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Ppc2000 Aca Standard Form of Contract for Project Partnering document sample
Position Paper for BCC CIG Date: 26 May 2009 Achieving Best Value for Construction: A Strategic Procurement „Roll-out‟ for Hong Kong Content 1. Introduction: Background of Procurement Journey in HK 2. Current Trial Plan of New Engineering Contract (NEC) in HK 3. NEC Trials in Other Jurisdictions and Their Implications on HK 4. Suggestions on the NEC Trials in HK 5. Wrap-up 1. Introduction: Background of Procurement Journey in HK The increasing concern on the capabilities of traditional procurement approaches in large-scale or technically complicated projects has caused the international construction industry to consider the adoption of other procurement strategies, such as the partnering or alliancing approach, to achieve the best value for construction. The procurement approach currently employed in HK, based on the lowest-bid awarding mechanism, tends to induce adversarial relationships between clients and contracting parties as each of the parties endeavours to protect their own interests. Many claims and disputes, as a consequence, arise and final accounts fail to be settled in good time often taking many years after the project completion. In contrast, other jurisdictions have adopted alternative procurement routes such as partnering or alliancing to facilitate the alignment of different parties to a common goal, yielding a spirit of mutual trust and cooperation for resolving problems that are integral to the industry, leading to reduced claims/disputes, lower project outturn cost, and best value to society. Since 1994, partnering has been on the agenda of the Hong Kong construction industry and been adopted in many public and private projects. Some private employers adopted a contractual partnering approach; the Royal Hong Kong Jockey Club undertook several New Engineering Contract (NEC) projects around 1995. Other employers including the Government have adopted non-contractual partnering on their projects. However, the public sector has yet to test contractual partnering. The Hong Kong Government, in the wake of Tang‟s report in 2001, has taken initiatives to effect changes within the construction industry. A further move away from the normal procurement approach is now underway within the construction industry. The Government has planned two trial projects to roll out the contractual partnering approach utilising NEC form of contract on some public projects. This paper questions whether the method by which the Government is testing NEC is effective and whether there is a better way to roll out the trial projects to truly benchmark the value of the adopted procurement approach. 1 Position Paper for BCC CIG Date: 26 May 2009 The British Chamber of Commerce‟s Construction Industry Group (BCC CIG) has prepared this paper as the collective view of its members, which covers the broad spectrum of the construction industry and includes client organizations, consulting engineers, architects, quantity surveyors, contractors, sub-contractors, lawyers, financiers and dispute resolution consultants, to respond to the aforementioned concern, raise discussion and provide direction on the more advantageous way to roll out the trial projects. 2. Current Trial Plan of New Engineering Contract (NEC) in HK To respond to the problems of the traditional approach and to progress the contractual partnering strategy, the Government has initiated two trial projects to adopt the NEC as the first step towards the contractual partnering in Hong Kong. The NEC form is widely regarded as a simple, easy, comprehensive, and flexible form of contract. Moreover, the Government has shown a sense of maturity and innovation by using this procurement approach which is designed to foster partnerships. The comparison of available contractual partnering forms and the suitability of the NEC for Hong Kong are reviewed as follows. The BCC CIG fully supports and endorses the initiative to trial the NEC form. 2.1 Available contractual partnering forms to achieve best value Currently there are several available contract forms that foster a collaborative (or partnering/alliancing) attitude among the project participants to maximize the benefits of a project. They are: New Engineering Contract (NEC) Be Collaborative Contract (BCC) PPC series (ACA standard forms) Project Alliancing (PA) The first three are in standard contract forms ready for project participants to adopt, while the Project Alliancing requires the participants to discuss the form of collaboration and commercial terms and finally develop the project alliancing agreement based on what they have agreed. The four options differ from each other and each has its own merits and demerits. They may differ in the means to achieve a certain end. In risk management, for instance, BCC requires 2 Position Paper for BCC CIG Date: 26 May 2009 that an uninsured risk should be allocated to the party who is best able to manage it, while PA requires it to be shared between all the project participants. NEC and PA are more flexible, as NEC contains 23 forms for different projects and PA allows the participants to develop a customized one. BCC may be more complicated, as “it is not a contract for the untrained and requires an emphasis on having advanced the design significantly at the point when the contract is entered into”. Furthermore, there is a claim that PPC2000 has a higher level of integration and tackles some risks directly through full integration and timetabling of activities. Finally, NEC and PPC are more mature as more tests and projects have been conducted in the construction industry. 2.2 NEC as a suitable contractual partnering form for HK The following features of NEC indicate its suitability for future adoption in Hong Kong: A collaborative means to achieve best value – NEC is collaborative and co-operative working, and its tools prompt users to move towards a foresight-based, real-time project- managed environment to get the best out of a supply chain Easy: simple language used rather than legal jargon Good project management practice embedded, e.g. early warning and advance evaluation of changes/delay/disruption Flexible: “options” besides “Core Clauses”, e.g. target contract plus W1 or W2 dispute resolution option Mature: the third edition forms Comprehensive: a suite of contract forms including target contract, cost reimbursable contract, framework contract, etc. for the choice in different kind of projects Collaboration spirit, e.g. fostering the change in attitudes and behaviours which enables a team to work in a very different way and perform better. Such advantages of NEC together with extensive uses in other jurisdictions have paved the way for substantive roll-out of NEC trials in Hong Kong. However, based on the available information about the current NEC trial plan, BCC CIG is concerned on whether the sufficiency and speed of the NEC implementation in Hong Kong will provide an effective platform to expediently raise the standards of procurement in the region. 2.3 The current NEC roll-out plan by HK government Two trial projects of NEC are currently under planning by the Drainage Service Department (DSD) and the Highways Department (HyD) respectively. The project in DSD comprises the decking of about 180 metres (m) long and 12 m wide open nullah at Fuk Man Road in Sai Kung, landscaping works and local road junction improvement with an approximate contract 3 Position Paper for BCC CIG Date: 26 May 2009 value of HK$96M. The project in HyD is a small-scale road project with an approximate contract value of HK$150M. These two NEC pilot projects will undergo a competitive tender to invite contracting parties under the umbrella of NEC contract form. There is a concern that these two pilot projects are too small-scale and would not provide sufficient data to draw sufficient results to adequately test the success or failure. Moreover, if these pilot projects will not be replicated quickly on other projects, there will be no long term development of this procurement route. It will be difficult to sum up best practices in a Hong Kong context and also to allow the maximization of learning in project teams. Although the pilot projects, e.g. the DSD one, is at time of waiting out to tender, the status of the NEC trial plan could lag behind the project progress or remain uncertain due to an unclear implementation and review schedule, leaving the trial dangling for several years without a clear result after the project completion. Expediting the NEC trial with a clear-cut schedule is highly desirable. It will provide a bank of meaningful data to fully support, or not as the case may be, the intent of trial projects, so that benchmark data and continuous improvement can be extracted from the trial programme. In the following two sections, we review what other jurisdictions have done and then propose some options to ensure the successful trial of NEC in Hong Kong. 3. NEC Trials in Other Jurisdictions and Their Implications on HK In other jurisdictions, the NEC has become the contract of choice in many projects, e.g. the Heathrow Terminal 5, the London 2012 Olympic Games project, and is used extensively by clients worldwide including Eskom, Anglo Platinum (Mining), Transnet and ABSA Bank of South Africa. Successful cases utilising NEC are also recognized, spanning from multi-million pound road projects to multi-billion pound water & sewerage projects, railway projects, and so on. The NEC3 Engineering and Construction Contract (ECC) has been recognized as „setting the benchmark‟ by a UK government select committee in 2008. 3.1 Successful case of NEC adoption in UK One successful case is a water service project in Wales, Dŵr Cymru Welsh Water (DCWW), which adopts NEC and reaps benefits out of the trial. The background of DCWW 4 Position Paper for BCC CIG Date: 26 May 2009 Dŵr Cymru Welsh Water (DCWW), now a not-for-profit company owned by Glas Cymru, is the sixth largest of the ten regulated water and sewerage companies in England and Wales, which operates 27,600 km water mains, 17,600 km sewers and 950 Treatment Works. It is responsible for providing over three million people with a continuous, high quality supply of drinking water and for taking away, treating and properly disposing of the wastewater. In the UK, water companies are regulated in their capital investment spent in 5 year Asset Management Periods (AMPs). The DCWW has gone through 4 stages of procurement journey so far as follows: - AMP1: the traditional approach in 1990 – 1995 with £1bn Investment Programme AMP2: the partnering approach in 1995 – 2000 with £1bn Investment Programme AMP3: the alliancing approach in 2000 – 2005 with £1.16bn Investment Programme AMP4: the alliancing approach in 2005 – 2010 with £1.2bn Investment Programme From the AMP2, the NEC Option C – target cost has been utilised with gain/pain shared with alliance partners to provide a legal framework for delivering best value and now the DCWW has entered into the AMP4 with a five-year alliance with a strategic partnering team. The problems DCWW faced when initiating NEC At the time the plans were being drawn up, there was much debate and discussion in the DCWW concerning the future development of a procurement strategy for its AMP2 programme. The adoption of a traditional approach in its AMP1 led to a £100m overspend, missed regulatory deadlines, increased client risks, a claims-oriented culture, and an eventual lose-lose situation. Apart from the internal drive, the DCWW was also compelled by an external drive. The Latham report in 1994 had stirred a great deal of strategic thought in the public sector. Partnering fostered and embraced a spirit and mindset of mutual trust and co-operation rather than an adversarial approach within the project team. It was under the internal and external drivers that DCWW initiated to adopt a partnering approach to its AMP2 programme, when NEC was adopted as a legal framework for facilitating a project-specific partnership. The subsequent Egan report in 1998 was set to enforce the procurement strategy and so the DCWW adopted partnering in its AMP 2 and subsequently alliancing in its AMP 3 and AMP4. 5 Position Paper for BCC CIG Date: 26 May 2009 How the NEC was rolled out in DCWW? As mentioned above, in the wake of Latham and Egan and based on the drive of project performance, the DCWW adopted NEC in its AMP2 - AMP4, which are three 5-year programmes with multi-billion pound contracts. The NEC trial in the AMP2 was massively successful, which led to a subsequent adoption in the AMP3 and AMP4 to further reap the benefits of NEC. NEC has been chosen at AMP2 – AMP4 because it facilitates sound project management principles and practices, as well as defining legal relationships that foster mutual trust and co- operation, early involvement of contractors, and early identification and reduction of risks, claims and disputes. Under the NEC Option C - target cost contract with pain/gain incentives against targets, the use of the compensation event process for changes of scope has mitigated the disputes and delays that are traditionally associated with this type of occurrence. Furthermore, the structure and processes that exist in the NEC have a powerful impact upon how decisions are formed and made, and how work actually gets done on the ground. Such a collaborative approach, bearing partnership as the essence, creates an open-book and information sharing culture and improves the behavioural mindsets of project personnel, which in turn helps the achievement of the desired project outcomes. The benefits/outputs of the NEC adoption in AMP2 & AMP3 Based on the results so far, the substantive trial of NEC in DCWW‟s 1995-2000 AMP2 and 2000-2005 AMP3 has generated sufficient data for cross-sectional and longitudinal comparison of the NEC performance. Also, the speed of the NEC trial was fast and progress was traceable with a clear-cut trial schedule. Magnificent benefits were recognized in 1995- 2000 AMP2 (where adopting partnering as a procurement strategy helped DCWW to outperform financial and regulatory targets) and also in 2000-2005 AMP3 (where adopting alliancing helped to beat the tough financial and regulatory targets imposed at the start of AMP3). The added benefits of partnering/alliancing are being able to maximise the supply chain, share best practice and minimise risk across an experienced group of partners. The detailed benefits reaped during these two stages are summarized as follows: Outcome of 1995-2000 AMP2 (£1bn investment programme) – o Imposed 15% OFWAT (i.e. the regulator) efficiency compared to AMP1 6 Position Paper for BCC CIG Date: 26 May 2009 o £100m saved o Delivered on time o Shared project risk Outcome of 2000-2005 AMP3 (£1.16bn investment programme) – o Further 16% OFWAT efficiency o Target 10% savings – outperformed o Meeting delivery dates o Sharing investment risks Besides the above benefits, there is an overall improvement in communication, early payments by the client, a fast and effective dispute resolution procedure and enhanced relationships with the local community. 3.2 Implications of NEC adoption on HK In view of the aforementioned success reaped by the NEC adoption, we hereinafter discuss its implications on Hong Kong by exploring the local experience in past NEC projects and the Guaranteed Maximum Price (GMP)/Target Cost Contract (TCC) projects in Hong Kong. Past NEC projects in HK private sector The NEC contract has so far been used by only two Hong Kong employers. The Construction Projects Department of the Royal Hong Kong Jockey Club has undertaken four NEC projects and the South China morning Post has constructed a new building in the Tai Po Industrial Estate using this form of contract. These projects, based on the publicly available information, are successful in terms of the NEC adoption. Different options in NEC were used, such as the conventional activity schedule contract in constructing the Beas River equestrian facilities, or the target activity schedule contract in constructing the Jockey Club Kau Sai Chau public gold course by the Jockey Club. Why other Hong Kong employers have not adopted the NEC contract, according to J. Halliday in his 1995 paper, is due to the lack of external and internal drive. Unlike the UK where a change in the procurement process was driven by the 1994 Latham Report, Hong Kong is not driven by any governmental or external over-riding pressure. Moreover, there is no over-riding recognition in Hong Kong that there must be greater collaboration between the two parties to any construction contract. Hong Kong construction contracts tend to transfer much of the risks to the contractors. 7 Position Paper for BCC CIG Date: 26 May 2009 However, the aforementioned situation has been commented on during the past decade, when the Tang‟s report was published in 2001 increasing awareness regarding a change in the adversarial stances taken up by two sides. Successful Target Cost Contracts (TCC) in HK The purpose to discuss the TCC forms is to study the potential adoption of the NEC Option 3 - Target Cost Contract in Hong Kong as all these contract strategies should cultivate a partnering spirit, require fair risk allocation, and facilitate the early involvement of contractors with an incentive mechanism to save costs. Some Hong Kong projects, although not using NEC forms, were successfully procured by TCC contract to achieve project objectives. For example, the MTRC Tsim Sha Tsui Railway Station Modification Works completed in 2005 adopted TCC. In these projects, the clients set an agreed ceiling price at main contract award and provide a financial incentive mechanism to achieve cost-savings. Yet, in TCC contract, the ceiling price is not fixed. During the contract execution stage, the contractor is paid the actual construction cost for the work done. If the final construction cost differs from the final target cost, the difference would be split between the client and the contractor based on a pre-determined gain-share/pain-share model set out in the contract. A sum of money is set aside based on the risk quantification exercise as a contingency pool. Savings arising from the innovation, value engineering initiative, management and mitigation of the shared works would go into the pool. The gain or pain in the pool at the end of the contract will be shared on a predetermined basis. During the tendering and contract execution stages, the accounts are operated on an „open-book‟ basis, which allows the development of a co-operative working relationship between the two parties. Also, the TCC enables the early involvement of the contractor‟s buildability advice on alternative construction techniques and materials during the design process. Hence, time and quality performance has the potential to be greatly improved. The motives for adopting TCC contract is to provide financial incentives for contractor to contribute and save cost by offering innovative ideas, and to attain a co-operative contracting approach. The substantial uncertainties and the high-risk profile of major construction projects, utilising the traditional fixed price lump sum contract, result in a plethora of claims and disputes amongst contracting parties. It has been proved that the use of incentive arrangement helps to align the individual objectives of various project stakeholders to the overall objectives of the project, and establishes more harmonious working relationships within an integrated team. The use of „open-book‟ accounting regime also enabled 8 Position Paper for BCC CIG Date: 26 May 2009 quantification of the real cost of risks and prevents the risks of a negative contractor‟s cash flow adversely affecting the project. It is believed that the aforementioned MTRC project achieved about 5% of cost saving and was completed 7 months earlier than the contract completion date. The success of the project has justified the use of alternative procurement strategies that could best align the project team to the high-risk profile the project. We believe the Hong Kong Government has a great opportunity to capture the benefits of NEC option 3 - Target Cost Contract in the local industry. 4. Suggestions on the NEC Trials in HK In view of the successful cases abroad and given the local conditions, the following options may be considered in the current roll-out plan of NEC in Hong Kong: 4.1 Option 1: Same contracting party, multiple consecutive projects Following the successful Welsh Water experience, a collection of projects can be undertaken during a 3-year term (Figure 1). The 3-year term/plan would be an excellent model by which to trial NEC contracts in the local construction industry. The benefit of this model is that efficiency and comparison can be measured over specified periods of time and continuous improvement made during the following 3 year plan. For this process to work to best effect, the parties to the contract need to be aligned such that all stakeholders are embedded within one organization. The NEC Target Cost Contract is an excellent vehicle by which to achieve these goals. The DSD refurbishment and renewal drainage projects would be an ideal series of projects to test this model. 9 Position Paper for BCC CIG Date: 26 May 2009 Contracting Party A NEC projects for NEC projects for NEC projects for ONE client base ONE client base ONE client base Productivity Time 3 years term 3 years term 3 years term Learning curve Lessons learnt Figure 1: Option 1 - same contracting party, multiple consecutive projects 4.2 Option 2: Different contracting parties, multiple overlapping projects As an alternative to the two small projects being trialed, we propose that Government adopts a more ambitious approach. There are many major projects due for release in the next 3 years and it would seem an ideal opportunity to implement an alliance approach on a sample of these projects. A series of projects released on the NEC form could be benchmarked against projects awarded on HK Government‟s traditional procurement route (Figure 2). This would provide the necessary data to properly test the efficiencies of the NEC model. 10 Position Paper for BCC CIG Date: 26 May 2009 Projects Standard Gov forms Projects NEC forms Projects Standard Gov forms Projects NEC forms Projects Standard Gov forms Projects NEC forms Productivity Time Yr1 Yr2 Yr3 Yr4 Yr5 Learning curve Lessons learnt Figure 2: Option 2 – different contracting parties, multiple overlapping projects 5. Wrap-up There appears to be much dissatisfaction within the Hong Kong construction industry over Government‟s existing procurement methods. This is evidenced by the large volume of commercial disputes that exist within the industry. Further, in a market that may become overheated over the next 5 years Government may not see the best out-turn costs following 11 Position Paper for BCC CIG Date: 26 May 2009 traditional procurement route as contractors, consultants and the supply chain become able to fully price risk to win contracts. The British Chamber of Commerce‟s Construction Industry Group (BCC CIG) strongly supports the Hong Kong Government‟s trial of the NEC contract on public projects. Yet, the current two trial projects are perceived too small and too slow in implementation to provide sufficient data as benchmarks, or indeed to provide meaningful and much needed change within the industry. Now is the ideal time for Government to be put into place an innovative solution to the industry‟s existing procurement practice. We urge Government to consider the 2 options for roll-out of NEC within this paper or at very least take a more ambitious approach to trial the NEC contract. Real advancement in existing procurement practice would put Hong Kong at the forefront of best- practice but more importantly provide best-value for society. 12 Position Paper for BCC CIG Date: 26 May 2009 Appendix - Evaluation criteria Apart from the redesign of NEC roll-out plan, we suggest to consider the following evaluation criteria base on the best value. Defining “Best Value” In a project, stakeholders are those who influence or are influenced by the values and deliverables from a project. They are very concerned with a few major values or benefits out of a project. Stakeholders‟ values may include value for money, return on investment and reputation. However, these values differ from one stakeholder to another and are too abstract. Therefore, best value should be a common value (or „network value‟, see Kurmaraswamy et al 2008) which aligns the different stakeholders‟ value dimensions, and must be defined in practical terms in the construction industry. In practical terms, stakeholders‟ values are called “image elements” (Kumaraswamy et al, 2008) to be aligned in each specific project. They include cost, time, safety & security, good governance, environmental impact, quality & function, legacy, profit, contribution margin, and enhanced business opportunities. These are to some extent similar to the six categories identified in a study on the Value Engineering (VE) in Hong Kong (Iu, 2007), which indicates 25 benefits of employing value analysis: (1) save cost, (2) save time, (3) improve quality, (4) improve and enhance relationships between different parties, (5) enhance project understanding, and (6) others. Joint risk management also seems to be a relevant value. According to Anvuur and Kumaraswamy (2007), the best value, as targeted in an ongoing Hong Kong based initiative towards „Relationally Integrated Value Networks‟ (RIVANS) research project, is referred to as the enhanced performance through better team-working, in turn envisaged through genuine co- operation and relational contracting type joint risk management, which reach beyond partnering and alliancing. In a long-term time horizon, “Whole Life Value” is a necessary component of the best value. It requires (1) identifying the difference between price and value, (2) identifying project value drivers and how to reconcile conflicting value drivers between project stakeholders, and (3) measuring value. As European Construction Institute stated, “using a whole life value model which seeks to identify and measure all areas of value generation is the only way to realize successful investments in projects”. 13 Position Paper for BCC CIG Date: 26 May 2009 Apart from the aforementioned value, the problem of aging demography in the construction industry has brought the awareness to recruit and train more young people in the industry. In this regard, the opportunities offered to the young people will add value to the projects by sustaining the future labour force in the industry. As threatened by the imported labour force, the local subcontractors/suppliers need to secure future businesses in the local market. Hence, the number of local vendors involved in the project will have a value in the evaluation framework. There are also other values to be included in the evaluation framework. Examples like the utilization of three/four-dimensional building information models in the project. By utilizing these latest technologies, the project can demonstrate the values to the stakeholder in a more easy and effective manner. Key values as evaluation criteria Based on the above, the best value is defined as a set of common values shared by all stakeholders in a construction project comprising the following key values: (1) Cost and margin: Cost-saving for the client while reasonable margin for the contracting parties (2) Time: On-time or ahead delivery (3) Quality: Good quality and better engineering solutions (4) Health, safety, environment compliance, and Corporate Social Responsibility (CSR) development (5) Joint risk management (6) Whole life cost reduction (7) Better relationship and teamwork among stakeholders during and after a project (8) Claim and dispute reduction to save cost and time (9) Employment and training offered to the young people (10) The number of local vendors involved in the project (11) The latest technologies used in the project Maintaining the best value criteria We believe that the Government needs to set targets for the abovementioned best value, for example, the 10% cost saving after utilizing NEC in the value item 1, to monitor and control the performance of NEC trial projects. Such best value criteria will be evolved during the NEC trials as more experience gained from the NEC implementation. A partnering manager or a cost 14 Position Paper for BCC CIG Date: 26 May 2009 facilitator in each of these trial projects will be needed to independently monitor and improve the best value criteria throughout the whole project. 15
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