A COMPARATIVE STUDY ON THE PROCUREMENT METHODS USED IN THE CONSTRUCTION INDUSTRY OF SOUTH AFRICA

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A COMPARATIVE STUDY ON THE PROCUREMENT METHODS USED IN THE CONSTRUCTION INDUSTRY OF SOUTH AFRICA Oluwaseun O. Oshungade 1 and Deon Kruger 2 1 Postgraduate School of Engineering Management, University of Johannesburg, South Africa oluwaseun.oshungade@gmail.com 2 Department of Civil Engineering Science, University of Johannesburg, South Africa dkruger@uj.ac.za ABSTRACT An indicator of an effective construction industry is the completion of a construction project on time, on budget, and on specification, which are all considered to be major project objectives. However, in the South African context, over and above these criteria, empowerment and employment creation are also considered to be crucial project/client objectives. All of these project objectives may be impacted on by the procurement methods used. Typical procurement methods include traditional, design/build (DB), and construction management (CM) procurement techniques. This study compares these procurement methods which are all used within the South African construction industry in order to analyse and determine which method would best improve the project objectives. This study was carried out using a desktop study and an interview. The findings of this study show that the traditional method of procurement is currently the most used route used for procurement in construction project in South Africa. Moreover, the findings also reveal that using the DB method will improve the project/client objectives. Based on this, the study concludes that the DB method will produce the best outcome in terms of the project/client objectives in the South African construction industry. The study thus suggest that public sector clients such as government and city councils, should be advised on the benefits of using the DB methods for procurement of their construction projects, as it will lead to the accomplishment of most of their project objectives. Keywords: Construction industry, Construction management, Design/build, South African Construction projects, Traditional procurement. INTRODUCTION According to Sunjka and Jacob (2013), the construction projects involve processes which are complex and dynamic. Construction projects involve a number of stakeholders and discrete business individuals such as professionals, investors, manufacturers, trade contractors, and others (Sunjka and Jacob, 2013). A large range of infrastructural facilities such as housing, water, power supply, transportation, waste disposal and manufacturing, are been produce by the construction industry (Ibrahim et al. 2014). This industry also has an exceptional ability to develop individuals by providing for human daily needs, creating employment, and generating investment and therefore, the socio-economic impact of this industry on the economic growth of any nation can never be underscored (Ibrahim et al. 2014). In addition, governments utilise this industry to assist in economic recoveries from recessions (Baloyi and Bekker, 2011). As stated by the South African Construction Industry Status Report (2004) as cited by Baloyi and Bekker (2011), the industry amounts for over 10% of the world s economy. In South Africa (SA), the construction industry contributed to about 35% of the Gross Domestic Fixed Investment in 1997 (Nkado, 1999). However, for the construction industry to be effective, projects must be completed on time, on budget and on agreed quality. These triads time, cost (budget), and quality are often referred to as the primary project objectives which must be achieved in order for a construction project to be successful. Also, from a project management perspective, the fulfilment of these primary project objectives is seen as the main criteria for a successful project (Chan and Kumaraswamy, 1997). Using effective and efficient procurement methods are prerequisites for optimizing project performance (Oladinrin et al. 2013; Muriro and Wood, 2010). Procurement methods are referred to as a structured process or procedural method used by owners to acquire construction products and services (Oladinrin et al. 2013). These procurement methods are mainly categorised into two types traditional and alternative procurement method (Figure 1) (Thwala and Mathonsi, 2012). Procurement methods have undergone developments and refinements over the years. This is due to the inadequacies of the traditional procurement method which was the most common (and often the only) construction procurement method until the early 20th century (Konchar and Sanvido, 1998). Owing to the inadequacies of the traditional procurement method, researchers came up with innovative procurement methods often referred to as alternative procurement methods (Shrestha et al. 2012). These alternative procurement methods include the Design/Build (DB), the Construction Management (CM), and the Management Contracting Procurement (MCP) method (Shrestha et al. 2012). The aim of this study is to compare the different procurement methods used in the construction industry of SA. For the purpose of this study, the procurement methods are limited to DB and CM procurement method as an alternative to the 4» 3 rd IPMA Research Conference» ISBN: 978-0-86970-792-0

traditional procurement method. Thus, this paper presents a comparative study on the procurement methods used in the construction industry of SA. PROCUREMENT METHODS Various terms have been used by a number of researchers and practitioners for the term procurement method. Related terms to procurement methods include terms such as project delivery methods, procurement systems, procurement routes, project approach and contractual arrangement. Hence, for this study the term procurement method is used. Procurement method is that method that is used in securing a project (Adenuga, 2013). According to Shrestha et al. (2012), the procurement method is a process by which the component of design and construction, including the roles and responsibilities of parties involved, sequences of activities, cost of materials and labour are combined to deliver a project. It is a method for clients/owners to provide and fund constructed facilities (Shrestha et al. 2012). Procurement methods have turn out to be a crucial subject in the construction industry because construction involves a series of processes that are interrelated and sequential for the procurement of construction projects (Oladinrin et al. 2013). The success or failure of projects depends on the effectiveness and efficiency of these processes. From the mid 1960s to date, a number of procurement methods have emerged and are in use in the construction industry (Adenuga, 2013). Figure 1 show the two principal procurement methods. Procurement Methods Traditional Alternative TRADITIONAL PROCUREMENT METHODS The traditional procurement method is that procurement method which offers the clients three separate sequential tasks of design, bid, and build (Oladinrin et al. 2013). This method has been in existence ever since the end of the 18th century (Mbanjwa, 2003). For this method, the client is leading the project. Also, the client is in contract with two entities, namely the design consultant and the contractor. The client relies on the design consultant who may be an architect or consulting engineer to carry out the design work and also supervise the construction (Thwala and Mathonsi, 2012). The design consultant prepares the design and contract documents for the project after which, the main contractor is then procured by invitation of bids based on the detailed design documents prepared by the client and design consultant (Eriksson and Westerberg, 2011). The main contractor can be appointed through one of these three tendering methods open, selective and negotiated tendering (Thwala and Mathonsi, 2012). ALTERNATIVE PROCUREMENT METHODS Figure 1: Classes of procurement methods The word alternative procurement method denotes every other procurement methods other than the traditional procurement method used in construction and may also be referred to as non-conventional procurement methods (Thwala and Mathonsi, 2012; Oladinrin et al. 2013). These non-conventional procurement methods do not only consider the design and build aspects of a project, but also considers operating, financing and the managing of the project (Thwala and Mathonsi, 2012). There are three main variants of alternative procurement method integrated, management-oriented, and collaborative procurement methods (Thwala and Mathonsi, 2012). The integrated procurement method is often referred to as DB procurement method. For the purpose of this study, both the DB procurement and CM procurement methods as variants of the managementoriented procurement method will be further discussed in the next two subsequent sections. Design/Build (DB) procurement methods The DB procurement method is a procurement method where the two sequential phases of design and build are recognised as a single task. This method gives the client a single point of contact in which the client is in contract with only one entity, namely the main contractor (Grobler and Pretorius, 2002). In this method of procurement, the main contractor is responsible for both the design and construction of the project and all the phases of project from conception through design and construction are handled by the main contractor (Oladinrin et al. 2013). There are three variants of the DB procurement method direct, develop and construct, and competitive (Mbanjwa, 2003). An example of a project where the DB procurement method was use by the City of Johannesburg as client is in the construction of Nelson Mandela Bridge (Grobler and Pretorius, 2002). ISBN: 978-0-86970-792-0» 3 rd IPMA Research Conference» 5

Construction Management (CM) procurement methods This method unites the three-party construction players consisting of the client, the designer and the contractor in a nonadversary relationship (Oladinrin et al. 2013). It also provides the client with an opportunity to partake fully in the construction process. This method is a fee-based arrangement in which the construction manager is fully responsible to the client and acts in the client s interest during every phase of the project (Oladinrin et al. 2013). Under this arrangement, all construction contracts are implemented directly between the client and contractors. This method allows the construction work to be broken down into a number of trade contracts and various specialists eliminating the need for one or more main contractors (Mbanjwa, 2003; Oladinrin et al. 2013). An example of a project which the CM procurement method was utilised by the City of Johannesburg as client was during the construction of new taxi rank at the Park Station (Mbanjwa, 2003). Comparison of procurement methods The selection of the right procurement method is crucial for all project stakeholders and is an important element which adds to project success and the overall client s fulfilment (Muriro and wood, 2010). These procurement methods Traditional, DB and CM procurement methods all have both advantages and disadvantages. Therefore, in selecting the most appropriate procurement method for a particular project, the pros and cons need to be considered carefully. Table 1 presents some differences and similarities amongst the procurement methods. Konchar and Sanvido (1998) conducted research on the comparison of U.S. project delivery systems and they found that the DB procurement method achieves significantly improved cost and schedule advantages over the CM and traditional procurement methods. In addition, it will also produce equal and sometimes more desirable quality performance than CM and the traditional procurement methods. Recent research conducted on the effects of selected procurement systems on building project performance in Nigeria revealed that the DB method is more cost effective than the other methods (Oladinrin et al, 2013). In the same research, it was also found that the CM method is the most appropriate method for achieving best quality. Table 1: Comparison of the various procurement methods Traditional DB CM 1 Client design and construct sequentially Client design and construct simultaneously Client design and construct separately 2 Client selects a contractor to perform construction work Client selects a contractor to perform both design and construction work Client selects a contractor to perform construction management services and construction work 3 Two separate contracts One single contract Two separate contracts 4 Design company only provide the complete design document and contractor perform the construction Contractor/design company perform both the design and construction Contractor has significant input in the design process and also perform the construction PROCUREMENT PERSPECTIVES IN SOUTH AFRICA South Africa (SA) with its industrialised economy is faced with many socio-economic challenges. These challenges have an effect on the South African construction industry. As a result of these socio-economic challenges, project objectives are no longer being determined only in terms of the primary objectives of the project (Mbanjwa, 2003). As stated, the following are considered as secondary objectives of any public project: transfer of skills, community empowerment and employment creation for the upliftment of the socio-economic status of Historically Disadvantaged Individuals (HDIs) (Mbanjwa, 2003). Hence, in selecting the right type of procurement method for a particular project in SA, the primary and secondary objectives of a project must both be considered. Also, selecting the right type of procurement method depends on the type of client and project public or private sector client or project. In SA, the public sector project s objectives differ from those of the private sector. Public sector project objectives include both primary and secondary objectives while private sector project objectives mainly focus on the primary objectives of the project (Mbanjwa, 2003). Thus, procurement methods in use in SA will be compared to determine which one will best satisfy the different projects/clients objectives. PROCUREMENT METHODS IN SOUTH AFRICA Grobler and Pretorius (2002), highlighted the three types of procurement methods used in SA while Mbanjwa (2003), added Management Contracting Procurement (MCP), and Design and Manage (D&M) to this list. The involvement of the various project participants clients (public and private), designers and contractors in the different procurement methods and sectors are important when considering the best procurement method to use. The evaluation of the best procurement method is also based on the different project objectives/selection criteria in respect to the responses of the various project participants. 6» 3 rd IPMA Research Conference» ISBN: 978-0-86970-792-0

Involvement of the project participants in the different procurement methods and project sectors The project participants include public and private sector clients, designers, and contractors. Table 2 present the analysis of a survey conducted by Grobler and Pretorius (2002) on the involvement of project participants in the building and civil engineering project sector in SA. The average percentage by weight of the different project sectors is indicated in the table. These percentage numbers indicate that the majority of the project participants fell into the category of civil engineering construction. This means that 51.3% of the project participants were engaged with civil engineering project while 48.7% of the project participants dealt with building projects. This implies that the majority of the project participants were involved with civil engineering projects. Table 3 present the breakdown of the survey conducted by Grobler and Pretorius (2002) on the involvement of the project participants on the use of the different procurement methods in SA. Comparing the usage of traditional, the DB, and the CM procurement methods with each project participants, it can be deducted that public sector clients, designers, and contractors use the traditional procurement method more than the other methods for execution of public construction projects in SA. On the other hand, the private sector clients utilize the DB method more than the other methods for private construction projects in SA. Table 2: Involvement of project participants in the building and civil engineering sector (Adapted from Grobler and Pretorius, 2002) Sectors Project Participants Building Civil Engineering Public sector clients 2% 98% Private sector clients 92.5% 7.5% Designers 35% 65% Contractors 66% 34% Average by weight 48.7% 51.3% Table 3: Involvement of project participants in the different procurement methods (Adapted from Grobler and Pretorius, 2002) Procurement methods Project Participants Traditional DB CM Other Public sector clients 54% 11% 0% 35% Private sector clients 30% 44% 5% 21% Designers 77% 19% 2% 2% Contractors 59% 29% 6% 6% Table 4 indicates the percentage by weight of the procurement methods used in construction projects in SA. From the table, it can be seen that the traditional procurement method has the highest percentage usage by weight. This can further be buttressed by the survey Mbanjwa (2003) carried out on the use of procurement methods for delivering construction projects in SA. His survey revealed that the Traditional procurement method was the most widely known method implying that the project participants have an excellent knowledge of this method. Table 4: Percentage by weight of the procurement methods (Adapted from Grobler and Pretorius, 2002) Procurement methods Project Participants Traditional DB CM Other Average by weight of project participants (%) 62 28.6 1.4 8 ISBN: 978-0-86970-792-0» 3 rd IPMA Research Conference» 7

Comparison of the procurement methods in terms of project objectives/selection criteria This section gives a comparison of the procurement methods in terms of time, cost and quality while the secondary project objective is also considered. The comparison of the procurement methods in terms of project objectives/selection criteria is shown in Table 5 (Adapted from Grobler and Pretorius, 2002). The table points out the average percentage number by weight of project participants whom are in support of each procurement method to have satisfied each project objectives/selection criteria listed in the table. From the table, it can be seen that the DB methods outweighs the traditional and CM methods. It must be noted that in Mbanjwa s survey (2003), he determined that the CM method will best satisfy the empowerment and employment creation as the secondary project objective criteria in the South African context. Table 5: Comparison of the various procurement methods in terms of project selection/objectives criteria (Adapted from Grobler and Pretorius, 2002) Project objectives/selection criteria Procurement methods Average by weight of stakeholders 1. Procurement method which can best DB 66.6% establish project cost before start of the Traditional 20.8% detailed design. CM and Other 12.6% 2. Procurement method which can best establish schedule. 3. Procurement method which leads to shorter project duration. 4. Procurement method which will give better value for money. 5. Procurement method which is best suited for large and complex projects. 6. Procurement method which is best suited for small projects. 7. Procurement method which is more flexible regarding changes to the scope of work. 8. Procurement method which leads to better communication between stakeholders. 9. Procurement method which have fewer disputes and claims. DB 66.5% Traditional 20.8% CM and Other 12.7% DB 77% Traditional 8.6% CM and Other 14.4% DB 60.5% Traditional 25.1% CM and Other 14.4% DB 41.7% Traditional 45.8% CM and Other 12.5% DB 66.9% Traditional 16.5% CM and Other 16.6% DB 60.5% Traditional 26.7% CM and Other 12.8% DB 70.9% Traditional 14.6% CM and Other 14.5% DB 79.3% Traditional 8.3% CM and Other 12.4% METHODOLOGY The aim of the study was to investigate the best procurement method which leads to the optimization of project/ client objectives within the SA construction industry. This study was carried out using a desktop study and an interview. A desktop study involved a critical review and analysis of related published literature relevant to the study. This relevant published literature, ranges from published articles, journal and magazine articles, and relevant books. Through these sources of information, much relevant data was obtained. This data can be quantitative data or qualitative data. Quantitative data deals with numbers while qualitative data deals with descriptions. In this study, quantitative data was obtained and used for the analysis of this study. In Section 3, the detail of the quantitative data obtained and used for the analysis of this study is presented. 8» 3 rd IPMA Research Conference» ISBN: 978-0-86970-792-0

An interview is a purposeful interaction between two or more people (Saunders et al. 2012: 372). Interviews can be structured, semi-structured and in-depth (Saunders et al. 2012: 374). Structured interviews are used in descriptive study; semi-structured interviews are used in an explanatory study and in-depth interviews in exploratory study (Saunders et al. 2012: 377). In this study, a structured interview was used. The interview was conducted with a relevant stakeholder in the City of Johannesburg, which is the economic hub of South Africa. Table 6: Demographic information of the interviewed stakeholder Demographic information Sector Civil engineering Years of experience 14 years Employment category Client Qualification M.Sc. Role of employment Director Tables 6 and 7, presents the demographic information of the interviewed relevant stakeholder and a list of questions asked during the interview. Table 7: List of questions asked during the interview Procurement methods Description of questions Traditional DB CM Others Procurement method with the highest number of usage Procurement method which will best satisfy time Procurement method which will best satisfy cost Procurement method which will best satisfy quality Procurement method which will best lead to empowerment and employment creation Most preferred procurement method FINDINGS AND DISCUSSION The findings of this study are based on a literature review as well as interviews with a senior construction staff at the department of infrastructure and services in the City of Johannesburg. The details of the interview are discussed in the last paragraph of this section. The findings in terms of involvement of project participants in the different project sectors and procurement methods is as shown in Figures 2, 3 and 4 respectively. These figures are derived from Tables 2, 3, and 4 in Section 3. Figure 2 indicates the involvement of project participants in the different project sector and it can be deduced that the majority of the public sector clients deal with civil engineering project while a large component of the private sector clients are engaged with building project. Likewise, the designers and contractors also follow a split trend implying that a significant proportion of designers fall into the civil engineering project sector whereas a high number of the contractors fall into the building project sector. However, going by the average weight of the project participants, the split is almost 50/50 with the project participants dealing with either civil engineering or building projects. As shown in the figure, the public sector clients are the highest project participants dealing with civil engineering projects while their private counterparts are the lowest. This indicates that the South African government (public sector clients) invest largely in infrastructural projects rather than building projects. ISBN: 978-0-86970-792-0» 3 rd IPMA Research Conference» 9

Procurement Methods Sectors Oshungade & Kruger 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Public sector clients Private sector clients Designers Contractors Average by weight of project participants Civil Engineering 98 7,5 65 34 51,3 Building 2 92,5 35 66 48,7 Figure 2: Involvement of project participants in the different construction sectors in SA Figure 3 presents the involvement of project participants in the different procurement methods and indicates that designers are the highest user of traditional procurement methods. Other project participants contractors, public sector clients and private sector clients are rated 2nd, 3rd and 4th respectively in terms of traditional procurement methods usage. Similarly, from the figure it can be seen that the private sector clients are the highest user of DB procurement method. Following closely to the private sector clients, is the contractors, while the designers are third in line while the public sector clients indicate the lowest usage. Likewise, the figure shows that the contractors are the highest user of CM, follow by private sector clients and designers. However, from the figure it shows that the public sector clients don t use the CM procurement method. In summary, the highest user of traditional, DB and CM procurement methods are designers, private sector clients and contractors respectively. 80 70 60 50 40 30 20 Traditional DB CM Other 10 0 Public sector client Private sector client Designers Contractors Project Participants Figure 3: Involvement of project participants in the different procurement methods in SA Figure 4 shows the percentage by weight of the procurement methods used for construction projects in SA. From the figure, the traditional procurement method has the highest percentage at 62%, followed by DB with 29%, with CM as the lowest at about 1%. From this, it is obvious that amongst the three procurement methods used for construction projects in SA, the traditional method despite its shortcomings, is still the most popular and frequently use method. This is probably due to its long and entrenched existence, less awareness by role players of the other procurement methods, the advantage of empowerment and employment creation offered, and reluctance to change by the South African construction industry project participants due to the South African government legislation on procurement. 10» 3 rd IPMA Research Conference» ISBN: 978-0-86970-792-0

Procurement Methods Oshungade & Kruger Percentage by weight of the procurement methods CM Other 1% 8% DB 29% Traditional 62% Figure 4: Percentage by weight of the procurement methods used in SA From Table 5, it was seen by comparing the project objectives/selection criteria that the DB procurement method was most highly rated by all stakeholders. Figure 5 presents a comparison of the procurement methods in terms of the major project objectives of time, cost and quality and it can be seen that the DB method received the highest percentage score, followed by the traditional method and lastly the CM. This implies that the DB method will best fulfil/improve the major project objective of time, cost, and quality. Thus, the DB procurement method will produce the best result as compared with traditional and CM procurement methods in terms of the major project objectives of time, cost, and quality. 70 60 50 40 30 20 DB Traditional CM 10 0 Time Cost Quality Project Objectives Figure 5: Comparison of the procurement methods in terms of major project objective in SA Lastly, during interviews with a senior construction staff employed by the Department of Infrastructure and Services of the City of Johannesburg, it was revealed that the usage of the traditional procurement method for construction projects in SA is very high in comparison with the DB and CM methods (Manqoba, 2014). Comparing this finding with the presentation in Figure 4, it can be seen that both findings prove that the traditional procurement method is still the most popular method used in the South African construction industry. The reason for the high usage of the traditional procurement method for construction projects in SA is that it will best satisfy the secondary project objectives of empowerment and employment creation (Manqoba, 2014). This is due to the fact that the traditional method is fair, equitable, transparent and competitive (Manqoba, 2014). However, Mbanjwa s survey (2003) revealed that the CM method will best satisfy the secondary project objectives of empowerment and employment creation. Analysing this disagreement during the said interview, it was pointed out that this disagreement was because of the understanding that the process for the CM procurement method might not be fair, equitable, transparent and competitive (Manqoba, 2014). It was also pointed out during the interview that the DB procurement method is believed to be able to assist with achieving this secondary project objective (Manqoba, 2014). Furthermore, the DB method was preferred over the traditional and CM procurement method because the staff interviewed at the Department of Infrastructure and Services of the City of Johannesburg have experience with the DB method and have noted its benefits compared to the other methods (Manqoba, 2014). ISBN: 978-0-86970-792-0» 3 rd IPMA Research Conference» 11

CONCLUSIONS AND RECOMMENDATIONS This study presents a comparative study on the traditional, DB and CM procurement methods used in the construction industry of SA. The findings of this study show that public sector clients are the main project participants dealing with civil engineering projects while their private counterparts are focuses more on building projects rather than civil engineering projects. This indicates that the South African government (public sector clients) invest largely into infrastructural projects rather than building project. Furthermore, the findings of this study revealed that the highest user of traditional, DB and CM procurement methods are designers, private sector clients and contractors respectively. Also, from the findings of this study it is discovered that amongst the traditional, DB, and CM procurement methods used for construction projects in SA, the traditional method is still and remains the most popular and frequently used method. Despite its shortcomings, it is still the commonly use method, probably because of its long existence, less awareness of other procurement methods by the various role players, the advantage it has for empowerment and employment creation, and the resistance to changes by the South African construction industry due to the South African legislation. Lastly, based on the findings of this study, it is concluded that the DB procurement method will produce the best result in terms of project objectives of time, cost, and quality as compared with traditional and CM procurement methods. Also, the DB method is believed to be able to achieve the secondary project objective of empowerment and employment creation in a way as revealed from the interviews with staff from the City of Johannesburg. However, from the discussions during the interview, it was highlighted that the traditional procurement method will best satisfy the project objective of empowerment and employment creation which is one of the major areas of concern of the SA government. This has a great impact on high and frequent usage of the traditional contract procurement method in SA. Based on the findings of this study, the study recommends that the public sector clients should be advised on the benefits of using the DB methods for procurement of their construction projects, as it will lead to the accomplishment of most of their project objectives. Also, it is recommended that a similar study be conducted with more detailed interviews and questionnaires because this study is based mainly on literature reviews and a limited interview due to time constraints. By doing this, it will help to validate the findings of this study. REFERENCES Adenuga, O.A. (2013). 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