Procurement in property development is a fairly straight forward concept, but one which needs a bit of thought and planning way ahead of placing a contract with a builder. The procurement method must be decided upon at an early stage of a project as this will help the entire development process and create a solid place to start from.
Procurement in simple terms, just means the method in which the purchase of goods and services is completed, but you will see from this article, that there is no ‘one size fits all’ approach which can be taken, and your approach will depend on your circumstances, business plan and overall objectives.
Lets dive into the detail and take a look at the main methods of procurement.
Types of Procurement
There are different routes to procurement in property development. The choice of your procurement method will be vital to the success of your project, therefore making an informed choice is the key to making a profit from your project.
There are three main procurement methods you can choose from, which are as follows:
- General Contracting (Traditional Method)
- Design and Build
- Construction Management
Before looking at the advantages and disadvantages of these types of procurement lets define these approaches you can take.
The general contracting (traditional) procurement method involves separating the design and construction process, the developer will appoint a design team to complete the design, and then separately contract with the building contractor to complete the construction works. The responsibility of the design of the development will lie with the developer (and designers), where as the contractor will be solely responsible for the construction activities.
This remains the most popular type of procurement in construction, mostly because the developer retains the control of the design, and its a method which is largely understood by the industry.
Design and Build is pretty much as the name suggests. The contractor now has responsibility for both the design element and the build. The developer provides a set of requirements and the contractor provides the plans and specification for how this will be realised.
With construction management, similar to traditional method, the design and construction elements are split. The developer will appoint a design team to complete design, however, the developer will then appoint a construction manager to manage the construction phase, either directly within the development company or outsource to a specialist construction manager.
This means that during construction the construction manager will put together smaller packages of construction work and contract with specialist suppliers or sub-contractors to complete that specific work, creating potentially hundreds of different construction packages and contracts.
The pros and cons of Procurement Methods:
General Contracting (Traditional):
The benefits of a traditional contract are many – which is why it has become the traditional mode for procurement.
The main reason to take control of the design and contract out the build is to ensure quality. The development design will be finalised before contractors offer tenders for the build – this means you know what you are getting. This isn’t to say that this is an inflexible approach to design and build. The designs can be adapted, and the instructions changed post-tender – it is just that there is a clearer vision of the end-product from the start.
The cost should be fixed from the start, which offers some certainly for the client – and they retain control of the design throughout.
The disadvantages of this procurement method revolve largely around time. The property development process is front loaded – there is a lot of time devoted to the design element. If you need a quick build then going through a design, tender, build approach may be too time-consuming. Even if you offer incomplete plans to the contractors this in turn can lead to delay, additional costs and conflicts if the plans change too many times or are too unclear to make early build decisions.
The cost may also be higher – as the quantities are dictated in the design and the contractor has little flexibility to manage the price.
Design and Build (D&B):
The advantages of design and build tend to counter the disadvantages of traditional contracting procurement methods.
Design and Build is a way to fast track construction and the contractor often should dictate a fixed cost or a guaranteed maximum price that offers certainty to the client. There is also a single point of contact – and this creates a smoother line of communication and can avoid fall outs.
Ultimately, this offers the lowest risk for the client, who is able to lay out a set of requirements and then hold the contractor responsible for these requirements.
However, on the down side, the (potentially) cheapest and quickest approach to procurement may not always be the best. The contractor now has interest in cutting costs themselves and may compromise quantity and quality of materials. They need to make a profit and have set a maximum price that likely was calculated to undercut competitors – therefore margins will be tight.
Equally, it could cause inflexibility. Once begun, the contractor may apply huge penalties if you ask for changes in the design – both in terms of price and time.
This method of procurement is best suited to experienced developers who may a have larger in house team or experience dealing with complex projects.
Each element of construction works is packaged up and tendered so that there are contracts in place between the developer and lots of different contractors and sub-contractors to complete the project.
The main benefit to this is costs. By competitively tendering each element of construction works, you know that you are getting best price across the board. The developer will also retain maximum control of quality, and changes can be made throughout the development process with minimum penalty compared to the other two methods.
However, this is the most time and management intense process. The developer will have the extra expense of hiring a construction manager and with the potential for a large amount of contracts to be put in place, the room for error because larger.
Which procurement method should you choose?
Like so many answers to a property development question… It depends.
The criteria for choosing your procurement method will depend on your experience, the experience of the contractor and the type of project you are undertaking. The sort of decision making involved in procurement methods in property development are complex. It demands quality information provided in a timely manner. Therefore, if you have a fixed idea of the nature of the project from the start and this is likely to go unchanged – then traditional contracting should offer the best approach.
However, if you are undertaking something a little more experimental, then you are more likely want to employ a construction manager, especially if costs are critical to you, and you have the experience.
If you need a fixed cost, then design and build may feel more comfortable but if you want quality over value – then you probably want to retain more control over the nature of the materials and techniques employed.
It is about weighing up all the different factors in the decision-making and come to the best fit for your situation.
All the best,