Essay on Procurement Methods Available in the Construction Industry of Cyprus
Procurement methods are crucial for the construction industry of Cyprus because they determine how the acquisition and ordering of properties or their elements of the buildings that are being constructed. In actuality, procurement methods influence the development of the company-customer relationships and, to a significant extent, influence the entire construction industry. The company-customer relationships are very important for the stable development of the construction industry of Cyprus. In such a situation, the construction industry of Cyprus depends on the development of procurement methods, which help construction companies and customers using their services to prevent conflicts and regulate relations between them. At the same time, the development of the construction industry raises the problem of the wide implementation of effective procurement methods because of the changing business environment and the integration of the construction industry of China into international business relations. In such a situation, procurement methods in the construction industry of Cyprus may change under the impact of changes in the business environment of Cyprus. Today, the procurement methods influence consistently the development of the construction industry of Cyprus because they determine the company-customer relationships and details of contracts constructors have to perform that makes it possible to forecast the development of the construction industry of Cyprus through the identification of the most popular procurement methods in the industry at the moment.
Theory
Procurement is generally defined as the act of obtaining or buying goods or services. At the same time, procurement implies the establishment of business relations based on contracting between companies operating the construction industry and customers using their services. Procurement is essential for the development of the construction industry and the effective performance of organisations operating in the industry because procurement determines the procedure of obtaining and buying goods and services. In this regard, procurement becomes an essential tool that determined the relationships between companies and customers. In such a situation, the choice of procurement methods may play the determinant part for the further development of the construction industry because the choice of the procurement method affects the development of relations between companies and customers and help to facilitate the interaction between them. At this point, it is worth mentioning the fact that that companies operating in the construction industry and their customers attempt to choose optimal procurement methods that facilitate their interaction and the delivery of goods and services from companies to customers. At the same time, companies operating in the construction industry have to adapt to current needs of customers, their expectations and wants.
At the same time, different factors may influence the choice of the procurement method, among which it is possible to distinguish external and internal factors. The development of the construction industry depends on the impact of those factors because they affect procurement methods used by companies and customers in the construction industry of Cyprus. External factors may be as significant as internal ones and they both have a considerable impact on procurement methods and the impact on the construction industry at large.
External factors relate mainly to the socioeconomic environment, where companies operating in the construction industry operate. In this regard, a particular consideration should be given to the potential impact of economic, commercial, technological, political, social and legal factors which influence the client and their business, and the project team during project’s lifecycle. For example, potential changes in interest rates, changes in legislation and so on. Such changes influence policies of construction companies as well as procurement methods they choose. For instance, as a rule, companies choose the procurement method which allows them minimising the fiscal pressure on them and their customers.
Client resources also have a considerable impact on procurement methods used by organisations. A client’s knowledge, the experience of the organisation with procuring building projects and the environment within which it operates will influence the procurement strategy adopted. Client objectives are influenced by the nature and culture of the organisation. The degree of client involvement in the project is a major consideration.
Project characteristics can also have a considerable impact on the choice of the procurement method (Love & Mohamed 1996). The size, complexity, location and uniqueness of the project should be considered as this will influence time, cost and risk. All these characteristics influence the supply of goods and services and, therefore, influence the procurement method. For instance, some locations are easier to reach than others. Naturally, construction companies set different requirements and price depending on the location. Special requirements of construction companies or their customers lead to the choice of the specific procurement method.
The ability to make changes is anther important factor that affects the choice of the procurement method (Love, Gunasekaran & Li 1998). Ideally the needs of the client should be identified in the early stages of the project (Dissanayaka 1998). This is not always possible. Changes in technology may result in changes being introduced to a project. Changes in scope invariably result in increase costs and time, especially they occur during construction. It is important at the outset of the project to consider the extent to which design can be completed and the possibility of changes occurring.
Cost issues play an important part in the choice of the procurement method because depending on the costs available to the construction company that the customer can spend on the particular project, the company and the customer elaborate the procurement method. For instance, in some cases customers can prepay goods and services supplied by the construction company, while in other cases, customers may pay for goods and services, when the construction has already started. An assessment for the need for price certainty by the client should be undertaken considering that there is a time delay from the initial estimate to when tenders are received (Rowlinson 1999). The extent to which design is complete will influence the cost at the time of tender. If price certainty is required, then design must be complete before construction commences and design changes avoided.
The timing is one of the key factors that influence the choice of the procurement method. Most projects are required within a specific time frame. It is important that an adequate design time is allowed, particularly if design is required to be complete before construction. Assurances from the design team about the resources that are available for the project should be sought. Planning approvals can influence the progress of the project (Turner 1990). If early completion is a critical factor then design and construction activities can be overlapped so that construction can commence earlier on-site. Time and cost trade-offs should be evaluated.
On the other hand, there are internal factors, such as human resources available to the construction company, the organisational culture and structure, and other factors that are characteristics of the construction company and that may affect the procurement method chosen by the organisation. Internal factors can affect consistently the choice of the procurement method because the company relies heavily on its human resources. If the company does not have professionals capable to carry out certain procurement methods, then the organisation naturally focuses on procurement methods that are available to its professionals, which they can carry out successfully. Internal factors can affect the performance of the construction company preventing it from fulfilling its obligations, if the procurement method chosen by the company is wrong. For instance, if the company cannot maintain the productivity of its employees high, then the company will be unable to supply goods and services within short timeline.
Applying the term procurement method to the construction industry, it is possible to define procurement as the acquisition or ordering of properties or their elements by customers, who order the construction of facilities from construction companies, while the latter are supposed to offer the specific procurement method that matches interests of the customer the best. In such a way, the choice of the procurement method is not just the choice of the construction company or customer individually but it is the choice made by the company and client through interaction and negotiations. The development of the construction industry relies on the use of efficient procurement methods which enhance the marketing performance of companies operating in the construction industry and stimulating the further progress of the construction industry.
Key procurement methods
At the moment, there are several key procurement methods that are particularly widely-spread in the construction industry of Cyprus, including general contracting; design and build; construction management; management contracting; private finance initiative; public-private partnership; framework contracting; and prime contracting. In fact, the variety of procurement methods that are currently applied to the construction industry of Cyprus are effective and help to develop effective marketing strategies but companies should make right choices to choose the most efficient marketing strategy and proper procurement method that matches needs of the company and its clients and allow the company to use the full potential of its resources.
Traditional contracting
Traditional contracting is the traditional procurement method applied to the construction industry. This method involves the constructor works according to a detailed plan provided by the investor. Traditional contracting involves three sub-types, such as lump sum, measurement and cost reimbursement. These three sub-types co-exist and may replace one another, when necessary. At the same time, companies choose the optimal type of the traditional contracting to maintain the effective marketing performance and to reach the high level of the customer satisfaction.
Lump sum is the procurement which implies that the contractor undertakes to carry out a defined amount of work in return for an agreed sum. This can be a fixed amount not subject to recalculation, in which case there would be no opportunity for the employer to make variations. The sum is likely to be subject to limited fluctuations, usually to cover tax etc changes not foreseeable at the time of tendering. The sum may be subject to fluctuations in the cost of labour, plant and materials – the so called fluctuations provision. Recovery may be use of a formula, or by checking invoices (Love, Skitmore, & Earl, 1998). In fact, lump sum involves the close interaction between construction companies and their customers, when customers pay for specific work companies have to perform for the agreed sum of money. The payment does not change significantly, in spite of the changes in the business environment or possible issues that may rise in the course of the construction.
Lump sum contracts with quantities are priced on the basis of drawings and a firm bill of quantities. Items which cannot be accurately quantified can be recovered by an approximate quantity or a provisional sum, but these should be kept to a minimum. Lump sum contracts ‘without quantities’ are priced on the basis of drawings and another document. This may simply be a specification of a descriptive kind, in which case the lump sum will not be itemised, or one that is detailed to the extent that the contract sum is the total of the priceable items. The job might be more satisfactory described as a ‘Schedule of Works’, where the lump sum is the total of the priced items. In the latter cases, an itemised breakdown of the lump sum will be a useful basis for valuing additional work. Where only a lump sum is tendered, then a supporting ‘Schedule of Rates’ or a ‘Contract Sum Analysis’ will be needed from the tenderer. Tenders can be prepared on the basis of notional quantities, but they will need to be replaced by firm quantities if it is intended to enter into a ‘with quantities’ lump sum contract. In such a way, contractors have limited opportunities to change the sum the customer will have to pay, even if they confront substantial problems in the course of the implementation of the project and have to increase costs of the project. This is why companies have to create accurate plans and calculate all costs accurately to prevent unexpected costs that may put under the question the successful implementation of the project. In such a situation, companies should have well-developed forecasting potential to foresee possible challenges that may arise in the course of the construction and include those issues into their plans and costs of the construction.
Measurement contracts are also referred to as ‘re-measurement contracts’. This is where the work which the contractor undertakes to do cannot for some good reason be accurately measured before tendering (Mortledge, Smith, & Kashiwagi 2006). The presumption is that it has been substantially designed, and that reasonably accurate picture of the amount and quality of what is required is given to the tenderer. Probably the most effective measurement contracts, involving least risk is to the employer, are those based on drawings’ with approximate quantities. Measurement contracts can also be based on drawings and a ‘Schedule of Rates’ or prices prepared by the employer for the tenderer to compete (Gordon 1994). This type of contract might be appropriate where there is not enough time to prepare even approximate quantities or where the quantity of work is very uncertain. Obviously the employer has to accept the risk involved in starting work with no accurate idea of the total cost, and generally this type of contract is best confined to small jobs. In such a way, companies prefer measurement contracts when small projects are involved. Measurement contracts allow them using costs efficiently and obtaining balanced profits.
Cost reimbursement implies that the contractor undertakes to carry out an indeterminate amount of work on the basis that they are paid the prime or actual cost of labour, plant, and materials (Mortledge, Smith, Kashiwagi 2006). In addition, the contractor receives an agreed fee to cover management, overheads and profit. Hybrids of the cost reimbursement contracts include: cist plus percentage fee; cost-plus fixed pee; and cost-plus fluctuating fee. Cost-plus percentage fee is the method applied, when the fee charged is directly related to the prime cost (Smith & Love 2001). It is usually a flat rate percentage, but it can also be on a sliding scale. However, the contractor has no real incentive to work at maximum efficiency, and this variant is only likely to be considered where the requirements are particularly indeterminate pre-contract. Cost-plus fixed fee –means that the fee to be charged is tendered by the contractor. This is appropriate provided that the amount and type of work is largely foreseeable (Mortledge, Smith, Kashiwagi 2006). The contractor has an incentive to work efficiently so as to remain within the agreed fee. Cost-plus fluctuating fee implies that the fee varies in proportion to the difference between the estimated cost and the actual prime cost. The assumption is that as the latter cost increases, the contractor’s supposed inefficiency will result in a fee which decreases. This approach depends upon there being a realistic chance of ascertaining the amount and type of work at tender stage (Smith, Love, & Wyatt 2001). In such a way, customers cover the costs of the construction company spent on the labour force, the plant and materials used in the construction of the facility ordered by the customer. This method is effective and applied, when customers can cover the costs of the construction company and, as a rule, are in partnership with the constructor company.
Essay on Procurement Methods Available in the Construction Industry of Cyprus part 2
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