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Characteristics of the construction industry which influences the…
Characteristics of the construction industry which influences the procurement methods
Market Structure
Oligopoly
Few firms dominate
Monopolistic Competition
Firms want to gain a monopolistic advantage
USPs, higher quality, lower cost
Will be matched by rivals
Contracting nature
Many firms act as both contractors and developers
Majority of the small firms act as subcontractors for large firms
Large number of overseas contractors
few large local contractors
Small-Medium sized enterprises (SMEs) -> Less than 50 employed -> 98.4%
High degree of sub-contracting
Parties involved
Client
Main Contractor
Sub-contractor
Only interested in end product
Needs to deal with fragmentation
Tendering
Most common method of procurement
First-price sealed-bid
Lowest price wins, assuming all have similar approach
In reality: may differ
Price is still a major factor
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Business Models of contractors
Winning as many projects
Done by quoting lower price to win more projects
Leads to low profit margins
Cutting costs becomes an option
Subcontractor management (Power Asymmetry)
Making them wait for payment
Project management may be difficult
Errors may further lower profit
Difficult to recover losses
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Could be risky
"Winner's curse": Bad projects
Project-oriented nature
Contractual arrangement
Constant changes
Short period nature of projects
Increase in management costs
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Procurement Methods
Construction management
Design Team
All communicate with client directly
Construction Management Team
Trade Contractors
Earlier commencement
Suitable for...
Large projects
Complexity
Client wants direct involvement
Client willing to take risks
Traditional (design-bid-build)
Advantages
Time Certainty
Cost
Risk
With/Without Quantity Tendering
With Quantity: Designs and specifications done
Without Quantity: Everything needs to be done
Disadvantages
Slow
Suitable for...
Inexperienced firms
Lower management costs
Design and build
Single contractor does design and building
Big Risk for contractor
Fixed Lump-Sum
Easier for client to manage
Variants
Traditional
Package Deal
Design Manage and Construct
Novation D&B
Develop and Construct
Suitable for...
Client has clear design
Lower risk: One firm only
Management contracting
Client appoints management contractor (Man-C)
Man-C oversees entire project
Has direct contractual links
Client appoints design team
If D-team delay, high risk
Suitable for...
Faster project time
Lower risk
Design and manage
Client appoints contractor
C oversees entire project from design to construction
Suitable for...
Client wants less responsibility
Client is inexperienced
Fragmentation
Everything needs specialists
Influences on procurement methods
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