Chapter 2: Literature review
2.3 Contract strategy
• quality
• aesthetics
• time
The employer should determine the order of preference of his objectives.
Figure 6 below shows the range of contract types.
Figure 6: Range of contract types
Source: Willis, CJ & Ashworth, A. 1987. Practice and procedures for the quantity surveyor. 9th ed. Oxford: BSP Professional books (sighted in Burgess, R.A.(ed). 1980. Construction projects, their financial policy and control. Longman)
Under measurement contracts, work is measured on the basis of finished
quantities. The contractor is paid on the basis of quantity multiplied by the rate.
Willis and Asworth (1987:156) provide the following alternate forms of
measurement contracts used in the construction industry:
• Drawing and specification
• Performance specification
• Schedule of rates
• Bills of quantities
• Bills of approximate quantities
Under Cost reimbursement contracts, the contractor is able to recoup the actual costs of the materials, labour and plant on the work plus profit.
According to Willis and Asworth (1987:157), the different forms of cost reimbursement contracts are as follows:
• cost plus percentage
• cost plus fixed fee
• cost plus variable fee
The government of Botswana utilises the bill of quantities which is a measurement contract.
2.3.2 Organisational method
The organizational method deals with the way that the project will be managed from inception to completion. The choice of organisational method will depend on the employer’s objectives associated with time, cost and quality of construction.
Brümmer (2000:1) says the organisational methods available are:
• conventional method
• management method
• all- inclusive method
With the conventional method, the employer appoints the architect as his principal agent. The architect designs and co-ordinates the functions of other professional consultants, supervises and administers the project.
The management method is where the employer appoints a firm (usually known as project managers) to manage and co-ordinate the design and supervision of the project.
The all- inclusive method is where the employer appoints a firm to undertake both the design and construction of the project.
Preece and Tarawneh (1997: 24) conducted research in the United Kingdom to find out whether clients are satisfied with the all- inclusive method. Their
findings were that most clients were dissatisfied with poor quality proposals and specifications, lack of detailed programming, as well as a lack of communication at post-contract stage by contractors.
The Botswana Government utilises the conventional method for executing projects which are included in the scope of this study.
2.3.3 Contract procurement methods
These are methods that are used to source out work. Willis and Asworth (1987:157) state the contract procurement methods that are mostly used as follows:
• Competitive tenders
Competitive tenders have two forms, namely open and selective tenders.Open tenders are where tenderers are invited by advertisement without restriction of suitability of firms. Most public sector tenders are open. Selective tenders are where a restricted number of tenderers are invited by reference to a standing roster or by reputation. The employer is morally obliged to accept the lowest tender.
• Negotiated tenders
This happens when the employer and his consultants negotiate with a contractor to determine a tender.
• Two-stage tenders
A contractor is selected early in the design process by means of competitive tenders based on relatively little information. The contractor then works together with the project team as the design develops and his final tender is developed out of cost and price data contained in his original tender.
• Continued tenders
This is a situation where the employer offers the contractor packages of work or contracts on a continued basis subject to satisfactory performance at re-tendered or re-negotiated prices.
2.3.4 Risk allocation
The Aqua Group (1982:10) defines risk as the possible loss, which has to be stood by someone, resulting from the difference between what was anticipated and what finally happened.
The primary function of any contract is to identify, define and allocate risk.
This will depend to a large extent on the employer’s circumstances. Informal observations indicate that contractors usually allow for premiums in their tenders which will be used to pay insurance companies to carry the risk for them.
Table 1 on the following page shows risks which are usually met by contractors in South Africa and Third World countries in southern Africa.
Table 2.1: Risks influencing contract strategy, adapted from Klopper CH. 1985: An investigation into and evaluation of the cost reimbursable basis for building
contracts. Pretoria: University of Pretoria. Unpublished DSc (Quantity Surveying) - thesis
RISKS INFLUENCING CONTRACT STRATEGY*
Technical
- Incomplete design
- Insufficient site inspection
- Uncertainty regarding the source and availability of material - Correctness of specification
Logistical
- Availability of resources – particularly material, labour, plant, spare parts and fuel - Availability of adequate transport facilities
Construction
- Uncertain productivity levels of resources - Weather and seasonal implications - Problems regarding industrial relations Financial
- Inflation
- Availability and fluctuations in foreign exchange rates - Loan taxes
Political
- Customs and import restrictions and procedures
- Possible problems regarding selling of plant and equipment after completion of the project
- Pressure to make use of local firms and agents
* The risks indicated in this table are deemed to have been caused by factors such as the programme requirements of the employer rendering complete documentation and necessary inspections impossible, lack of relevant statistics and unstable political and economical circumstances. Such risks thus fall completely outside the control of the design team.
SOURCE: Brümmer DG. Risk allocation in building contracts, 2000:3
2.3.5 Contractor selection
Willis and Asworth (1987:165) state that the method used for contractor selection and price determination is a difficult one because of varying opinions amongst construction experts as to their advantages and disadvantages. Specific attributes of tenderers other than price should be regarded.
According to Brümmer D.G (2000:2), the following attributes should be considered:
• commercial terms being offered
• experience
• craftsmanship
• reputation
• financial stability
Models which take into account specific attributes of tenderers at contractor selection stage, like the Diekman model, have been developed.