24/EU, which was transformed into German law. To name just the most important rules: German Act Against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen - GWB), German Regulation on the Award of Public Contracts (Vergabeverordnung - VgV), Sector Ordinance (Sektorenverordnung – SektVO), Procurement Regulation for Contracts related to Issues of Defense and Security (Vergabeverordnung für die Bereiche Verteidigung und Sicherheit (VSVgV), Standard Building Contract Terms Part A (Vergabe- und Vertragsordnung für Bauleistungen, VOB/A). The contracting authorities must apply these rules if they wish to award construction works. As a rule, a public invitation to tender must be carried out.
Private clients can also use the tendering method to select the contracting party.
As far as the private projects are concerned, the parties are free to select their preferred contractor, either by directly engaging a party or by launching a call for tenders, and freely negotiate the contractual terms (please refer to the concept of the freedom to contract described under Question 8 below).
Unlike in private projects, public contracts are assigned through specific procurement methods, primarily deriving from EU legislation. That said, the most frequently used procedures for the awarding of public contracts (works, supply of goods or services) are the open procedure (Art. 27 and 264 of Public Procurement Law) and the restricted procedure (Art. 28 and 265 of Public Procurement Law). Other, less common, procurement procedures are: (a) the competitive procedure with negotiation (Art. 29 of Public Procurement Law); (b) the negotiated procedure without prior publication (Art. 32 and 269 of Public Procurement Law); (c) the competitive dialogue (Art. 30 and 267 of Public Procurement Law); (d) the innovation partnership (Art. 31 and 268 of Public Procurement Law); (e) the direct award to a single economic entity as regards contracts of a value up to EUR 20,000 (Art. 118 and 327 of Public Procurement Law); (f) a brief informal tendering procedure for contracts of a value between EUR 20,001 and 60,000 (Art. 117 and 327 of the Public Procurement Law).
The most popular methods of procurement are the architect agreement and the general or total contractor agreement.
The most common type of project delivery method in the United States is design-bid-build. Under this method, the owner first retains an architect to prepare design drawings and specifications, after which the owner puts those documents out for review and bidding by contractors. Contractors who place bids agree to construct the project in accordance with the design prepared by the architect. The lowest, most responsive bidder is generally selected by the owner. Both the architect and contractor have separate contracts with the owner, who exerts control over the design.
Another popular project delivery method is known as design-build. Under this method, the owner generates the concept and the programmatic requirements, and then contracts with a single entity (known as the “design-builder”) to perform both the design and construction of the project. The owner benefits from the design-build method because it provides a single point of contact, minimizes risk for the owner, and expedites the design and construction phases of the project, which reduces the delivery schedule by overlapping those two phases. The contractor on the other hand takes on additional risk by contracting for both design and construction; however, such risk can be mitigated through contractual indemnity and insurance.
There are several other forms of project delivery which are lesser used, but nonetheless have important applications:
The design-build-operate-maintain method combines the design and construction responsibilities of design-build procurements with operations and maintenance. Generally used in heavy construction projects, the design builder is also required to operate and maintain the project upon completion, and is compensated with a portion of operating revenues subsequently generated.
The design-build-operate-transfer is the same as the design-build-operate-maintain, with the additional requirement that the design-build contractor is responsible for obtaining project financing. The design-builder is then paid from project proceeds upon completion, and once fully compensated, turns the project over to the owner.
The Construction Manager at Risk method involves both preconstruction and construction phases. The owner retains the architect to prepare design drawings and specifications. The owner also retains a construction manager to consult with the architect and manage the construction. As the architect is developing the design, the construction manager is reviewing it and putting out to bid those portions of the design that are complete. The construction manager enters into contracts with subcontractors. This method allows construction to begin before the design is complete.
The Construction Manger Not at Risk method is nearly identical to the “at risk” method. The one key exception is that the owner, not the construction manager, enters into contracts with the trade subcontractors to construct the project.
Where private clients are involved, there are no standardised methods of procurement. On public contracting, the most frequent methods of procurement are public procurement proceedings, negotiated proceedings with prior publication and non-public proceedings without prior publication.
The three most common methods of procurement are the traditional method, design and build, novation agreement and project management.
Under the traditional method, the employer chooses to procure the project with the traditional way, where the consultants – design team (Civil Engineer, Architect, Quantity Surveyor etc) are appointed directly by the Employer and therefore, are contracted directly with him.
Design and build contract is when the Employer procures the project through a contract which includes the design and construction of the project. The consultants – design team consist part of the team of the Contractor. The design and build Contractor who successfully bids for the works, engages his own designers (or more commonly novates the original designers) to complete the design and then builds the project.
The Employer can choose to import to the conventional structure of the project the novation agreement, which allowing him to novate his place (in the contract with the consultant) with the Contractor. Through this agreement a direct conventional relationship can be created between the Contractor and the consultant and vice versa.
Less common, is the construction management method whereby the employer enters into (i) a contract with a construction manager and (ii) a large number of contracts directly with the various trade contractors.
There are a number of ways for major projects to be procured in Ireland, including the following:
- traditional form of contracting whereby the employer (which may be a private or state developer) appoints the contractor to carry out the construction work and separately appoints the design team to carry out design services;
- design and build contracts, where the employer appoints a contractor who takes on the responsibility and liability for both the design and construction (it is possible in Ireland for the employer to appoint a design team at the outset and then ‘novate’ the design team to the contractor, who then becomes responsible for the design and the design team);
- engineering, procurement and construction contracts are more typically used in power production projects and involve the contractor carrying out all of the engineering works and design, procuring all materials and plans and all construction works; and
- PPPs, where the state contracts with a private company for the private company to design, finance and build (and sometimes operate) large infrastructure assets (such as roads, water treatment plants and certain civic facilities such as court buildings).
There is no standard form for construction management or management contracting but projects can be let on these bases using amended standard forms of building agreements.
In public projects, for purposes of transparency, the bid process shall be preferred. However, exceptionally and for specific cases (mostly for complex projects) the Federal Constitution and the Public Works and Related Services Law allows other methods as the invitation to at least three participants (restricted bid) and Direct Award.
The three most common methods of procurement are the traditional method, design and build, and construction management.
Under the traditional method, the employer engages a design team to design the project, and then the project is put out to tender. The main contractor enters into a contract with the employer to complete the project, following the instructions of the employer’s design team which acts as an agent of the employer.
Design and build is an increasingly popular procurement method because it offers the employer single point responsibility . The employer engages a consultant to produce an outline design, which is then put out to tender. The design and build contractor who successfully bids for the works engages its own designers (or more commonly novates the original designers) to complete the design and then builds the project.
Less common, and only for use by sophisticated employers, is the construction management method whereby the employer enters into (i) a contract with a construction manager and (ii) a large number of contracts directly with the various trade contractors. The employer must take the risk of trade contractor default or insolvency and manage the interface between the trade contractors.
In Spain it is very common to buy the house off plan, before it has been built. But for this, it is essential that the building project has obtained a building permit and the horizontal division be recorded in the Land Registry. The other form of acquisition is once the house is already built.
Usually, the end user of the building or consumer signs a contract for the sale of a home with the developer of the work. The latter has previously contracted (i) with the planner the development of the project (ii)with the construction company the execution of the work, (iii) with an architect the construction management, as well as (iv) with a technical architect the executive direction of the work.
The construction management directs the development of the work in its technical, aesthetic, urban and environmental aspects; while the execution management is limited to directing the material execution of the work, the qualitative and quantitative control of the construction, as well as the quality of the construction.
Parties usually draft and negotiate their own procurement contracts in private sector. Mostly, it is the main contractors’ or employers’ standard type of contract to be used against contractors, suppliers or subcontractors. On the other hand, major suppliers tend to insist on using their own standard type contracts which are commonly amended as per the parties’ concerns and expectations. Another popular method of procurement is turn-key engineering, procurement and construction contracts with a fixed contract price. In terms of large public projects with strict financing requirements, the most common method is build-operate-transfer schemes or where public procurement law is involved (whether the project is small or large), it is mandatory to use a statutory standard type of public procurement contract as the tender rules for public projects are quite strict.
The most popular methods of procurement are:
(i) Traditional procurement – where the design and construction of the project are separate. Under this method of procurement, the employer will appoint a professional consultant or team of consultants (typically an architect or engineeer dependent on the nature of the intended works), who will be responsible for the design of the project and will separately appoint the building contractor on the employer’s behalf, who will construct the project. This procurement method is most commonly used for road and other civil construction works and commercial or residential building works.
(ii) Design and build procurement – where the contractor is responsible for both the design and construction of the project.
Other procurement methods such as:
(A) engineering, procurement and construction (“EPC”),
(B) multi-contracting procurement;
(C) engineering, procurement, construction and management (“EPCM”)
are also available for both international and local contractors. Public Private Partnerships (“PPP’s”) are also commonly used by the government as a tool for developing, operating and maintaining infrastructure in South Africa.
Procurement for public contract is strictly regulated. The applicable rules will depend on the public legal entity involved in the project and on the contemplated cots of the contract. For large projects, an open tender has to be carried out at the national or European level.
In relation to private contracts, the project owner is free to choose the applicable method of procurement. Competitive tender process is commonly used, but it is often opened only to a limited number of pre-selected bidders.
Public procurement is regulated by the Public Procurement Act (2016:1145), which inter alia stipulates that a public tender invitation must be submitted and that the cheapest alternative that fulfils all the requirements for the project shall be procured.
In resemblance with public procurement, a vast majority of private procurements are based on competitive tender against a list of requirements presented by the employer. It is arguably most common to procure design and construct contracts.
Most of the larger construction projects in Denmark, public as well as private, are put out to tender for competitive bidding.
Public authorities and other public sector employers are obligated to comply with the public procurement legislation if the monetary value of a project exceeds a certain amount.
In addition to turnkey contracts, general contracts and individual trade contracts, public private partnerships (PPP) where the private company continues to manage the project after hand-over of the work are not unusual for public projects such as office buildings and court houses.
- In the past, the most common project delivery method in Korea had been traditional construction contracts, under which the employer would first engage a designer to prepare the project design, and then engage a construction contractor to build the project based on the design. For such contracting, it has been common to use lump-sum contracts with payments based on milestones or remeasurement. Cost-plus contracts have not been commonly used in Korea.
- Today, public entities frequently procure projects through design-build contracting, where the employer appoints a contractor who takes on the responsibility and liability for engineering, procurement and construction. The level of involvement in the contractor’s works and the allocation of risk for specific aspects of the construction process differs from one project to another.
- Construction management is also used to procure projects in some cases, both by government and private entities.
- Public-private-partnerships have been implemented for infrastructure works.