FIGURE 1

THE RELATIONSHIP BETWEEN RIMARY CRITERIA

Time
(Speed to completion or certainty of
completion date)
Project Objectives- as the emphasis of any
one criteria is increased the other criteria
are affected

Cost Performance (design,

(Price or cost certainty) quality)
 2.2 Project Objectives
Construction (and refurbishment) projects are often complex with potential for cost
and time overruns or the finished building performing less well than planned. To
minimize such risks the client should select the procurement strategy which matches
the objectives of the projects. These must be clearly established and priories before
any design or other work begins.

The client must decide the relative importance of the three main type of criteria-
time, cost and performance:
• TIME: earlier completion can be achieved if construction is started before design is
finished The greater the overlap between the two, the less time will be required to
complete the project
• COST: with the exception of simple ‘standard’ building and certain design and build
strategies, a final construction contract sum cannot be established until the design
is complete. Any overlap between design and construction means that construction
start before the is fixed. This increases the importance of accurate cost forecasting
and
• PERFORMANCE (DESIGN) : the quality and performance characteristics required
from the completed building determine both the projects time and cost. Some
strategies reduce the project client’s ability to control and make changes to the
detailed building specification after the contracts have been let
 Systems for the management of the design and construction
of building projects

Integrated procurement
Separated and co-operative systems Management-orientated
procurement systems procurement systems

Design and build Variants design and British property

Conventional system Variants of the federation system
build
conventional system

Package deals Develop and

constructs

negotiation serial contract Turnkey

Continuity contract
Two-stage selective Cost –reimbursable
tendering contract
Construction
management
management
Design and
Contracting
manage

Figure 1.1 The categorization of building procurement

systems Source : Perry (5)
 2.1 Definition of Terms
Different procurement strategies provide different ways if allocating risk and responsibility to the
organization contributing to the project.
The main type of procurement strategy are summarized below (they are covered in more
detail in section 2.4)
• Traditional: design by consultant is completed before contractor tender for then carry out,
construction
• Construction management: design by the client’s consultant and construction overlap. A fee-
earning construction manager define and manages the work packages. All contract are
between the client and the trade contractor. The final cost of the project may only be
accurately forecast when all packages have been let
• Management contracting: design by the client’s consultant and construction overlap. A
management contractor is appointed early to let element of work progressively by trade or
package contract )’ called work packages’) The contract are between the management
contractor and the work contractor. A with construction management, the final cost can be
accurately forecast when the last packages has been let
• Design and manage: similar to the management contract, with the contractor also being
responsible either for detailed design for managing the detailed design process; and
• Design and build: detailed design and construction area both undertaken by a single
contractor in return for a lump sum price. Where concept design is prepared before the
contractor is appointed the strategies is called develop and construct
 FIGURE 2
PROCUREMENT ARRANGEMENT- TRADITIONAL

CONTRACTUAL RELATIONSHIP
CLIENT

CONSULTANT
MAINCONTRACTOR (fee contract)
(Standard lump sum contract)

SUBCONTRACTOR
(Standard lump sum ) SUPPLIERS
(various contract)

ADVANTAGES DISADVANTAGES
Pre-construction time saving potential Open to abuse (resulting in less
competitive fairness satisfactory certainty) slow to start on site
public accountability (no parallel working) contractor
procedures well known easy to not involves in design or
arrange and value changes planning adversarial

SEQUENCE

Brief Design Competition Construction

RISK
LOW COST RISK
MEDIUM TIME RISK
LOW QUALITY DESIGN RISK
 PROCUREMENT PATHS

Traditional Paths

 The unique characteristics of this method is the separation of design responsibility from the construction work in the
construction project
 The lump sum contract is generally regarded as the traditional form of contract
 The clients appoint independent consultants to act on his behalf to produce the design and supervise construction
 The design will be completed before the appointment of the building contractors to whom detailed plans and specifications
must be given
 It places the main responsibility for the coordinating the various organization with the architect and the building contractor
undertakes to perform work for a fixed price
 The 2 variants in this method are the sequential method and the accelerated method

Method

1) sequential method

 often termed as single –stage selective tendering or a step by step process

 The client will appoint the design and cost consultants who will produce a set of detailed drawing and a Bill of Quantities, a
detailed and quantified list of all categories of material and labour in a job
 Price will then be soughed out from the selected contractors bidding in competition ,e.g.. Open Tendering
 The successful contractor then appoint sub-contractor to deal with specialized parts of the project
 The nominated sub-contractors too will be supervised by the main contractor
 It is usual for an architect to act as design leader and project coordinator
 An engineer can be the project co –coordinator it has a high engineering content
 These consultants will form the design team who will advise the client on building method, form of contract and type of
contractor most suited to the project
 The main contractors responsibility is to build the project in accordance with the requirements of the client’s professional
team
2) Accelerated method

 There are 2 types of tender in this method namely the two stage tender and the negotiated tender

 In the two stage tender, the 1st stage will involve discussions between the client, professional advisers and a number of
selected contractors with experience of the type of project envisaged, the type and scope of work, financial implications,
proposed timetable, volume of specialist work and pricing method

 A firm BQ will be produced when the detailed designs are completed

 The 2nd stage will involve the commitment to the method of work by the contractor when the tender price is finalized

 In the negotiated tender, only one contractor will be selected to negotiate with the contractor in order to ensure value for
money

 The cost-plus contracts will enable the contractor’s involvement to overlap that of the design team

 There are various forms of cost plus contracts which give varying degrees of incentive to the contractor to minimize the cost
of the contract

 One of this is target cost of contracts, where the proved cost is compared with measured value and any saving is shared

 The other cost plus contracts are cost plus percentage fee, cost- plus fixed fee and cost- plus fluctuating fee
 TRADITIONAL METHOD (SEQUENTIAL METHOD)

ADVANTAGES DISADVANTAGES

• High degree of certainty on the basis of cost and
specified performance before a commitment to
build
• Clear accountability and tight client control at
every stage
• For simpler industrial building other methods
may be faster and less complicated
• Greater co-ordination and control required
because of different firms and contractual
relationship

• Competitive pricing • No opportunity for the contractor to contribute

building expertise early in the process
• Opportunity to combine the best consultancy and
contracting skill for the project

• Flexibility in developing the design up to contract

documentation stage and if necessary in varying the
design during construction
 TRADITIONAL METHOD (ACCELERATED METHOD)

ADVANTAGES DISADVANTAGES

• two stages tendering allows early testing of the • Less certainty on price before commitment to
market to establish price level and gives early build
contractor involvement for construction speed
• Competition is reduced or absent in
• Negotiated tendering allows early contractor negotiated
involvement of ‘fast tracking’ and gives flexibility tendering, more approximate in two stage
of design development as construction proceeds tendering

• Possibility of delay if contract negotiations are

protracted

• More concentrated client involvement

required to ensure efficient planning and
control throughout the process
 FIGURE 7
PROCUREMENT ARRANGEMENT- DESIGN AND BUILD

CONTRACTUAL ARRANGEMENT
CLIENT

DESIGN AND BUILD

CONTRACTOR
(Standard lump sum contract)

SUPPLIERS
SUBCONTRACTOR (various contract)
(Standard lump sum )
DISADVANTAGES
ADVANTAGES
Relatively fewer firms (less real competition_
Single point contact and responsibility client need to commit himself before
inherent build ability early firm design is complete in house design and
price possible reduced total build firm is an entity )compensation for
project time weak parts not possible) no design
overview unless consultants appointed
difficult for clients to prepare adequate
brief bids difficult to compare design
liability by standard contract client driven
SEQUENCE changes can be expensive

Brief Competition Design

Construction
RISK
LOW COST RISK
MEDIUM TIME RISK
LOW QUALITY DESIGN RISK
 FIGURE 6
PROCUREMENT ARRANGEMENT – DESIGN AND BUILD

Some option available- showing proportional involvement in the design process by client and contractor between package deal, and develop
and construct

Turnkey

Package deal

Design and build

(competitive)

Design and build

(negotiated)

Develop and
construct

The range of options enables the procurement arrangement to be used for a wide range of client types and for clients to be involved to a
greater or lesser extent

Client involvement

Contractor
involvement

-The Procurement Guide-

 DESIGN AND BUILD METHOD ( DIRECT)
ADVANTAGES
• Single contractual arrangement for the total
process
• Integration of design and building expertise and
programmed assists a rapid and efficient process
• Guaranteed cost of building and date for
completion
DISADVANTAGES
• Uncertainty about specified performance
before commitment to build (unless
conditional proposals are provided)
• Loss of competitive pricing
• In house design expertise may be limited
• Client has only one source of advice on all
aspects of the project (unless independent
building adviser appointed)
 DESIGN AND BUILD METHOD ( COMPETITIVE)
ADVANTAGES
• Single contractual arrangement for the total
process after the selection stage
• Competitive pricing
• Guaranteed cost of building and date for
completion
• Can allow consultant design input
DISADVANTAGES
• In-house design expertise may be limited
• Competing schemes may not meet client’s
requirements for cost and performance,
unless specified in detail before bidding
• More direct involvement may be required in
the details of the running of the building
contract
 CONSTRUCTION MANAGEMENT

• Project planning , design and construction should be treated as independent tasks

• The task of the construction manager is to act as the client’s agent who will co-ordinate and control all aspects of the
projects so as to achieve the client's state requirement

• The construction manager process the construction expertise and he will be involve throughout the project

• The aim is to achieve a higher level of integration by separating managerial from technical (designing and building )
responsibility through the appointment of a specialist construction manager

MANAGEMENT CONTRACTING

• The client will appoint the management contractor who may be a general contractor , to work along side the other
professional consultants.

• To ensure construction expertise to be incorporate into the design at am early stage in the project

• The management contractor does not carry put any of the construction but he is an adviser to the design team

• He will be responsible for setting up the site establishment, providing general back-up services advising on the use of
specialists sub-contractor and organizing construction
 FIGURE 4
PROCUREMENT ARRANGEMENT- CONSTRUCTION MANAGEMENT

CONTRACTUAL ARRANGEMENT
CLIENT Fee contracts
(no standard form for CM)

CONSULTANTS
Including
CONSTRUCTION MANAGER

Lump sum contract

(non standard)

ADVANTAGES
Time saving potential for overall project time
trade packages let competitively build
ability potential breaks down
traditional adversarial barriers parallel
working inherent clarity of roles, risks
and relationships for all participants
late change easily accommodated
WORK or TRADE DISADVANTAGES
CONTRACTORS No cost certainty at outset needs informed
client, able to take an active part
needs a good quality brief relies on a
good quality team needs time and
information control

SEQUENCE

Design
Brief
Construction

RISK
LOW COST RISK
MEDIUM TIME RISK
LOW QUALITY DESIGN RISK
 FIGURE 5
PROCUREMENT ARRANGEMENT- MANAGEMENT CONTRACTING

CONTRACTUAL ARRANGEMENT
CLIENT

MAIN CONTRACTOR
(fee contract)

CONSULTANTS
(fee contract)
WORK CONTRACTOR
(fee contract)
ADVANTAGES DISADVANTAGES
Time saving potential for overall project Need for good quality brief poor certainty of
time build ability potential breaks price relies on a good quality team may
down traditional adversarial become no more than a ‘post-box
barriers parallel working inherent system in certain circumstances removes
late changes easily accommodated resistance to works contractors claim
work packages let competitively

SEQUENCE

Brief Design

Construction
RISK
LOW COST RISK
MEDIUM TIME RISK
LOW QUALITY DESIGN RISK
 MANAGEMENT CONTRACTING AND CONSTRUCTION MANAGEMENT METHOD

ADVANTAGES DISADVANTAGES

• Combine design and construction management • With management contracting much of the risk
skills to assist a rapid building process remains with the client

• Gives flexibility for developing detail throughout • With construction management the total risk
design and building lies with the client

• Enable competitive pricing for packages of • A high degree of trust in necessary to use both
construction methods effectively and the choice of manager
is of crucial importance
Procurement Strategy
These primary risks are summarized by example on the chart below by procurement method in the categories
time, cost and performance

Time Cost Performance

Traditional Fixed but extensions Fixed but subject to Designed by client's
of time possible due change where design consultant. Quality
to client and changes are made, set by contract
designer initiated where inflation documents
changes occurs or where
contractor is alleged
to have grounds for
contractual claims
Design and build As Traditional As traditional Design by contractor
contractor but with varying
levels of input by
clients-quality set in
same way
Separate Time not fixed by Cost not fixed before As traditional
management contract commencement
function
 Which Procurement Method?

Fig 3.7 Speculative Risk

Contract type Risk

Employer Contractor

Design and build

Complete ‘package by supplier

Design and build

Design input by employer

Traditional Lump Sum

Fixed price

Traditional Lump Sum

Fluctuations

Traditional Measurement
Bill of approximate Quantities

Traditional Measurement
Fixed fee Prime Cost

Traditional Measurement
Percentage fee prime cost

Management contract
WHICH PROCUREMENT METHOD?
Comparison of Procurement Methods
TRADITIONAL
SPEED Not the fastest of method.
Desirable to have all information at tender stage.
Consider two stage or negotiated tendering
COMPLEXITY Basically straightforward, but complications can
arise if employer requires that certain sub-
contractor are used
QUALITY Employer require certain standard to be shown or
described. Contractor is wholly responsible for
achieving the stated quality on site
FLEXIBILITY Employer controls design and variations to large
extent
CERTAINTY Certainty in cost and time before commitment to
build. Clear accountability and cost monitoring at all
stages
COMPETITION Competitive tenders are possible for all items.
Negotiated tenders reduce competitive element
RESPONSIBILITY Can be clear-cut division of design and
construction . Confusion possible where there is
some design input from contractor or specialists
sub contractors and suppliers
RISK Generally fair and balanced between the parties
SUMMARY Benefit in COST and QUALITY but at the expense of
TIME
DESIGN AND BUILD
Relatively fast method. Pre tender time largely
depend on the amount of detail in the employer’s
requirements. Construction time reduced because
design and building proceed in parallel
An efficient single contractual arrangement
integrating design and construction expertise within
one accountable organization
Employer has no direct control over the contractor’s
performance. Contractor’s design expertise may be
limited. Employer has little say in the choice of
specialists sub-contractor
Virtually none for the employer once the contract is
signed. Without heavy cost penalties. Flexibility in
developing details or making substitutions is to the
contract’s advantages
There is an guaranteed cost and completion date
Difficult for the employer to compare proposals which
include for both price and design. Direct design and
build very difficult to evaluate for competitiveness.
No benefit passes to employer if contractor seeks
greater competitiveness for specialist work and
material
Can be a clear division but confused where the
employer’s .Requirement are detailed as this reduces
reliance on the contractor for design or performance.
Limited role for the employer’s representative during
construction
Can lie almost wholly with the contractor
Benefits in COST and TIME but at the expense of
QUALITY
MANAGEMENT
Early start on site is possible, long
before tenders have even been
invited for some of the work
packages
Design and construction skill
integrated at an early stage.
Complex management operation
requiring sophisticated technique
Employee requires certain standards
to be shown or describes.
Management contractor responsible
for quality of work and materials on
site
Employer can modify or develop
design requirements during
construction. Management
contractor can adjust programmed
and costs
Employer is committed to start
building on a cost plan , project
drawings and specification only
Management contractor is
appointed because of management
expertise rather than because his
fee is competition. However
competition can be retained for the
work packages
Success depends on the
management contractor’s skills. A
element of trust is essential. The
professional team must be well
coordinated through all the stages
Lies mainly with employer- almost
wholly in the case of construction
management
Benefits in TIME and QUALITY but at
the expense of COST
In construction ,partnering is usually a contractual arrangement between a client and his /her contractor. It is simply a
relationship where (CII 1991)

All seek win-win solutions;

Value is placed a long term relationship;
Trust and openness are norms;
An environment for long –term profitability exist;
All are encouraged to openly address any problem;
All understand that neither benefits form exploitation of the other;
Innovation is encouraged;
Each partner is aware of the other's need ,concern and objectives;
Overall performance is improved

Partnering

The construction Industry Institute (CII 1991) defines partnering as:

“ a long –term commitment between two or more organization for the purpose of achieving specific business objectives by
maximizing the effectiveness of each participant’s resources. This requires changing traditional relationships to a shared
culture without regard to organizational boundaries. The relationship is based upon thrust, dedication to common goals, and
an understanding of each other’s individual expectations and values. Expected benefits include improves efficiency and cost
effectiveness, increase opportunity for innovation and the continuous improvement of quality products and services”

It is implicit, in this definition, that the three key elements necessary for partnering are trust, long-term commitment, and shared
vision. Trust helps eliminate the traditional adversarial relationship between the participant. Long-term commitment helps reduce
the learning curve for the participants in knowing each other’s principles and expectations. Shared vision is the mutual exchange
of idea between the participants, which helps the parties to accomplish the common goal successfully
What is Partnering?
Partnering involves a series of simple steps. Key stakeholders in a project, usually including the key supplier. Clients, contractors,
consultants and sub-contractors, form a project team. The team then spends time building relationships and identifying common
objectives for the project. This process often involves a value engineering exercise, an examination of documentation and
common issues.

The workshop identifies, apart from common objective, issues resolution strategies, whose key features generally include:-
•Prompt resolution and rapid escalation through management hierarchism, to stop problems festering;
•Use or team based mechanisms

Constant evaluation and monitoring of the partnering performance are critical to successful partnering

Facilitator Monitor
Improved
Performance

Partnering
OWNER CONTRACTOR
Contract

Contractor –led
Owner-led scope engineering
Liason with business procurement
unit performance construction
monitoring

Project
Figure 3- Full Partnering Agreement implementation
Source : NEDC’s Working Party (1991. pp.18)
Comparison Between Partnering and Design and Build

The following are important characteristics of most design and build system (Turner 1990, Franks 1991, and HURL 1992)

• The contractor is responsible for design , construction , organization and control, which means that these activities may
proceed simultaneously in the most advantageous way.
• The client has direct contact with the contractor. This improves lines of communications
• The nature of the design and build contracts tends to restrict changes during construction because of the disruptive and
relatively high price to the contractor and client
• The nature of the system should promote the creation of an integrated design and construction team
• The closer involvement of architects in the building process should e/lead to designs which have a greater appreciation of
construction methods; i.e. improved build ability
• Competition between contractors on both design and or price may be advantageous to a client, but design costs of
unsuccessful tenders may be very significant
• The client’s representatives may supervise the works and ensure that the contractor’s proposal are complied with and that
the work is not skimped

It is clear that the design and build method does help in reducing some of the problems which arise in the traditional contractual
methods. It improve lines of communication between the client and the contractor

It also reduces the problems of design construct ability. However , it is not able to promote the spirit of teamwork and trust
among all parties involved in the construction process.

Therefore, it can be concluded that partnering is the most appropriate contractual method for implementing TQM in the
construction project
 PARTNERING
PARTNERING - WHAT IS IT?

Partnering involves a new way of working . In this US in the 1980’s arising out of the “ design, construct and sue” experiences of
industry practitioners, a number of initiatives were taken that had as their essential feature, the construction of projects based on
the development of shared objectifies, achieved through an open and trusting relationship.

Many industries participants concluded that the ‘hand to hand’ combat, which has been a feature of relationships between
industry stakeholders, had in the end, benefited no-one.

Partnering, in its simplest form, is a commitment between two or more organizations for the purpose of achieving specific
business objectives by maximizing the effectiveness of cooperation

Partnering involves a series of simple steps. Key stakeholder in a project, usually including the key supplier, clients, contractor,
consultants and sub-contractor, form a project team. The team then spends time building relationships and identifying common
objectives for the project. This process often involves a value engineering exercise, an examination of documentation and
common issues

Surveys have found the following results are achieved through partnering arrangements;
•Less adversarial relationship;
•Improves resources planning;
•Increased openness;
•Increased trust;
•Improved safety;
•Fewer errors; and
•There have been significant reduction in engineering cost (up to 10%) and a reduction in the order of 6% in administrative costs
Partnering aims to:

• Meet the objectives by co-operation, team building and mutual trust rather than by confrontation
• Develop a win-win culture
• Place value on long term relationships;
• Develop an environment for long term profitability;
• Encourage innovation;
• Encourages better project definition
• Lower the project cost through the process of value engineering;
• Reduce project time an improve quality
• Eliminate contractual conflict
• Establish a more dynamic organizational structure and clear lines of communication

The workshop on partnering was conducted and it is identifies, apart from common objectives, issues resolution strategies,
whose key features generally include:

• Prompt resolution and rapid escalation through management hierarchies to stop problems festering
• Use of team based mechanisms

Constant evaluation and monitoring of the partnering performance are critical to successful partnering

Systematic

The partnering relationship will be systematic in nature, it cannot depend solely on individuals
Competitive Edge

All parties seek new ways to lower cost and differentiate themselves to gain competitive advantages

Benefits for the Project Owner

• Reduced exposure to litigation through open communication and issues resolution strategies

• Lower risk of cost over-runs and delay, because of better time and cost control over the project’

• Better the quality product. The percentages are focused on the ultimate goal and are not misdirected to adversarial concern

• Potential to expedite projects through efficient implementation for the contract

• Open communication and unfiltered information allows for more efficient resolution of problems

• Reduce risk of pressure group disrupting the project through the involvement of end user and other stakeholders in project
partnering

• Lower administrative costs because of elimination of defensive case building

• Increase opportunity for innovation through open communication and trust especially in the development of value
management changes and build ability improvements

• Increased opportunity for a financially successful project because of a non adversarial attitudes
The Central Elements of Partnering

Long-term commitment
Experience show that the benefits of partnering are not achieved quickly. Trust enables combining the
resources and knowledge of each partner in a fashion to eliminate adversarial relationships. Partners are
then able to share information, tolerate contact with each other and accept diminished control resulting in
enhanced capabilities for the partnering relationship

Shared Vision
Each of the partnering organizations must understand the need for shared vision and common mission for the
partnering relationship

Equity
The strength of partnering is derived from the synergy of the two organizations permitted through a
relationship based on equity and parity

Investment
All parties invest in partnering

Synergism
A synergistic environment will promote the open exchange and consideration of ideas. The “not invented here”
is avoided

Share Risk
All parties take opportunity risk commencing with their reward and the concepts unique to their partnering
relationship
Rewards
Their must be advantages and opportunities. All parties should expect more than is available in other relationships
commensurate with their investment and risks

Benefit to Contractors

• Reduced exposure to litigation

• Increased productivity because of elimination of defensive case building

• Expedited decision making with issues resolution strategies

• Better time and cost control over project through improved information sharing and flow, clear definition of objectives and
reduces re doing of work

• Lower risk of cost over-runs and delays because of better time and cost control over project

• Better quality management through a culture and organizational structure conducive to TQM. Implementation

• Better integration of materials management through improved communication and team approach

• Quicker responsive time to questions and speedier processing of variations

• Increasing opportunities for a financially successful project because of a non adversarial attitude

• Opportunity to increase margins through cost sharing of post tender value management saving splitting;

• Improved industrial and safety through team approaches and sub-contractors involved in planning and monitoring;
Benefits to Project Architect Engineers & Consultants

• Reduced exposure to litigation through communication and issues resolution strategies;

• Minimized exposure to liability for document deficiencies through early identification of problem,
continuous evolution and co-operative resolution which can minimize cost impacts;

• Enhanced role in decision making process as an team member in providing interpretation of design intent
and solution to problem;

• Reduced administrative cost because of elimination of defensive case building and avoidance of claim
administration and defense cost

• Increase opportunity for a financially successful project because of non-adversarial attitude;

 Benefits to Sub-contractors and Suppliers

• Reduced delay through project team involvement in industrial and safety issues;

• Reduced exposure to litigation through communication and issues resolution strategies

• Equity involvement in project increase opportunities for innovation and implementation of value
management in work

• Potential to improve cash flow due to fewer disputes and with held payments;

• Payment decision making costly claims and saves time and money

• Enhances role in decision making process as an active team memlx: rs; and

• Increased opportunity for a financially successful project because of a non adversarial attitude
Table 2 Prioritisation of risks Factors by the respondents
ALL Contractor Clients Lenders
PFI Related Risks
Index Rank Index Rank Index Rank Index Rank

Design Risk 0.765 1 0.786 1 0.738 5 0.769 10

Construction Cost Risk 0.750 2 0.771 2 0.677 6 0.800 6
Performance Risk 0.746 3 0.700 3 0.757 2 0.785 8
Delay Risk 0.740 4 0.671 4 0.738 5 0.800 7
Cost Overrun Risk 0.735 5 0.700 5 0.662 9 0.846 3
Commissioning Risk 0.720 6 0.571 6 0.785 1 0.846 5
Volume Risk 0.715 7 0.657 7 0.646 10 0.815 2
Operating/maintenance Risk 0.690 8 0.657 8 0.738 4 0.846 13
Payment Risk 0.688 9 0.643 9 0.554 14 0.667 1
Tendering cost Risk 0.670 10 0.686 10 0.554 17 0.769 9
Contractual Risk 0.668 11 0.686 11 0.643 11 o.769 15
Legal Risk 0.635 12 0.643 12 0.554 19 0.708 12
Market Risk 0.620 13 0.600 13 0.554 16 0.708 11
Residual value risk 0.615 14 0.571 14 0.600 12 0.677 14
Planning Risk 0.585 15 0.629 15 0.554 18 0.569 19
Environment Risk 0.585 16 0.586 16 0.671 8 0.492 23
Safety Risk 0.575 17 0.486 17 0.677 7 0.569 20
Financial Risk 0.570 18 0.629 18 0.492 22 0.586 18
Credit Risk 0.565 19 0.457 19 0.400 24 0.846 4
Possible change in government 0.560 20 0.500 20 0.523 20 0.662 16
Project life risk 0.525 21 0.543 21 0.600 13 0.431 26
Changes in European Legislation 0.525 22 0.471 22 0.569 15 0.538 22
Development risk 0.517 23 0.543 23 0.514 21 0.492 24
Banker Risk 0.490 24 0.486 24 0.354 26 0.631 17
Debt Risk 0.475 25 0.486 25 0.385 25 0.554 21
Land Purchase Risk 0.430 26 0.400 26 0.415 23 0.477 25
The ten most important risk factors base on the table are related to design construction cost, platformance, construction delay,
cost overrun, commissioning, operating maintenance, payment and tendering cost
The table also show that all these ten risk factors were ranked among the ten most important risks by each group with the
exception of operating and maintenance risk which was ranked at 13 th position by the lenders and commissioning risk ranked 17 th
by the contractors

The credit risk which was ranked highly by the leader’ group ranked 19 th overall. Environment risk and safety risk which were
ranked 16th and 17th overall respectively were among the most important risk factors to the client

The consistently least important risk factors overall and within the groups are associated with land purchase, debt, bankers,
development changes in European legislation, project life and possible change in government. Contrary to expectation political
risk in the form of European legislation and possible change in government were ranked lower; this is probably because the
Labour Party (UK opposition parry) is committed to the principle behind PFI (Court, 1996)

Design Risk

The private sector is responsible for the design of the asset in PFI and it is necessary in any PFI proposal to specify output and
performances targets. In addition to physical requirements (Hornagold, 1995) The asset design should meet the performances
requirement specified by the client

The less detailed the output specification, the higher probability of providing innovative design and service solution by the
promoter. It is not surprising that this is of a major importance to both contractors and clients.

For the client the risk, of design changes is an important one. If There are several design changes instituted by a statutory
authority, the client would be expected to pay for them. Design changes are critical to contractor’s budget estimate and overall
progress.
Although ,PFI schemes are mostly designs-by the PFI consortium, in which case the contractor (where the consortium is led by a
contractor) has overall control of the design , the contractors claimed this was the most important risk factor.

Public sector projects have been usually procured by ‘traditional procurement’. In Which the client (public sector) bears the
design risk. This change in design culture for public sector projects may have constituted a shock to contractors with attendant
high ranking of design risk

Design risk is one important risk that the public sector is willing. To transfer to private sector. Although the lenders ranked the risk
at tenth position, this may be due ‘ to their lack experience of construction projects and process.

Construction cost risk

Cost associated with PFI. Including the cost of construction repairs operating and maintenance, need to be evaluated in weighing
up the risks and rewards of PFI Projects. Added to third is the uncertainty of tax treatment, as certain tax assumptions have to be
made when preparing a bid and these assumptions which cannot be altered if they turn out to be incorrect (Willets, 1996).
Construction cost is a major part of these costs
Construction cost risk is concerned with the reliability and accuracy of tender estimate for construction. This is a major concern to
all the parties. This cost is usually taken into account in modeling the cost of services that the asset providers

The contractors ranked it second with an index of 0/771. Contractors will be extremely concerned about their cash flow and will
attempt to judge reasonably accurately the contract financial position.
Public sector's intensity of use o f construction facilities do change over time it important that the risk associated with these
changes is reflected in the construction cost. This is also important to the financial institutions that provide working capital for
contractors;

It is obvious that the FPI projects financiers would want to be assured that the cost is accurately determined by the contractor
and that the revenue structure of the projects can cope with the construction cost. Design risk is directly linked to construction
cost risk; design changes during the work progression can effort the overall construction cost structure

Performance risk

A PFI business case or proposal must specify both the function And performance requirements for the scheme. The performance
risk is related to definition of inappropriate output requirements o changes to output needs by the client

Since the PFI Projects are occurred on the basis of output specifications, client performances risk will include failure of the asset
provided by services provider (concession company or the Special Purposes Vehicle) to meet the specified requirement of the
client. The client would obviously be concerned at all stages of the projects development about the ability of the faculty to meet
the expected requirements.
Contractors concerns would include the possibility of the facility not meeting the client’s need. Considering this, it is expected
that FPI Contractor s would adopt some form of quality assurance and control strategy to ensure that the contract develops
without major problems.

The lenders’ primary objective is to retrieve the capital invested with a profit where possible. It Is in lenders therefore to monitor
the contract and the contractors performances and to ensure that the scheme runs smoothly.
Project Delay Risk

This relates to the possibility of the asset and consequently the services not being available at the scheduled time for use by the
client. Both the contractor and the lender would no be paid anything until the facilities is completed with the possibility of
penalties being applied; if the delay is attributable to the action of the PFI consortium. The delay could also affect the
clients' programme.

Delay risk could also be as result of delay in PFI contract negotiation. This position is corroborated by the contract Journal and
knowles (1961) survey on PFI which reported that the private sectors wants clients to speed-up PFI contract letting, but
clients are reluctant to commit to negotiating timetable to speed up PFI

The client would obviously be eager to have the smite delivered as expediently as possible and delayed provision of the facilities
could cause extensive financial harm and affect the client’s programmed. The risk is important to both contractor and
lenders as an delay in provision of the asset may affect the project revenue anti flow regime.

Project cost overrun risk

A project cost overrun would obviously have an impact on the profit margin of the PFI consortium. Such an overrun could be as a
result of innumerable factors including lack of effective risk management, misunderstanding of the balance of risk, poor
design and cost information, unrealistic construction programmed, etc

Any of these could result in the overall coat of the project being exceeded. Whatever the source of cost ever run, this risk is of
major concern to the PFI parties. To the contractors any overrun in cost could have effect an profit margin including
additional finance charges on the capital borrowed

However, it is expected that any increased cost arising from poor initial cost estimates, delays In design and construction or
failure to meet specified requirements should in principle be wholly met by the private sector operator/services provider
(Private Finance Panel, 1996a) as the private sector operator has overall control and is responsible for the design and
construction of the asset
Commissioning Risk

Commissioning risk relates to the , possibility of the asset and services commissioning taking longer than
planned and how the asset is to be used upon its completion. Delays in commissioning the asset may
result from time overrun in design and construction of the asset.

These delays in commissioning against schedule may affect the clients' programmed. However, The private
Finance Panel (1996a) expects that responsibility for the commissioning of the asset with its associated
risk should lie with the private sector operator

The client would want the asset commissioned within an agreed period and should be concerned with the
delivery and assets performance. They have funded is going to be used ; any delay in asset commissioning
may have impact on the recovery of the capital invested
Volume or Demand Risk

Volume risk is associated with the future use (frequency of use) of the facilities and it determines the payment stream by the
client for the services that the facilities provides. Although transfer of volume risk to the private sector is an important
feature of most PFI projects, the most important aspects of demand is the extent to which it can be forecast and allow the
degree or risk to he assessed with some confidence

This is generally agreed upon as being difficult to achieve . In relation to prison contract, the position has been clarified, the
public sector is expected o bear volume risk associated with prison schemes as the number of prisoners is outside the
control of the private sector and it cannot assume volume risk for this ( Private and Finance Panel, 1996b; Landers. 1996)

There are many factors that could determine the future use of the facility. For example, Martin, (1996) identified unpredictability
in road tax, petrol, prices or die advent of competition (another new road or railway) as factors that could determine the
future volume of traffic for DBFO road projects. Volume risk could also depend on advances in technology which can made
the use of the facilities obsolete before the expiration of the contract period

The risk has a direct impact payment for the services provided by the asset and consequently the recovery of capital invested but
the lender
Operating and maintenance risk

The PFI consortium is expected to operate, effect repairs and maintain the asset throughout the contract period to an agreed
quality standard and to ensure continuity and quality of services of the asset. The main risk associated with PFI
maintenance is associated with determination of how often over the contract period, major repairs and maintenance of the
assets will be undertaken. This information will have some bearing on the costs of building, repairing and maintaining the
asset

The client ranked this risk highly; even though the public sector is expected o retain as little operational control and responsibility
as possible on the asset ( Private Finance Panel 996a); The clients high ranking of the risk factors perhaps reflect concern as
to how the asset operation and maintenance together with the associated costs would develop after construction is
completed and the asset in use and perhaps also due to the public sector’s inexperience of PFI schemes.

Where a contractor lacks appropriate facility operation and management capability within its establishment. It is important to
bring into the consortium a facility management group. Since most contractor usually alck the experience of delivering a
facilities management service for a long contract period it is not surprising that this risk is ranked important to the
contractors. Inaccuracy in the prediction of the both operating and maintenances cost will affect the possibility of the
projects lenders recouping their capital investment when due. Because PFI scheme are a relative novelty it is very difficult
for lenders to predict how these costs associated with operating and maintaining PFI Schemes will perform
Payment Risk

The pricing and payment structure for PFI schemes are agreed between the client and facility provider, at the outset of the
contract. Payments relate to performance and availability of the facility (Allen, 1995). The Scottish office (1996) has
classified the payment mechanism: into four type; availability charges, performance charges, usage charge and final
payment for sale at the end of a services agreement.

Availability payment is not paid until the construction is completed and the flow of services commences ad performances
payment is not paid in . Full if the facility fails to meet agreed standards with the client. Usage payment is not received fully
if the levels of usage of the facility falls below the expected level and the final payment for sale anticipated at the beginning
of the services agreement may not be realized due to technologies change or changes in market conditions

No payment will be due until the facility is up and running, delivery the specified output. In essence, payment risk is determined
by a combination of design , construction, operation, volume tired-technological charge risks. To mitigate some, of the
sources of payment risk it is essential that the revenue streams associated with PFI project be clearly identifiable

Special contract condition are drafted for each PFI contract and may contain different payment terms compared with that of the
traditional conditions Lender’s would be concerned due to possibility of payment not forthcoming as result of the various
rinks associated with payment.

The reason why the contractors, might have ranked the risk tenth and lender’s first could be any of the following: the contractors
has traditionally worked for public sector clients and they find them reliable in honoring contract payments: contractors
have less to lose than lenders if payment is nit forthcoming; financial institutions' inexperience of direct public sector
funding; complexity of PFI payment mechanism; the excessive length of the PFI contract period for PFI and capital
investment recovery: etc
Tendering cot risk

The Akintove and Dick (1996) survey showed that bidding cost is recognized by 85% of the contractors surveyed as a major
problem in PFI. This is supported by a more recent survey by Contract Journal and Know led (1996) which showed that
respondents rated the both the cost of bidding and unsatisfactory bid process at 8 out of a scale of 10 as reasons why PFI is
unattractive to them.

Their findings showed that the respondents would like to see partial reimbursement of tendering cost as a key method of
overcoming the shortfall of risk capital. Travers (1996) reckoned that the cost of preparing a PFI bid could be as much as £0.5
m depending on the size of the job as a result even the biggest contractors would baulk at risking such sums time after time
with no guarantee of a payback.’

Many contractors have refused to get involved in PFI contracts because of the risk associated with tendering ( Akintoye and Dick,
1996). Though the clients ranked the risk very low, it is important for them to recognize that high tendering costs would
have impact on competition for PFI schemes with fewer competitive tenders being submitted: This may lead to less choice
and higher costs for the client

The Lenders ranked this risk fairly high; however, contact, journals and knowles (1996) surveys showed that the financial
institutions are likely to supply funds needed to bid for PFI schemes to a lesser extent compared with either contractor,
industrialists of PFI operator. This tends to suggest that lenders are more likely to fund successful PFI schemes rather that
being involved as a member of a consortium in tendering for PFI projects.