Advantages and Disadvantages of Procurement Systems & Explained under Different Conditions - Management Assessment Answers

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Evaluate the advantages and disadvantages of procurement systems for particular scenarios. Any scenarios under the project management ,construction management,Design and construct, Public private Partnership and Build-Own-Operate-Transfer(BOOT)is to be considered. Any 3 procurement system out of these is to be explained under different conditions.

Abstract:

The aim of this paper is to critically analyze the advantages and disadvantages of three types of procurement methods used in construction projects. The paper points out that the main advantage of public-private partnership (PPP) is that it leads to average of ten to fifteen percent cost savings. A disadvantage is the fact that potentially there is a danger that when insufficiently monitored and licensed, the control by the authorities could be lost. Build-own-operate-transfer (or BOOT) has the advantage that it is cost effective and ensures that deadlines are met strictly. A major disadvantage of this method is that the private company involved holds a lot of risks. Design and construct method has the advantage that, it reduces costs and lowers delivery times. Disadvantages include the fact that this method excludes the possibility of selecting a contractor by tender.

Introduction:

This paper focuses on procurement methods for construction projects. Procurement involves a set of processes used for locating and acquiring goods and accessing services from external sources. This is usually done through a tender or bid based system (Shaw, 2010). The aim of this paper is to critically analyze the advantages and disadvantages of three types of procurement methods used in construction projects. The three methods assessed in this paper are public-private partnership, Build-Own-Operate-Transfer (BOOT) and design and construct.

Public-private partnership method:

Bernard (2013) states that, a public-private partnership (PPP) is a type of contract based partnership between public owned organizations and private companies. Thus is usually done for special projects and the goal is division of labor. The private company generally ensures efficiency of production or service, and the public company focus on attaining the overall objectives. The collaborations are done to deal with restricted budgets. As private companies have expertise and are focused on the economic aspects of the project. PPPs are a softer alternative to privatization. In the end of 2015, there was a volume of € 73.8 billion PPP projects, of which € 54.7 billion were originated between 2010 and 2012. Largest PPP market is the UK, with a share € 42.2 billion (57%), followed by Italy (€ 29.8 billion; 40%), Germany (€ 9.5 billion; 13%). This method is apt for large scale, complicated projects that need huge budgets and expertise (Walker, 2015).

According to Walker (2015), the economic benefit for the public sector is usually the central justification for PPP. Average of ten to fifteen percent cost savings are usually achieved. The economic advantage is determined by comparative calculations that face the conventional implementation (Public Sector Comparator, PSC) over PPP. The costs are usually considered for several decades; frequently over the entire life cycle. The advantages demonstrated by appropriate cost analysis and also the subsequent tender price is the most heavily weighted in almost all criterion in vendor selection of the PPP project. The discount rate is predetermined here by the organizer. According to the maxim that the State and the private sector focus on their respective strengths and core competencies, the overall efficiency is optimized in the establishment. The private companies have many years of experience for optimal design and therefore the operating risks are lowered and opportunities are better.

As per Lewis (2015), a disadvantage is the fact that potentially there is a danger that when insufficiently monitored and licensed, the control by the authorities could be lost. A negative example is the Toll Collect project in Germany, in which the project was completed one year after the specified date. In budgetary terms, PPP is only effective as a new borrowing of the public sector, if insufficient or no risks and opportunities to the private sector have been transferred. Under current EU rules, PPP projects are not a matter of public debt when the construction and market risk have been transferred to the private sector (Bernard, 2013). It is criticized the idea of a win-win situation and the extension to the area of interest is not realistic. There is a trade-off: The policy is welfare -oriented and therefore the interests of those people who can ask by insufficient purchasing power is significant in the allocation of resources. The main objective of a company, however, is the maximization of profit for its owner. There is the risk of deterioration of the performance range due to the mostly monopolistic exclusive contracts. Also, the frequent practice of secrecy of privatization contracts is the biggest criticism of PPP. It is therefore often not possible to draw conclusions about the viability of PPP projects. It is in accordance with the principal -agent problem the problem of asymmetric information.

Build-own-operate-transfer (BOOT) method:

As per Weele (2015), Build-own-operate-transfer (or BOOT) is a procurement option in which the private sector is given a license by the public sector to fund, develop, construct and run a project for a certain amount of time, after which the authority goes back to the public body. Before the transfer, the private institution is permitted to establish usage charges and lease properties in order to recover the initial investment, as well as offset the operating costs and maintenance of the project. Some countries use this system, such as Japan, Taiwan, Malaysia, Philippines and Hong Kong. But, in nations like Canada and New Zealand, the system is used, for example, to improve the transport infrastructure, such as airports, ports and roads, as investment in such sector are generally very expensive. One of the first systematic attempts made probably was by VW manager Ignacio López when he introduced the concept in the Puebla plant in Mexico. Under this strategy, suppliers obstructed their parts on the band itself and the payment for it was not due until the quality release of the entire vehicle. Also the industrial park Smartville in Hambach is certainly one of the best known examples, and consists of a multitude of individual operator models (Mishra, 2016).

As per Walker (2015), in the classical form, this model involves the investment made by the operating company and dive accordingly in the balance sheet and not in the client. This approach is still relatively quite possible under the rules of accounting but bound to stricter rules. It is also called by project financing. The operator gets the investment made by his client usually proportionately per unit produced. The advantage is that the method is cost effective and ensures that deadlines are met strictly. It also ensures that the quality of service is assured. In most cases, operating models are related to a new plant construction, and the operator is usually the equipment manufacturer itself or an operating company is founded to reduce the risk as an offshoot (SPC: Special Purpose Company). Some operators’ models have also been applied to existing systems. Whether public or industrial operator model, the motives are similar: On the one hand there are financial aspects, on the other hand, the inclusion of knowledge of a specialist, i.e. a form of outsourcing, and thus there is also a shift of the business risk from the customer to the supplier, especially in a piece related pay without guaranteed annual quantity (Weele, 2015).

A major disadvantage of this method is that the private company involved holds most of the risk. In developing countries, political risks are high. The dominant political party in power can change. In turn, policies and rules can be get altered. The costs of a project can shoot up due to this. Construction can even be stalled due to newly imposed restrictions or laws. Another disadvantage is the technical risk involved. It is difficult to predict construction challenges, such as, soil issues, equipment issues, etc. Another issue is the financing risk. This includes foreign exchange rate risk and alteration of interest rates, market risk (raw materials cost changes), income risk (ineffective cash-flow forecasts), risk of going over budget, etc. (Abou-bakr, 2013).

Design and construct method:

As per Abou-bakr (2013), implementation of construction projects under the "design-build" or design and construct method involves a system project, used in the construction industry and in which the design and construction is carried out by one organization. It uses a "one-stop shop principle", which clearly reflects the essence of this approach. In contrast to the scheme "design-bid-build", in the scheme of "design-build" the entire responsibility for the contract is assigned to a single company, thus minimizing the investor risks and reducing delivery times due to the simultaneous implementation of the design, production, delivery and installation of the building. The biggest advantage of this system is that, by focusing on the full responsibility of one person scheme, design-build provides the customer with transparent contractual terms, obliging the contractor to take full responsibility for the project (Lewis, 2014).

According to Burnett (2014), traditionally, the construction project designer is assigned to one side and the contractor on the other. Way of realization of the "design-build" project under the scheme alters the usual schedule of processes. It corresponds to the client's general desire to assign full responsibility to one organization in order to minimize potential threats and total expenses. To date, this approach has been implemented extensively in numerous nations, and templates of agreements are easily accessible. Although the American Institute of Design and Construction (DBIA) considers that the scheme can be led by the contractor, designer, joint venture, etc., it is best to involve the expertise and specialization of an experienced architect as an individual approach to the construction project (Mishra, 2016).

As per Delmon (2014), in this process, the contractor shall take decisions on the design, and also the problems linked to the costs and payback periods. While, the general construction process differentiates the interests of designers from the interests of the contractors, the method of "design-build" does not. In this regard, there is a perception that the approach of "design-build" is not suitable for projects with complex constructive work, necessary from technical or aesthetic reasons. It is believed if the designer / architect is working in tandem with the construction company, it is likely in most cases he will insist on simplified concepts. Interestingly Belmont Learning Center project implemented the "design-build" model, which was subjected to considerable criticism, not only due to the excessive cost, but also from an environmental point of view. The scandal revolved around the supposedly damaged, which led to substantial delays and increased expenses (Burnett, 2014).

Steve Cooley, District Attorney of Los Angeles, who led the trial of project Belmont educational complex for the Los Angeles Unified School District, in March 2003 issued a final report on the investigation. According to the report, different problems in the Belmont scandal, had a direct bearing on the application of the approach "design-build". This highlights the disadvantages of this system. "Design-build" excludes the possibility of selecting a contractor by tender. Criteria for selection of the contractor are subjective, and cannot be quantified easily. They lack further justification. The selected design and price can be seen as suspicious by the public, regardless of their validity. The report set out the conclusion that the method of "design-build" together with the "concept of multi functionality" were the reason for the dispute, and uncertainty about the complexity of the project, increased the chances of its failure (Delmon, 2014).

Conclusions:

It can be concluded that a public-private partnership (PPP) is a type of contract based partnership between public owned organizations and private companies. Thus is usually done for special projects and the goal is division of labor. Average of ten to fifteen percent cost savings are usually achieved. A disadvantage is the fact that potentially there is a danger that when insufficiently monitored and licensed, the control by the authorities could be lost. Build-own-operate-transfer (or BOOT) is a procurement option in which the private sector is given a license by the public sector to fund, develop, construct and run a project for a certain amount of time, after which the authority goes back to the public body. The advantage is that the method is cost effective and ensures that deadlines are met strictly. A major disadvantage of this method is that the private company involved holds a lot of risks. Design and construct method involves a system project, used in the construction industry and in which the design and construction is carried out by one organization. The biggest advantage of this system is that, design-build reduces costs and delivery times. Disadvantages include the fact that this method excludes the possibility of selecting a contractor by tender.