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