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Ppc2000 Aca Standard Form of Contract for Project Partnering - DOC

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					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.
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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

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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
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   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




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   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.

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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

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               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.



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   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

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   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.




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                                         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.




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 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


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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.




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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”.




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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



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facilitator in each of these trial projects will be needed to independently monitor and improve the
best value criteria throughout the whole project.




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Description: Ppc2000 Aca Standard Form of Contract for Project Partnering document sample