UCL

					FINANCIAL ASPECTS OF PROJECT
ENGINEERING AND CONTRACTING


      CONTRACTS
         AND
      TENDERING
          Richard Hill


                         Whitewater Limited
                         Consulting Engineers & Scientists
          How Projects Happen
 Purchaser identifies a need
 He makes a rough cost estimate and uses an
  evaluation tool to decide if the benefit is worth the
  expenditure
 He prepares a detailed specification of the project
  (he may employ a consultant or do it himself)
 He makes a better estimate of the probable cost,
  sets a budget to meet it, and ensures that he has the
  means to pay
 He discusses details with potential contractors
 He issues a definitive specification of the work to be
  done, and gives an indication of the terms of the
  contract which he proposes to let

                                             Whitewater Limited
                                             Consulting Engineers & Scientists
          How Projects Happen
 Contractors submit offers to do the work
 The client considers the alternative offers and selects
  the one which (if any) appears best
 Client and contractor meet to agree details
 The client awards the contract to the contractor
 The contractor performs the work set out in the
  specification
 Any changes from the specified work should if
  possible be agreed while the work proceeds
 The client pays the contractor when payment is due
 When the work is completed, the client checks that
  the result meets the specification
 Client and contractor are happy with the outcome
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                                             Consulting Engineers & Scientists
              The Contract
 A contract is simply an agreement between
  two parties that one will execute the work in
  return for payment
 There must be an understanding of what has
  been agreed to and this is the purpose of the
  “contract documents”.
 These are usually issued by the Purchaser as
  a “Tender Document”
 The Contractor submits a tender (offer) for
  doing the work
 The Purchaser accepts (usually) the lowest
  priced tender
                                     Whitewater Limited
                                     Consulting Engineers & Scientists
   Competitive Tendering




Competitive bidding
                       Whitewater Limited
                       Consulting Engineers & Scientists
             Tender Documents
 Tender documents vary enormously depending on
  the industry, the type and size of contract, whether it
  is a “greenfield” project or modifications to an existing
  plant and who has prepared them.
 Tender documents prepared by civil engineers tend
  to concentrate on general specifications and priced
  bills to allow “re-measurement” by quantity surveyors
 In the chemical industry they are usually prepared by
  process engineers who are more concerned with
  process performance and lump sum prices
 Tender documents prepared by consultants
  frequently contain large amounts of irrelevant
  material designed to “pad out” the documents

                                               Whitewater Limited
                                               Consulting Engineers & Scientists
              Tender Documents
 Scope of Work defines the work to be executed
  under the contract and should provide background
  details such as why the work is to be done and what
  impact other associated contracts might have on the
  work
 Particular Specification sets out specifications for
  processes and equipment to be used on the project.
    Performance specification - eg guaranteed quantity and
     quality of product
    “Design and build” specification which details the process
     route to be used but not the detailed design,
    “Detailed specification” which gives all dimensions for
     structures and provides a shopping list of equipment to be
     procured, installed and commissioned by the contractor,
     usually in the form of “bills of materials”

                                                    Whitewater Limited
                                                    Consulting Engineers & Scientists
            Tender Documents
 General Specification provides the Purchaser’s
  standard specifications for equipment, paint finishes,
  materials and so on
 Programme - usually the contractor will be required
  to submit his proposed programme for contract
  execution, but sometimes the Purchaser will issue a
  programme for the works
 Compliance requires the contractor to submit a
  tender in complete compliance with the specification”
  or to provide a list of all areas in which he has
  deviated from the specification
 Alternatives may allow the Contractor to offer an
  alternative design (provided that he submits a bid for
  the specified plant

                                             Whitewater Limited
                                             Consulting Engineers & Scientists
            Tender Documents
 Project Management identifies how the project will be
  managed and often contains “hidden” costs
  associated with progress meetings, reports, QA
  documentation and Health & Safety issues. It might
  even stipulate what management software the
  contractor has to use.
 Validity requires the Contractor to hold his tender
  open for acceptance for a specified period of time
  (although the tenderer may revoke it at any time
  before but not after acceptance)
 Terms of Payment sets out how and when payments
  are to be made by the Purchaser to the Contractor

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                                            Consulting Engineers & Scientists
                   Acceptance
 For a contract to exist the Purchaser has to accept
  the contractor’s offer
 Acceptance of the tender by the Purchaser
  concludes the contract and cannot be revoked.
  Because the drawing up of contracts often takes a
  considerable time, the Purchaser will sometimes
  issue a “letter of intent” to allow the contractor to
  start work before the final contract is signed. This will
  normally be legally binding and will conclude the
  contract
 The rules that govern how the contract will be
  executed are set out in the Conditions of Contract.

                                               Whitewater Limited
                                               Consulting Engineers & Scientists
           Traditional Contracts
 “Supply only” in which the contractor has to supply
  and deliver certain specified goods - for example a
  factory built skid mounted pump set - to a specified
  delivery point at a specified time.
 “Supply and install”, where the contractor is required
  not only to supply the specified goods - for example
  an air handling unit for an air conditioning system or
  underground pipes and fittings - but to install them
  and, often, commission them.
 “Construction” in which the contractor is required to
  construct exactly what is specified in the contract


                                             Whitewater Limited
                                             Consulting Engineers & Scientists
          Traditional Contracts
 Selection of the contractor is by competitive
  tendering and the lowest bidder wins the contract
  even if he’s made a mistake in his tender price. The
  conditions of contract generally promote a
  confrontational or adversarial relationship between
  the Purchaser and Contractor with the result that
  neither party is really happy with the result.
 To overcome some of the intrinsic problems of
  competitive tendering, various approaches have
  been developed to find a way of giving both
  Purchaser and Contractor a common interest in a
  producing a result which represents the best solution
  at the lowest price.
                                            Whitewater Limited
                                            Consulting Engineers & Scientists
          Reimbursable Contracts
 The contract price is not fixed
 Contractor is reimbursed by the Purchaser for the work he has
  done and the items he has purchased
 Purchaser selects a short list of pre-qualified Contractors and
  issues a performance specification
 Contractor has complete freedom to propose any solution
 A variety of contracting skills are needed in this type of contract
  it is quite common for a consortium to be set up to tender for
  this type of contract.
 Once the Contractor has been appointed, the contract usually
  proceeds in two stages.
 In the first stage the Contractor prepares a Front End
  Engineering Package which has enough design information to
  produce a more accurate cost estimate.
 The design is agreed with the Purchaser and the cost estimate
  becomes a Target Cost for the second stage of the contract

                                                        Whitewater Limited
                                                        Consulting Engineers & Scientists
          Reimbursable Contracts
 The second stage of the contract is much like a design and
  build contract
 Purchaser is much more closely involved in all the decision
  making
 The target cost estimate identifies the cost of each direct cost
  item – materials, subcontracts, and engineering, procurement
  and contract management man-hours at the Contractor’s cost
  centre rates
 It will also identify an agreed mark-up (that is a percentage
  addition to direct costs) to cover the Contractor’s overhead
  (typically this will be lower than in a D&B contract because the
  contractor’s risk is lower)
 As the contract proceeds the Contractor expends man-hours,
  buys materials and places subcontracts
 “Open book” accounting shows both parties exactly what
  money is being spent and how much profit the contractor is
  making
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                                                      Consulting Engineers & Scientists
         Reimbursable Contracts
 Progress is monitored weekly and any variations from the target
  cost have to be agreed with the Purchaser.
 Design and construction problems have to be solved by
  Purchaser and Contractor together
 Purchaser (or his consultant) becomes part of the team and
  needs the same level of technical knowledge as the Contractor
 A high degree of trust is needed between contractor and
  purchaser
 Reimbursable contracts allow “fast track” projects




                                                    Whitewater Limited
                                                    Consulting Engineers & Scientists
         Other Types of Contract
 Design and build (D&B)
    relieves the Purchaser of the responsibility for designing the
     project (or paying a consultant to do so)
    tenders received may all be based on different designs and
     this makes tender adjudication a much more complicated
     procedure
    Allows the Contractor to offer an innovative design
 Design build finance (DBF)
    Contractor also provides financing for the project
    Purchaser doesn’t have to pay interest on a bank loan
     (although he pays for the Contractor’s loan)
    Beneficial if Purchaser doesn’t want interest payments to
     appear on his accounts
    Beneficial if the Contractor can borrow money more easily or
     at a preferential interest rate

                                                      Whitewater Limited
                                                      Consulting Engineers & Scientists
         Other Types of Contract
 Design build operate (DBO)
    contractor designs, builds and operates the project
 Design build finance operate (DBFO)
    Same as DBO contracts but Contractor provides finance
 Build own operate (BOO)
    Same as DBFO but Contractor retains ownership of the
     project
    Contractor writes off the capital cost in his operating
     charges over the contract period
    Purchaser effectively buys whatever the project produces
    In a word, it’s outsourcing.
 BOOT schemes
    Same as BOO but ownership transfers to Purchaser at end
     of contract period

                                                    Whitewater Limited
                                                    Consulting Engineers & Scientists
                Other Types of Contract

                          Contractual responsibilities


TYPE         DESIGN          CONSTRUCTION   FINANCE      OPERATION           OWNERSHIP
Build only   Purchaser       Contractor     Purchaser    Purchaser           Purchaser
D&B          Contractor      Contractor     Purchaser    Purchaser           Purchaser
DBO          Contractor      Contractor     Purchaser    Contractor          Purchaser
DBF          Contractor      Contractor     Contractor   Purchaser           Purchaser
DBFO         Contractor      Contractor     Contractor   Contractor          Purchaser
BOO          Contractor      Contractor     Contractor   Contractor          Contractor
BOOT         Contractor      Contractor     Contractor   Contractor          Contractor



                                                               Whitewater Limited
                                                               Consulting Engineers & Scientists
           Other Types of Contract
 The contractor does more than provide a bit of hardware – he both
  builds and operates the project, that is he provides a service
 This has far reaching implications.
 The contractor neds operational skills
 The consortium generally takes the form of an “Operating Company”
  formed specifically for the purpose
 The structure of the consortium will reflect the risk that each party is
  taking and the scope of their input to the contract
 It is common for the banks which provide capital to become partners in
  the consortium
 The consortium owns a fixed capital base requiring a different financial
  structure from that of a contractor
 The design, construction, and long-term operation of the project are all
  in the same hands. There is therefore no point in skimping at either the
  design or construction stages if it is going to bring about an increase in
  the costs of operating or maintaining the project.



                                                             Whitewater Limited
                                                             Consulting Engineers & Scientists
                   PFI Schemes
 Private Finance Initiative projects use privately funded
  DBFO contracts to provide public services – hospitals,
  schools, roads, prisons
 The operating company is paid on the basis of the
  number of units – patients, prisoners, students or vehicles
  – using facility
 Many PFI contracts have gone shockingly wrong
 The reason is that Governments seem incapable of
  organising good contracts
 PFI is a radical new idea – no contracts have yet run their
  full course
 With more experience it should be possible to do better
 PFI holds the promise of better engineering


                                                 Whitewater Limited
                                                 Consulting Engineers & Scientists
               Summary
 The traditional competitive tendering
  method of commissioning projects has
  often given bad results.
 The last twenty or so years has seen a
  variety of efforts to improve matters by
  different forms of contract.
 Some of these turn the contractor from a
  provider of hardware into a service
  provider, and that should, at least in
  theory, make for better design and
  construction.
 No clear winner has yet emerged.
                                   Whitewater Limited
                                   Consulting Engineers & Scientists

				
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posted:11/14/2011
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