Introduction
The Consortium, Heriot Developments, is a catering and leisure company that provides hotels, country clubs and golf courses with associated facilities to local communities.
This report is prepared on behalf of Heriot Developments by Richard Arton Associates and will offer recommendations to Heriot Developments with regard to their proposal to develop a recently purchased property from the Watt family.
Purchased Property Details
Whitegates House and Whitegates Lodge, 35 acres of land with a house and lodge on the periphery of the local town.
This report will look at the site proposals and make recommendations on procurement strategy, potential partnering for the procurement and suitable contractual arrangements in line with the recommended procurement option.
Section – 2
Outline of Heriot Developments New Proposals;
The 35 acres of land purchased by Heriot Developments contains a house and a lodge. Heriot desires to develop a golf course on the land and to develop the existing main house into a hotel and the lodge into a club house. The following are the proposals to develop the property –
Phase -1, Main House shall be developed into Hotel and Country Club.
The Existing house will be modified to accommodate the main reception, lounge bar, restaurant and function/conference facilities. Two extension buildings are to be constructed, one building to accommodate 100 bedrooms with facilities and the second building to be constructed into a country club consisting of a swimming pool, sports hall and gym with associated facilities such as reception, dress changing areas, bar and a bistro restaurant.
Phase – 2, Lodge to be adapted into a club house.
Phase – 3, Part of the grounds to be developed as golf course.
Heriot Developments directors have indicated that they have extensive knowledge in the catering and leisure industry, however they did not have the necessary skills to manage the design and construction of the project.
Section – 3
Main Considerations of Heriot:
This development should create positive image within the local area community. The development should be a prestigious one finished to high quality standards. This needs to be balanced with the project cost being kept within budget and completed as soon as possible, with all parts of the development completed at the same time.
Section – 4
Criteria for the Procurement
The selection of the right procurement system based on specific project requirements are an important part of the success of any project. By using the form developed by NEDO (National Economic Development Office) Thinking about Building, (Alan Turner 2002) a review of procurement options considered should include;
High Quality: In this case the standard of quality finish was to be of a higher level with the intention of making the result a prestigious project. Due to the history of Whitegates House and Whitegates Lodge the renovations should minimize the damage / change to the existing structure and additional works to be constructed according to client’s requirements should take into account and mirror the design of the existing buildings. Elevation work should maintain a rich look to maintain the image of the Heriot development.
Price Certainty: This is very important for the consortium. Price shall be kept within budget and a solid estimate for the project development is needed taking into account all factors. While writing specification it is important to keep in mind that the project cost should not overruns the budget. During the project this budget should be monitored closely and reviews / contingency plans put in place where the budget is being over-run.
Programme: On time completion is important. It is necessary to finish the project as early as possible in order that income from the project can begin to be generated. This should be achieved without compromising other aspects of the project (i.e. quality) Furthermore all parts of the development need to finish at the same time, in order that the first guests are not arriving onto a partially complete development / jobsite.
Complexity: Complexity was considered in view of the fact that the project is fairly large and there is modification works required. A detailed design, procure and build schedule needs to be developed. The new building also should connect with existing building for all service facility.
Variation: Less important, but important for on time completion. The client has the ideas about what they want for their business and careful consideration of these factors at the design stage of the development should minimize variation during the project. Large variations, particularly at later stages of the project could have impacts on both cost and schedule.
Management: The client does not have the necessary skills to manage the project, with only limited knowledge of the various problems related to the construction of such a development.
Team Building: In this project existing buildings need modification and must be attached to the new building. It is necessary to develop team work because of the different areas being constructed at the same time in order that the completion of the different areas occurs at the same time.
Satisfaction: Construction quality shall be kept at a high standard to achieve the positive and prestigious image sought by Heriot development within the society.
Delivery: All part of the work to be completed at one time and on time to generate income from the facility.
Risk prevention: The client not able to recommend or provide solution for the construction conflicts and problems, but a system needs to be in place to monitor potential risks.
Having reviewed the criteria for the Procurement listed, the priorities were established as follows;
- High Quality – High standard of work to make the completed development prestigious – Essential for the image Heriot Developments seeks.
- Price – Certainty of price was important.
- Programme – important. Early completion favorable with all parts of the work to be completed at the same time.
Section – 5
Procurement assessment
A suitable procurement option was considered from the review of procurement assessment criteria, focusing on the main criteria selected but with the understanding that all aspects listed need to be considered. Options considered;
Traditional
This will give favorable result for price certainty and the competitive price obtained from contractors. A separate design will be required, with the contactor only liable for workmanship. There will be less team spirit achieved. Variation is a feature of a traditional contract if the client wishes to change the specification and the contract period may be extended for various reasons. This option is not suitable for large and complex construction required specific skills. “The end product will not be finished at the same time. The budget will overspend as the final account far exceeds the client’s expectation. Responsibility for specialist lies with the client. The possibility of disputes in traditional contract will be more”(Cook, B. & Williams, P. 2004).
Design & Build
The contractor will be totally responsible for undertaking the design and construction of the project and this will be done at an agreed price. This single point of responsibility has other benefits including potential schedule savings if there are limited variations during the project. Cost certainty is a big advantage to the employer. The project can be completed on time and the buildings can operate earlier. There are opportunities to overlap design and construction to speed up the activities. The Client will know the contractual completion dates at an early stage of the construction, however, will find it difficult to control the quality and design by the contractor. Also, if the client requires variations from original design during construction it could become somewhat expensive and potentially effect the scheduled completion date.
Management Contracting
This will be favorable if the project is quite large in size and requirements are complex (Murdoch, J. Hughes, W. 1999). It will be more suitable where there is early completion required. During the design, planning and estimating stage the management contractor will act as a coordinator in order to complete the project at the right time. The works package again allows overlap between the design and construction program and the subcontractors can start work separately as they wish. Overall construction period will come down here in order for the client to generate income as early as possible. High quality can be achieved by a high level of supervision and variations also can be kept under control.
Section – 6
Implementation of Partnering Approach:
“Partnering extends the definition of team work by adding the need for a more formal structure to be agreed by the parties which;
- Identifies the common goals for success;
- Sets out a common resolution ladder for reaching decisions and solving problems;
- Identifies the target that provide continuous measurable improvements in performance; and
- Sets out incentives where these are not included within the formal contract.” (Scottish executive, 2006)
“Partnering is required to make an arrangement where by people are encouraged to work more efficiently together including shared problems resolution, continuous improvement , continuity of work, fast construction, completion time, lower legal cost and improved profits” ( Thomas, G. Thomas, 2003)
At the initial stage of the development a partnering workshop should be organized. A client representative should present the company’s objectives and commitment of the project to guide the team. In this workshop all the stakeholders must communicate their value criteria and objectives. There are several types of partnering method that exist; options include project partnering, strategic partnering and TQM (Total Quality Management) partnering.
A project partnering approach will be good for the full duration of a single project. It is important to ensure commitment to the project from all parties, to ensure a high degree of co-operation and also it is essential to build trust among the all the parties involved in the project. It is continuous process that needs sustained effort by all of the parties to deliver measurable benefits.
Objectives shall be intimated to each party and mutual objectives identified and developed in order to construct the project without any major problems/disputes. Where disputes arise they should try to be solved based on a win-win philosophy for each party. The common set of goals and objectives will be established to focus the project success.
Decision to use
Before taking the partnering route it has to be analyzed as to whether the organization is comfortable with and has a favorable attitude of mind to a partnering arrangement.
The more practical soft issues and hard issues will be explained to the parties. The rules and procedures shall be modified in the tender to accommodate partnering arrangements with that.
All the potential parties will be selected by normal tender procedure and at the time of inviting tender the partnering approach shall be included in the Preamble.
Although there might be a number of contracts between each contractor and client, a single partnering arrangement could be developed and agreed by all of the parties.
The partnering workshop will be held with all key players involved in the projects. In the workshop, after the introduction, the important points are raised and discussed. These would include the needs of the client, roles of each partner, identifying mutual objectives, key issues, problems, risk and opportunities, sub group work issues and agreeing problem and resolution process.
A partnering charter will also be announced and agreed by all parties. The Partnering arrangement established will work on the unique strengths of all parties and the group as a whole, whilst maintaining equality where possible in order to avoid problems.
Identifying Partners:
“Partnering can promote better value for money by encouraging stakeholders
- Identify ways of driving out waste and inefficiency in the construction
- Replicate good practice from earlier projects
- Integrate the supply chain
- Minimize the risk of disputes resulting in costly lengthy litigation by avoiding adversarial relationship between client and contractors” ( National Audit Office (NAO) , Modernising construction, 2001)
All potential partners will be selected based on some pre-qualifications such as track record, experience of working together, value of work undertaken, quality of management, type of attitude and ability to manage resources.
Competition shall be used to finalize the partnering organization and the partners will be selected based on their value contribution to partnering and not necessarily because of the lowest bid. Individual partners shall be encouraged to avoid unnecessary costs in whole- life cost to be explained.
Section – 7
Contractual Arrangements
Contractual arrangements are written mutual agreement between two or more parties which are enforceable by law.
It is necessary to make an agreement with a Project Manager. The scope of all technical approvals, planning, schedules and control of the project should be mentioned.
In the contract, the scope of work as well as the responsibilities shall be clearly defined. A service contract will be required between the client and the management contractor. In the service management contract a clause should be included for the cost certainty, the interpretation of which should clearly show the responsibility to finish the project within the allotted budget. Along with the consultant a structural designer and quantity surveyors will be required for the modification of the existing buildings as well as golf club. The physical works should controlled by the management contractor.
As shown in figure 1.1 (Phase -1A) a subcontract agreement is necessary to modify the existing main house into a reception, lounge bar, restaurant and conference facilities.
Another design and build subcontract agreement (Phase -1B) will be required to construct the two extension buildings which are going to construct with design.
A separate subcontract agreement for (Phase -2, 3 & 3A) is to be arranged for the clubhouse, golf club and interior decoration works.
Detailed drawings and specifications are to be prepared with in line with client’s needs and necessities.
For the all the individuals involved a contract will be prepared to include the following criterion;
- Scope of the services and description of work.
- Letter of acceptance.
- Particular conditions and General condition of contract
- Bill of quantities
- Program of work
- Price as per tender amount
- Payment method
- Commencement and completion date
- Penalty
- Performance security
- Termination
- Law and arbitration.
- Also in all the contracts a clause shall be added to include the partnering approaches / arrangements among the stakeholders
There are many types of contracts be evaluating for consideration before awarding, depending on the scope/type of work undertaken. These include –
- Cost-plus-fee
- Cost-plus-percentage
- Cost-plus-incentive fee
- Fixed price.
Under cost-plus-fee or cost-plus-percentage contracts there is a higher possibility to over run the cost of projects because of inaccurate estimation. This is often used when the scope is not clearly identified. Here the contractor won’t take much risk. If they performed well cost will be lower level yet the more work that occurs the more money there is for the contractors. Here the risk is with the client. This may be considered for a project where there are many design and specification changes expected (Kerzner, H. 2006).
In cost-plus-incentive contracts though there are incentives for the contractor, if he performs well the risk will remain with the client. Well written contracts of this type can motivate contractors, for example if they take a percentage of any savings achieved under the budget, or if they finish early. It is important in this type of contract however those other considerations (i.e. Quality, Safety etc) are not mitigated in order for the contractor to achieve their incentives.
In a fixed fee or lump sum contract 100% of the risk will go to the contractor. The contractor has to calculate his cost estimates with a high level of accuracy and has to perform well in order to get profit from the work. If the contractor puts his estimate too high for the work including this risk he may lose the bid to competitors. If he put his profit at lower level he may win the project, but will then have to work efficiently within this budget set to achieve profit for his work. This contract type protects the client from risk. The owner can get almost the exact price or maximum price of his project in advance. It is important here that the owner knows clearly what he wants before starting the projects. Any changes after awarding the contract could lead to un-favorable conditions including high prices for variation work and changes to completion dates if the variations are major or numerous.
Having reviewed all the contracts we can consider that the FIDIC lump sum (fixed fee) contract will be suitable contract for this development. There will be control of the cost and cash flow will be easy to arrange for the client as the client knows the ultimate cost of the project. It is important that the specifications are strict in terms of quality of finish, safety etc in order that the contractors do not cut costs in these areas in order to maximize their own profits.
Contractual relationships ( fig.1.1)
Contractual Link
Communication Link
Section – 8
Recommendations
Time, cost and quality control are the important considerations for the success of this project.
Heriot developments have not had experience in construction procurement but have clear targets and specifications for the final development that they want achieved. They know that their required facility must be designed and constructed as soon as possible to a high standard. It is therefore necessary to appoint the contractor/s who has the proven ability to perform the work with required degree of quality and timeliness.
The Client’s priorities are
- High Quality
- Certainty of price
- Schedule – Early completion if possible
Recommendation – 1
Procurement choice:
For this project a combination of a management contract and a design build will be suitable. The management contract will give a higher quality of standards than other contracts and will be the best choice for the early completion. There is no control in cost certainty of the project however and so a design and build element will also considered in the management contract.
Under the direction of the management contractor the project becomes a team effort.
By choosing a design and build contract alone the client cannot guarantee the prestigious quality required. Specifically to get more profit the contractor may try to finish as quick as possible without concern for quality. In view of the fact that client’s most important priority is high quality construction design and build alone will not workout.
It is advisable that initially the client’s representative/project manger shall be appointed prior to appointment of the management contractor. Separate contracts should then be placed for the hotel and country club development and the clubhouse development, preferably as design and build contracts. Finally the golf course work should be give to a separate specialist contractor.
This combination of a management contract and design build contracts is able to satisfy all the client’s necessities /needs.
Recommendation – 2
It is strongly recommended to incorporate into all contracts the partnering arrangements with all stake holders to improve the benefits to the client. As outlined previously this is in order to instill a sense of commitment to the project from all parties, to encourage team work and to reduce the disputes and litigation.
Recommendation – 3
Finally it is recommended that the organizational structure be laid out as in figure 1.1 (see above) in order to achieve the clients requirements, and that the contractual arrangements / award of all contracts places emphasis on the specifications of quality, price and schedule as required by the developer.
It is suggested that these recommendations will ensure the effective use of the selected procurement option for the Heriot development project in order to achieve all the desired goals of the project.
