Lecture 4B Procurement System

1. Contract arrangement
i. under the general law of contract, when a party makes an offer to provide goods / services for
some certain consideration and the other party accepts it; a contract exists which is enforceable at
law provided it is not any illegal act.
ii. in any construction contract whereby, an offer is made by a contractor who tender to carry out the
construction works for a certain sum and upon acceptance by the client; a building contract comes
into being.
iii. in order to ensure a contract is binding and effective it has to be in a written form (verbal also
accepted based on employer and contractor but will a lot of dispute). Each party to a contract has
agreed to do something and is liable for breach of contract if he fails to perform his part of the
agreement i.e. it establishes the contractual rights, obligations, responsibilities and liabilities of the
contracting parties.
iv. many standard forms of building contract (PAM/ PWD / CIDB / IEM) (AIAC & FIDIC) have been used
in the construction industry fully acknowledge by the client and the contractor.
v. the contractual arrangement forms the contractual and legal framework for the building
procurement process. This is normally done by a CQS.

The different types of contractual arrangements are:

a) contract based on Bills of Quantities (BQ).
b) contract based on approximately BQ.
c) contract based on drawings and specification.
d) contract based on schedule of rates.
e) contract based on cost reimbursement.

The basis in selection of a suitable contractual arrangement

a) nature and characteristics of the project.
b) size and complexity of the project.
c) expertise and resources available.
d) project objectives and priorities.
e) likely hood of changes / variations in requirements.
f) availability of information and details.
g) measurement and cost fluctuation requirements

2. Tendering methods
There are three principal methods of choosing a contractor through tendering as follows:
a) open tendering.
b) selective tendering.
c) negotiated tenders.
2.1. Open tendering

a) initiated by the client’s consultants usually CQS upon instruction by the client.
b) place advertisement in local newspapers / technical press stating the description of the project,
location, form of contract, class of contractors (class A – class F) etc. to invite contractors to
apply for tender documents.
c) suitable contractors pay the tender documentation charges to collect the tender documents.
d) tender deposits (cannot withdraw the tender) are required and refundable to unsuccessful
contractor on the submission of a bona fide tender.

Advantages:
a) an opportunity to provide capable contractors to submit their tenders.
b) fulfills public accountability (CAT – competitive, accountability and transparency) and removes
any suspicion of favoritism.
c) highly competitive tender expected due to large number of contractors participation.

Disadvantages:
a) there is a danger that the lowest tender may be submitted by a contractor who is inexperience
in preparing tender (especially where BQ is not provided).
b) there is no guarantee that the lowest tenderer is capable or financially sound to undertake the
project to completion.
c) tendering cost increases due to large number of contractors taking part.
d) an unscrupulous contractor may submit unrealistic tender sum compare with the reputable
contractors.
e) standard of workmanship and quality of works were unsure or no guarantee.

2.2. Selective tendering

a) a short list of the contractors is drawn up who are considered to be suitable and capable to carry
out the proposed project through recommendation by client and consultants to be invited to
tender.
b) the Code of Procedure for Selective tendering recommend a list of five to eight tenderers
according to the value of the contract. The time for tendering shall be not less than four weeks
and shall be related to the size of the project.

Advantages:
a) only capable and approved contractors submit their tenders i.e. reputable contractors.
b) reduce the tender documentation charges as the number of tenderers is small.
c) reduce tender reporting time.

Disadvantages:
a) the tenders submitted may not be competitive as reputable contractors are invited and the
number is small. (contractor is reputable, they will not simply submit the tender)
b) many good contractors have no chance to be invited since they do not know to the client or
consultants. (recommendation to contractor – good contractor maybe 2 to 3 contractors,
but the rest good contractor will not be invited)
2.3. Negotiated tenders
a) a contract to be negotiated with a single contractor nominated by the client instead of resulting
from the process of competitive tendering.
b) the rates and prices are discussed with the assistance of QS. This may be done using BQ or
Schedules of Rates prepared by QS instead of the contractor pricing the tender document on his
own for evaluation.
c) sometime the contractor will price the tender document first to provide a basis for the
negotiation. The client’s QS will go through the rates and to reach an agreeable unit rates with
the contractor to arrive at the contract sum.

Advantages:
a) reduction in tendering costs; only one set of tender documents need to be prepared.
b) more realistic rates and prices are obtained through negotiations with expert input by the CQS.
c) a reliable and reputable contractor selected.
d) contractor has a greater awareness of the client’s requirements; most likely the subsidiary of the
client’s group of companies or same contractor for the same design completed in previous
contract satisfactorily.
e) the design team has the advantage of the contractor’s specialized knowledge with early
participation in the project.

Disadvantages:
a) one can never be sure that one has obtained the cheapest offer; although the services of a
competent professional CQS is involved but there is an assurance that the client get good value
for money for the works done. (reasonable price not cheapest price, cheapest price is for open
tendering)
b) difficult to explain why that firm was chosen in preference to all the other contractors which
would be equally good if not better. Normally; the reason is because of the previous contract
was done satisfactory or may be the subsidiary of a client’s construction arm.
c) time taken to award may be reduced since single negotiation only but sometime negotiations
takes times.

3. Pre-qualification of the contractors

a) it is normal to see that for any tender based on open tendering will attract many tenderers to
participate especially when the number of project available become less. This has resulted
increase in client tender documentation costs and time to get tender documents ready
b) for issuance to tenderers. The contractors’ back grounds were unknown to the consultants and
client.
c) due to the above reasons; CQS will recommend to the client to use selective tendering. This
procedure is to select a limited number of contractors who are suitable and meet project criteria
through a pre- qualification exercise carry out before invite the contractors to tender.
d) this is normally use for a mega size project and specialized design project.
e) through pre-qualification; tender reporting and contract awarding time will be reduced.
f) an advertisement will be inserted in the newspaper with sufficient description and information
of the proposed project to inform the tenderers.
3.1 the criteria to be used in drawing up a list of pre-qualified tenderers will depend to some degree on
the character of the project, as well as on its size is as follows:

a) class of registration with the authority e.g. PKK class.

b) financial stability e.g. paid-up capital & bank credit facilities and length of time in business.
c) track record of firm e.g. whether projects complete on time, claim conscious, ability to work as a
team with other consultants.
d) plant and equipment possess and extend of firm practice to sub-let part of the works.
e) professional site staff available and their work experience; company good working relationship with
consultants, subcontractors and suppliers.
f) the capacity available in relation to the current work load.
g) the history in respect of labour relations e.g. strikes, stoppage of works due to labour dispute, ability
to attract labour.
h) the real and willingness to tender.
i) contractor with good reputation through reference or recommendation from other consultants.