MANUAL PROCUREMENT STRATEGY IN CONSTRUCTION

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LEONARDO DA VINCI ToI PROJECT

TRAIN-TO-CAP

Strengthening of European Union Funds Absorption Capacity

for Infrastructure Construction Projects

2010-1-PL1-LEO05-11469

MANUAL

“PROCUREMENT STRATEGY

IN CONSTRUCTION”

Authors (in alphabetical order): SALEEM AKRAM CRISTIANA CAVALLINI ALTAN DIZDAR ARNAB MUKHERJEE PAWEŁ KLUCZUK ZBIGNIEW KUJAWA LUIGI MASSARINI ANDRZEJ MICHAŁOWSKI ALEKSANDER NICAŁ PAWEŁ OLAF NOWAK PIOTR ROBERT NOWAK BARBARA PUŻAŃSKA MACIEJ SIEMIĄTKOWSKI KAROLINA ZARĘBA

Warsaw, Ankara, Ascot, Mondavio 2012

"This project has been funded with support from the European Commission under the Lifelong Learning Programme. This publication reflects the views only of the authors, and the Commission cannot be held responsible for any use which may be made of the information contained therein."

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PREFACE

This book and training course are the results of the project no. 2010-1-PL1-LEO05-11469 entitled ”Strengthening of European Union funds absorption capacity for infrastructure construction projects”, implemented within the framework of Leonardo da Vinci Programme – Transfer of Innovation.

The Polish Association of Construction Industry Employers, Poland was the project promoter. The project partners were:

 The Chartered Institute of Building – United Kingdom;

 ERBIL Project Consulting Engineering CO. Ltd – Turkey;

 Training 2000 – Italy;

 Civil Engineering Faculty– Warsaw University of Technology – Poland. The aims of the project were to:

 Minimise problems connected with disputes and claims in construction projects regarding infrastructure;

 Increase transparency of procedures in risk management and claims and disputes processes;

 Increase access to training through the MOODLE platform.

The main result of the partnerships’ works within the TRAIN TO CAP project is a blended learning training set containing: training courses on MOODLE (Multi Object Oriented Dynamic Learning Environment) platform concerning risk and dispute management in infrastructure construction projects and three textbooks:

 PROCUREMENT STRATEGY IN CONSTRUCTION

 DELAYS AND DISRUPTIONS IN CONSTRUCTION PROJECTS

 MANUAL FOR TUTORS

The project products are prepared for: qualified engineers, managing directors, project managers, construction managers, engineers (FIDIC), and other managing staff from construction companies, government agencies, local authorities who are able to manage international projects and act in any European country.

TRAIN TO CAP as a blended learning course was created in order to increase the professional knowledge, skills and background of employees dealing with European construction projects. Understanding and gaining the specific skills minimises risks and disputes during conducting construction and infrastructure projects on European Union market. Gained knowledge and usage of specific terminology allows avoidance of unnecessary problems with management and communication during the lifetime of projects. These aspects are directed to strengthen effective European Union funds absorption in the field of infrastructure projects.

The project products are available in four language versions: Polish, English, Turkish and Italian. TRAIN TO CAP course is to be used as a basis for organisation of trainings for the engineering staff at construction companies, local government organisations, and local authorities and for postgraduate students as well.

More information about the project and the online course is on TRAIN TO CAP website: www.traintocap.eu.

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CHAPTER 1 INTRODUCTION – PROCUREMENT STRATEGY

IN CONSTRUCTION

OBJECTIVES OF CHAPTER 1

The primary objective of this chapter is to introduce the concept of construction procurement, its strategic context, its relevance in terms of EU Directives and some future trends.

LEARNING OUTCOMES FOR CHAPTER 1

The primary learning outcome for this chapter is to gather understanding of the notion and the nature of construction procurement including contextual and strategic issues.

1.1. Introduction

Construction procurement is the process of identification, selection and commissioning of the contributions required for the delivery of:

• Alteration, refurbishment, maintenance, extension or demolition of an existing building or structure, and/or

• The creation of a new building or facility, including all associated site works.

To obtain the best service and performance from the construction industry, the client must be closely involved with each step of the procurement process. Successful construction procurement should result in a project delivered on time, to cost and to the desired quality capable of performing the specific function required by the client.

New buildings or structures are seldom standard items and the refurbishment of existing structures can never be standard. The act of creating a new structure or extending or refurbishing an existing structure cannot be directly compared to the procurement of goods which can be requisitioned, are often “off the shelf” and where an immediate choice can be made in terms of cost and quality.

The procurement of construction works involves the commissioning of professional services, either from within the procuring organisation or from external sources. The process is complex, involving the interaction of the client, design team and other consultants, contractors (who provide the construction expertise, labour, materials and plant resources), suppliers and various statutory/public interest bodies. Construction procurement is often the subject of joint funding, with the different stakeholders having varying degrees of interest and objectives in the outcome of the project.

From recent literature on this subject1, the following six elements can be identified as the best practice drivers in terms of construction procurement:

• Traditional processes of selection should be radically changed because they do not lead to best value;

• An integrated team, which includes the Client, should be formed before design and maintained throughout delivery;

1_{See for example Constructing the Team, Sir Michael Latham, 1994; Rethinking Construction, Sir John Egan,}

1998; Improvement of Capacity, Sir Christopher Kelly, 2004 & 2006; Public Sector Efficiency Review, Sir Peter Gershon, 2004; Securing the Future – UK strategic policy document, 2005; Economics Review, Sir Michael Stern, 2006

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• Contracts should lead to mutual benefit for all parties and be based on a target and whole life cost approach;

• Suppliers should be selected by Best Value and not by lowest price; this can be achieved within EC and government procurement guidelines relating to value for money;

• Performance measurement should be used to underpin continuous improvement within a collaborative working process;

• Culture and processes should be changed so that collaborative rather than confrontational working is achieved.

However, in the context of construction procurement, many contractual arrangements are often not aligned to achieve or facilitate these drivers.

1.2. Procurement practices in construction

Procurement practices in construction, broadly speaking, are quite varied and complex in the sense that it is quite difficult to define the various arrangements available2.

The key drivers of any construction project will remain centred around either cost, or time or the quality. A good procurement strategy will understand the key drivers and achieve the optimum balance in context of the individual project and the requirement of the organisational strategy.

To provide an example, a particular requirement for a project may be a specific design, which in turn assigns the quality through the specifications and if this parameter is relatively fixed, then the other two key drivers i.e. the cost and the time will have to be optimised through the procurement strategy.

There may also be situations where the end user requirements and the costs are fairly set, and through the procurement process the design and the time elements will have to be optimised and achieved. Table 1.1. below3 attempts to capture the characteristics of the different contractual arrangements common in construction.

The various procurement options available reflect the fundamental differences in the allocation of risk and responsibility to match the characteristics of different projects, therefore the selection of the procurement strategy must be given strategic consideration.

The specific contractual arrangement, when reviewed in context with the current EU legislative requirements (EU Procurement Directives are discussed in detail in Chapters 3 & 4), makes it imperative for any public sector organisation undertaking construction projects to consider carefully the organisational needs and strengths and the strategic fit of the intended procurement strategy it its organisational capabilities.

1.3. Business strategy and construction procurement

In addition to the risk allocation, the client organisation’s business strategy will also have an influence on selection of the procurement strategy. This is particularly important in terms of funding the construction project. For example, if a public sector body considers Public Private Partnership (PPP) or Private Finance Initiative (PFI) to be a viable option to commission the project, there are specific steps and considerations at the procurement stage which the commissioning body will have to follow.

Table 1.1. Characteristics of the different contractual arrangements

2_{Hibberd & Djebrani (1996)}

3

Rowlinson & Newcombe (1984); NEDO (1985) Thinking about Building , Building Economic Development

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9 Type of arrangement Price Design Lead in time to start Certainty Level (including professional fees) Parallel/overlap between design & construction Changes Buildability inherent in design through early contractor involvement Construction process

Traditional Good Low No Easy No Long

Design &

Build Good Medium Yes Difficult Yes Medium/Short

Measurement Average to

Poor Medium Yes Easy No Medium/Short

Prime Cost Poor High Yes Easy No Fast

Consulting Management Function

Average to

Poor Medium Yes Easy Yes Fast

Framework Good High No Easy Yes Fast

There are also fundamental differences in delivery structure and contractual arrangements, which involve a larger number of stakeholders, a substantially different risk matrix and more complex responsibility for the management of risk. It is important at the strategic level to consider and understand these risks, which are more extensive, more onerous and which extend for a much longer period4.

1.4. Procurement/tendering in context of EU legislations

EU procurement (tendering) rules were introduced by the European Community to open up competition between member states. This is because public sector spending represents a significant proportion of the construction spend across the EU member states.

Any contracts with an estimated value of more than the amounts listed below as threshold values are subject to specific rules regarding specification and the tender process.

These thresholds are subject to amendment by the European Union and are usually adjusted every two years,

Considerations for contracts falling within thresholds are listed below.

 Values exclude VAT.

 Values are TOTAL values NOT annual values e.g. a three year contract valued at £60,000 per annum (total value £180,000) is covered.

 Values are to be aggregated e.g. if there is an on-going annual need for supplies.

 It is a breach of EU law to deliberately divide up contracts to avoid the rules.

 There are specific rules in relation to extensions of existing contracts.

 There are specific rules relating to contracts for both services and supplies.

 There are specific exceptions to these thresholds. They are similar to the local or regional government (e.g. councils) exceptions, but different procedures apply.

4

See recent CLOMEC 2 publications on PPP projects and also Code of Practice for Project Management (4th edition), CIOB (2010).

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The EU Procurement Directives The Directives cover the following:

Works - Building and engineering capital works over the threshold value;

Supplies - Supply, lease, rental or hire purchase of goods over the threshold value;

Services - Supply of services over the threshold value (Does not apply to employment contracts).

The application of the Services Directive is split between Part A services (e.g. IT) which are subject to the full European regime and Part B services (e.g. catering) which have minimal legislative requirements.

Part A Services (see below) are subject to the full requirements. This means for instance, that the services must be advertised in the Official Journal of the European Union (OJEU).

Part B Services (summarised below) have minor requirements. The main requirements are in relation to technical specification and award notice.

Table 1.2. Services Directive

Part A Services (full regime) Part B Services (partial regime) Accounting, auditing, book-keeping Catering

Market research and opinion polling Legal Management consultancy Security Architectural, engineering, urban planning,

landscaping and related technical services Educational Advertising Health and Social

Building cleaning and property management Recreational, cultural and sporting Sewerage and refuse disposal

Other Services IT Services

Financial services

Transport and courier services

Maintenance and repair of vehicles and equipment

The above categories are in summary form only. There are extensive and detailed EU definitions for the types of services covered under each of these categories.

The EU Procurement Directives and their implications for construction procurement are discussed in further detail in Chapters 3 and 4.

1.5. Trends in construction procurement

Over the last two decades or so, procurement practices in construction have undergone a considerable transformation, partly due to a shift in the business environments in which the procurement systems operate. In the 1990s procurement experts and practitioners were involved mainly with debating the more strategic issues of the time such as privatization, market liberalisation, and the role of culture and trust in negotiations, as well as the more traditional themes of procurement systems, contractual arrangements and forms of contract5. In the late 1990s some wider issues relating to procurement began to emerge,

i.e. those procurement systems/strategies that looked at the whole life cycle of the project, rather than just cost and time criteria6. Recent reports also acknowledge that the ‘softer’ skills

5

McDermott (1999)

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of persuasion, collaboration and alignment are required by the industry in order to best incorporate value creation and best practice procurement7. Procurement is no longer concentrating on operational activities, but on strategic objectives linked to the long-term survival and development of the organisations as a whole8. Using procurement as a ‘competitive tool’ brings many implications and complex interconnectivities9

that have to be properly assessed and understood to obtain the optimum benefits from a procurement strategy.

1.6. Literature and further reading for chapter 1

1. Chartered Institute of Building (2010) Code of Practice for Project Management for Construction and Development (4th edition), Wiley Blackwell.

2. Future Purchasing Alliance (2003) Connecting Purchasing and Supplier Strategies to Shareholder Value. FPA, UK.

3. Goodier, C.I., Soetanto, R., Fleming, A., Austin, S.A. and McDermott, P. (2006) The future of construction procurement in the UK: a shift to service provision. Proceedings of CIB W92 Symposium on Sustainability and Value through Construction Procurement, McDermott, P. and Khalfan, M.M.A. (eds.) University of Salford, 29 November - 1 December, pp. 182-193. ISBN 1-905732-11-2.

3. Hibberd P & Djebrani R (1996) Criteria of Choice for Procurement Methods (1996) available at www.rics.org/site/download_feed.aspx?fileID=2330...PDF accessed November 2011 4. Male, S. (2003) Future trends in construction procurement: procuring and managing

demand and supply chains in construction. In Management of Procurement, Bower, D. (ed.), Thomas Telford Publishing, London.

5. McDermott, P.(1999) Strategic and emergent issues in construction procurement. In Procurement Systems: A Guide to Best Practice in Construction, E&FN Spon, London. 6. McDermott, P. (2006) Think Piece: Policy through Procurement? In The Future of

Procurement and its Impact on Construction, a workshop of Joint Contracts Tribunal & the University of Salford, 19/07/06.Male (2003).

7. Miller G, Furneaux C, Davis P, Love P & O’Donnell A (2009) Built Environment Procurement Practice: Impediments to Innovation and Opportunities for Changes, Curtin University of Technology, Report for Built Environment Industry Innovation Council, Australia.

8. NEDO (1985) Thinking about Building, Building Economic Development Committee, London.

9. Rowlinson, S.M., and Newcombe, R. (1984). ‘Comparison of Procurement Forms for Industrial Buildings in the UK’ The 4th International Symposium on Organisation and Management of Construction, University of Ontario, Canada.

7_{FPA (2003)}

8

Male (2003)

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12 1.7. Set of exercises for chapter 1

Exercise 1.1:

Define construction procurement – what are the key objectives of construction procurement?

Exercise 1.2:

Briefly outline the advantages and disadvantages of various contractual arrangements in terms of cost, time and specification (design) flexibility. What procurement advice will you provide to a client who requires strict control of the end product, and needs a quick start while the design is being developed but must have cost certainty?

Exercise 1.3:

Name the three key drivers in a procurement strategy

Exercise 1.4:

Name the key areas covered by EU procurement directives

Exercise 1.5:

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CHAPTER 2 LIFE CYCLE OF CONSTRUCTION PROJECT

OBJECTIVES OF CHAPTER 2

This chapter presents different stages of project life cycle in construction industry. Different stages of the cycle are presented: conceptual stage, implementation stage, operational stage and abandonment stage. The chapter also presents information about the feasibility report (importance of preparation and contents) and elements of strategic planning (basic steps and risk management strategies).

LEARNING OUTCOMES FOR CHAPTER 2

After reading this chapter you will be more familiar with project life cycle of the construction object. You will differentiate stages of the life cycle. You will know about feasibility study report and strategic planning, its importance, contents and stages for preparation. You will be familiar with an introduction to risk management strategies.

2.1. Introduction

Management can be translated into a simple two-step sequence: “Plan before doing”, or even “Plan Your Work, Work Your Plan!”. This basic concept is the foundation of the project life cycle by which projects need to be managed. First plan, then produce.

The goal of the construction company is simple - it is to build something with profit. What differentiates the construction industry from other industries is that its projects are large, built on-site, and generally unique. Every project can be broken down into a series of logical definable steps, which will become a roadmap for the project. The project team will start at the beginning of the list, and when they get to the end the project is over. Projects are characterised as having a simple starting and ending point with all the work in between. The uniqueness of each project characterises the high-risk nature of project management. Because they are generally one-time ventures, a bad roadmap can lead the team in the wrong direction, wasting money and time.

The acquisition of a constructed facility usually represents a major capital investment, whether its owner happens to be an individual, a private corporation or a public agency. Since the commitment of resources for such an investment is motivated by market demands or perceived needs, the facility is expected to satisfy certain objectives within the constraints specified by the owner and relevant regulations.

Construction projects are intricate and time-consuming undertakings. The total development of a project normally consists of several phases requiring a diverse range of specialised services. In progressing from initial planning to project completion, the typical job passes through successive and distinct stages that demand inputs from such disparate directions as financial organisations, governmental agencies, engineers, architects, lawyers, insurance and surety companies, contractors, and building tradesmen. From the perspective of an owner, the project life cycle for a constructed facility may be illustrated schematically in Figure 2.1. [2] Essentially, a project is conceived to meet market demands or needs in a timely fashion. Various possibilities will be considered in the conceptual planning stage, and the technological and economic feasibility of each alternative will be assessed and compared in order to select the best possible project. The financing schemes for the proposed alternatives will also be examined, and the project will be programmed with respect to the timing for its completion and for available cash flows.

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14 Operati on an d Mai ntenance Des ign and E ngineerin g Procurement and Construction Compl etion of Const ruct ion

Startup for Occ

upan cy Acceptanc e of Facility Construct ion Pla ns a nd Spe cificati on s ABANDOMENT STAGE Market Demands or Perceived Needs E nd of Proj ect L if_e Cycle Fulfillement of Usefu_{l Life} OPERATIONAL STAGE Disposal of Fac ility Definition of P roje ct Objective s an d S cop e Conceptual Pl an ning and Feas ib ility Stu dy IMPLEMENTATION STAGE CONCEPTUAL

STAGE Conceptual Plan

or

Preliminary De

sign

Figure 2.1. Project life cycle of a constructed facility [2]

After the scope of the project is clearly defined, detailed engineering design will provide the blueprint and set of technical requirement for construction, and the definitive cost estimate will serve as the baseline for cost control. In the procurement and construction stage, the delivery of materials and the erection of the project on site must be carefully planned and controlled. After the construction is completed, there is usually a brief period of start-up or shakedown of the constructed facility when it is first occupied. Finally, the management of the facility is turned over to the owner for full occupancy until the facility lives out its useful life and is designated for demolition or conversion.

2.2. Strategic Planning

2.2.1. Introduction

The word ‘Strategy’ has been borrowed from the military and adapted for business use. It is a management tool and as with any management tool, it is used for one purpose only: to help an organisation do a better job - to focus its energy, to ensure that members of the organisation are working toward the same goals, to assess and adjust the organisation's

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direction in response to a changing environment. It is a process that engages an entire organisational community in integrating its best hindsight and foresight in aligned action. The objective of strategic planning is to build a posture that is so strong in selective ways that the organisation can achieve its goals despite unforeseeable conditions.

There is a considerable amount of confusing terminology surrounding strategy. It is normally defined as the means to attainment of ends, not their specification. In other words, a strategy is a general method for achieving specific objectives. It describes the essential resources and their amounts which are to be committed to achieving those objectives. It describes how resources will be organised, and the policies that will apply for the management and use of those resources. But most of the time, the company owners, when asked about their business strategy, start talking about their revenue goals, expense budgets, cash flow needs for the next year and how they will meet overhead costs. In other words, there is a prevalent sense that the goal or purpose of their business is to make money – this confuses the mission of their business with the reward for achieving it.

Most planning is seen as a budgeting exercise rather than a process of engaging key staff in dialogue, analysis and prioritising to determine what is needed to sustain, strengthen or achieve a competitive advantage. But the real purpose of strategic planning is to find the best strategy for the company to increase its shareholder value and strengthen competitiveness. The emphasis is also on understanding how the environment is changing and will change, and in developing organisational decisions which are responsive to these changes. No matter what your current strategy, the challenge of going through the process on a regular basis is to find an even better one. Only when you cannot find a better strategy will you be sure the one you have is the one you should follow.

The construction industry worldwide designs, produces and maintains the physical infrastructure for the functioning and welfare of society and the continuing growth and development of the economy. Its basic structure reflects the three main components of operation: the design of buildings and facilities; the manufacture and importation of the necessary materials and components; and the on-site construction process. The product of the construction process includes all buildings for uses such as housing, industry, commerce, health, education, leisure utilities, underground installations, transportation routes and facilities, drainage, water supply and waste disposal. Strategic thinking and planning is therefore central to the future wellbeing of all societies.

2.2.2. Basic elements of strategic planning

The basic steps in a strategic planning process are:

Getting ready / Preparing for the project

To get ready for strategic planning, an organisation must first assess if it is prepared. The leadership and key stakeholders must understand that a shared understanding of its past and possible futures will catalyse more effective and aligned responses to these issues in the present. It is the day-to-day decisions and enactments that ultimately shape an organisation. The moves in this initial part of the process should include:

 Identifying specific issues or choices that the planning process should address.

 Clarify roles (who does what in the process) and the ground rules.

 Creating a planning committee to customise and guide the process.

 Develop an organisational profile and engaging top management in a clear sponsorship role.

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Exploring and learning and finding common goals

The process should now move up and back into history, engaging the intuition and feelings of participants by looking at the big picture. Throughout this stage the group should dialogue and document in an exploratory mode, gathering a common base of respect and understanding for the visioning journey ahead. A solid platform of information and agreements should be created which would serve as a springboard for visioning. When people know what some of the given boundaries are, they are freer to improvise and stretch. Clarifying the understandings at this stage sets up everyone for a launch into visioning. Common moves include:

 Completing a graphic history.

 Identifying core competencies and historic values.

 Creating a context map of the relevant environment.

 Analysing industry structure.

 Agreeing on trends, assumptions, and essentials.

 Analysing strengths, problems, opportunities, and threats of the current organisation.

 Interviewing customers, stakeholders and others for their perspectives.

Assessing the Situation

An organisation must take a clear-eyed look at its current situation. A part of strategic planning, thinking, and management is an awareness of resources and an eye to the future environment, so that an organisation can successfully respond to changes in the environment. Situation assessment, therefore, means obtaining current information about the organisation's strengths, weaknesses, and performance - information that will highlight the critical issues that the organisation faces and that its strategic plan must address. These should include a variety of primary concerns, such as funding issues, new programme opportunities, changing regulations or changing needs in the client population, and so on.

The products of step three include: a data base of quality information that will be used to make decisions; and a list of critical issues which demand a response from the organisation.

Articulating mission, vision and guiding principles

A mission statement is like an introductory paragraph. It typically describes the reason for the firm’s existence, a definition of product and services the organisation provides, technologies used to provide these products and services, types of markets and the expertise that sets the firm apart from others. The mission of Skanska, a Swedish company founded in1887 is “To develop, build and maintain the physical environment for living, working and travelling.” The vision should describe where the organisation is headed and what it intends to be. Its processes seek to create a compelling picture of desirable future states, which often represent quantum changes from the past. They develop stories about the nature and benefits of this future, and work backwards to understand the journey that could carry people to this vision. Vision should also be linked to customers’ needs and convey a general strategy for achieving the mission. Visions are most powerful if they represent real aspirations. They do not need to be worked out in every detail, but imagined powerfully and vividly. For example a company ‘A’ has its vision stated as “To be the world leader - the client’s first choice - in construction -related services and project development.” Company ‘B’, one of the world's largest, publicly owned engineering, procurement, construction, and maintenance services organisation states, “To be the preeminent leader in the global building and services marketplace by delivering world class solutions.”

Guiding principles, guide the journey to that vision by defining attitudes and policies for all employees. For example the guiding principles of ‘B’ are:

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 Motivate (people essential for business success);

 Apply knowledge (to deliver customers solution);

 Manage risk (to the benefit of stakeholders);

 Deliver shareholder value (through sustained profitable growth, business discipline and cost diligence).

The mission, vision and guiding principles serve as the foundation for strategic planning. They must be articulated by top management and also by people who lead.

Developing strategies, goals and objectives

Once an organisation's mission has been affirmed and its critical issues identified, it is time to figure out what to do about them: the broad approaches to be taken (strategies), and the general and specific results to be sought (the goals and objectives).Strategies link the learning from the past with the vision by articulating a high level path forward. In a sense, they begin to bring the vision back down to the ground. The moves in this part of the process begin to integrate the work of the prior stages. Strategies should tell a powerful story of where to focus actions.

Strategies, goals, and objectives will come from individual inspiration, group discussion, formal decision-making techniques, and so on - but the bottom line is that, in the end, the leadership agrees on how to address the critical issues.

The product of this step is an outline of the organisation's strategic directions - the general strategies, long-range goals, and specific objectives of its response to critical issues.

Strategy deployment

The mission has been articulated, the critical issues identified, and the goals and strategies agreed upon. This step essentially involves putting all that down on paper and developing a detailed action plan. If there is one thing that undermines a process of this sort, it is lack of genuine involvement and modelling of its significance. The most direct route is to involve as many people as possible in refining the vision and strategies. Another key part of this step is formal communications that let everyone know what is happening, and building feedback mechanisms. The ultimate success of a strategic visioning process is the extent to which leadership and key stakeholders actually begin living the vision day-to-day. Finally strategic planning is the process of making sure you’re doing the right things and doing them right.

Evaluating and changing

None of the tasks associated with strategic planning are a onetime venture. As events unfold, better way to do things becomes evident. Thus managers must constantly evaluate performance and monitor the situation. They should make necessary adjustments as required.

Format for a strategic plan

A strategic plan is simply a document that summarises why an organisation exists, what it is trying to accomplish and how it will go about doing so. Its "audience" is anyone who wants to know the organisation's most important ideas, issues, and priorities: board members, staff, volunteers, clients, funders, peers at other organisations, the press, and the public.

Below is an example of a common format for strategic plans, which might help writers as they begin trying to organise their thoughts and their material. This is just an example, however, not the one and only way to go about this task.

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Figure 2.2. Strategic Planning Process – an example [2] The sections commonly included in a strategic plan are: 1. Introduction by the president of the board. 2. Executive summary.

3. Mission and vision statements. 4. Organisation profile and history. 5. Critical issues and strategies. 6. Programme goals and objectives. 7. Management goals and objectives. Benefits of strategic planning are as follows:

1. Clearly defines the purpose of the organisation and establishes realistic goals and objectives consistent with that mission in a defined time frame within the organisation’s capacity for implementation;

2. Communicates those goals and objectives to the organisation’s constituents; 3. Develops a sense of ownership of the plan;

Vision

Mission

Establish strategy

Review strategic initiatives and critical success factors

Value Engineering

Develop short and long term plans

Deploy the plans

Review measures

Strategy Development Process

Planning Process

Business Priority Process Strategy Deployment

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4. Ensures the most effective use is made of the organisation’s resources by focusing the resources on the key priorities.

2.2.3. What is a feasibility report?

A feasibility report is an analytical tool used during the project planning process which shows how a project would operate under a set of assumptions, the technology used, and the financial aspects. It also gives an outline description of the recommended solution, and explains the reasons for selection.

It is conducted during the deliberation phase of project development before financing is secured. The study is the first time in a project development process that the pieces are assembled to see if they perform together to create a technical, environmental, social and economically feasible concept.

The feasibility study evaluates the project’s potential for success. If, after completing a feasibility study, the group decides not to proceed, there is no need to create a project plan. The perceived objectivity of the evaluation is an important factor in the credibility placed on the study by potential investors and financiers.

2.2.4. Why prepare feasibility studies?

Developing any new business venture is difficult. Taking a project from the initial idea through the operational stage is a complex and time consuming effort. Before the potential members invest in a proposed business project, they must determine if it can be economically viable and then decide if investment advantages outweigh the risks involved. Often construction project operations involve risks with which the members are unfamiliar. The feasibility study allows groups to preview potential project outcomes and to decide if they should continue. It is an integral part in developing a construction project. The purpose of the feasibility study is to explore the project in enough detail for the interested parties and stake holders to make a commitment to proceed with the development of the project.

Feasibility studies are useful and valid for many kinds of projects. An evaluation of a new business venture both for new groups and established businesses is the most common, but not the only usage. Studies can help groups to expand existing services, build or remodel facilities, change methods of operation, add new products, or even merge with another business. A feasibility study assists decision makers whenever they need to consider alternative development opportunities.

Although the cost of conducting a study may seem high, they are relatively minor compared with the total project cost. The small initial expenditure on a feasibility study can help to protect larger capital investments. A feasibility study permits planners to outline their ideas on paper before implementing them. This can reveal errors in project design, before their implementation negatively affects the project. Applying the lessons gained from a feasibility report can significantly lower the project costs. The study also presents the risks and returns associated with the project so the prospective members can evaluate them. There is no correct rate of return a project needs to obtain before a group decides to proceed. The acceptable level of return and appropriate risk rate will vary for individual members depending on their personal situation.

The study is not conducted as a forum merely to support a desire that the project will be successful. It is rather an objective evaluation of the project’s chance for success. Studies with both positive and negative conclusions can assist a group’s decisions.

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20 2.2.5. Feasibility study elements

The creation of a feasibility study, although part of the project cycle, contains a process in itself. It consists of the following steps.

- The conceptual study is the first level study and the preliminary evaluation of the construction project. Often groups proceed directly to the feasibility study and overlook the importance in making the first decision with deliberation. Take the time to determine if a feasibility study is appropriate. Careful consideration of whether to conduct a feasibility study will save much time and money and increase the study value once completed. Moreover if this decision is conducted thoughtfully, the group will probably have established a procedure for decision-making. Then the decisions that the group needs to make later in the development process will probably come easier and the likelihood of them being correct will be greater.

The principle parameters of the conceptual study are mostly assumed and/or factored. Accordingly the level of accuracy is low. Flow sheet development, cost estimation and construction scheduling are often based on limited data, test work and engineering design. The result of a conceptual study typically identifies:

 Technical parameters requiring additional examination.

 General features and parameters of the proposed project.

 Magnitude of capital and operating cost estimates.

 Level of effort for project development.

A conceptual study is useful as a tool to determine if subsequent studies are warranted. However it is not valid for economic design making.

- The pre - feasibility report - prior to initiating feasibility report, the group needs to sketch out possible design of the project. This can begin with the “back of the envelope” calculations and proceed through a formal pre –feasibility study for complex projects. The purpose of this phase is to establish whether a project looks likely to happen and calculate the potential cost of carrying out the full feasibility study. It also serves the purpose of initiating wider public interest. Sufficient work has been completed to develop the construction project and processing parameters for equipment selection, consumables, flow sheet, production and development schedule.

The degree of detail carried out in the pre-feasibility study will be dependent on the nature and type of the scheme. The economic analysis from a pre-feasibility study is of sufficient accuracy to assess various development options and the overall project viability. However these cost estimates and engineering parameters are typically not considered of sufficient accuracy for final decision making or bank financing.

At the end of the pre-feasibility stage, the promoting organisation will have to make a decision on whether to proceed to the full feasibility study phase and will have the job of raising investment to carry this out.

- The feasibility report - the feasibility report represents the last step for evaluating a construction process for “go-no go” decision and financing purposes. It presents a holistic view of the entire project. The principle parameters for a feasibility report are based on sound and complete engineering and design work.

Although all studies must start with certain assumptions, they are closer to reality to give a value to the study. A feasibility study presents the environment where the project will occur and describe its scope. The description also includes the need for the project and how the

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group can accomplish the goals. The scope also includes the key elements of all aspects of the project. Potential reaction by competitors should be included in the study.

The study also includes the rationale for scenario selection. Both worst-case possibilities and optimistic scenarios are compared. Comparative results from scenarios are presented in tables. Possible economic outcomes should be a prominent part of a feasibility study. Operating costs and net revenues are factors that show if the project is economically viable. The study contains pro-forma balance sheets, operating statements, benefit-cost ratios, projected cash flows, and internal rates of return for the project. These are normally based on a three year projection.

The study includes possible project risks for potential members and other investors, project technology, potential legal and governmental setbacks, management and labour resources and time-critical factors. Most importantly, the feasibility study enables members to make constructive, informed decisions on whether to proceed with, revise, or abandon the project. Simply put the feasibility study is a formal technical report that is used by the company to determine whether the proposed project is capable of being developed at a sufficient return to justify the capital and managerial resources that must be committed to the project.

The level of accuracy for a feasibility report is higher than the pre-feasibility report. The objectives for the feasibility report are the same as those listed for the pre-feasibility report, but the level and detail and accuracy for each objective are stringent. Detail calculations have been worked out to develop the flow sheet development, equipment selection, consumables, power consumption, material consumption, drawing, construction schedule, and capital and operating cost estimates.

2.3. The stages of the project

The information necessary to the project manager for making important decisions must involve an understanding of preceding phases of the project or what is expected in subsequent stages. The life cycle of the project consists of four stages (fig. 2.3.)

(1) The conceptual stage; (2) The implementation stage; (3) The operational stage; and (4) The abandonment stage.

2.3.1. The conceptual stage

Prior to implementation of any planning in the construction management process, there has to be an establishment or identification of a “need”. The basic process of decision making starts with the recognition that there is a need for a capital improvement or for a new development. Once the owner has identified a need for the new facility, the requirements are defined and a potential solution is developed. The budgetary constraints are also delineated and the project is conceived and defined during this period.

Project definition involves establishing broad project characteristics such as location, performance criteria, size, configuration, layout, equipment, services, and other requirements put forth by the owner, which are needed to establish the general aspects of the project. During this stage the owner hires key consultants including the designer and construction manager. The definition of the work is basically the responsibility of the owner, although a design professional may be called in to provide technical assistance and advice. The most critical decision that is made during this project phase is whether to proceed with the project or not.

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Project scope is the way in which one describes the boundaries of the project. It defines what a project will deliver and what it will not deliver. For larger projects, it can include the organisations affected, the transactions affected, the data types included etc.

The scope of the project must be kept current and good communication maintained with all of the team who may be involved in the various studies and financial analyses. If you look at the reasons why projects fail, it is usually the result of two problems. Either the team did not spend enough time defining the project and/or there was a lack of scope management.

After initial definition, a preliminary feasibility study will be made to determine whether the concept is technically possible. Examination of rough economic data is done to justify pursuing the project. Assuming that the project is feasible, a preliminary definition is made and very preliminary planning is done. A closer look is taken at costs and a viability study is prepared. The viability study determines the commercial feasibility of the project. Viability means that the project can be profitable or necessary to the company’s operations and available at a reasonable cost. Profitability and pay-outs for the project are calculated. The financing source for the project is established as the capital may come from the owner, from outside financing, from the sale of bonds or elsewhere. Once the source of money has been resolved, formal submission of the proposal or request for funding is made and approval is given if the project is to proceed.

Figure 2.3. The stages of development. [2]

Operational Stage Abandon

ment

Stage

Development Stage Implementation Stage

Conceptual Stage

P r o d u c e

P l a n

Go/No-Go Decision

Total Project Life Cycle

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In sum, for the conceptual planning stage of a project the owner needs to gather as much reliable information as possible about a project. This process will require hiring quite a number of design and technical consultants to help if those resources are not available within the company. Once the information is formulated the owner needs to make a decision as to whether or not to proceed with the project. This is called the go/no go decision. If the decision is go, the owner needs to select a site, establish programme, a conceptual estimate, and a master schedule. The designer and construction manager should also be hired at this stage. Conceptual planning stops short of detailed design although a considerable amount of preliminary architectural or engineering work may be required.

2.3.2. The development stage

It is during this phase that detail planning starts followed by basic engineering, detailed engineering, procurement, construction and handover the facility to the owner.

During the design development the project manager independently investigates costs and availability of systems proposed by the designer. He advises the designer or the engineer as to the availability and costs of possible alternative systems. During design development the project manager performs necessary periodic reviews of the proposed design in order to monitor pre-established budgets and cost limitations.

Conceptual engineering of the project should be done concurrently with the preliminary planning. Decisions are made as to the source of the technology to be used.

The project manager reviews preliminary specifications prepared by the architect-engineer, including quality control standards and criteria for site development, plumbing, electric, and site utilities. In accordance with the review of the total design, which may include design aspects such as the architectural, civil, mechanical, electrical, and structural plans, the construction manager considers both construction feasibility and possible economy that may be affected by different choices of proposed materials and construction methods.

At the conclusion of the preliminary design stage, the project manager makes a very important estimate. This is the first point at which major structural, mechanical, and electrical systems have been defined. This information combined with the spatial solution of the schematic design, can be cost-estimated with a higher degree of accuracy.

Prior to completion of the final design plans, the project manager together with the architect-engineer will analyse the total design effort and establish the appropriate decision of work for the final contract documents and plans and specifications.

2.3.3. The implementation stage

The next stage in the life cycle is construction planning. It is a fundamental and challenging activity in the management and execution of construction projects. It involves the choice of technology, the definition of work tasks, the estimation of the required resources and durations for individual tasks, and the identification of any interactions among the different work tasks.

Construction planning consists of three steps:

(1) Determination of the job steps or activities that must be performed to construct the project; (2) Ascertainment of the sequential relationships of these activities; and

(3) The presentation of this planning information in the form of a network.

However these three actions usually proceed more or less simultaneously rather than as discrete and successive steps.

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A good construction plan is the basis for developing the budget and the schedule for work. Developing the construction plan is a critical task in the management of construction. In addition to these technical aspects of construction planning, it may also be necessary to make organisational decisions about the relationships between project participants and even which organisations to include in a project.

Procurement is an important job that follows construction planning. It can make or break the profit situation on a specific contract and for the company as a whole. Procurement involves purchasing of equipment, materials, supplies, labour, and services required for construction and implementation of a project.

The major individual components of materials management includes:

 requisitioning: including specifying, designing and material take-offs;

 inquiry;

 receipt of vendor offers;

 technical and commercial bid analyses;

 bid conditioning;

 issuing purchase orders;

 expediting vendor documents;

 expediting vendor orders;

 inspection during manufacture/fabrication;

 shop testing/acceptance;

 traffic or transport of the material from the plant/shop to the jobsite;

 receipt of the material at the jobsite; and,

 closeout of purchase orders.

The scheduled smooth and uninterrupted flow of materials to the site represents a very important determinant of project success.

Procurement methods and practices differ with individual firms and projects; nevertheless certain principles are common to each general approach to construction procurement.

The procurement process is affected by a number of different factors and hence should not be performed in isolation. It should not be performed without considering the design and construction schedule of a project. It is essential that procurement be considered as a grand plan involving a number of stages.

After the completion of the construction works, which includes acceptance of work, subcontractor evaluation, inspection and testing and mechanical acceptance, handover of the facility to the owner, takes place. Following the project closeout, direction of the plant start-up activities comes under the owner’s start-start-up manager at the time of mechanical acceptance. One individual, the start-up manager, is named to assume the responsibility for commissioning the plant and for starting it up. Frequently the plant may be turned over to the owner on a system-by-system basis or all at one time depending upon the size of the project. The owner’s project manager makes sure that the plant has been completed and is ready for customer acceptance. Once the facility is accepted, it is under the care and custody of the owner.

2.3.4. The operational stage

Even prior to the turnover, the owner has started marketing product and training operating personnel. There are three important aspects of plant start-up: (1) The start-up plan (2) Equipment (3) Staffing. Prior to revenue service, the owner should simulate service to test whether all system elements are functional and perform as designed. Start-up operations

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should verify the competence of the personnel and ensure a smooth transition from construction, through testing, to revenue service.

During this phase, a transition occurs from construction to operations, which directly affects the approach to safety, risk management, and insurance. The system safety programme plan addresses all aspects of operational safety and guides standard and emergency operating procedures. As the project is implemented a formal safety certification process is conducted to verify that all safety features are included and function as specified in the design. The installation is maintained to assure a continuous level of output. The operation of the facility is optimized and major or minor changes are made to increase production.

2.3.5. The abandonment stage

This is the final stage in a product’s life cycle. The market matures, competition increases, the technology changes and the market share may drop. The facility becomes uneconomical or obsolete after certain duration of time. The installation is then written off the books and the life cycle is complete. Thus a project can be viewed as a series of activities that need to be completed successfully in order to meet the project objectives.

The stages of development in Figure 2.1 may not be strictly sequential. Some of the stages require iteration, and others may be carried out in parallel or with overlapping time frames, depending on the nature, size and urgency of the project.

2.4. Risk management strategies

Project development, due to its complex nature, will often encounter many unanticipated problems, resulting in projects falling behind on deadlines, exceeding budgets and resulting in sub-standard products. Strategic plans, corporate objectives, annual budgets and day-to-day business operations all involve some degree of uncertainty or risk. It is the ability to recognise and manage these risks, which defines the success of a business organisation. Although these problems cannot be totally eliminated, they can however be controlled by applying risk management methods. This can help to deal with problems before they occur. Organisations that implement risk management procedures and techniques will have greater control over the overall management of the project. By analysing five of the most commonly used methods of risk management; conclusions will be drawn regarding the effectiveness of each method. Risk management strategies include the following:

- Risk avoidance: avoiding the risk associated with a specific task, activity or project. Often, following the review of a contract, it is determined that a project is just too risky. The client may decide not to bid the work at all, or remove that element of the work from their bid, sometimes using an alternate method to delineate the exclusion. Risk avoidance is strictly a business decision, and sometimes a very good strategy if construction documents are unclear, ambiguous or incomplete.

- Risk abatement: the process of combining loss prevention or loss control to minimise a risk. This risk management strategy serves to reduce the loss potential and decrease the frequency or severity of the loss. Risk abatement is preferably used in conjunction with other risk management strategies, since using this risk management method alone will not totally eliminate the risk.

- Risk retention: a good strategy only when it is impossible to transfer the risk. Or, based on an evaluation of the economic loss exposure, it is determined that the diminutive value placed on the risk can be safely absorbed. Another consideration in retaining a risk is when the probability of loss is so high that to transfer the risk would cost almost as much as the cost of

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the worst loss that could ever occur, i.e. if there is a high probability of loss, it may be necessary to retain the risk instead of transferring it.

- Risk transfer: shifting the risk burden from one party to another. This can be done several ways, but is usually done through conventional insurance as a risk transfer mechanism, and through the use of contract indemnification provisions.

- Risk allocation: sharing the risk burden with other parties. This is usually based on a business decision when a client realises that the cost of doing a project is too large and needs to spread the economic risk with another firm. Also, when a client lacks a specific competency that is a requirement of the contract, e.g., design capability for a design-build project. A typical example of using a risk allocation strategy is in the formation of a joint venture.

2.5. Literature and further reading for chapter 2

1. “Technical Construction Language”, manual for Introductory, Intermediate Course of Professional English Language for Construction Managers and Engineers, Oficyna Wydawnicza PW, Warsaw, 2004. (Leonardo da Vinci PL/01/B/P/LA/140310: “Improvement of the Linguistic Skills of Polish and Portuguese Construction Managers and Engineers - Recognition of Needs and Preparation of Courses in "Construction English Language"” supervised by DSc. PhD. Eng.. A. Minasowicz, ISBN 83-89780-06-2.

2. “Principles of the Management in Construction (PM/CM/QM/REM)”, manual for Introductory, Intermediate Course of Professional English Language for Construction Managers and Engineers, Oficyna Wydawnicza PW, Warsaw, 2004, ISBN 83-89780-07-0. 3. “Procurement and Tendering Procedures”, manual for Advanced Course of Professional

English Language for Construction Managers and Engineers, ISBN 83-89780-08-9, Oficyna Wydawnicza PW, Warsaw, 2004.

4. www.lifecyclebuilding.org

5. Lifecycle Construction Resource Guide, by The Pollution Prevention Program Office, U. S. Environmental Protection Agency, 2008.

6. The Lifecycle Construction Guide Design for Deconstruction: The Chartwell School Case Study, by Scott Shell, Octavio Gutierrez, Lynn Fisher, et al for U.S. Environmental Protection Agency, 2006.

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Exercise 2.1:

Fill the empty spaces with proper text:

?? - disposal of facility; ?? - design and engineering; ?? - start-up for occupancy

Exercise 2.2:

Name the benefits of strategic planning (descriptive question).

Exercise 2.3:

Which order of basic steps for strategic planning is correct? Choose the right one. a)

1 - ??

2 - ??

3 - ??

Preparing for the Project

Exploring and Learning and Finding

Common Goals

Assessing the Situation

Articulating Mission, Vision and Guiding

Principles

Developing Strategies, Goals and Objectives

Strategy Deployment

Evaluating and Changing

Format for a Strategic Plan

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b)

c)

Proper answer is b).

Exploring and Learning and Finding

Common Goals

Assessing the Situation

Strategy Deployment Developing Strategies, _{Goals and Objectives} Articulating Mission, _{Vision and Guiding}

Principles

Evaluating and Changing

Assessing the Situation Exploring and

Learning and Finding

CommonGoals

Strategy Deployment Evaluating and

Changing

Articulating Mission, Vision and Guiding

Principles

Developing Strategies, Goals and Objectives

MANUAL PROCUREMENT STRATEGY IN CONSTRUCTION

LEONARDO DA VINCI ToI PROJECT

TRAIN-TO-CAP

Strengthening of European Union Funds Absorption Capacity

for Infrastructure Construction Projects

2010-1-PL1-LEO05-11469

MANUAL

“PROCUREMENT STRATEGY

IN CONSTRUCTION”

Contents:

CHAPTER 1

INTRODUCTION – PROCUREMENT STRATEGY

IN CONSTRUCTION

CHAPTER 2

LIFE CYCLE OF CONSTRUCTION PROJECT

P r o d u c e

P l a n

Total Project Life Cycle