Various Types of Procurement Contracts Commonly Adopted in Construction Industries
- Background of Research
Construction is known as the process in which the plans and specifications of designers are transformed into physical facilities and structure. It entails the coordination and management of all the materials for the construction equipment, project labor, materials, technology, money, utilities, supplies, procedures and the duration needed to complete projects on time in regard to the performance and standards of quality in the contract documents (Ball, 2014, p. 44). It should be understood that the contractor and subcontractors are vital during this stage. The engineer will have to consider some relevant inputs for inspection and analysis. The shipping companies, consultants and suppliers of equipment and materials play the supporting roles. The construction project is expected to be conducted wisely and correctly to facilitate good results, a confined period of completion and a quality product that has utilized minimum costs.
A contractor is an individual or group that makes a deal with the owner or another organization for the construction or refabricating of a building, structure or a road. The contractor has the duty of specifying the methods and means that can be employed in construction accomplishment of the project as per the documents. The contract documents will comprise mainly of the contract agreement, general and specific conditions of contract, budget, plan, project specification which are crafted by a design expert (Brook, 2016, p. 102). There must be a methodology that is based on sound engineering judgments to facilitate the completion of construction projects that are successful and are within the prescribed schedules. One of the critical elements in procurement construction is the selection of the suitable contractor. Mainly, it is essential to hire performers’ contractors who have a prequalification in various construction projects and the work has been carried out through different methods of practice. The primary objective of the selection process of the contractor is to minimize the risks of the projects, increase the entire value to the owner of the project and establish a long-term relationship among the members of the project.
In the public sector, the project owners will decide to tender construction projects of roads, buildings, site formation, port works, drainage and water works. During such projects, the contractor is significant and this explains why the selection of the contractor will comprise of a critical judgment for project owners. The procedure used in selection should focus on the potential of the contractor to offer a service that has an acceptable standard, delivered on time and is within the budget. For instance in Malaysia, over the decades, the majority of the construction projects have utilized the traditional procurement methods (Ball, 2014, p. 84). Nowadays, the projects have become more multifaceted which poses a higher demand for the management strategies and engineering skills thus making the conventional procurement methods as not appropriate to cater for the requirements. The design and build method is considered as a solution to the traditional method and it has reaped benefits to the contractors, engineers, architect and clients.
- Aims and Objectives
This study will have three objectives that are to be achieved;
- To study various existing procurement contracts commonly adopted in construction industry
- To identify the existing problems and factors being experienced by the contractor and to rank them.
- To recommend possible solutions to the problems experienced by contractors in the construction industry
- Significance of Study
This research aims to examine the different procurement construction contracts used in engineering. Alongside that, it identifies the common issues and factors that contractor’s experience. The study has focused on contractors from Hong Kong due to the many challenges being experienced in their construction industry. Contractor selection is among the primary duties of clients. The project will be affected if there is lack of an accurate and proper method for selecting the most relevant contractor. Therefore, the contractor is termed as a crucial element during construction. The gathered information can be utilized by the government to provide solutions to contractors that face problems when using design and build contract.
- LITERATURE REVIEW
- Definition of Contracts
According to Sir William, the English authority on contract law, a contract is denoted as an obligatory legal agreement made by two or more parties from where one or more acquire rights to acts for the sake of the others (Brook, 2016, p. 132). Based on engineering, a contract is a mandatory agreement between two or more people that is enforced by the law and provides mutual rights and duties.
- Contract Elements
Among the essential elements that are legal for construction include acceptance, an offer and consideration that is provided when services are paid. The offer is a proposal or a bid that is offered by a contractor to build a structure based on the plans, conditions and specifications that are provided by the owner. Acceptance will be in the system of notice of award while consideration is in the form of cash payment or else anything that has a legal value. According to (Brook, 2016) the essential elements of a legal contract include:
- A clear proposal or offer
- An unqualified acceptance of the offer
- Certainty whereby the terms of reference should have the capability of being certain
- Consideration whereby every participant issue something in reciprocation of the promise from the other
- There has to be an intention from every party that they want to engage in an obligatory legal deal
- The involved parties to demonstrate their legal capacity to contract
- For the individuals, consent should not be through fraud, coercion, undue influence or misinterpretation.
- The contract must be legal in that it is formed under the rules of the law
Figure 1: Elements of a valid contract
- Types of Contracts
- Contracts centered on the payment or pricing criteria
- Contracts focused on contract procurement method
- Miscellaneous kinds of contracts
2.2.1 Contracts centered on the payment or pricing criteria
This is a method that is based on the establishment of the contract price and the subsequent payment is provided to the contractor. In this category, there is further sub-classification of the contracts.
- Fixed Price Types of Contracts
This is a type of a contract whereby the contractor will quote an amount for the entire project. The contractor will have to calculate the risk of the work entailed and its cost. In reality, the contractor may be liable to the differences in the contract sum and the fixed price items may be regarded as items that are paid for on a simple programmed projection of the cost of work. Also, there are allowances for the risks to be encountered and the market situation as compared to the workload of the contractor and the projected price made by the customer despite the expenses suffered by the contractor (Brook, 2016, p. 162). The construction and engineering industry experiences a variety of fixed prices contract and this is discussed below.
- Lump Sum Contract
This is a form of contract where a party decides to do the whole work for a stated and fixed price that is payable by the other. The agreement may contain direct provisions that allow adjustments of the contract sum for possibilities like payment for additional preliminaries, variations among others. The relevance is during the period of contracting; both participants have to come to a deal based on the lump sum price that will be paid for specific work to be carried out (Cook and Williams, 2013, p. 155). It has to be realized that majority of the standard forms of contracts used in Hong Kong include the IEM and JKR Forms which are fundamentally complete contracts for a lump sum with alterations to upgrade to rigors of strict totality. The two types of lump sum are with drawings and bills of quantities with specifications.
- Measure and Value Contracts
This type of contract is used in circumstances whereby the quality of work and scope cannot be accurately determined in the process of tendering. The employer provides a basis in the bidding to tender documents to give the tenderers an opportunity to come up with a price. The work is measured, valued and payment made to the contractor in the event of completing the work or through the currency of the contract (Cook and Williams, 2013, p. 158). Such forms of contracts are prevalent, expect in infrastructure and civil engineering projects like those which entail earthworks or underground works. This type of deal is in two primary forms which are a schedule of prices and bill of quantities.
- “Turnkey” Contracts
The turnkey observes various labels and its primary attribute is the combination of all the necessary activities of the project which are production, design and management in one pack. The contractor not only has the full responsibility but also bears sole liability for planning and construction. At this moment, the employer will reach out to the contractor with all the requirements including drawings, detailed specifications, brief statements, schedules among others which relied on the nature of the project or the degree to which the employer will express his wants (Cook and Williams, 2013, p. 162). The contractor replies through an offer referred to as ‘contractor’s proposals’ to the employer. This comprises of production, contract price, design work and the form through which the contract price was calculated.
The aspects of contract price analysis are forbidden in the ‘turnkey’ contract and if they are used, it is for facilitating payment to the contractor. Even if ‘turnkey’ contracts are by cost reimbursement or fixed price, they also support the fixed price strategy (Oloo, Munala and Githae, 2014, p. 88). The standard is that the contractor can contract by a set projection of the cost of the completed work. This conforms to the selling point of a similar process where the contractor encounters all the risks also to the charges and pricing risks which are subjected to changes induced by extended preliminaries and the employer.
- Cost Reimbursement Type of Contracts
This is a term used to denote the principal methods that are used to make payment on a contract. In Hong Kong, this type of arrangement is not typical as it presents the employer with risks and lacks the idea of the ultimate financial commitment. It gives no motivation to the contractor to boost efficiency and maintain low costs since they have been assured of their charges at an earlier stage (Oloo, Munala and Githae, 2014, p. 91). This arrangement provides the employer with the burden of the disadvantages as simultaneously ensure the contractor of their charge with minimal risks in attendance. The cost reimbursement contract is in three forms which are
- Cost and fixed fee contracts
- Cost and percentage fee contract
- Cost and fluctuating fee contract
- Contracts Centered on Method of Procurement
- Traditional General Contracts (TGC)
As it appears in different labels like employer-design contract and general contract, this type of contract is mainly characterized by construction or installation elements of the contract. The employer has full responsibility for the design as they can influence the plan to be made by the professional designers. Based on the selected contractual arrangement, the employer has the mandate to order the preparation of bills of quantities (Oloo, Munala and Githae, 2014, p. 110). The contractor is expected to manufacture or build what has been presented by the designer. The contractor has the role of workmanship and material aspects of the contract and for the working of their subcontractors while not emphasizing on time-tested credentials.
- Management Contracts
This is a type of contractual arrangement whereby the contractor is paid a certain amount to manage the project on behalf of the owner. In essence, it does not focus on contract building rather than a contract to manage. The attribute of this agreement is that the employer invites the design contractor in the project at an earlier phase to offer construction proficiency to work and manage the process of construction (Gibbs et..al, 2015, p. 147). A fee is provided to the management contractor who is either in a pre-agreed percentage or fixed lump sum basic. The nature of the contract made between the trade contractor, management contractor and the employer, the management contractor may or may not bear liabilities for the delay inclusive, defaults or eliminations of the latter.
- Construction Management Contracts
According to studies, this type of contract is a subset of the collective mass of management brand of agreement and they share similar features with management contracts. The main differences include;
- The employer has direct contracts with the trade or works contractors
- The employer can pay the contractor directly
- The construction manager is not accountable for the works of the trade or works contractors
- The construction manager has responsibilities as a consultant and not as a contractor
- ‘Package’ Deal Type of Contracts
In this type, the contractor has the role in the design and construction. Nevertheless, the contractor is responsible for technology transfer, complete fitting out and financing. The main differences include:
- Design and build contract (D & B)
- Design and construct contracts (D&C)
- Engineering, procurement and construction contracts (EPC)
- Engineering, procurement, installations and construction contracts (EPIC)
- Build, Operate and Transfer Contracts
According to (Lo, Fung and Tung, 2006) studies, this form of contract procurement has developed on the local scene directly as it is attributed to the privatization policy of the government. Based on this scheme the contractor has several duties which are:
- Conducting the necessary design and construction
- Financing all stages of the project
- Maintaining and operating the building works in a defined period
- When the agreed period elapses, the contractor can reassign it to the employer with no fees
- Delivery Methods
This refers to the approach of the owner to coordinate the team of the project that is responsible for managing the whole process of design and construction. The selection process has a lot of risks and the owner has to develop the desire to use a method that will complete the project on time and in a form that adequately meets the needs (Lo, Fung and Tung, 2006, p. 77). Several accredited strategies can be employed to achieve such requirements. The three most useful design and build, traditional contracts and construction management. The owner has to review their options and ensure they use the right choice for a particular project.
- Traditional or Conventional Contract
This form of contract begins with hiring a design professional who makes the design and also prepares the contract documents. The design expert is given a fee that is either a lump sum amount or a portion of the projected cost of construction. The owner has the chance to negotiate with a specific contractor or make a bid opening to obtain the contractor who will offer the lowest charges (Zaghloul and Hartman, 2003, p. 201). The contractor will then have to complete the project as per the requirements in the contract documents. The contractor can decide to select a subcontractor for much of the work or even chooses to finish the entire project. In the phase of construction, the owner has the opportunity to hire an architect to administer the plan or select one of the employees to carry out the duty. The contractor is employed through a simple commercial contract and is given the assignment of conducting the terms of the construction contract.
- Design and Build Contract
This form of contract is whereby the contractor or a single entity takes the duty of designing for the whole or part of the construction and completion of the project. The concept of design-build was based on a single firm, expertise and staff to perform the design, planning and construction work. In the modern approach, there is no regulating design-build to companies with in-house possibilities in all areas. The fields are free to enter into contracts with engineers who subcontract part of the work to a contracting company and the construction contractors will commission the design work to an engineer or architect. Nowadays, there are three types of design-build firms which are a single firm, designer-led and contractor led. The contractor-led are famous because they are right in estimation and purchasing. The supervision of construction cost control, ability to manage risks as well as a better financial banking of the contractor and other benefits.
The build method, designer and owner offer an opportunity for contact and responsibility for the entire duration of the project. The company hired by the owner will undertake the construction and design. Units that offer this services are joint venture firms or firms such as design-build that have in-house employees who will collaborate to carry out the entire project. In both scenarios, the design-build can look for subcontractors who will undertake the original construction work (Zaghloul and Hartman, 2003, p. 256). This for is being used widely in various industries mostly in industrial construction. Due to the complexity of projects such as those in power plants and oil refinery will suit well for a design-build contract. This form of procurement contract offers a single point responsibility for the entire construction and design. Contractors given the duty to execute the project can coordinate all other projects. However, the customer is not abandoned in the process. The system ensures that it observes the needs and requirements of the client and this brings the uniqueness of the approach.
This chapter will discuss and elaborate the research method, instrumentation and statistical techniques to be employed for analysis. The methods used will facilitate achieving the objectives which will study the various procurement contract in building and highlight the problems and factors being experienced by the contractor (Walker, 2015, p. 76). The research involved distributing questionnaires and conduct interviews with the respondent. This involved companies from class A contractor which are registered with Pusat Khidmat Contractor (PKC), the grade seven contractors who are registered by construction industry board, agencies of the government and other construction companies.
This is one of the simplest and popular methods that can be used to meet the aims and objectives of the research. The technique is affected by several factors such as training, experience, levels of skills, knowledge, personality and fatigue. According to scholars, the face-to-face interview is regarded as an observation. The interviewer who is skilled is sensitive to nonverbal communication, tones of the relationship and the consequences due to the setting of the interview (Walker, 2015, p. 119). Such individual factors are somehow considered as risks to validity but they can in other way be strengths as the interviewer who is skilled can use insight and flexibility to facilitate an in-depth and detailed understanding of the experience of the participant. The interviewer can examine a thorough comprehension of the information concerning the topic. The interview can be used as supplements to several respondents of questionnaires through further examination of the responses. Most of the interviews will employ open-ended questions. The standardized, open-ended interview presented the respondents with questions that are open and they were able to write down their answers. In this study, the open-ended questions were beneficial as they facilitate the attainment of objectives for this research.
3.3 Questionnaires Survey
The use of questionnaire has an advantage as the required information can be gathered directly through the survey and little time is needed to answer the forms which make it very efficient for the respondents who have several tasks to do. The reason is that all the required answers are organized in the questionnaire and the respondent will only have to tick the appropriate selection. The questionnaire form was regarded as the most suitable technique to be employed in data collection for this study.
This is also a simple method to ensure the goals of the study are met. This is denoted as a formal group of questions that are made to collect information from the respondents to realize the objectives of the research. The questionnaire has to be designed in a way that it meets the aims of the research. Among the factors that affect the design decision include the objective of the study, appropriate alternatives for investigations and nature of the problem (Walker, 2015, p. 99). The design is referred to as the plan used in constructing the structure of the study using the brief idea that summarizes all the elements of the project. The primary aspects taken into consideration before the design of the questions include:
- What is the aim of study?
- What are questions being developed to give answers?
- What kind of results are to be obtained from the questionnaires?
The close-ended is partitioned into multiple choice and dichotomous question. The close-ended questions have response answers and minimize the bias from the interpreter which facilitates the analysis. Dichotomous questions are those close ended that provide response choices and have the capacity to understand the demographic compassion of the respondent easily. This study used the closed-ended questions that had a scaled-question method (Zaghloul and Hartman, 2003, p. 206). Collection of data for the research was facilitated by the distribution of questionnaire forms at Bumiputera contractor to the target audience. 100 questionnaires were delivered to the respondents. The questionnaire was divided into two parts which include:
This phase was used to gather data based on the background of the respondents. The aspects contained in the form include:
- The title of the respondent within the company
- The respondent experience in the construction works
- The company’s expertise in the construction industry
- The procurement contracts being used in different projects of the company
This part was concerned with identifying the common challenges and factors being experienced by contractors. Also, the problems were categorized. The respondents had to use their working experience and judgment to position or classify the common problems encountered by contractors. The board of industry development of Hong Kong and Pusat Khidmat Contractor offered the sampling frame from their directory (Zaghloul and Hartman, 2003, p. 201). The questionnaire is made from Likert’s Scale and contains ordinal measures of 1-5 based on the level of frequency. Each scale represents a rate as shown below;
(5)- Strongly agree
(2)- agree less
(1)- do not agree
Data analysis was then used to present the results of the research. Through this, it will be possible to conclude the project and state whether it was possible to attain the objectives or not.