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2. Discussion of procurement options

Option 1 - fixed lump sum

This option is the industry standard. It is the norm for a fully documented project using special conditions of contract developed for Victorian government projects.

Continued stability of the building industry with relatively low impact of rise and fall considerations and strong competition existing in the tender market, suggests that this method of procurement offers the principal advantages by way of:

  • clear indication of project cost at commencement of works
  • competitive tenders submitted by contractors familiar with terms and conditions used by the Department of Health and Human Services
  • commitment of the contractor to provide a facility based upon required specified standards and fully developed drawings and specifications.

The major risks associated with this form of contract are:

  • poor tender documents lead to claims for variations by contractors
  • change in design are likely to give rise to claims for cost and time extensions
  • delays due to actions of the principal such as relocating departments / vacating buildings will be pursued as variations.

Option 2 - construction management (CM)

This option offers flexibility to the principal in directing work practices and the option to nominate or amend sub-contractors and their works during construction. CM offers the opportunity to obtain a wider range and more competitive group of sub-contractors than a contractor would normally provide. This form of procurement involves the contractor and principal (health service / agency) entering into a number of sub-contract agreements, usually based on trade packages. Significant risk arises where:

  • there is a lack of a known fixed price at commencement of works
  • there is a lack of a cohesive construction team, which a building bontractor may be able to provide.

In some instances the principal may offer incentives to the construction manager for early completion and/or finishing below the maximum price.

Option 3 - design and construct (DC)

Whilst the DC approach may present initial capital cost efficiencies, substantial problems may arise with difficulties in quality control.

The DC option enables the builder to determine their own construction methods as well as their own specifications to meet the principal (clients) brief. Whilst this may appear attractive on a capital cost basis, potential poor quality of product and resultant shorter life and maintenance problems could reduce apparent benefits.

Other major risks include:

  • difficulty in defining all performance requirements
  • control over designs
  • inflexible relationships.

Option 4 – public private partnerships (PPP)

Projects such as PV being implemented under BOOT and BOO require additional approval, e.g. from the Department of Treasury & Finance. BOOT and BOO projects mean that the Government and its Agencies become purchasers of services over a lengthy period from the private sector and as such bear some level of financial and viability risk. This also has a significant impact on recurrent expenditure.

Refer to the DTF website for Gateway provisions that apply to these projects.

Issues for PV projects include high legal costs, extensive planning and design specifications, complex risk assessment and apportionment, commitments of a long-term nature making it difficult to change contract parties, and establishing benchmarks (public sector comparator) and be difficult and complex. PV should only be used on a project specific basis following an assessment of state funded options and a thorough examination of service and business planning requirements.

Summary

The preparation of a Risk Profile should be undertaken with input by the consultant to evaluate and assess the most appropriate procurement option. The preferred project procurement method for normal projects is fixed lump sum contract. The procurement method for projects such as hospital redevelopment where the existing facility needs to be kept operational is Construction Management. However, this should be initiated during the Schematic Design process and reviewed when more specific details regarding program/cash flow target, completion dates, building occupation by Principal and staging of construction works are resolved.