There are a lot of different costs to manage in construction. It can be very confusing to track and manage them all.
This becomes especially complex when you consider; contractual relationships, legal obligations, divisions of work, and conflicting interests across parties.
This year during the ProcureCon Facilities Conference, I gave a talk on cost categories and discussed how to handle self-performing contractors. I’ll be summarizing that talk in a future post, but before I publish that I wanted to address procurement policies because it was a prominent topic that came up during my talk.
Why you Need Procurement Policies
Procurement policies are necessary because the largest amount of spend in construction is in the cost of work. Establishing a policy for how these costs will be managed allows an Owner to influence the way these costs are managed.
Besides the obvious challenge over cost control, a procurement policy allows you to regulate subcontractor qualifications which is another risk for Owners.
Many top tier General Contractors already bid only the best qualified subcontractors, but to ensure this is observed, it’s best to document your requirements.
Adding a procurement policy in your GC’s contract serves to regulate how the GC manages these costs and ensures that only the best qualified subcontractors are used.
When a Procurement Policy makes most sense
It’s always a good idea to include a procurement policy in your construction contract, but these policies are most effective when you are using a Cost Plus Open Book contract.
In a fixed price contract, having a procurement policy simply regulates the qualifications of subcontractors and ensures the GC understands your expectations for management of cost. For this reason the language I use in a fixed price contract is less restrictive than I would use with an Open Book contract.
In reality, procurement policies in a fixed price contract are unenforceable. The Owner has no right to see the GC’s bids in a fixed price quotation. In this case, using a procurement policy does nothing more than define the standards you expect the GC to observe. However, it should be noted that if your contracts also include audit rights, an Owner might be able to verify (retroactively) that a GC is following your policy.
In an Open Book contract a procurement policy is essential to ensure alignment between yourself and the GC. This is the highest and best use of a procurement policy, but it should be noted that the policy alone does not ensure compliance.
If you plan to implement a procurement policy, it will require constant monitoring to ensure compliance. GC’s are not accustomed to the same procurement rigor that an Owner’s procurement organization typically observes. These rules will be foreign to the GC and will require up front time to set up and constant monitoring.
How to implement a Procurement Policy
The simplest way to implement a procurement policy is to write the policy right onto your general contractor’s contract. I like to add a section called “Procurement”. This typically falls somewhere in your general conditions or if your contract includes business terms, you can add this section after your payment application process.
I make a special effort to specifically call out and discuss the procurement policy during the bid period. If you don’t call attention to it, the vendor may miss it and be caught by surprise when you attempt to enforce the policy.
The actual implementation of the policy typically requires several up front meetings with the GC. During these meetings, you will review and agree on; contract templates, bid forms, and qualification questionnaires. You should also discuss how bids will be received, when and how the bids can be opened, how the bids will be combined and what criteria will be used for evaluating and scoring the results.
What to include in your Procurement Policy
To be sure that your policy is providing you with the proper level of protection, there are certain key factors that must be included. The specific language you use can vary as long the following considerations are addressed. Just be sure your terms are objective, enforceable, and achievable. You don’t want to make this so onerous that the GC is smothered or stifled by the regulation.
One of the key factors to consider to avoid making your policy too restrictive is setting a clip level for which contracts require compliance and which do not. Your clip level should be something low enough that your tolerances (or your corporate policy) wont be violated from a single source award, but high enough that your GC can handle simple or quick needs with ease.
I’ve used $25,000 as a clip level, but you may adjust this up or down depending on your circumstances.
An easy thing to miss is documenting what responsibilities your GC will have with respect to procurement of sub-contracts. State whether you expect the GC to create a bid form, host/attend a pre-bid walk-through, compile bids into a side by side report, score responses, etc. Don’t assume your GC knows how you want the RFP run and be explicit with your requirements. Be careful not to ask for too much. Remember that depending on how big your project is, the GC may have dozens of contract that are needed. This can be a lot to handle in a very short amount of time.
Be specific about minimum qualifications subcontractors must meet. I say “minimum” qualifications because you don’t want the bar set so high that you have limited choices. Your standard should be set such that anyone with the skills to perform the work, are licensed, and are insured can qualify.
Number of bids needed
Specify how many bids you require. I use language requiring a minimum of three qualified bids. The word “qualified” gives me some leeway to request additional bids if a specific subcontractor does not appear to meet certain criteria.
How Bids are managed
Specify in your policy how bids will be received and how the GC must present the bids. If you want to be present when the bids are first opened, you will need the bids to be presented in a sealed envelope. If you want digital submissions, you may want to create a special email address so that you and the GC receive the bids simultaneously.
If your GC has the ability to self-perform any work. You must specifically address when self-performance will be allowed and under which conditions it is permitted. You may want the GC to competitively bid themselves against two others in order to validate their price.
Under equipment procurement you want to be sure you clearly define which equipment will be competitive bid and which equipment will be from a single source. By default, my verbiage states that all equipment will be competitively bid, unless otherwise noted. This gives me leeway in case the drawings specifically call out a single brand. I also ask for spare parts and warranties to be included with each piece of equipment. Also, don’t forget to note that the GC is responsible for expediting equipment to the job site. This may be assumed, but unless stated, the GC may neglect this and your project may be delayed.
I dislike ever thinking about blacklisting suppliers, but the truth is that some contractors may have tarnished or bad reputations and may not be acceptable to an Owner. For this reason, I always include a line requiring that all sub-contractor must be “acceptable to the Owner”. This is a vague statement, but it gives the Owner freedom to disallow a supplier for any reason. I have been in situations where a subcontractor chosen by a GC was in active open litigation with a Client and would not be allowed on the premises. For this reason, I add this line to allow for such circumstances.
If you have read this far, I have a special gift for you.
If you subscribe using this link, you will receive a downloadable pdf version of my one page procurement policy for fixed price contracts. This is a simplified version of the procurement policy I use on my open book contracts. Feel free to use this language as is or as a starting point for formulating your own version of a policy.
Be mindful of your own specific needs and feel free to make this your own.
My only words of caution would be to be careful not to make this too restrictive. You want to exert some control, but not so much that bidders opt out of your project or your project costs become inflated.
So what do you do to control costs? Do you have a procurement policy? If so, what provisions do you include in your policy? Tell me your stories.
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