nuclear supply chain symposium - canadian contracting models
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NUCLEAR SUPPLY CHAIN SYMPOSIUM
CanadianContracting Models
Darryl J. BrownGowling Lafleur Henderson LLP
November 10, 2015
Suite 16001 First Canadian Place
100 King Street WestToronto, Ontario
Canada M5X 1G5
Telephone (416) 862-7525Facsimile (416) 862-7661
www.gowlings.com
Canadian Procurement/ConstructionDelivery Methods
Various procurement/construction delivery methods exist to provide alternatives as to how risks and responsibilities are allocated for a project and how key factors such as time and price are addressed.
Traditional Delivery Method: Design-Bid-Build
· Stipulated Price· Cost Plus· Unit Price
Contemporary Delivery Methods: Construction Management (not-at-risk / at-risk) Design-Build P3’s
Overview of Design-Bid-Build Model Under this model the owner retains a design team/consultant
such as an architect or engineer to design a project. Once plans are completed, the owner, usually through a call for bids (or, possibly sole-sourced negotiations), retains a contractor to construct the project. The owner, therefore, enters into two separate contracts: one with the design team/consultant and the other with the contractor.
Each of the parties may subcontract with various other consultants, trades and suppliers in order to fulfill their obligations at each project stage.
Overview of Design-Bid-Build Model(cont’d)
Model’s pricing structure may take 3 basic forms: Stipulated Price Cost Plus Unit Price
Cost Plus Model also lends itself to more complex pricing structures Guaranteed Maximum Price (Fixed) Guaranteed Maximum Price with sharing of savings Target Price (margin and/or entire payment at risk above Target)
ConsiderationsDesign-Bid-Build Model In General: Structure is good for a risk-averse owner as risks do not flow back to the
owner for construction or design defect issues – they remain with the contractor and design team, respectively
Owner must await completion of the design before commencing construction of the project - it cannot be fast tracked
Owner is not fully aware of the price until tender which may delay financing arrangements, etc.
Design consultant and contractor have the potential to be at odds with each other should problems arise - both could deny fault and engage in finger-pointing resulting in delay
ConsiderationsStipulated Price: Easier for a contractor to provide a fixed price due to the design being
completed before pricing occurs Should result in fewer changes to the design thereby saving owner
money Contractor absorbing greater risk, therefore, higher contingency No scrutiny of contractor’s books/records
ConsiderationsCost Plus: Contractor must keep and disclose full and detailed accounts and records
necessary to document cost Contractor’s profits are tied to fees paid for all materials and services,
therefore, potentially less incentive to be efficient Owner does not know the total cost of the construction project at the time of
signing the contract
Unit Price: Suitable for projects where the required materials can be easily identified but
not the number of such items Owner does not know the total cost of the construction project at the time of
signing the contract
Construction Management Method
Similar in framework to traditional construction contract with the primary difference being that an owner retains a construction manager (or Owner self-performs) in place of the general contractor to provide project administration and technical services such as scheduling, budgeting, and material selection, but not to do any actual construction work
No single contractor assumes responsibility for the entire project
Construction manager may be “at risk” or “not at risk”
Considerations: CM Not-At-Risk
Cost advantages exist in that there is limited risk to the construction manager whose fees should therefore be less
Model is suitable for moving construction along at a fast pace because procurement/construction can start before design is finalized
Owner has better control over budget and schedule
Costs can be saved given that contractors enter into contracts directly with the owner with no markup by a middleman
Construction manager’s experience may be looked to by the design team and they can work together
Owner carries the risk of construction regarding scheduling and performance issues, etc. rather than the construction manager
Limited incentives for construction manager to aggressively seek cost savings
Final cost of the design is not known to the owner until everything is in place
Increased level of contractual complexity
Owner may be found to be the “constructor” given that the owner is entering into several contracts with contractors
Considerations: CM At-Risk
Similar to that of a Construction Manager Not-at-Risk model except that the risk of being found “constructor” now flows to the construction manager instead of the owner
Cost savings reduced as construction manager bears increased risk
ONE MODEL DOES NOT FIT ALL
Contract Delivery Models and Pricing Structures are becoming more complex to reflect the complexities of the scope of nuclear projects
EXAMPLE: Pricing OptionsHybrid Pricing Options arising to deal with different aspects of EPC contracting
1. Engineering Majority of pricing fixed First of a kind risks or areas with significant unknowns (such as
Inside the Vault) may require Target Price
2. Procurement Generally Fixed
3. Construction Variations of Fixed and Target Pricing to address allocation of
risks and risk sharing for significant unknowns
STICKS & CARROTS(Risk-Sharing)
A. STICKS Delay Liquidated Damages for failing to achieve milestones Escalating Loss of Margin or Entire Fee above Target Price
B. CARROTS Bonus if cost savings below Target Price Bonus if milestone dates achieved
CONCLUSION
The best Models allocate risks to the party best able to manage risk
Goal: achieve a partnership where both parties have an opportunity to succeed
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