PROCESS OF CONSTRUCTION PROCUREMENT

Definition
The term procurement is used in the context of construction & it refers to the
process of acquiring construction projects.

Elements
a) Initiation
b) Funding
c) Design
d) Statutory Approvals
e) Tendering
f) Construction
g) Risk Allocation

1. Initiation
Process of recognizing the need for a facility for owner occupation, as an
investment or as a speculative development.

a) The Client
An initiator or promoter who wishes to have a facility constructed and
possesses the ownership or has the authority to develop the land on
which the required facility will occupy.

Client consists of two categories :

Public Sector Client

- Federal government
- State government
- Local government
- NFPE (public sector agencies, statutory bodies, government
owned/controlled companies)
 Private Sector Client
- Individuals
- Firms & corporations
- Associations, guilds, institutions & societies
- Other private bodies

b) Feasibility Study
A proposal to determine whether a project is viable or feasible from
both business, technical and social points of view. Consists of :

- Identify and assess the suitability of site

- Economic and market analysis (competition, interest rates, user fees)
- Estimates the time needed for project and the range of cost
- Authorities’ policies in relation to the proposed development

c) Project Brief
A statement of needs of the client in terms of concept, time, cost &
functionality.

The elements of project brief consists of :

- The requirements of the project
- Target completion date
- Design feature
- Budget allocated for the project

2. Funding
Process of identifying the sources of funds and the method of adequately
funding a project.

a) Sources & Types of Funding

Projects funding in the private sector may be through internally
generated funds or through external borrowings. The latter may be
obtained from banks and/or other financial institutions: finance
companies, credit corporations and leasing companies.
 In the public sector, the government provides the necessary finance.
The source may be through the Treasury or through borrowings from
the local or international bodies. The latter may include the World
Bank, the Asian Development Bank and the Islamic Development
Bank.

Financial instruments consists of :

- loans
- bridging finance
- end-finance
- syndicated loans
- debenture stocks

In addition, Islamic Banking is increasingly being used. For instance,

the al-Bai approach is widely used to finance house-end purchasers, in
the form of al-Bai Bithaman Ajil (deferred sale) and Bai-al-Istisna'
(sale on order). The Islamic Banking system is interest-free and
therefore is considered unique.

b) The Process of Obtaining Funding

A specialized area and a complex process. The complexities arise, in
parts, due to the funding bodies’ strict lending regimes. Clients may
have to provide proof that they would be able to achieve substantial
sales. In addition, banks and the other financial institutions require
clients to provide adequate collateral before their applications for
project funding would be considered. The forms of collateral
acceptable include the land and building to be procured for the total
amount of the financing.
 In the context of the Islamic Banking system’s end financing for
house purchase, the activities involved in processing a loan
application include:

- The bank first determines the requirements of the customer in

relation to his period and nature of repayment.
- The bank purchases the asset concerned.
- The bank subsequently sells the relevant asset to the customer at
an agreed price. The agreed price comprises : the actual cost of
the asset to the bank and the bank’s profit margin.
- The bank allows the customer to settle the payment by
installments within the period and in the manner is agreed.

3. Design
Process of translating the initiator’s requirements into forms, shape, size
and functions. Divided into 3 stages :

- Schematic design: the process of translating the requirements of the

initiator/promoter into a basic design form, indicating the general
design in terms of shape, size and function of the building.

- Detailed design: the production of detailed drawings and

specifications, from the concept/schematic designs, detailing and
describing each element of the building so that it may be constructed.

- Specialist design: the development of detailed drawings and

specifications for a specific component or element within the structure,
which requires specialist technical knowledge to design and construct
such as mechanical and electrical installations.
a) The Designer
Leading professionals involved with the design process and a brief
account of their key roles are:

- Architects: to provide services in architectural design and in

general pre-contract and post-contract administration.

- Engineers: civil and structural, mechanical and electrical engineers.

Civil and structural engineers are responsible for designing the
structural aspects of the facility. They are also responsible for the
design, supervision and construction of roads, drains, sewerage, and
other civil works. Mechanical and electrical engineers are responsible
for the design, supervision and construction of services including
air-conditioning, ventilation, lifts, electrical services, fire fighting
building automation system, plumbing and sanitary services, etc. as
well as the external infrastructure services associated with public
utilities to the development.

- Quantity surveyors: to act as a financial controller throughout

the duration of the project. Other functions of the quantity surveyor
include preparing estimates, preparing tender documents, to call,
evaluate and to award tenders to successful contractors, to
evaluate and to recommend progress payments and to finalize
contracts’ accounts.

b) The Design Process

The design process in Malaysia, the practice of the JKR is selected
for discussion and illustration. In any case the design process adopted
by the JKR is quite representative of those existing in other public
sector organizations and those existing in the private sector. The
system of project implementation is well documented, such as in the
Panduan Pentadbiran Kontrak Kerja Raya, Edisi Kedua (A Guide on
the Administration of Public Works Contracts, Second Edition) by the
Ketua Pengarah Kerja Raya.
 c) The Design Process under Non-Traditional Procurement System
The design process described herein before concerns the traditional
system of construction procurement. Under the design and build or
turnkey procurement system, a client engages a single firm (the
contractor) to undertake the design and the construction of a
proposed project. The client as well as the design and build
contractor may appoint consultants.

Under the management contracting procurement, the client appoints a

management contractor to manage and coordinate the project on his
behalf. The duties of the management contractor during the design
process may include appointing and the administration of the
design and other consultants for a fee. Responsibility for the design
remains with the designers.

4. Statutory Approvals
Process of obtaining permissions from the relevant authorities to initiate
and to construct a facility and upon its completion to occupy the completed
facility. The objectives of statutory approvals are :

- To achieve proper use of land.

- The planning of towns and cities.

- The regulating of standards of buildings including fire prevention and

provision of services, the standards of roads, drains and lighting.

Statutory control on construction and the process of obtaining statutory

approval involves various authorities: public and private. The former
comprises three levels of governments which are local, state and federal. In
addition, different sets of statutory control and approval are applicable at
different stages of the procurement process.
a) Statutory Control and Standards
Divided into two broad categories:
- statutes that directly affect construction
- statutes that have an indirect effect on construction.

The first category of laws, by-laws and regulations impose strict

control on construction activities including the processing and
approving of plans from change of land use, subdivision and
amalgamation, Development Order, Building and Services Plans
approval to issuance of Certificate of Fitness for Occupation and
therefore they have direct effect on construction activities. The second
category of laws, by-laws and regulations have an indirect effect on
construction activities because they govern and control the
administration of the authorities and the practicing professionals in
architecture, engineering, surveying and the activities of property
developers.

b) Process of Obtaining Statutory Approval

It is observed that procedures for obtaining statutory approval for

construction are not standardized. The procedures vary from one
project to another depending on its nature, size and complexities; from
one department to another within a local authority; and from one local
authority to another within Malaysia.

Divided into four key stages:

- Development Order.
- Building and Services Plans.
- Construction.
- Certificate of Fitness for Occupation.
c) Development order stage

Development Order is the first stage in a series of activities for

statutory approval for construction. Broadly, it involves four key
activities :

- approval pertaining to land matters

- approval for Environmental Impact Assessment (EIA)
- planning permission
- application for Development Order Approval.

Firstly, statutory approval pertaining to land matters. A client must

have the authority to develop the land. Land matters in Malaysia are
complex due to factors including: (1) land matters are governed by
customs and history, and (2) high demand for land due to the rapid
process of industrialisation.

Under building and industry categories the State Government may

impose:

- The area or proportion of the land to be built upon.

- The type, design, height and structure of any building to be erected
on
- The land, and the type and quality of the materials used in its
construction.
- The dates on or before which the building is to be commenced or
completed.
- The use of the building.
Secondly, EIA Report is required for most land development projects
of 50 hectares or more. Clients should prepare and submit EIA Report
to the Director General of Environmental Quality for approval. The
EIA procedures comprise three main stages :
- preliminary assessment
- detailed assessment
- review

The preliminary assessment stage in the EIA procedure relates to the

initial assessment of impacts arising from the proposed construction
activities. Project options are identified at this stage and any
significant residual environmental impacts are made known. Next, the
detailed EIA Report must be submitted to the Director General of
Environmental Quality for approval prior to the giving of approval by
the Kuala Lumpur City Hall for the project. A review of the EIA
Report is carried out by the Department of Environment and
recommendations arising out of the review are transmitted to the
Kuala Lumpur City Hall for their considerations in making decisions
on the project.

Thirdly, planning permission is required for all types of

development. The initial process involves the client or his/her agent
applying for approval of the layout plan of the proposed development.
Details required in the submission include the proposed layout plan,
indicating among others: number and types of proposed buildings,
open spaces, schools and community reserves where required, all
utility services’ reserves such as electricity, water, sewerage disposal,
existing contour lines and proposed formation levels and existing
natural water courses and drainage proposals.

The fourth and final stage of the development order involves the client
or his/her agent submitting an application to the Planning
Department for Development Order Approval. Documents required in
the submission include the site and sketch plans, relevant
application forms and submission fees and copies of title deeds.
 The document is assessed by a Technical Sub-Commit- tee prior to
deliberations by the Town Planning Committee. The latter makes
approval based upon the recommendation of the former. Once the
Town Planning Committee approves the application, a Development
Order is issued. The Development Order usually spells out several
conditions of approval to which the client must comply in the
subsequent stages of the work.

d) Building & service plans stage

The objective of statutory control over buildings is to ensure that
buildings are designed, constructed and maintained free from failure,
defects or nuisance which may jeopardize their utilization or endanger
life and health, during and after construction.

e) Construction stage
During construction, the contractor is responsible for observing the
various laws, by-laws and regulations concerning construction
activities such as Local Government, Health and Safety, Factories and
Machinery (Building Operation and Works of Engineering
Construction). The objective of these statutes is to ensure that
construction works are monitored and disciplined.

f) Certificate of fitness stage

It is mandatory that a Certificate of Fitness or CF be obtained before
a completed facility can be occupied and used. In applying for CF to
the Building Control Division, the client or his/her agent must submit
among others final and complete as-built drawings for the building
works and services and give notice for final inspection on the
completed project.
 g) Effects of statutory control on construction procurement
The adverse effects of statutory control on construction include:

- Delay in planning and implementing construction projects.

- Requires a great deal of time and manpower to meet procedural
requirements and bureaucracies.
- Uncertainty in programming projects.
- Increase in holding charges.
- Increase in financing charges.
- Creating cash-flow problems.
- Dislocating demand and supply of commercial, industrial and
housing needs of society.
- Causing properties to increase in prices.

5. Tendering
a) Tendering for Consultants’ Services
The client appoints consultants. It is not encouraged for consultants to
be appointed by other consultants (including the architect) because
their own respective professional bodies govern each type of
consultant and therefore they cannot be held responsible for the
performance of other consultants.

In the public sector, the criteria for selection would normally

include quota, track record, experience and fees payable. The
quota system is to ensure that projects are fairly distributed among
firms. Normally, the Ministry of Finance stipulates a minimum of ten
years experience before one can be considered for government
projects.

In the private sector, the criteria used by clients in selecting

consultants would normally include track record, personal
contacts and fees payable. A series of interviews and negotiations
with the short-listed consultants will follow in order to agree on terms
including fees payable, style of payment and other considerations. The
 appointment of a successful consultant is finalized after the client
and consultant signed a formal contract.

b) Tendering for Contractors’ Services

In Malaysia, construction projects are almost always constructed by
contracting firms selected and employed by the client through a
tendering process. The most common methods of tendering are:

- Open tendering
- Selective tendering
- Negotiated tender.

Open tendering refers to the procedure of inviting offers from

registered contracting firms through tender advertisements
normally in the general press. A tender advertisement provides
information such as outline details of the work, its scale and
programme, tendering period, class of registration of contracting
firms eligible to tender and other relevant matters. In open tendering,
all eligible contractors have the opportunity to tender and maximum
competition may be achieved.

Selective tendering refers to the procedure of inviting offers from a

limited number of registered contracting firms through the
client’s personal contact, recommendation from consultants or
third parties known to the client. In the public sector, the names of
contracting firms are drawn from the list of registered contractors
(with both the CIDB and the Pusat Khidmat Kontraktor or the PKK)
that have proven experience and track record in constructing projects
similar to the one being tendered. Selective tendering is a common
approach in the selection of a successful contractor in a design and
build project.

In a negotiated tender, there are provisions in the conditions of

tendering for a negotiation or a series of negotiations to be held
between tenderers and the client. In general, a client would carry out
 parallel negotiation with the lowest two or three contracting firms
whose bids meet the technical details and specifications. Normally
the key issue in the negotiation is the tender price.

c) Registration of Contractors
In 1984, the government established the PKK. The key function of
PKK is to centralize the registration of contractors for public
works. In December 1994, the government set up the CIDB. The
functions of CIDB include accrediting and registering contractors
in Malaysia. Following the enforcement of the Act on 22 July 1996,
only contractors registered by CIDB are allowed to participate in
tender exercises and to build and construct in Malaysia.

The criteria in registering and assessing contractors into the

appropriate class, categories and areas of specialization include:

- The firm must first be registered with the relevant bodies such as
the Registrar of Business or Registrar of Companies.

- The firm must have minimum capital and financial capability.

The minimum amount required for each class of registration is as
shown in Table 5.3.

- The qualification of the firm’s staff and management. For Classes

A to BX, the firm management staff must have a technical degree or
professional qualification, and a technical diploma for Class C. For
class D to F, the firm’s management staff must have sufficient
knowledge and experience in the respective field of construction.

It is mandatory for all contractors and builders to be registered with

CIDB and that no person shall undertake to carry out and complete
any construction works unless he/she is registered with the CIDB. A
registered firm may, after a year of being registered, apply for
upgrading of grade, for additional category or for additional area of
specialization. The CIDB reviews the status of each registration each
 time new information becomes available and consequently may
downgrade a firm’s grade or reduce the categories or areas of
specialization.

d) Process of Tendering
In the public sector, the tendering procedures to be followed are
governed by factors such as source of funding and type, nature and
estimated cost of projects. It is mandatory to let projects estimated to
cost more than RM100,000.00 each through open tendering
(Pekeliling Perbendaharaan No. 180). Only in specific circumstances,
such as urgency of the work and/or for security reasons, is selective
tendering or negotiated tender allowed.

e) Tender Documents
For a public work tender for a contract based on Bills of Quantities,
the tender documents would normally comprise the following:

- Letter of invitation to tenderers.

- Check list for submission of tenders.
- Articles of Agreement and Conditions of Contract.
- Form of Tender.
- Form for details of tenderer’s registration as a contractor and of
organization, and particulars of ten jobs completed and jobs in hand.
- Letter of Acceptance.
- Bank and insurance guarantee forms for Performance Bond.
- Bank and insurance guarantee forms for advance payment.
Specifications.
- Relevant drawings.
 f) Evaluation of Tenders
Tender evaluation and recommendation is normally performed by the
quantity surveyor. Some of the salient points that warrant
considerations when evaluating design and build proposals include :

- Scope and extent of work.

- Limits of liability and responsibility.
- Planning and design concepts.
- Quality and suitability of materials used.
- The extent of mechanical and electrical services and equipment and
its maintainability.
- Maintenance and warranty.

6. Construction
It can be said that the process of construction falls under two main
categories:

- Management of construction.
- Construction production.

a) Management of Construction
Most contractors have established and developed management skills
through experience with little formal training. A large number of
contracting firms are family owned businesses where skills are passed
from the senior family members to the Juniors.

b) Construction Production
The process of converting construction inputs into outputs performed
by contracting firms. The contractors have the task of converting the
inputs: human, physical and financial, into the process. There are two
main types of contractors:

- Main contractors
- Sub-contractors.
 Main contractors normally specialize in either building works or
civil engineering works or both. A main contractor is selected
through a tendering process and enters into a contract with the client
for the execution and completion of the work. The main contractor
may enter into further contracts with subcontractors and/or suppliers.
In the case of nominated sub-contractors and nominated suppliers, the
main contractor is responsible for their due performances under the
main contract.

There are three main types of sub-contractors:

a) Nominated sub-contractors
Normally specialist contractors are nominated by the client
but enter into a contract with the main contractor.

b) Domestic sub-contractors
The main contractor’s own sub-contractors. It is common for
the main contractor to employ several sub-contractors to
execute different parts of the works.

c) Labour only subcontractors

Individuals or firms employed by the main contractor to
supply workers for the work.

7. Risk Allocation
Risk in general and as a subject associated with the processes of construction
procurement in Malaysia is an area that requires detailed study in its own
right, such a study is not within the scope of this book. However, it is
acknowledged that risk is a factor of consideration in all construction
projects irrespective of the project type, location, procurement system used,
the project team.
a) Types of Risks
There are five main types of risk associated with the processes of
construction procurement. They are :

- construction time
- product price
- design apportionment liability
- project finance
- effectiveness of the building in operation
- quality of workmanship

b) Sources of Risks
The main sources of risks that are considered to be relevant to the
processes of construction procurement in Malaysia are as follows:

- Client/government/regulatory agencies = bureaucratic delays,

changes in regulations

- Funding/fiscal = changes in government funding policy, liaison

between several financiers

- Project organization = authority of the Architect or Engineer or the

S.O., involvement of individuals or outside bodies that are not a
party to the contract

- Design = adequacy to meet need, realism of design

- Construction contractors = experience, financial stability

- Construction materials = availability of an adequate and timely

supply of materials, excessive wastage, reliability of quality

- Construction labour = availability of an adequate and timely supply

of labour, industrial relations, foreign workers, multi racial labour
force
 - Construction plant = availability of an adequate and timely supply of
plant, resale value, spares available, availability of skilled operators

- Logistics = remoteness, access to site.

c) Allocation of Risks
The allocation of risk among the parties in the process of construction
procurement may be done in different ways, The common methods of
allocation of risk include:

- The client could transfer risks in whole to another party or parties

in the procurement process and the client retains the rest.

- Risks could be reduced by the client by adopting several measures

such as preparing a thorough and adequate project feasibility study,
project brief, site and soil investigations, allowing for adequate
design and cost estimates, selecting and employing suitable
qualified and experienced designers, constructors, etc.

- Risks could be contained such as through performance bonds,

completion guarantees, and warranties from manufacturers of
equipment and materials, operating guarantees. For instance, in
Malaysia and in most private works contracts but certainly in all
public works contracts, a contractor is required to provide an
irrevocable performance bond amounting to 5 percent of the contract
sum. The bond may be in the form of cash, a bank guarantee or an
insurance guarantee. The performance bond provides guarantee
that the contractor will honour his obligations on the construction
and completion of the project, all in accordance with the contract.