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How Aggressive Risk Transfer and Procuring for Value Has a Significant Effect on Procurement Systems

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“Aggressive risk transfer and the search for the lowest possible price at the expense of value typifies public and private sector procurement” (Public Administration and Constitutional Affairs Committee, 2018)

According to the oxford dictionary the term procure is ‘an acquisition process used to secure services, goods and work from external sources’. (Capital, 2014). More specifically in relation to construction, procurement is ‘Obtaining a wide spectrum of goods, materials, plant and services in order to design and commission a building that delivers the best possible value for money for the client of its life cycle’.

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In the essay, I will be exploring the accuracy of the above statement using reliable sources to build up a balanced argument. I will firstly discuss different procurement systems and why they are necessary to the industry, I will then move on to how these systems have an effect on public and private sector procurement. Once discussed I will move onto how aggressive risk transfer and procuring for value has a significant effect on these procurement systems.

Procurement is a term used to describe all activities undertaken by the client in seeking to bring about the construction of, or the refurbishment of a building. . The term procurement can also be seen as a method of systems used to weigh up both the advantages and disadvantages which are likely to cause an effect on a project. These method systems can also be used to show financial constraints which are likely to affect the project, this can the leas to selecting an effective agreement.

When choosing the right procurement method, the main concerns are usually;

• Completing the project on time

• Staying within the budget

• The overall quality of works on the project.

In order to achieve and overcome these concerns there are four main procurement options available however for this essay I will only be discussing two methods.

The most common procurement method is the traditional system. This method of procurement has been the standard practice in the construction industry for nearly 150 years.  This method of procurement followed on from the emergence of general contracting firms and independent client consultants.  This traditional method is made up mainly of two main features, the first main feature being the design process. This process is completely separate to the construction process and should be undertaken prior to the project commencing. Full documentation must be submitted by the client in order for the contract to tender for the works. The traditional system is characterised by the following;

• Once the contractor has prepared a competitive tender it will be submitted to the client before selection.Many contracts require the contractor to appoint a professional consultant in order to receive required documentation for the project, this could be an architect, quantity surveyor or contract administrator ect.

• The client has control over the design through their appointed consultants (i.e. architect). In most cases there is no responsibility on the contractor to design any works

• The duration of the project tends to be a very long process due to the separate sequential process of both design and construction being kept separate. 

• Risk in a traditional procurement method is relatively well balanced between both the client and the contractor. A lump sum contract is more in favour of the client however the time required may be longer than other procurement methods. 

 

While the traditional procurement method is very simple and well known by almost everyone in the industry its main problem is that it can prolong the construction process as the design process is separate to the build. This means that everything needs to be in place before the construction process can begin. This can have an effect on pre-determined delivery dates for the project and also lead to preferred contractors becoming unviable for works.

Public and Private Sector Procurement differs greatly from other areas of procurement such as traditional procurement. Public Procurement is procurement that is completed within the context of not-for-profit organizations (NFP’s). Also known as the public sector, the procurement that occurs in this context is typically government affiliated, which can be central, state, or local. 

The over-riding procurement policy requirement is that all public procurement must be based on value for money, defined as “the best mix of quality and effectiveness for the least outlay over the period of use of the goods or services bought” . This should always be achieved through competition unless there are compelling reasons not to. Public Sector procurement encourages open competition between multiple different companies in the field and value for money. It also attempts to stay in line with various different agreements and obligations both internationally and nationally. 

As a public-sector buyer, value for money is fundamental to the procurement activity you carry out. 

Whereas Private Procurement is defined as “Procurement that is completed within the context of for-profit organizations (FP’s). Private procurement happens within privately owned companies; also known as the private sector”.

There is a distinct noticeable difference between the private and public sectors. As private sectors are mainly run for profit it gives them the flexibility and resources to meet both their internal and external needs. The government can play a major role in the funding for public and private sectors meaning if the funding is cut to public sectors it can show and major change overnight and put mass amounts of pressure on procurement teams. (The Difference between Public and Private Procurement, 2019). This disturbance in funding can lead to major delays meaning public companies have to suspend activities which can have a negative impact on the supply chain.

Aggressive risk transfer is defined as ‘the attempt to pass on most of the risks associated with delivering public services to a provider.’ (Skinner, 2018) The main aim for the public sector is to maintain a strategic distance from the financial burden of negative externalities amid the public services. (Skinner, 2018)As a result, companies attempt to reduce risk in such a way that they become as detached from the government as possible.

In the modern-day business model, aggressive risk transfer is a vital part of the private sector. Large companies such as Uber and Amazon rely heavily on this to enable them to transfer many risks associated with labour to the employees stating they are responsible for their own actions.This will therefore minimise the cost of claims ect to the companies and increase the value involved in the job.  Another example of this can be seen with Uber, if an employee crashes their car, the liability lies with them to sort rather than the company.

Risk transfer can therefore be seen as a very unjust way of running a business and in relation to the statement above it does typify private sector procurement.Procuring for Value is an essential part of the industry. Value is a term described to improve the impact of capital programmes, their delivery and lifetime performance. Value must be captured and demanded as part of the procurement exercise.

The idea behind procuring for vale outlines how the industry can be changed an improved by increasing productivity and user satisfaction. It is estimated that a more joined up approach to procurement could save an annual rate of 15Bn in the construction industry.

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