A Project Manager’s View on the Contracting Process

Who wants what from a contractor?

Contractors will be the ultimate makers or breakers of a project.

Although there are core economic and technical selection criteria, frequently these criteria also have to entertain the requirements of stakeholders, namely the banks, investors and Owner. At times they coincide, other times they diverge.

What do the Bankers want?

•      Proven contractor under contract

•      Fixed price and schedule

•      Parent guarantor for performance

A no risk scenario

What do the Owner and Investors want?

•      Lowest capital and operating cost, quality asset

•      Into production at the defined time

•      Obtain project funding

•      Achieve a return on investment

A long-term profitability scenario

What contract types are available to achieve the optimization of each stakeholder’s objectives?

Contract types

Contractor selection is crucial to the project’s safety, cost, schedule and quality. The timing to award a contract is a fit amongst the 1) stakeholder’s objectives; 2) readiness status of the project; and 3) risk appetite of the Owner.

The following diagram summarizes some contract types and their relationship to allocating risk between the Owner and the Contractors:

Several contract types exist:

EPCM - Engineering, Procurement, Construction Management:

• Reimbursable services for the design; procurement process of materials, equipment and contractors; and management of construction contractors.
•  Responsibility typically ends with the end of mechanical completion.
• Does not guarantee the cost or the schedule outcome of the project, even if prepared by the EPCM.
• Can require sizable Owner project team presence.

EPC – Engineering, Procurement, Construction:

• Can be reimbursable, but usually fixed price for the design; supply of materials and equipment; and construction.
• Responsibility typically ends with the end of mechanical completion.
• Contract formulation and negotiation will be long and arduous – think scope and claims management.
• Owner project team involvement is ideally low, with focus on quality control.

Lump Sum Turn Key (LSTK):

• Similar to fixed price EPC, but includes commissioning and start-up until commercial acceptance – ‘turn the keys over’. 

EPC Convertible:

• Initially an EPCM mode set up to freeze scope, estimate and schedule. After, say, 6 months, or after progress, say, 50 %, then reverts to an EPC or LSTK.
• Reimbursable for the EPCM period, then shifts to a fixed price at the conversion point.
• Owner project team is significant in EPCM period.

Time and Materials:

• Construction/installation service order, wherein engineering design, and sometimes construction materials are provided by the Owner.
• Commonly used by Operations for emergency works.
• Try to avoid. 

MC – Managing Contractor (or PMC – Project Manager Contractor):

• Provides the Owner with project management expertise.
• A reimbursable contract primarily for man power.
• Increases the project’s responsibility and accountability complexity.

Design-Build-Operate-Maintain (DBOM): 

• Similar to a LSTK except the scope includes operation and maintenance.
• Cost and schedule concerns; may have conservatism in design and in equipment/materials to ensure minimal operations and maintenance impacts.

Alliance: 

• Consists of consolidating the major contractors (and sometimes critical suppliers) under a single project ‘pain/gain sharing’ arrangement.
• Not to be confused with Consortium, Joint venture or Frame agreements.
• Difficult to resolve amongst the contractors - when things go wrong fingers start pointing.

Hybrid/Mixed Contracts: 

The project components can be combined in a number of ways, either as reimbursable or fixed price:

• Engineering and procurement (E/P) only
• Construction only
• Commissioning assistance
• Supplier contracts as design/supply, as EPC, or as DBOM.

Hybrids have the best probability (followed by lump sum EPC) of:

•  project cost and schedule successes
• contractor performance

Regardless of the contract types used, in the final analysis the Owner will ultimately be responsible for risk. It’s a question of balancing the Owner risk exposure with the contract type’s quality, cost and schedule benefits.

The principal contracting steps, a few suggestions

Contracts involves these main steps:

Some suggestions along the way:

1 - Contract Formulation

Use project-experienced legal staff working with the project team. Corporate legal may not have the construction nuance expertise. And include the contract’s final user, the contract administrator (CA), in the formulation process. The CA will have to apply the contract language.

Key in on the submittal of deliverables, on time and of quality. Detailing is a valuable effort. Are penalties for non-compliance appropriate?

Get the reporting frequency, format and content for the long haul. Include a sample report as an Appendix. When things go off track - it is an uphill battle to get more included.

But the elephant in the room is claims.

Make sure a schedule of rates is included so that the unit cost basis for claims is pre-determined. Even for fixed EPC and LSTK.

Reinforce the period of time allowed for claim submittals. Disallow a claim on work that was done ‘x’ months ago. The typical statement of ‘no claims to present’ parroted in weekly contract administration meetings also has to have teeth.  

2 – Tender and Award (T&A)

Limit the number of bidders. Use the pre-qualification step to zero in on a shortlist of four bidders.

In pre-qualification the net can be cast to 10, 20 possibilities. The goal is to find those 4 bidders that fall into the venn-diagram intersection of: 1) experienced/qualified, 2) financially solvent, 3) consistent performer, 4) relationship to work with, 5) willing to bid.

Four bidders are a manageable number for the project team to fully engage, and entices bidder interest knowing that the playing field is small.

Include the project’s risk and opportunities register in the tender package. Request what the bidder would do as mitigation for any relevant items. Also, the bidder could identify risks and opportunities the project overlooked. The replies give you further insight for the selection decision.

Consult the Owner teams of previous contractor's projects to get their perspective.

Don’t award too early. The timing of a contract award is not solely dependent on the status of the project for tendering. Too many times after award a project faces standby costs and claims when Owner responsibilities falter in the initial weeks.

Bottom line on award - the lowest priced Contractor seldom succeeds.

3 – Contract Administration

Project staff need to look beyond the ‘note taker’ during the weekly contractor meeting and engage with the contract administrator (CA) regularly. Gratefully the CA is maturing into a specialist position, but many projects overlook its importance.

The CA needs to be kept abreast of any technical deviations as soon as possible. As mentioned above, contractor performance makes or breaks a project. A good project staff/CA team can be proactive and help to promote a win-win for both Owner and contractor.

What it really boils down to

The bottom-line criteria for contractor selection and performance is people, people, people.

The project needs a relationship in which there is shared values and commitment, and confidence in experience and qualification. The Owner and contractor will coexist during the next few months, or for the next few years.

The contractor’s staff will have to faithfully employ tried and true systems and processes.  Its first and second-line managers will have to motivate and obtain best performance from their teams. The contractor needs to be cultivated as a part of the happening, not as a minion.

And that cultivation and growth of the relationship rests also with the Owner. So, while cost and schedule are the fundamental criteria for contractor selection, spend the time to know the first and second-line managers before making the contractor selection, and then even more so after.   

I’m always keen to hear your feedback

Allan Brownrigg          abrownrigg@hotmail.com

Project Management | Investment Management | Due Diligence | PFS/Feasibility Studies | Project Execution | Board & Steering Committees