What is Procurement in the Construction Industry?

Procurement lies at the heart of every construction project.

From housing developments to commercial spaces, procurement defines how contractors and subcontractors are managed and refers to acquiring goods and services for a construction project. When done well, procurement will ensure projects are delivered on time, on budget and in compliance with all the industry standards.

For those operating under the UK’s Construction Industry Scheme (CIS), procurement is especially relevant. Under the scheme, all contractor and subcontractor payments must be handled correctly to remain compliant with HMRC. Here at Contractwise, we offer a wide range of services that assist with this, keeping contractors and subcontractors protected. This includes payroll audits, removing the risk of HMRC reclassification and ensuring CIS compliance.

With extensive knowledge of the construction industry, in this article, we’ll take a closer look at how procurement in the construction industry works.

What is procurement in the construction industry?

Procurement in construction is the process of acquiring goods and services, including goods and labour that are needed to complete a project. However, it’s about a lot more than just purchasing; it involves tendering, negotiating contracts and risk management. The overall goal is to ensure contractors and suppliers deliver the promised work at the right costs and to the highest standards.

Types of procurement

There are several procurement routes, each offers its own advantages depending on the project scope. Let’s explore the different options:

Single-source procurement

This is where a business gets all of its materials and services from one supplier. There is no tendering involved, and it often occurs when there is a good relationship between both parties.

This approach can save time as there is no lengthy bidding process to worry about, and it builds trust and loyalty between the client and the contractor.

Multiple-source procurement

Instead of relying on just one supplier, clients will use multiple suppliers to acquire the same resource.

There is a reduced risk to this approach, as if one supplier underperforms, others can step in to fill the gap. It is also more competitive as people can go elsewhere, so it encourages suppliers to keep costs at a reasonable level.

Two-stage tender

As the name suggests, this process works in two steps. First, the buyer will provide the supplier with a list of requirements. The supplier will then provide the buyer with a list of prices. This process will be carried out with multiple suppliers before the buyer reviews all the options and makes their choice.

This tends to be more flexible and gives construction companies a good idea of pricing before having to make a commitment.

Selective tendering

Sometimes known as restrictive tendering, this process works by the buyer inviting selected suppliers to submit bids for a project. This provides quality assurance as it ensures only competent contractors can participate, and it also saves time as only realistic bids will be made.

Open tendering

Here, contracts are advertised publicly, and anyone can place a bid. Usually, this is used when the scope of work is simple, and it encourages competitive pricing. However, it can attract a lot of low-quality bids, too.

Negotiated contracting

In this scenario, the buyer will negotiate directly with a single contractor to agree on terms. This can foster long-term relationships, and contracts can often be customised to the unique needs of the project.

What are procurement contracts?

Procurement contracts are formalised agreements that are created between the client and their chosen contractor or supplier. This will be drawn up following the procurement process and will define responsibilities and payment terms of the deal. Common options include:

Lump sum contract

This is the most common type of contract. Here, the bill will be paid in one go once the project has been completed, but it is not always a fixed price. This is because costs can fluctuate significantly during the course of a project.

Cost reimbursable contract

In this case, the contractor is reimbursed for all of the costs incurred during the project, as well as being given a fee on top.

Guaranteed max price contract

With this type of contract, an agreement will be made that costs will not exceed a pre-agreed amount. Anything additional, the contractor will be responsible for paying for.

What to look for in a procurement contract?

When reviewing procurement contracts in the construction industry, it’s essential to look beyond the headline numbers and consider everything. Here are some things you should pay attention to:

Scope of work

The contract should always clearly define the full scope of work, including:

• Descriptions of tasks

• Specifications for materials

• Quality standards that must be adhered to

Construction timelines

Timeframes are central to all construction projects, where delays can trigger penalties and financial losses. Contracts should set out:

• Start and completion dates

• Key milestones

• Consequences if delays occur

Costs

Undoubtedly, financial terms are key to every construction project. A strong contract will outline:

• Pricing structure

• Schedule of payments

• Retention clauses

• CIS compliance information

This will protect both the contractor and subcontractor, ensuring transparency and avoiding unexpected financial disputes.

Dispute resolution

Even with the best planning, disagreements can arise during a construction project. This should be factored into contracts:

• Escalation procedures: This will outline the process of what should happen if issues occur.

• Alternative dispute resolution: Guidance on mediation or arbitration processes.

• Legal information: Clarifying which legal frameworks will be applied to the project.

Change order process

Construction projects often evolve after contracts have been signed. Clear mechanisms need to be in place to handle change, including:

• How changes are requested

• Approval authority

• Impact on costs and timelines

• Documentation requirements

Final Thoughts

Overall, procurement in the industry is about much more than just sourcing contracts or buying materials - it is the foundation of project success. From choosing the right tender to setting contract terms, it is important you think carefully about this process. Compliance is also important during procurement, and here at Contractwise, we will make navigating CIS a breeze. For more information, contact our team today.