CONTRACT, SPECIFICATION

AND CHAPTER - 5
QUANTITY SURVEYING CONSTRUCTION
PROCUREMENT

Instructor: Welday T.
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Stages in Construction
The following are the common formal stages for a construction project:
I. Inception and feasibility
 At this stage the owner puts his visions and wishes and with this as the
starting point, the various groups (professionals) try to conceptualize the
project and prepare a conceptual design.
 At this stage the owner will hire a consultant to formally design and
develop the concept into a practicable project.
II. Planning and Design stage
 Planning is a function of devising the cause for future with a vision,
formulated for the future state of the organization or project.
 At this stage the consultant plans and designs the project based on the
owner’s requirement and the possible constraints.
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III. Tendering Stage

 At this stage contractors are invited to offer their best technical and
financial offers as per the conditions and specifications depicted in
the contract documents.
IV. Bid Evaluation/Evaluation of Tenders
 The bids are evaluated based on:
 Compliance with the contractual terms and conditions,
 Correction of bid prices,
 Detailed analysis.
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V. Award of Contract
 After the negotiations have been successful, the contract will be
awarded to the successful contractor.
 The formal Steps might include:
- Write a letter of acceptance
- Write the letter to proceed with the works
- Performance bond: 10% a guarantee that he will do the job as
per agreed
 There are different methods & types of construction contracts. The
owner generally makes the selection.
 The type selected depends on the kind of work being performed
and the conditions under which it is being performed.
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VI. Construction
 Here is where the actual execution of the works takes place as per
scheduled.
VII. Commissioning and Acceptance
 Commissioning is a process where by the contractor makes sure that all
installed mechanical or electrical parts are operational.
 Acceptance has two stages:
 Provisional acceptance: the client accepts the completed works on
provisional basis for a period one year. During this period all payments
except the retention money are paid.
 Final acceptance: At this stage the owner completely accepts the
works executed and the retention money is released to the
contractor.
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Stages in Construction
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Introduction to Procurement
 Procurement is a process used to select the lowest competitive and
qualified bidder for procuring services, works or goods from potential
competitors based on reasonable & relevant criteria.
 Procurement can also be expressed as a method used to employ or
buy services or works or goods for the value (in the form of money)
which includes reasonable profit.
 An effective and efficient procurement method ensures the following
rights called the "Five Rights".
- The Right Quality,
- The Right Quantity,
- The Right Cost /Price/,
- The Right Counterpart and
- The Right Time
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…………….
 Procurement types can be classified based on the things to be
procured and the way how they are procured.
 There are five bases for classifying procurement methods. These are:
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…………..
 Things to be Procured: Goods, Services, or Works .
 Procurement of Goods: Physical resources like Materials and Equipments
are made available using Procurement of Goods.
 Procurement of Services : In the construction Industry procurement of
services are often termed as consultancy services procurement
o These include services like Pre-feasibility and Feasibility studies, Design
and Contract Administration of projects, Construction Management
Consultancy Services, Research or Study based Consultancy Services,
etc.
 Procurement of Works: In the CI procurement of works mean the
procurement of contractors to carryout the actual physical infrastructures.
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…………..
 Bidders’ Coverage: Competitive Vs. Negotiated Tendering
 Competitive Tendering:
o Used for the selection of better and capable winning bidder among
the various eligible firms.
o Competitive bidding can either be Open or Limited Competitive
Bidding in the form for their invitations .
o Open Tendering – all eligible bidders are allowed.
 Consumes time for tendering and bid–evaluation
 Might result in incompetent bidder
 Results in better cost
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Advantages of Open Tendering

 It allows all interested contractors to compete on equal grounds and
potentially strong new contractors may appear in the competition.
 It gives the opportunity for local authorities to demonstrate the best
bargain possible for public and government money and assures
fairness in selecting contractors.
 It helps to prevent contractors from forming rings i.e. agreeing on offers
to be submitted to the owner due to the long list of contractors and
may not know each other.
 The owner may obtain the least possible construction cost estimates
due to the tight price competition among long list of contractors.
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Disadvantages of Open Tendering

 Due to the long list of contractors, tender evaluation will take longer time
incurring additional overhead costs to the owner.
 Contractors with ill-equipped management may submit the lowest offer
and inevitably the contract can drag out causing delay and incurring
additional cost to the owner.
 If the submitted tender price is too low and the contractor is losing
money, then the contractor may try to reduce the quality of works .
 It is also very normal that qualified and experienced contractors may not
participate in the tender knowing that the competition will be very tight .
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o Limited Tendering / Selective Tendering

 Only those passing a certain qualification criteria are allowed.
 Applicable when the project is urgent or unique.
 Avoids the rejection of Bids which are non – responsive for technical
evaluations .
 The short list of contractors is usually prepared based on different criteria
such as:
- Contractor’s previous reputation in business,
- Financial standing,
- Available resources especially of machineries and manpower,
- Normal conduct of business i.e. the specialization of the contractor,
- Attitude on contractual claims, and others.
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Advantages of Selective Tendering to the project owner:

 Competent contractors are participating in the tender and it is fair to
select the contractor with the lowest offer
 It reduces the time and overhead cost of tender evaluation and facilitate
the early commencement and completion of the project.
 It results in less abortive tenders and, hence, a reduction of tendering
cost and waste in the construction industry.
 Enable competing contractors to include an adequate level of profit
which helps to give stability to the construction industry
 Reduces the risk of failure .
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Disadvantages of Selective Tendering to the project owner:

 Tender prices are inevitably higher than would have been under open
tendering due to the limited number of competing contractors.
 Contractors who are not interested in the tender may submit high prices
rather than withdrawing from the tender not to remove their names in the
subsequent tender lists.
 There is a great chance of forming rings among contractors unless the
composition of the list of contractors is variable for each tender.
 Care shall be taken to ensure no favoritism in inclusion and exclusion of
contractors from the short list especially in public and governmental
projects.
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Negotiated Tendering
o Negotiated contracts are made particularly when the contactor has
special skills to undertake particular work which require a high
degree of technical competence or is capable of completing the
works within a required time period.
- Direct appointment of an eligible firm
- Exceptionally exercised
- Applicable when the project requires special skill and is very
urgent
- The offer might be higher than the norm
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Advantages of negotiated tendering are:

 The contractor can participate starting from design stage contributing
his experience for a better quality and performance of works.
 It allows early commencement and completion of projects with a
better understanding of the contracting parties.
 Client’s tendering costs are substantially reduced owing to the
production of minimal tendering information.
 All the important points of the construction project (e.g. construction
programme, method and procedure) are discussed during the
negotiation and this effects the rational price.
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Disadvantages of negotiated tendering are:

 Contractors will offer higher tender prices.
 Client obtains an offer which is not truly competitive and does not
reflect what the construction market can bear.
 It may not satisfy the requirements of public accountability in
construction projects for public sector clients.
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 Geographical Coverage: International Vs Regional Vs National Vs Local

Tendering
 Such types of procurements are generally caused by three major
factors.
o Local Capacity – lack of local capacity,
o Financial Sources – depending on financial source and,
o Globalization – free tread policy
 In Practice - Preference Margins – Up to 10% margins might be used
to encourage local firms.
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 Procurement Awareness: General and Specific Tendering

 To enhance proof of competition and increase accessibility, projects are
recommended to create awareness starting from its initiation.
 This approach is very helpful for:
 The Project Owners to:
o identify interested bidders to issue Invitations by letters and save time;
o identify bidders relevant for the procurement required; and
o protect loss of cost in preparing lots of tender documents.
 The Bidders to:
o give sufficient time to assess the cost of the project;
o protect loss of cost only to participate;
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 Procurement Steps:
- They are related with whether tender packaging for submission
separately and their evaluations are staged for a single or two steps
when invitations are made.
- Single or Two Staged Tendering:
o Single Staged: Bidders submit single proposal and the evaluation is
carried out on the same.
o Two Staged: When the bidders submit separate proposals and the
evaluation will be carried out separately, usually financial then
technical.
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Procurement Management
 Procurement Management is a process of selecting individuals or
organizations to carry out the intended services and / or works.
 Procurement Management is carried out based on the provisions made
during the contract planning phase of the Procurement and Contract
Process.
 It involves the preparation of procurement documents, their invitation
and submission of tender proposals, and Opening and Evaluation of
tenders.
 On the bases of results from tender evaluations, the procurement team
will recommend the lowest responsive bidder for Contract Management
Phase.
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Procurement and Contract Delivery system

 Procurement and Contract Delivery system is the way Project Owners together
with Project Regulators and Financiers determine the assignment of
responsibilities to Project Stakeholders along the Construction Process.
 Procurement and Contract Delivery system is often determined during the Basic
Planning phase of Construction Project.
 Generally, there are six types of Procurement and Contract Delivery systems.
These are:
- Force Account,
- Design Bid Build (DBB),
- Design Build (DB) or Turnkey,
- Finance / Build Operate System (BOT),
- Construction/Facility Management Consultancy, &
- Alliances and Outsourcing.
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 Force Account
- When the Project Owners engage themselves to undertake the
project, it is called a force account delivery system.
- Often such a system is promoted if the Project Owners believe that
there is a comparative advantage in Cost, Time and Quality issues .
- When projects are unattractive to bidders .
- These days this type of delivery system is often used when projects are
small and places are remote.
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 Design Bid Build (DBB)

 Is the most practiced type of delivery system in the Ethiopian
Construction Industry – Since 1987
 Project owners →Basic Planning → Design - Consultants →Bid –
Contractors → Project Built .
 This traditional approach becomes less popular due to the following
factors:
 Severe Adversarial relations between the design and contract
administration consultant and the contractor
 Fragmented contract for the project owner
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 Design Build / (DB)/ Turnkey

 Design-build contracts are exactly as what the name implies. One
contractor responsible for both the design and construction.
 Reduces fragmentation and adversarial relations. However, there is
loss of control & Higher cost of tender.
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 Finance Build Operate Transfer (BOT)

 Design-build-operate contracts are not as common as DB. They may be
used for projects such as athletic arenas, water treatment plants , water
purification facilities , and toll highways .
 The principle is that the contractor will retain some percentage to
ownership in the facility, up to 100%, for a specified period of time, and
operate the facility during that time to recoup the capital investment
(total cost plus profit).
 The period of ownership by the contractor may vary from few years to
permanent .
 During the period of ownership, the contractor is responsible for all costs
of ownership, and all profits resulting from ownership.
 This delivery system is advantageous because It minimizes owners’
scarcity of financial resources
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 Construction/ Facility Management Consultancy

 Construction Management Consultancy Delivery System is a response
to problems associated with DB and BOT where the Project Owner was
not well represented for its benefit and the problem of fragmentation
between Planning and Implementation.
 Construction management consultancy firm is used to coordinate all
management consultancy activities from concept inception through
acceptance of the facility.
 Partnering, Alliances, Outsourcing
 The need for constructing quicker, cheaper and to a higher quality of
physical infrastructure by clients
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 Procurement Management process can be idealized into three major

processes. These include Preparation, Tendering and Evaluation (including
Award Recommendation) Processes.
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 Tender Evaluation
 Tender Evaluation Phase: is made to determine and make award
recommendation for the least evaluated bidder using preliminary and
detail evaluations.
 The recommended winner may or may not necessarily be the lowest
bidder.
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 Tender Evaluation
 Commercial Evaluation
o This includes Benefit Forgone due to Completion Time; Additional Costs due
to differences in Foreign Currency Exchange and Advance Payment
requirements ; and Provisions of Domestic or Regional Preference Margins
 Benefit forgone due to completion time
• The Benefit Forgone (BF) due to additional completion time can be
computed using the following expressions:

Where: TO = Tender Offer after Arithmetic Check;

n = Completion time in days
i = Discount Rate = 0.05 % per day = 1.5 % per month;
FV = Future Value
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 Tender Evaluation
 Commercial Evaluation
 Additional cost due to Foreign Currency Exchange requirements
• Used when the tenders have provisions to quote different
currencies .
• For currency conversion, selling rates of Bank published by an
official source and applicable for transactions shall be used
• Additional cost due to Foreign Currency Exchange requirements
can then be determined using selling rates at:
15 days prior to tender submission date
Tender Opening Date
Decision for Award or Expiry of Tender Validity date
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 Tender Evaluation
 Commercial Evaluation
 Additional Cost due to Advance Payment Occurs when different
amounts of advance payment are requested as part of the tender offer.
• The Additional Cost due to differences in mobilization advance
requirements can be computed from the following expressions:

Where: AP = Advance Payment Requirement in %;

TO = Tender Offer after Arithmetic Check;
i= Discount Rate = 0.04 % per day;
n= Completion time in days;
PWF = Present Worth Factor; PV = Present Value
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 Tender Evaluation
 Commercial Evaluation
 Domestic or regional factor
• Domestic or regional preference margin is a provision to give
preference to local companies even if their bid offer is not over by
a percentage often equals 7.5- 10% for construction works.
• This implies that domestic or regional companies can be awarded
the tender even if they are not lowest in tender price of the
evaluated bidders using all the other criteria.
• A contractor can be eligible for such preference margin if and only
if;
o Its legal constitution is in accordance with the Employers’
Country /Region
o It is registered according torules and regulations of the
Employers’ Country / Region
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 Tender Evaluation
 Commercial Evaluation
 Domestic or regional factor
• A contractor can be eligible for such preference margin if and only
if;
o It has proof that its majority of works are undertaken in the
Employers’ Country / Region
o Its majority of capital shares are held by the Employers’ Country
/Region nationals
o Its majority of the board of directors members are the
Employers’ Country / Region nationals
o Its 50% key personnel are nationals of the Employers’ Country
/Region.
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 Tender Evaluation
 Financial offer comparison
 After all commercial comparisons are considered on the same bases;
 the Tender offer will be adjusted based on the Cost-Benefit principle which
involves adding costs and benefits foregone. That is:

Where TO evaluated = Tender offer evaluated

TO = Tender offer after arithmetic check
BF CT= Benefit forgone due to completion time
AC AP= Additional cost due to advance payment
AC FE= Additional Cost due to foreign exchange
AC PM= Additional cost due to preference margin
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