procurement strategies for infrastructure...
TRANSCRIPT
Procurement strategies for infrastructureprojects
Dr Ron WatermeyerDEng (Witwatersrand) , FSAICE, FIStructE, FICE, FSAAE
CEng, PrEng, PrCM, PrCPM
Director, Infrastructure Options (Pty)Ltd
Further reading – seehttp://www.ioptions.co.za/default.aspx?PageId=12
http://www.cidb.org.za/_layouts/toolkit/data/ai_docs/IDM-Toolkit-DMG-6-PG2-ConstructionProcurementStrategy-V11-2011-04-20.pdf
Infrastructure:• Immoveable assets which are acquired, constructed
or which result from construction operations; or• Moveable assets which cannot function
independently from purpose built- immoveableassets
Value for money concept 1Value for money may be regarded as the optimal use of resources to achieve theintended outcomes. Underlying value for money is an explicit commitment to ensurethat the best results possible are obtained from the money spent or maximum benefit isderived from the resources available. It is a means for developing a better understanding(and better articulation) of costs and results so that more informed, evidence-basedchoices can be made.Value for money is about striking the balance between three “E’s” economy, efficiencyand effectiveness” whilst being mindful of a fourth “E” – equity i.e what can beleveraged through the project .
The critical starting point in delivering value for money through projects is to clearlydefine objectives and expected outcomes as well as parameters such as the time lines,cost and levels of uncertainty. This frames the value for money proposition that needs tobe implemented at the point in time that a decision is taken to proceed with a projecti.e. it establishes “economy” and identifies “equity”. The end point is to compare theprojected outcomes against the actual outcomes i.e. to confirm the “effectiveness” of theproject in delivering value for money.
Cost ImpactInput Activities Outputs Outcomes
Value for money
Equity Considerations
Effectiveness
planning implementation close out
Public Infrastructure• has little inherent
value• creates value through
the economic andsocial activities itsupports.
Public infrastructure which• provides
improvements orefficiencies in services,production or exportcapabilities
• is delivered andmaintained in amanner whichminimizes waste ofmaterials, time, andeffort in order togenerate themaximum possibleamount of value
is most likely tocontribute to economicgrowth
Key question - “does theinvestment provide value
for money?”
Value for money
Economy Efficiency
Value for money concept 2
Cost ImpactInput Activities Outputs Outcomes
Value for money
planning
Economy(cost of resources)acquiring inputs of the rightquality at the right price
Efficiency(productivity)how well inputs areconverted to outputs.
Effectiveness(achieving of outcomes)how well outputs achievedesired outcomes
Equity considerationsWhat equity (promotion of secondary objectives) can be leveraged through a project
implementation close out
Gap puts valuefor money fora project at
risk
Root causes forlack of success?
Optimism bias (the humanmind’s cognitive bias inpresenting the future in apositive light)Strategic misrepresentation(behaviour that deliberatelyunderestimates costs andoverestimates benefits forstrategic advantage
Poor / lack of procurementstrategies
Poor procurement practicesin selecting contractors and
consultants
Degree of project definition at end ofplanning
3
Guideline fees published by SACAP andECSA suggest that project definition issomewhere between 20 to 40% at the endof contract planning processesUS Department of Energy - class 3 estimateis made towards the end of contractplanning processes with a -20 to + 30%accuracy where the degree of projectdefinition is between 10 and 40%
Key question – how does one keep project withinbudget during implementation?
Portfolioplanningprocesses
Contractplanningprocesses
Detailed designprocesses
Site processes
Close outprocesses
Strategic briefConcept report
Design developmentreportProductioninformation
Completed works
Planning
Close out
Implmentation
“mega project” - extremely large scale project ~ 1 billion US$ or more, time to complete of 5years or more and generates high public attention
Criteria for failure (Merlow 2011) - one or more of the following:Costs grew (real) 25%+; Schedule Slipped 25%+; Overspent (Absolute Measure) 25%+; Execution time (AbsoluteMeasure)50%+; Severe and Continuing Operational Problems into Year 2 after start-up Yes
66%fail
Project Initial Budget(R bil)
Estimated or final Cost (Rbil)
% over budget
Gautrain 25.1 30.5 21Kusile 90 121 34Medupi 33.6 105 213Gauteng Toll Roads 6.3 90 1329NMPP 11.1 23.4 111OR Tambo 5.2 8.5 64De Hoop Dam 7.9 20 153FIFA Stadiums 8.1 18.4 126N4 toll roads 2 3 50
NERSA
Frustrations 4MEGA ProjectFailures
The inability of many South Africanmunicipalities and provincial governments tospend all of their capital budgets each yearhas for several years been a sore point withNational Treasury (Wall et al, 2012)
World Bank - countries typically only manageto spend about two thirds of the budgetallocated to investment in infrastructure(Foster 2008)
Inability to spend budgets
Clientsatisfaction?
time
cost
Quality / performance
Quantum ofdelivery
Approach to contracts 5
Traditional approach inherited from the UK
After the Romans left Britain there was virtually no civil engineering work until the construction of the Clyde Canal
John Smeaton in 1768 during the construction of the Clyde Canal (Scotland) established his management scheme forthe construction phase with detailed tables of responsibility for:
• the engineer in chief,
• the resident engineer and
• the ‘surveyors’ for the various geographical sections working under him.
He established the master / servant relationship between designers and contractors
Sir Joseph Bazalgette’s standard form of contract for London’s major sewer projects and the embankments on theThames 1860s was adopted by the Metropolitan Board of Works based on the mater / servant relationship
Institution of Civil Engineers’ standard form of contract published in 1945 was based on the 1860 standard form ofcontract
South African current traditional forms of contract based on these historic forms of contract
Office of Government Commerce (UK)Common Minimum Standards for Procurement of Built Environments in the Public Sector(2006)
Procurement strategies and contract types must support the development of collaborativerelationships between the government client and its suppliers and shall facilitate the earlyappointment of integrated supply teams (each part of which should incorporate an integratedsupply chain)
Guidance states:Traditional, nonintegrated procurement approaches should not be used unless it can be clearly shownthat they offer best value for money – this means, in practice they will seldom be used
Procurement strategy 6
Procurementstrategy is the• packaging• contracting• pricing, and• targetingstrategy andselection
procedure for aparticular
procurement
Organization ofwork packagesinto contracts
How to securefinancial offers
and toremuneratecontractors
Nature of therelationshipbetween the
parties
Procedures forpromotingsecondary
procurementobjectives
How to solicittender offers
Procurement strategy is all about the choices made in determining howbest to achieve objectives
Maintenance project
Construction projectPackage =works whichhave beengroupedtogether fordelivery undera singlecontract or apackage orderissued in termsof a frameworkagreement
There are a number of different approaches toprocurement each of which can result indifferent outcomes. Procurement strategy is allabout the choices made in determining what isto be delivered through a particular contract, theprocurement and contracting arrangements andhow secondary procurement objectives are tobe promoted.A construction procurement strategy can bedeveloped for a single project, a programme ofprojects or a portfolio of projects to identify thebest way of achieving objectives and value formoney, while taking into account risks andconstraints
packages (single ormultiple projects)
package 1package 2package 3
programme
portfolio of projectsOver next few years
portfolio: a collection ofprojects or programmesand other work that aregrouped together tofacilitate effectivemanagement of that workto meet strategicobjectivesprogramme: a group ofrelated projects managedin a coordinated way toobtain benefits and controlnot available frommanaging themindividually Packaging concept
Framework for developing strategy 7
Gather andanalyse
information
(Conduct spend,organisational
and marketanalyses)
Formulateprimary andsecondary
procurementobjectives
Package worksinto contracts ororders linked to
a frameworkagreement
Allocate risks forpackages Contracting
strategy Pricing
strategy
Identify asuitableform ofcontract
Decide onselectionprocedure
Decide ontargeted
procurementstrategy
Packageprofessional
servicecontracts
Allocaterisks for
professionalservice
contracts
Identify asuitableform ofcontract
Documentprocurement
strategy
Contracting strategy• Design by employer• Develop and construct• Design and construct• Construction management• Management contractor
Pricing strategy:• Lump sum• Price list• Activity schedules Bill of quantities Cost reimbursable Target cost Cost plus
Primary objectives• tangible ( budget,
schedule, quality andperformance
• environmental andhealth and safety
• intangible (buildability,relationships, clientinvolvement, end usersatisfaction,maintenance andoperationresponsibilities etc.
Secondary(developmental)objectives (what is to bepromoted):• B-BBEE• alleviation and
reduction of poverty,• local economic
development,• the transfer or
development of skills• contractor / supplier
development• etc
Decide on deliverymanagement
strategy
Role players 8
Client team Delivery team StakeholdersClientAs sponsor initiates, commissions andpays for the project, owns the businesscase and leads the projectAs implementer• oversees
o management of demand;o programmes to realise specific
benefits;o projects which progress
implementation;o budgets and cash flows;o procurement of implementation
resources;o the payment of contracted persons
and the accounting for expenditure;o compliance with legislation;o etc.
provides client direction to andaccepts the outputs of the deliveryteam
leads engagements with stakeholdersand utilities
etc
Design team – integratesclient’s requirements into
workable solutions
Supply team (manufacturerand constructor)–
manufacture or provide newinfrastructure or rehabilitate,
refurbish or alter existinginfrastructure
Custodian - thecaretaker of infrastructure
throughout its lifecycle
Treasury – budgets forand controls financial
expenditure
Project manager – deliversthe development and
implementation of the project
Affected communities –the communities that are
impacted upon by theprojects
End user – thebeneficiary of the
business case
Delivery management is the organisation, administration, andsupervision of processes which when combined into a comprehensive
plan, provides the business and technical functions needed tosuccessfully achieve the outcome of the project
Implementation responsibilities are usually assigned to a deliverymanager. A delivery manager sets the team up for successful
delivery and removes obstacles, or blockers to progress.Delivery management strategy
Procurement strategy
9Delivery team
Delivery team
Design team
Supply team(manufacturer and
constructor
Project manager
Contract manager administers a contract
or an order on behalfof the employer
Designer provides design
or conditionalassessmentservices
Lead designer• establishes and refines
the design approach orsolution so that itachieves the requiredstandards and is co-ordinated within theproject team
Cost controller• provides independent
and impartialestimation and controlof the cost ofconstructing,rehabilitating andrefurbishinginfrastructure
Supervising agent• confirms that the works are
proceeding in accordancewith the provisions of thecontract
Project manager delivers the development and implementation of the project administers professional service contracts on behalf of the client
Procurementleader• oversees the
development ofthe procurementdocuments andmanages theprocurementprocess
Project leader leads and directs the
design team in a non-technical role includingthe monitoring andintegration of theactivities, developmentand maintenance of aschedule, monitoring ofprogress and facilitationof the client acceptanceof an end of stagedeliverable
Health and safety agentassumes statutory
responsibilities imposedby the ConstructionRegulations and leadshealth and safety riskmanagementcompliance processes
Manufacturer /Constructor• manufactures or
provides newinfrastructure orrehabilitates,refurbishes or altersexistinginfrastructure
Project, programme and portfoliomanagement
10
Portfolio managementManagement of initiatives and changes thatcollectively will deliver strategic objectives
Service delivery
Programme managementManagement across a group of projects to
realise the anticipated benefits
Stakeholder value
Quality deliverablesProject managementManagement of time, cost andquality to deliver the required
capabilities
Do the rightthings
In the rightway
Do themwell Capability
Benefits
Results
cost
qualitytime
cost
qualitytime
cost
qualitytime
Growing synergyProject management is the application ofknowledge, skills, tools and techniques to projectactivities to meet project requirements
Programme management is the process of managing multiple ongoing projects
“Sponsor”
“Implementer”
“project manager”
Procurement routes for infrastructure 11
Need identified forinfrastructure
Funding?
Awardcontract
Coordination?
Client cannotfund outrightpurchase
Client can fundoutright purchase
Enter into alease
Enter into aPPP
requirednotrequired
Client transferssomeresponsibilities Client appoints another public sector entity to
function as the implementer on an agency basis
Apply selectionprocedure andtender process
Identify pricing strategyand suitable contract
and developprocurement document
Award contractto a principalagent
Client retainsfullresponsibility
Deliverymanagement?
Identify pricing strategyand suitable contract
and developprocurement document
Apply selectionprocedure andtender process
Identify pricing strategyand suitable contract
and developprocurement document
Apply selectionprocedure andtender process
Apply selectionprocedures and
tender processes
Award professional service, service,supply and engineering and construction
works contracts as required
Developprocurement
strategy
Developprocurementdocuments
CIDB register of contractors 12The concept of primary and secondaryobjectivesObjectives inform decisions that are made regarding investments in infrastructure.Procurement objectives accordingly relate to the delivery of the product (primaryobjectives),and what can be promoted through the delivery of the product(secondary objectives)
Primary objectives relating to the delivery and maintenance of infrastructureaccordingly include:• tangible objectives including budget (cost of the works); schedule (time for
completion); quality and performance characteristics required from the completedworks; rate of delivery (how quickly portions of the works or a series of projectscan be delivered or funds can be expended)
• environmental objectives• health and safety objectives• intangible objectives including those relating to buildability i.e. the ease with
which the designed building or infrastructure is constructed relationships (e.g.long term relationship to be developed over repeat projects, early contractorinvolvement, integration of design and construction etc); client involvement in theproject; end user satisfaction; maintenance and operational responsibilities.
Secondary objectives typically include those relating to broad Based BlackEconomic Empowerment, gender or racial equality, work opportunities for SMMEsalleviation of poverty, local economic development, development of CIDB registeredcontractors, transfer / development of skills, reduction of environmental impacts andimprovement in health and safety performance
Secondary procurement objectives are additional to those associated with theimmediate objective of the procurement itself. Secondary procurement policyobjectives influence procurement strategies both directly and indirectly.
An objective is an aimor a goal. It issomething that one'sefforts or actions areintended to attain oraccomplish
Time
Cost Quality /performance
Quantumof delivery
Competingobjectives
Procurement objectives
Framework agreement concept 13National Treasury Standard for Infrastructure Procurement and Delivery Management
Definitions
Framework agreement: an agreement between an organ of state and one or more contractors, the purpose of which isto establish the terms governing orders to be awarded during a given period, in particular with regard to price and, whereappropriate, the quantity envisaged
Dictionary definition• Sum of money for which
something is purchased• The actual cost of acquiring
something calculatedaccording to some specificmeasure or an estimate ofwhat the transaction isworth
Allows the employer to procure on an as-instructed basis (call offs) over a set termwithout necessarily committing to anyquantum of work
Supply contracts – batch order
Services contracts – task order
Works contracts – package order
Package / batch/ task order #6
Frameworkagreement
End of term
Start of term
Package /batch / taskorder #1 Package / batch
/ task order #2
Package /batch / taskorder #3
Package / batch/ task order #4
Package / batch/ task order #5
Order: an instruction to provide goods, services or any combination thereof under aframework agreement
Packaging strategy
Procure works or construction service?
Chamber of Mines – fourthquadrant (R70 m)
Package #1 Package #2
Undergraduate ScienceCentre– phase 1 (R178 m)
Wits Art Museum (R68m)
Package #4
Package #3
Refurbishment of Chamberof Mines – (R45m)
Start October2010
Start November2009
Start January 2009
April 2010
Same contractor but different professional teams
14
WestCampusGeneratorset
Newundergraduatescience centre
South Block forSunnysideresidence
Chamber ofMines / 4thquadrant andrefurbishment
Wits ArtMuseum
East CampusGenerator set
Short-term “hit-and-run” relationships focused onone-sided gain
Procure a construction serviceLong-term relationships focused on maximisingefficiency and shared value
Culture change
WitsUniversity
Principles for framework contractors 15Framework agreements may be entered into with contractors by:• inviting tender offers to enter into a suitable contract for the required work, using stringent
eligibility and evaluation criteria to ensure that contracts are entered into with only thosecontractors who have the capability and capacity to provide the required goods, services orworks; and
• entering into a limited number of contracts based on the projected demand and geographiclocation for such goods, services or works
The term of a framework agreement shall not exceed:• three years in the case of all organs of state other than a major public entity, a national
government business enterprise or a provincial government business enterprise; or• four years in the case of a major public entity, a national government business enterprise or
provincial government business enterprise
Framework agreements that are entered into shall not commit an organ of state to anyquantum of work beyond the first order, or bind the employer to make use of suchagreements to meet its needs. The employer may approach the market for goods or services orany combination thereof, whenever it considers that better value in terms of time, cost and qualitymay be obtained.
Framework agreements that are entered into shall set out:• the terms which are applicable for the term of the contract;• the manner in which orders are instructed;• the scope of work covered by the agreement; and• the basis by which contractors will be remunerated for work performed in terms of an order, if
and when such an order is issued.
NationalTreasuryStandard forInfrastructureProcurementand DeliveryManagement
Key question – how do you “determine thebasis for remunerating contractors for work”which is not defined?
Start date End dateFramework contract
Orders
Start EndStart End
Start
StartEnd
End
Principles for framework contractors 16
NationalTreasuryStandard forInfrastructureProcurementand DeliveryManagement
A framework agreement that is entered into may not be amended.
Orders:
• shall cover only goods or services or any combination thereof, falling within the scope ofwork associated with the agreement;
• may not be issued after the expiry of the term of the framework agreement; and• may be completed even if the completion of the order is after the expiry of the term
permitted
not permitted
Shift in thinking 17Current paradigm
Client appoints a professional team todesign the works
Open tenders are called once theproduction information has been finalisedby the professional team(production information = final detailing,performance definition, specification,sizing and positioning of all systems andcomponents enabling either construction(where the contractor is able to builddirectly from the information prepared) orthe production of manufacturing andinstallation information for construction)
Contractor prices the productioninformation
Contractors are contracted on a bills ofquantity basis for a single project (whichmay or may not include budgetary items tocover aspects of the works which have notbeen finalised)
Procuring a particular works
Developconcept forworks
Scope works
Documentworks
Constructworks
Hand over works
Package orders
P#1
P#2
Design works
Packagesdelivered overa term by asinglecontractor
Procuring a construction service over a period of time
P#2
P#2
How contractors remunerated for broadly defined work which isusually not sufficiently scoped to enable it to be priced at the timewhen the framework agreement is entered into
Need to relook at what pricing method are available
Challenges with framework agreementsGoodsHow do you add similar items that are not priced?How do you deal with the size of orders?How do you reduce risk pricing and compensate contractor for events for which they are not at risk?
ServicesHow do you add similar items that are not priced?How do you reduce risk pricing and compensate contractor for events for which they are not at risk?
Professional servicesHow do you remunerate consultants before the extent of the works which are to be delivered is known?
Engineering and construction works (development of a product (works) on a site)How do you remunerated contractors for broadly defined work which is usually not sufficiently scoped to enable it to bepriced at the time when the framework agreement is entered intoHow does one deal with preliminary and general items e.g. site establishment, management of the works, equipmentrequirements etc which vary significantly from site to site
Require a flexible contract which:
• provides cost based contracting options which enable costs to be controlled• provides a means in priced based contracts to arrive at prices for items not priced at the start of the contract in a
transparent manner• compensates contractors for events which occur
18
NEC3 family of contracts are suitable for framework contracts as they make provision for cost based pricingstrategies and assess compensation events on the basis of cost as defined in the contract plus a feeagreed at the time of contract formation which covers profit, overheads etc.
Bases for changes to the prices forcompensation events in NEC3 contracts
19
Compensation events are events which, if they occur, and do not arise from the Contractor’s fault, entitle theContractor to be compensated for any effect the event has on the Prices and the Completion Date or a Key Date (ifapplicable)
A change in Works Information, Services formation, Goods Information or Scope is a compensation event – anychange to such information after the conclusion of the contract is a compensation event
Fee percentages thattendered are includedin the Contract Data
Defined Costcalculated at openmarket or competitivelytendered prices
The changes to the Prices are assessed as the effect of the compensationevent upon
• the actual Defined Cost / Time Charge for the work already done and
• the forecast Defined Cost / Time Charge for the work not yet done.
A fee for overheads and profit is added to Defined Cost
EXAMPLEChange in Prices = subcontracted fee percentage x Defined Cost of subcontracted work / 100 + direct fee percentage Defined
Cost of other work / 100 + Defined Cost
Items not priced in Price List. Price Shcedule or Task Schedule are dealt with in the same way as compensation events
Options for pricing – price based 20
Contractor’s price build up :
• General items• Construction (work)
content• Overheads• Risk allowance• Profit
ItemNo. Description Unit Quantity Rate Total
Activity schedule - programmelinked to lump sums for activities
Bill of quantities - based on a standard system of measurement(Employer at risk for items not measured or in accordance withsystem of measurement and changes in quantities)
ItemNo.
ProgrammeReference
Activitydescription
Price
Price list - Lump sum with Employer at risk for changes inquantities
Lump sum
Pricing strategy
Options for pricing – cost based 21
Contractor’s prices build up:• General items• Construction (work)
content• Overheads• Risk allowance• Profit
Sharing ofcost savings/ overruns
Wages and salaries
Materials & plant at open market rates
+ Site overheads
Equipment at agreed rates, marketrelated rates or ± percentage of ahire list
Subcontract costs
+ Feepercentage
Cost reimbursablecontract
Target contract withactivity schedule orTarget contract withbill of quantities
Management contract(cost plus)
Subcontract costs
Prices for work done bythe contractor himself
+Subcontractedfee percentage
+ Feepercentage
+Subcontractedfee percentage
Pricing framework agreementsThe challenge is to decide on how contractors are to be remunerated forbroadly defined work which is usually not sufficiently scoped to enable itto be priced at the time when the framework agreement is entered into
Prices based on time charges or the percentage of construction costscan be used as a basis to arrive at price in Professional ServiceContracts.
Engineering and construction works involves the development of aproduct (works) on a site
Key questions – how does one deal with preliminary and general itemse.g. site establishment, management of the works, equipmentrequirements etc which vary from site to site
Answer require a flexible contract which:• provides cost based contracting options which enable costs /
productivityto be controlled
• provides a means in priced based contracts to arrive at prices foritems not priced at the start of the contract in a transparentmanner
Can tender a target price for the first package order and negotiate thetarget prices for subsequent tenders. Alternatively can invite tenderspurely on the basis of margins and negotiate a target price when thescope is capable of being priced.
NEC3 ECC– Option C (Target
contract withactivity schedule)
_ Option D (Targetcontract with bill ofquantities)
- Option F(Managementcontract)
Caution – NEC3 Option D (Target contract with bill of quantities) needs to be used with caution as thequantum of the target is known after Completion when the works is remeasured. Also assessment ofcompensation events is fairer and easer with activity scehdule. Work load on Project Manager andtheir delegates significantly less with an activity schedule.NB standard system of measurement assumes that the work is fully designed.
NEC3 ECSC– build up price from atendered Price List andtransparent cost plusprocedure to deal withitems not priced
22
Target pricecontrolsproductivity
Costscontrolled ifmost of thework issubcontracted
Contracting strategy options 23
Design and construct Contractor designs a project based on a brief provided by the client and constructs it
Design and construct a synthetic turf hockey pitch(national level, wet unfilled pitch), laid on top of ashock-pad and an engineered base / subbase, includingrun-off areas, technical areas, drainage and watersystems in accordance with the International HockeyFederation requirements
Employer
Contractor
Contractor
Employer
Electricalengineer
Civil engineerArchitect
Quantitysurveyor
Develop and construct Contract based on a scheme design prepared by the client under which a contractorproduces drawings and constructs it
Complete design for residences such that each unithas:• a central light complete with switch;• at least two double plug points in each room;• etc
Design and construction integratedEmployer not liable for delays and slippages in design
example
example
Design byemployer
Contractor under which a contractorundertakes construction on the basis offull designs issued by the employer
Managementcontractor
Contractor is responsible for planningand managing all post-contractactivities and for the performance ofthe whole of the contract
Mechanicalengineer
Professionalservice providers
Employer
Contractor
Management Contractor
Management contractor isprovided with a brief isrequired to manage thedesign (if required) andconstruction of the works bysubcontracting it to others
Contracting strategy
EPC(Engineering,Procurement,Construction)
Under an EPC contract, thecontractor will design, procurematerials and construct - throughown labour or by subcontracting partof the work.
2
Terminology 24
Employer
Contractor
Professionalservicecontracts
Supplycontracts
Subcontracts Servicecontracts
Management contract with design and constructresponibilities ?
Employer
Contractor
Turnkeycontract
Turn-key refers to somethingthat is ready for immediateuse, generally used in thesale or supply of goods orservices.
Design andconstruct?
EPCM(Engineering,ProcurementandConstructionManagement)
The project ownerselects a principalprofessional serviceprovider who managesthe whole project onbehalf of the owner.This EPCM professionalservice providercoordinates andmanages all the design,procurement andconstruction work
Contractor
Professionalservice
contracts
Supplycontracts
Subcontracts Servicecontracts
Employer
Professionalservice
contracts
Supplycontracts
Servicecontracts
Contractor Contractor
Constructionmanager
(Professionalservice contract)Professional
servicecontracts
Servicecontracts
Design-build
Design-build is a method to deliver aproject in which the design andconstruction services are contracted bya single entity known as the design–builder or design–build contractor
Design byemployer?
Early contractor involvement 25
Developconcept forworks
Scope works
Documentworks
Constructworks
Hand over works
Package orders
P#1
P#3
Design works
Packagesdelivered overa term by asinglecontractor
P#2
Sharing ofcost savings/ overruns
Stage 3: Strategic brief
Stage 4: Concept report
Stage 5: Designdevelopment report
Stage 6: Productioninformation
Contractorappointed in
traditionalcontracts
Early contractorinvolvement
Framework agreements
26Allocation of responsibilities (risks) betweenEmployer and Contractor
Portfolio planningprocesses
Project planningprocesses
Detailed designprocesses
Site processes
Close outprocesses
Risk is to expose (someone or something valued)to danger, harm, or loss
Workflow
Contractorappointed in
Design byemployer sratgey
Managementcontractor
Contract under which acontractor providesconsultation during thedesign stage and isresponsible for planning andmanaging all post-contractactivities and for theperformance of the whole ofthe contract
Design andconstruct
Contract in which acontractor designs a projectbased on a brief provided bythe client and constructs it
Develop andconstruct
Contract based on a schemedesign prepared by the clientunder which a contractorproduces drawings andconstructs it
Design byemployer
Contract under which acontractor undertakes onlyconstruction on the basis offull designs issued by theemployer
Early contractor involvement deals withfragmentation of design and construction –allows integration
Early contractorinvolvement(design and
construct, developand construct and
design by employer
Options and combinations 27
Lean construction conceptTo provide higher value and less waste thefragmentation in design needs to be addressed,preferably before 25% of the design is complete
Target cost contracts can enable this to happen even where a design byemployer approach is adopted as it allows a specialist in construction to
be appointed at the same time as the design teamAlternative is design and construct or develop and construct
Employer’s riskContractor’s incentive / risk
MinMax
MaxMin
Activity schedule (lump sum)
Bill of Quantities
Target cost
Cost reimbursable
Em
ploy
er’s
flexi
bilit
yto
eff
ects
cope
cha
nges
Min
Max
Pricing strategy
The relationship between the employer’s risk and flexibility to effect scope changesin the different pricing strategies
Bill of quantities
Target cost
Employer’s riskContractor’s risk
Employer’sflexibilityto effectchange
Price List
Cost reimbursable
min
maxminmax
maxmin
Activity schedule / lump sum
Design byemployer
Develop andconstruct
Design andconstruct
Managementcontractor
Cost reimbursable
Lump sum
Activity schedule
Price list
Bill of quantities
Target contract
Cost plus
Permutations
Critical questions– who is responsible for the design?- when is a contractor appointed ?- how do you remunerate contractors
Fast track construction - options 28
Target at start (total ofthe Prices)
Target at Completion (total of thePrices) adjusted for compensationevents
Price based onpercentage of productioninformation
Rand
Assumed Price ofoutstanding productioninformation based onelemental cost estimate
Price for compensationevents other than changesin production information
Price based on final (100%complete) productioninformation
Production information (information enabling either construction or the production of manufacturing and installationinformation for construction) needs to be complete in order to price a contract. This is not always possible. As a result,certain pricing assumptions may need to be made regarding allowances for items or budgetary items.
Option 2: Targetcontract
Allows continuousbudget control withearly contractorinvolvement as allparticipants arefocussed onfinalising the workto go within thetarget price at thestart
Option 1:Provisional billsof quantities“Pay as you go”system with nocontractor insightsand no incentive tokeep costs withinestimates
Contract value of main contractexcluding subcontracts and relatedmarkups (fixed component)
Estimated value of subcontractsincluding markups (highlyvariable component)
Price adjustment for inflation(projected component)
Contract value at award
Final contract value
Actual value ofsubcontractsincluding markups
Final priceadjustment forinflation
Difference = risk associated withdelivery model / poor estimates
Cost of changesto scope of workafter contractconcluded
Rand
Objectives / philosophy embedded instandard forms of contracts
29
JBCC Principal Building Agreement (July2007) Clause 15.5 : The contractor shallprovide everything necessary for the properexecution of the works and shall carry out andcomplete the works in compliance with thecontract documents, using materials andworkmanship of the quality and standardsspecified therein, provided that such quality andstandards shall be to the reasonable satisfactionof the principal agent
Contracts are drafted around significantly different objectives andphilosophies e.g.
• master – servant relationship or collaboration between twoexperts,
• risk sharing or risk transfer,• independent or integrated design• short term relationship based on one sided gain or long-term
relationships focused on maximising efficiency and shared value,• etc
There are accordingly a wide range of different contractingapproaches and price and cost based pricing strategies with distinctlydifferent risk allocations.
Martin Barnes 1999 - The basic interaction between Engineer and Contractor, for example, has mutated over the lasthundred and fifty years from ‘master and servant’ to a simple collaboration between two specialist contributors. Theboundaries of the traditional interactions have also moved in response to the same pressures to improve. In earliertimes, for example, contractors made none of the decisions about what was to be built and all the decisions about howit was to be built. Now we have developed operational and commercial relationships which will enable the boundarybetween design and construction to be placed anywhere that preferences might dictate on a particular project and evenvaried between different parts of the same project.
GCC 2010 Clause 10.2.1 In respect of anymatter arising out of or in connection with theContract, which is not required to be dealt within terms of Clause 10.1 (Contractor’s claims),the Contractor or the Employer shall have theright to deliver a written dissatisfaction claim tothe Engineer. . . . . . . . . .
FIDIC Silver book - …much of the market requires a form ofcontract where certainty of final price, and often of completion date,are of extreme importance. Employers on such turnkey projects arewilling to pay more – sometimes considerably more – for theirprojects if they can be more certain that the agreed final price willnot be exceeded
Identify suitable form of contract
Coverage of contracts for constructionworks
NEC3 Contract covers all types of contracts (engineering and construction, term service, professional service andsupply) using the same principles and philosophy
NEC3 Engineering and Construction Contracts cover the full range of contracting and pricing options that areavailable
Consideration NEC3 JBCC GCC FIDIC
Contracting strategy
Design by employer
Yes
Yes Yes Red
Management contractNo
No Silver
Develop and constructYes
Yellow &SilverDesign and build
Pricing strategy
Activity schedule
Yes
No No No
Lump sum Yes Yes Yellow & Silver
Bill of quantities Yes Yes Red
Cost reimbursable No No No
Target cost No No No
NEC3 contracts are suitable for framework contracts as they make provision for cost based pricingstrategies
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Management of cost and time overruns
Society of Construction and Law’s Delay and Disruption Protocol (2002) contains 21 core principles to:• provide useful guidance on some of the issues that arise on construction contracts where one party wishes to recover
from the other an extension of time and / or compensation for the additional time spent and the resources used tocomplete the project
• provide a means by which the parties can resolve these matters and avoid unnecessary disputes
1 Programme and records 12 After the event delay analysis2 Purpose of extension of time 13 Mitigation of delay and mitigation of loss3 Entitlement to extension of time 14 Link between extension of time and compensation4 Procedure for granting extension of time 15 Valuation of variations5 Effect of delay 16 Basis of calculation of compensation for prolongation6 Incremental review of extension of time 17 Relevance of tender allowances.7 Float as it relates to time 18 Period for evaluation of compensation8 Float as it relates to compensation 19 Global claims9 Concurrent delay – its effect on entitlement for
extension of time20 Acceleration
10 Concurrent delay – its effect on entitlement tocompensation for prolongation
21 Disruption
11 Identification of float and concurrency
The following points can be assigned to each of the 21 core principles in respect for each of the forms ofcontract as follows:-1 = non- compliance 0 = some compliance 1 = partially compliant 2 = fully compliant
JBCC 2000 PBA (2007) and GCC 2010 - poor correlation (≤ 0,5)FIDIC Red Book - a moderate correlation (> 0,5 but ≤ 1,5)NEC3 ECC - an excellent fit ( >1,5)
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Comparison of features of different forms ofcontract commonly used in South Africa
Criteria FIDIC GCC2010
JBCC 2000 NEC3
1 Correlation / fit with respect to Society of Constructionand Law’s Delay and Disruption Protocol (2002)
Moderate Poor Poor Excellent
2 Potential for collaborative working Moderate Poor Poor Excellent3 Target contract option for application in framework
contracts, collaborative working and early contractorinvolvement
No No No Yes
4 May be used for both engineering infrastructure andbuilding projects
Yes Yes No Yes
5 The main contractor may be required to assumeresponsibility for the design or the works or thefinalisation of the design
Yes
(yellowand
silver)
Yes No Yes
6 The main contractor may be required to operate as amanagement contractor
Yes
(silver)
No No Yes
7 Cost based pricing strategies, including target costcontracts
No No No Yes
8 Back to back subcontracts Yes No Yes Yes
9 Short forms of contract suitable for use where risks arelow and there is no requirement for sophisticatedmanagement techniques
Yes None Same managementrequirements as for
principal contract butno subcontracts
Yes
10 An open book approach to the cost of change No No No Yes
11 Pricing structures that align payments to results andreflect a more balanced sharing of performance risk
No No No Yes
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Targetedprocurementstrategy
Procurement as an instrument policy 33
Number DescriptorI Structure of the contracting entityII Internal workings of the contracting entityIII OutsourcingIV Nominated deliverables
e.g. B-BBEE score card
e.g. provide work for unemployed persons
e.g. subcontract to SSMEs
Scheme type Methods
Reservation
1 Set asides
2 Qualification criteria
3 Contractual conditions
4 Offering back
Award criteria5 Weighting of objectives at the shortlisting stage
6 Award criteria (tender evaluation criteria)
Incentives 7 Incentive payments
Indirect 8 Product/service specifications
9Design of specifications, contract conditions and procurementprocesses to benefit particular contractors
Supply side 10 General assistance
Type of obligations placed on contractors
Methods used to implement policies
Not permittedin all
procurementregimes
May compromiseequal treatmentof contractors ormay not be cost
effective
Targeted procurement procedures 34
A Key Performance Indicator (KPI) is a quantifiable performance measurement of anindividual, group or organisation against strategic or operational objectives
KPIs in procurement relates to targets
NEC3 Engineering and Construction Contract defines a KPI as “an aspect ofperformance for which a target is set.”
A KPIallows financial incentives to be paidenable preferences to be applied in the evaluation of tenders or financialincentives to be paidallows minimum requirements to be setenables sanctions including penalties (low performance damages) to be applied
KPIs need to be formulated so that they are contractually enforceable
SANS ISO 10845-1 defines a targeted procurement procedure as the process used tocreate a demand for the services or goods (or both) of, or to secure the participation of,targeted enterprises and targeted labour in contracts in response to the objectives of asecondary procurement policy
Targeted procurement procedures include:• Specifications for deliverables e.g. B-BBEE code of good practice, SATS 1286 (local
content), parts of SANS ISO 10845 (targeted enterprises and labour) etc.• Some specifications enable contractual obligations to be established e.g. a minimum
quantum of expenditure on target groups in the performance of the contract• Unbundling of contracts• Granting of evaluation points (price – preference)• Provision of financial incentives for the attainment of key performance indicators in the
performance of the contract
Procurementoutcomes
(deliverables) need tobe quantified,measured and
evaluated
Aim for minimum costneutral targets
Incentivise /encourage beyondminimumperformance – stretchtargets
Framework for procurement
Negotiation procedure
Competitive selection procedure
A Nominated procedure
B Open procedure
C Qualified procedure
D Quotation procedure
E Proposal procedure usingthe two-envelope system
F Proposal procedure usingthe two-stage system
G Confined procedure
H Design competition
I Shopping procedure
Competitive negotiationprocedure
A Restricted competitivenegotiations
B Open competitivenegotiations
Financial offerFinancial offerand preferencesFinancial offerand qualityFinancial offer,quality andpreferences
Approach toprocurement = + +
Eligibility criteria(if any) – criteriawhich need to besatisfied in orderto have asubmissionevaluated
SANS 10845 andNational TreasuryStandard providesthe universe ofoptions
Prequalification methodsExpressionof interest
Opportunities toengage withtenderers duringthe tender process
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Selection procedure
Framework for developing strategy 36
Gather andanalyse
information
(Conduct spend,organisational
and marketanalyses)
Formulateprimary andsecondary
procurementobjectives
Package worksinto contracts ororders linked to
a frameworkagreement
Allocate risks forpackages Contracting
strategy Pricing
strategy
Identify asuitableform ofcontract
Decide onselectionprocedure
Decide ontargeted
procurementstrategy
Packageprofessional
servicecontracts
Allocaterisks for
professionalservice
contracts
Identify asuitableform ofcontract
Documentprocurement
strategy
Contracting strategy• Design by employer• Develop and construct• Design and construct• Construction management• Management contractor
Pricing strategy:• Lump sum• Price list• Activity schedules Bill of quantities Cost reimbursable Target cost Cost plus
Primary objectives• tangible ( budget,
schedule, quality andperformance
• environmental andhealth and safety
• intangible (buildability,relationships, clientinvolvement, end usersatisfaction,maintenance andoperationresponsibilities etc.
Secondary(developmental)objectives (what is to bepromoted):• B-BBEE• alleviation and
reduction of poverty,• local economic
development,• the transfer or
development of skills• contractor / supplier
development• etc
Decide on deliverymanagement
strategy
Procurement documents 37
Component Broad outline of contents (ISO 10845-2)HeadingC1: Agreements and contract dataForm of offerand acceptance
Formalizes the legal process of offer and acceptance
Contract data Identifies the applicable conditions of contract andassociated contract-specific data that collectivelydescribe the risks, liabilities and obligations of thecontracting parties and the procedures for theadministration of the contract.
C2: Pricing dataPricingassumptions
Provides the criteria and assumptions which it isassumed (in the contract) that the tenderer has takeninto account when developing his prices, or target inthe case of target and cost reimbursable contracts.
Pricingschedules /Activityschedule / Billof quantities
Records the contractor's prices for providing goods,services or engineering and construction works whichare described in the scope of work section of thecontract.
C3: Scope of WorkScope of work Specifies and describes the goods, services, or
engineering and construction works which shall beprovided and any other requirements and constraintsrelating to the manner in which the contract work shallbe performed
C4: Site information (engineering and construction works contractsonly)Siteinformation
Describes the site as at the time of tender to enablethe tenderer to price his tender and to decide upon hismethod of working and programming and risks.
The implementation of a procurement strategytakes place through procurement documents.Procurement documents which presentrequirements in a clear, unambiguous,comprehensive and understandable mannersupport successful implementation.A standard form of contract or standardcontract is a contract between two parties thatis published by an authoritative industry bodywith fixed terms and conditions which aredeemed to be agreed and are not subject tofurther negotiation or amendment.
CIDB Standard for Uniformity inConstruction Procurement4.4.4.2 The standard industry forms ofcontract listed in 4.4.4.1 shall be used withminimal project specific variations andadditions which do not change theirintended usage.Cabinet Office (UK) Government
Construction Strategy (2011)Efficiency and elimination of waste2.28 . . . . . The Government will now movetowards using only standard forms ofcontract with minimal amendment for allnew central government procurement activity
Refrain from drafting specific clauses / modificationsto cover perceived issues – will probably lead to riskpricing, ambiguities, confusion and disputes and canlead to a contractor going insolvent
Questions