THE UNIVERSITY OF THE WEST INDIES

ST. AUGUSTINE

ASSIGNMENT NO 2: DISCUSS THE QUESTION OF RISK IN

RESPECT OF THE VARIOUS PARTIES INVOLVED WHEN
EMPLOYING DESIGN AND BUILD PROCUREMENT SYSTEM
AND A BUILD, OWN, LEASE, TRANSFER SYSTEM

COURSE CODE & NAME: PRMG 6007 PROCUREMENT

MANAGEMENT, LOGISTICS AND CONTRACTING

COURSE LECTURER: DR. WINSTON H.E. SUITE

STUDENT NAME AND ID:

ANEAL A. GIDDINGS

813005915

FACULTY OF
ENGINEERING
February 7, 2015

ABSTRACT
Procurement involves the process by which goods, services and works are acquired by
organizations both private and public sector. Projects for infrastructure works are not all the
same and as a result, a single model to govern the aspects of all projects is not feasible. Over the
years, enhancement in technologies, economic, social and political changes and environmental
awareness have all urged the need for different methodologies to be modified and enhanced. The
result is that of various procurement systems that can adapted to the characteristics that define a
specific project.
This assignment seeks to analyse the Design and Build (D-B) procurement system as well as the
Build-Own-Lease-Transfer (BOLT) model which can be used for many different projects for
both public and private entities. One of the major aspects of selection of either of these systems
is that of risk.
The assignment seeks to identify the parties involved in the two systems with the aim of
identifying the risks that they may face and possible methods of mitigating the impact of these
risks.

CONTENTS
1.

INTRODUCTION .................................................................................................................. 4
1.1

2.

DESIGN AND BUILD PROCUREMENT SYSTEM ........................................................... 6

2.1

INTRODUCTION ............................................................................................................ 6

2.2

RISK TO PARTIES INVOLVED ................................................................................... 7

2.2.1

RISK TO THE CLIENT ........................................................................................... 8

2.2.2

RISK TO THE CONTRACTOR .............................................................................. 9

2.3
3.

RISK AND PROCUREMENT ........................................................................................ 4

CONCLUSIONS ............................................................................................................ 10

BUILD, OWN, LEASE, TRANSFER SYSTEM ................................................................. 12

3.1

INTRODUCTION .......................................................................................................... 12

3.2

RISK TO THE PARTIES INVOLVED ......................................................................... 13

3.2.1

RISK TO THE CONTRACTED PRIVATE PARTY ............................................ 13

3.2.2

RISK TO THE PUBLIC ENTITY / CLIENT ........................................................ 15

3.3

CONCLUSIONS ............................................................................................................ 16

BIBLIOGRAPHY ......................................................................................................................... 18

1. INTRODUCTION
1.1

RISK AND PROCUREMENT

Risk, simply put, can be defined as the possibility that something bad or unpleasant (such as
loss or injury) will happen (Merriam-Webster 2014) in the context of a specific undertaking.
The question of risk can take different forms based on the kind of environment in which it is
analysed and for the purpose of this assignment, I will discuss risk as it relates to two key
procurement systems. The following are the prominent categories of risk as it relates to the issue
of procurement:

Technical Risk exposure to loss as a result of problems in design and engineering

Financial Risk exposure to loss due to financing methods that fail to provide the
required returns

Economic Risk exposure to loss due to changes in macroeconomic conditions such as

exchange rates, stocks and bonds.

Environmental Risk actual or potential threat of adverse effects on living organisms and
the environment by effluents, emissions and resource depletion amongst others.

Social Risk the threat of adverse effects to a neighbouring community due to

annoyances such as noise or water pollution.

Political Risk the exposure to loss due to political changes or instability in a country
such as change of government or coup dtat.

Procurement is the function that describes the activities and processes to acquire goods and
services (Purchasing Insight n.d.). It is also important to note that the term purchasing should
not be confused with procurement. Purchasing represents a phase in the procurement process that
involves ordering and receiving of goods and services. The Procurement Act of 2003, an act of
parliament in (Laws of Guyana 2003) defines itself as an act to provide for the regulation of the
procurement of goods, services and the execution of works, to promote competition among
suppliers and contractors and to promote fairness and transparency in the procurement process.
This specifically relates to the public procurement process or the procurement of goods, services
and works which are to be funded by the taxpayers for the benefit of the jurisdiction.
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It is noteworthy to mention the stages involved in the public procurement process and is depicted
in Figure 1-a.

1. Needs
Analysis

Determine the
needs and if
procurement is the
optimal solution

3. Project
Procurement
Plan

2. Funding
Approval

Determine the
project scope and
a base for funding

Determine the
strategy for
approaching the
market to ensure
objectives are
achieved

4. Service
Provider
Selection

Evaluations of
responses,
negotiations and
AWARDING OF
CONTRACT

5. Contract
Management

6.
Procurement
Evaluation

Transition
between contracts
and managing
performance

Assess the service

provider's
performance and
value for money

Figure 1-a: The Procurement Process

In general terms, procurement involves a person, entity, group or organization with a need that
seeks the assistance of an external or internal person, entity, group or organization to satisfy that
need for which parties to this process enter into a contract. It is very important that, in
procurement projects, potential risks to all parties be identified so as to create a framework or
risk management plan to deal with its effects.
It is therefore deducible that there is risk that can affect the parties on either side of the contract
and in order to minimize or avoid the effects that these risks may bring, they may employ various
methods to cover themselves.
The following sections look at two key procurement systems: the design and build and the build,
own, lease, transfer systems with emphasis on the identification of the major parties involved,
the risks that they may face and the methods employed to cover themselves from suffering the
effects of said risks.

2. DESIGN AND BUILD PROCUREMENT SYSTEM

2.1

INTRODUCTION

Design and build (D-B) is an integrated approach that delivers design and construction services
under one contract with a single point of responsibility (Design-Build Institute of America
2013). In this form of procurement system, a client with a need enters into a contract with a
contractor who takes full responsibility for design and construction. In many cases, the
contractor may enter into separate contracts with consultants as well as sub-contractors for
different aspects of the project.
In many instances, where there is a need, say for example to construct an apartment building, the
client will approach a contractor to present his/her terms and requirements and negotiate a
contract for all aspects of designing and constructing the edifice. Depending on the size of the
project, companies can joint-venture to form a new company for all aspects for procuring the
building but the client only enters into a single contract (with the result of the joint-venture). This
form of procurement is very similar to a master-builder type system1 but it focuses more on
specialization where design and construction can be a concomitant process. Figure 2-a and
Figure 2-b shows the relationships that exist between the parties in a D-B procurement system.

Master Builder procurement system occurs when a client enters into a contract with a single person that is
responsible for all aspects of the finished product.

Client

C
Contractor

Construction
Firm

C
Architect /
Designer

Figure 2-a: Relationships of parties in a typical design and build procurement system

Company with inhouse capacity

Client

C
Design
department

Construction
department

Figure 2-b: Client enters into contract with a single company that has its own in house capacity
Having identified the parties to contract, the following section analyses the risk that each party
might face.
2.2

RISK TO PARTIES INVOLVED

This section will look at the risk faced by the parties in a design and build procurement system
and ways of protecting or covering themselves from loss or harm. The apportionment of risks in
design and build contracts is unique among procurement methods. This uniqueness is brought
about by the single point responsibility... (Murdoch, Hughes and Champion 2008)
The parties involved in a design and build procurement system have been identified as:
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The Client

The Contractor

Any other party that enters into contract with the Contractor (for the purpose of providing
goods or services for the project where the contractor is unable to do so or to transfer
risk).

2.2.1 RISK TO THE CLIENT

In essence, in a design and build contract, although the client is at certain risk, he/she is not as
exposed to loss or harm as is the contracted party . This is solely due to the fact that in a design
and build contract, the contractor is a single point of responsibility for the success of the entire
project. The following are the risks faced by the client:
a) Technical Risk
The client can suffer damages including but not limited to:
i.

Structural failure as a result of poor quality construction or a failure to fully

analyse the conditions of the site, e.g. foundation cracks or failure to analyse soil
density by the contractor; issues that do not immediately present themselves and
can affect the deliverables of the project well after its completion,

ii.

Usability reduced due to a construction that is not reflective of its design,

iii.

Delays which hamper the timely completion of the project.

b) Financial Risk
The client may face financial risk in the following ways:
i.

Failure to secure the financing required for the project, for example if he/she
applies for a loan and is not approved or projections were made that assets would
be liquidated to finance the construction and this was not done in a timely
manner.

c) Environmental Risk
In most cases, it is the client who is responsible for obtaining an environmental permit for
construction works therefore, the client is liable (in the event that he/she did not obtain a
permit) for any damages that might arise due to environmental degradation.
The client can protect him/herself from these forms of risk by:
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ii.

Obtaining insurance policies,

iii.

ensuring that the contractor procures a performance bond,

iv.

inclusion of liquidated damages2 in the contract,

v.

implementing the method of retention of payment3,

vi.

ensuring that a full environmental impact analysis is performed and guidelines are
prepared so as to customize the project to reduce unfavourable impacts.

2.2.2 RISK TO THE CONTRACTOR

a) Financial Risk the contract specifies the reward or price that is to be paid to the
contractor and is usually a lump-sum. This is a price for the whole of the contractors
responsibilities, including design, production and any necessary statutory approvals such
as planning permission (Murdoch, Hughes and Champion 2008). The contractor would
face the risk of the cost of design and construction exceeding the agreed upon sum at the
specific time.
Delays to the project may also result if the client fails to pay as is agreed upon in a timely
fashion which can negatively impact the contractor in that, as time progresses, he/she still
needs to pay for labour, rental of equipment etc. Non-payment is a starting point to many
issues that can affect the contractor and it can ultimately lead to severe debt and even
bankruptcy.
b) Technical Risk The contractor is solely responsible for the outcome of the construction
and as a result, its timely completion. Any issues that may arise with the structure during
or after its completion (during a warranty period), is the liability of the contractor. It is
not necessary for the client to attempt to distinguish whether a particular problem is a
design fault, a manufacturing fault or an assembly fault (Murdoch, Hughes and
Champion 2008). It is therefore up to the contractor to ensure that all phases of the
procurement are carefully monitored and strict rules and procedures adhered to in order
to minimize the faults that could occur. If the contractor sub-contracts work to other

Liquidated damages are damages that have been agreed upon, in contract, to cover various issues that can arise,
e.g. delay in completion.
3
Retention involves the withholding of a certain percentage of a payment due to the contractor until the next phase
of payment so as to ensure the contractors performance.

companies or persons, those contracts must cover issues that might arise in the realm of
their responsibility.
c) Social and Environmental Risk may arise as a result of the actual construction process
whereby equipment or wastes create annoyances or hazards for the surrounding
community as well as the threat to the flora and fauna of the area. Although these risks
exist in almost any infrastructure or construction project, the body that does the
environmental impact assessment (EIA) is responsible for giving the green light on the
project, thereby, transferring some of this risk away from the contractor.
d) Political risk such as government regulations or deregulations can result delays to the
project.
The contractor, as a means of protecting him/herself from effects of the abovementioned risks
can opt to:
i.

Boosting the project price to compensate for unforeseen problems such as delays in
payment,

ii.

Stipulating the need for an advance mobilization bond4,

iii.

Ensuring that all equipment required is mobilized and properly maintained to avoid for
unnecessary downtime,

iv.

The use of standard form contracts (such as FIDIC or JCT) for sub-contractors so as to
ensure all possible outcomes are covered by contract,

v.

Implementing the method of retention for payments to sub-contracting parties and

vi.

Consider entering into joint-ventures with other parties that possess the necessary
finances to cover loss. In this way, profits of the project must be shared but ultimately
risk is reduced.

2.3

CONCLUSIONS

In the design and build system, when contractors do not have in-house specialists, they are
forced to either sub-contract phases of work to other contractors or joint-venture with other

An advance mobilization bond is given to a contractor when the client wishes to advance them an amount of
money so that work can commence.

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parties to complete the works. It is very important to recollect that in the design and build
system, the client only interfaces the one in which he/she has a contract with and not the subcontractors.
Here, the client is not faced with the quantum of risk as the contractor is. This is due to the fact
that a client enters into contract with a contractor who agrees to take responsibility of all phases
of the project including design and construction. As with any construction project, the client is
faced with the issues of poor quality works and delays for which require measures to be put in
place such as performance bonds, liquidated damages and insurance to cover some of the losses
that might occur. The risks faced to the contractor are more widespread and one of the main
devices he/she uses to mitigate the impact of these risks is to boost his/her price.

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3. BUILD, OWN, LEASE, TRANSFER SYSTEM

3.1

INTRODUCTION

Before analysing the characteristics of a Build, Own, Lease, Transfer (BOLT) procurement
system, we must look at its predecessor from which it was derived. The Build, Own, Operate,
Transfer (BOOT) procurement system is utilized, specifically in large public infrastructure
projects, where a private entity is contracted to build and operate a facility that would otherwise
be built by the private sector, for example: airports, manufacturing plants, toll roads, bridges etc.
The BOOT system is normally adopted or categorized in the Public Private Partnership (PPP or
P3) model which is simply an organization through which a government service is funded or
operated (Board 2012).
In other words, in the BOOT model, the client (usually a public sector organization) enters into a
contract with a private-sector company (which can take the form of a corporation or a
consortium) to design, construct and operate a large project. The private company usually is
responsible for financing and operating for a determined period of time. At the end of the
contract period, the facility is transferred back to the public sector organization usually after the
investment has been recovered. This form of contract is beneficial to the public sector because it
transfers of all the risks that comes with the various phases of the project for the duration of the
contract while simultaneously reaching the goal of the project: the provision of goods or
services.
The BOOT model, though beneficial to massive infrastructural developments in developing
countries, has had its challenges particularly for the contracted party. After some experience
would have been garnered, different variants to this model were derived such as:
i.

Build, Operate, Own (BOO)

ii.

Build, Operate and Transfer (BOT)

iii.

Build, Operate, Lease Transfer (BOLT) (Suite 2000)

The BOLT model is in effect when a private or public sector client gives a concession to a
private entity to build a facility (and possibly design it as well), own the facility, lease the facility
to the client, then at the end of the lease period transfer the ownership of the facility to the client
12

(Shukla, Panchal and Shah 2014). The major difference between BOOT and BOLT is that in the
latter, operation and maintenance of the facility is the responsibility of the client. Figure 3-a
shows a visual depiction of the parties involved in a BOLT procurement model.

Design
Consultants

Client /
Government /
Public Sector
Org.

Private Entity /
C

Consortium of

Contractor

Companies
C
Financier(s)

Figure 3-a: Visual representation of the relationships of parties involved in a BOLT/BOOT

procurement system
3.2

RISK TO THE PARTIES INVOLVED

In this form of procurement, it is noticeable that the majority of risks are on the entity that is
contracted. Because of the fact that the private entity or consortium (also referred to as the
developer) is solely responsible for the sourcing of funding, planning, designing and construction
the bulk of risks are transferred away from the client. This is not to say that the client or public
entity does not share risk as well as it is they who are responsible for the operation and
maintenance of the project after it has been completed.
3.2.1 RISK TO THE CONTRACTED PRIVATE PARTY
As with the Design and Build form of procurement, the contractor faces risk in the following:

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a) Technical mainly due to the fact that most projects that fall under the BOLT model are
for the public sector and the country, e.g. a sewerage system, underestimating in terms of
design can lead to catastrophic failures affecting not only the client but the shareholders
and target market that depends on the services and/or goods.
b) Financial, Economic, Political and Social the private party is solely responsible for
financing the project. This means it would either have its own finances to invest, enters
into contract with financial institutions to provide funding or persuade private investors
to come on-board to make the project successful. Notwithstanding, the investments made
must be repaid and repayment terms will be negotiated in the specific contracts signed
with these parties. In most cases, in BOLT, the lease payment made by the client
becomes the method of repaying the investment, and ultimately rewarding the
developers shareholders (Shukla, Panchal and Shah 2014).
The entity faces the risk that:
i.

It fails to procure the required financing for the project,

ii.

Unforeseen circumstances, such as economic recessions or contractual

obligations between developer and design consultants and contractor, prohibit the
timely completion of the project,

iii.

The project does not meet the requirements of its shareholders and target
demographics,

iv.

Failure to obtain lease payment from the client,

v.

Delays in construction can result in penalties being levied against the entity,

vi.

A new government does not agree with the project or the terms outlined and
seeks to break contract or create regulations that render the usefulness of the
project defunct. It is noteworthy to mention that this is unlikely as a concession
agreement would have already been in effect when the previous government was
in place.

The developer can reduce the impact of technical these risks by ensuring that the pre-feasibility
and feasibility phases are concise and does not cut corners in anyway. Also, the price for leasing
as well as the sale price at transfer time when the contract period ends must be reflective of the
risks that were borne during planning, design and construction. In other words, a reasonable
14

price must be given that accounts for these risks. Inclusive of which, financing methods should
be diverse in that multiple financiers should be approached and demonstration made to attract
their investment. This way if a financier pulls out, then pressure can be put on the remaining
interested parties to take up the slack. It is also important that the concession arrangement
include provision of financial security to account for failed payments.
3.2.2 RISK TO THE PUBLIC ENTITY / CLIENT
In most BOLT systems, the projects are envisioned to satisfy a public need and the client is
usually the government. In BOLT, much of the risk is on the developer during the concession
period (the period from the commencement of the project up to the point when it is transferred to
the client) as outlined in section 3.2.1. Notwithstanding, the client faces risk both during and
after the concession period. During this period, the client is responsible for operating and
maintaining the project which is leased from the owner (developer) and as such faces the
following risks:
a) Technical and Operational lack of maintenance or failure to adhere to proper operating
guidelines can cause the projects deliverables to be compromised or the case where a
faulty design led to structural defects which were only noticeable after the operational
period has commenced,
b) Financial the required revenue is not generated (in the case of revenue-generating
projects) which can lead to failure to pay lease, failure to meet operational costs, or the
need to request funding to meet its obligations to the owner from the publics pocket.
c) Economic issues such as exchange rate fluctuations and recessions can hamper the flow
of revenue, e.g. economic factors which can affect tourism which can cause an airport
built under BOLT to suffer financially.
d) Social and Environmental the exposure to loss due to the failure to implement proper
procedures and mechanisms to deal with issues such as operational health and safety,
emissions, effluents, forest degradation, ozone depleting releases etc.
e) Political and Legal issues that arise through legislation debated in parliament or
lawsuits can result in prices for services or goods generated by the project less than
projected which further leads to financial risk, e.g. protests spur opposition parties to
15

influence the government to review the prices set as toll for the use of a specific bridge or
road built under the BOLT system.
Mitigation measures that can be implemented by the client can include:
i.

For technical risk, the client should ensure that State Government Agencies play a role in
the design and construction phases of the project so as to ensure that proper standards and
measures be adhered to and inclusive, an even greater role in the operational phase to
safeguard from risk that can occur due to lack of following best practices and guidelines
outlined by the developer,

ii.

Penalties to the developer must be defined in contract if delays cause the project to be
delivered late,

iii.

Financially, the client can take out insurance as well as provisions for liquidated damages
during the operation phase should certain defects be detected. In lieu of liquidated
damages, the client must ensure that the developer provides a reasonable warranty on the
projects design and construction. Inclusive, the government must try to guarantee at least
15-20% per annum rate of return to the owner. This would ensure that the concession
period just before transfer does not extend beyond 15 years (as is recommended for this
type of procurement system in (Shukla, Panchal and Shah 2014)),

iv.

The government must ensure that Regulatory Bodies such as the Environmental
Protection Agency plays a significant role in the monitoring of the operations,

v.

Personnel that interface with the public and the users of the system must be well trained
and prices should be set so as to provide for the required rate of return as well as taking
into consideration the target demographics that would receive the goods or services
offered.

3.3

CONCLUSIONS

It is therefore concluded that, both parties tied together in contract in the BOLT system share the
risks that come with the project. During the design, planning and construction phases, the brunt
of risk is borne by the developer while during the operational period, risk is transferred to the
client. After the concession period has been completed the owner transfers the project to the
client and ceases to receive a lease payment from them. Measures can be put in place by both
16

parties to reduce the exposure to loss resulting from technical, operational, financial, economic,
social and environmental risk which range from the need to seek financing from multiple sources
to ensuring that financial securities be obtained to involving State Regulatory Agencies and
Regulatory Bodies in both the planning and design phases as well as the operational stage.

17

BIBLIOGRAPHY
Board, Thomas. 2012. BUILD OWN OPERATE TRANSFER Real World Comparisons between
WATHBA 2 Wastewater Treatment Plant, United Arab Emirates and Seaview and MOA
Point Wastewater Treatment Plants in Wellington. Auckland, 8 January.
2013. Design-Build Institute of America. http://www.dbia.org.
2003. Laws of Guyana. Procurement Act 2003. Vol. Chapter 73:05. Georgetown: Parliament
of Guyana.
Merriam-Webster. 2014. Definition of Risk. Web Dictionary. Merriam-Webster Incorporated.
Murdoch, John, Will Hughes, and Ronan Champion. 2008. Construction Contracts: Law and
Management, Fourth Edition. New York: Taylor & Francis.
n.d. Purchasing Insight. http://purchasinginsight.com/resources/what-is/definition-ofprocurement-procurement-vs-purchasing/.
Shukla, Nirali, Riki Panchal, and Neel Shah. 2014. Build-Own-Lease-Transfer (BOLT): "A
Public Private Partnership Model that Bridges the Gap of Infrastructure in Urban
Areas". International Journal of Civil Engineering Research (Research India
Publications) 5 (2): 135-144.
Suite, Winston H.E. 2000. Contracts Management And Construction Law (CE64A). Vols. Units
6-11. Bridgetown: Distance Education Center - The University of the West Indies.

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