Contracting for Engineering and Construction Projects

Peter Marsh

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351948821
• Edition: 5
• Topic: Business
• Subtopic: Management
• Index: Business

Peter Marsh's book has long been recognized as a standard work. With its emphasis on the commercial aspects of contracting, this book represents an eminently practical guide to this complex subject for purchaser and contractor alike. This edition reflects recent changes in case law and legislation, the major change being the passing of the Housing Grants, Construction and Regeneration Act 1996. The book also charts changes to model forms of contract conditions, in particular the new PACE forms of government contracts. Contracts covered are those for the construction of buildings and civil engineering works, the supply and installation of mechanical, electrical and process plants and also for computer system and facilities management. Methods of contracting, including PFI schemes, are critically examined and reference is made to the Government's latest thinking on prime contracting. As in previous editions, this book covers contract planning and contract administration, deals with both the preparation and the appraisal of tenders and explains in detail how to draft the key clauses in a contract to ensure the maximum advantage. In this revised version, Contracting for Engineering and Construction Projects will continue to serve the needs of purchasing and contracts staff, engineers, quantity surveyors, project managers and legal advisers seeking a reliable source of guidance.

PART ONE
CONTRACT PLANNING

CHAPTER ONE
Planning process

PROCUREMENT OF WORKS OR SERVICES

With any project the client’s first step should be the development of a procurement strategy which will best satisfy that client’s business objective. This strategy need not necessarily involve the client in undertaking construction. On examining the alternatives open to the client it may be found that selecting a construction project is not the optimum way of meeting the aims of the business and obtaining best value for money. Rather than constructing a new facility it may be more cost effective to contract out the services which the facility was intended to provide. In some circumstances the provision of those services by the service provider may necessitate the construction of particular works. But the contract which is then entered into by the client is essentially one for the supply of the services and not for the design and construction of those works; that then becomes the responsibility of the service provider. This is an important issue when entering into public private partnerships, particularly private finance initiative schemes (PFIs), which are considered further in Chapter 2 (see p. 17).

Before therefore the firm or authority decide to procure construction works on their own account they should satisfy themselves that doing so is the most efficient and cost effective means of fulfilling the business aims over the projected life of the facility concerned. In order to do this the client needs to appoint a senior person within its own organization to take overall charge of the project – sometimes referred to as ‘the project sponsor’. The project sponsor will require professional advice regarding the options open to the client and their associated costs, benefits and risk. Preferably this advice should be obtained in-house from the client’s functional departments. Only if there are no appropriate skills available in the client’s organ ization should an outside consultant be engaged and then his engagement should be strictly limited to the planning stage with no ongoing commitment. Every precaution should be taken to ensure that the persons providing advice to the project sponsor, whether from in-house or an outside consultant, do not have a vested interest in which option is selected. A person hoping to obtain design work if the construction option is chosen may not be the best person to act as an unbiased adviser.

BUSINESS CASE

If after appraisal of the alternatives the construction procurement route is selected as the preferred option then the client can proceed with the next stage of planning the project. This is where any mistakes made will be difficult to correct later and where time and money can most easily be lost or saved. Plan before you construct – the first law of contracting.

The planning should be undertaken by a team under the leadership of the project sponsor. The team will include representatives of the user, technical, commercial and financial functions with any professional adviser who has already been appointed. The initial task of the team is the preparation of a business case in confirmation of the decision to proceed with construction procurement and to provide the basis for the development of the project’s strategic plan. The following information should be included in the business case, much of which should already be available from the work done by the team in making the comparison between the alternative procurement strategies:

• the outline capital and operating budgets for the project over its expected lifetime
• the quantified benefits to the client which the project is expected to deliver
• how the project is to be financed
• a risk assessment in terms of cost, time and performance giving the extent of the risks and the probability of their occurring – this should also show how the risk is to be managed and the extent to which these risks are to be supported by contractors and consultants or covered by insurance and those which will be left to be borne by the client
• the outline programme for the project
• the procurement system to be used
• the resources which the client will require for the management of the project and how these are to be provided either in-house or by the engagement of consultants.

Many of these issues are inter-related. The apportionment of risk as between the client and others will depend upon the procurement system to be used as will the management resources. The budget and the programme are inter-related with the benefits which the client is expecting the project to produce. The issues need therefore to be considered as a whole to ensure their consistency and trade-offs will have to be made as necessary between one issue and another.

CLIENT’S OBJECTIVE

Any purchase is almost of necessity a compromise. There are few occasions when any employer can afford to have the best of everything, even if this were obtainable. Shorter delivery may only be achieved at the expense of higher prices. What one can afford may determine the quality of what one can buy. Shortage of capital may cause the purchase of equipment with high maintenance costs. Shortage of labour, or the need to reduce dependence on labour, may necessitate the purchase of equipment with a substantial degree of built-in automation. The absolute need from the safety angle to ensure complete reliability and conformity with rigorous specifications may limit the choice of suppliers to those possessing the highest standards of quality control.

The process of defining the objective starts therefore with the selection of those factors which are regarded as being of the maximum importance to the transaction in question. Sometimes from even a cursory examination one factor will stand out as of vital significance. It may be time of delivery. Once this has been established, then all subsequent actions will need to be subordinated to its achievement: the selection of the supplier, the formulation of the specification, the placing and wording of the contract, the action on progressing; all must be compatible with the defined objective.

More often no single factor stands out so clearly that others can be ignored. Certainly delivery on time may be important, but so too may be quality and price. Some sacrifice may be necessary in the interest of speed, but there are limits beyond which the pursuit of speed may become largely a self-defeating exercise.

The list below sets out the main factors which are commonly comprised within the client’s objective:

• Time How soon must the project be completed? How valuable to the client is each week by which completion is earlier and what financial detriment would the client suffer for each week of delay?
• Cost How serious would a cost over-run be? How important is it to the client to know the final cost at the time of placing the contract(s) for the project?
• Performance What guaranteed level of performance must the project achieve? What are the consequences to the client if this level is not achieved?
• Quality What level of quality is required? What is the required life of the project?
• Technical complexity/State of the art How complex is the project required to be and how near to the state of the art? Has a project already been successfully completed to the same or similar specification?
• Flexibility Does the client expect to have to make significant changes to the project during construction in order to meet the business objectives? Should the project be capable of expansion to meet a future increase in demand?
• Risk What are the main risks to which the project is exposed? To what extent is the client personally willing and able to bear these risks?
• Involvement To what extent does the client wish and have the capability to be involved in the design and management of the project?

These factors are also significantly inter-related. If the project is required to be of a high quality, to meet stringent guarantees and is complex then there are technical risks which may impact on the achievement of the completion date. To the extent that the client foresees the need to make modifications then both the completion date and the final cost will be affected. A client who wishes to be involved closely in the design of the project must accept the responsibility which goes with that involvement and the risk again to both the programme and cost. On the other hand if the client is willing to stand back from the design and management then those risks may be passed wholly on to the contractor. However this will be reflected in the contract price and the client will need to ensure that the contractor is capable of absorbing the risks.

Time, cost and capacity, using that term to refer not just to the size but also to the design and technical qualities of the project, have largely a fixed relationship. If one has a certain value then so do the other two; alter one and you alter at least one of the others. This may be described as the second law of contracting. If, for example, it is once established that the logic of a situation is that the capacity required cannot be met within the price limit set by management, or only if the time is extended, then management must be informed at the earliest possible moment so that they have the opportunity to reconsider and, as necessary, redefine the objective. It is no use hoping that somehow the price will come out all right on the day or that savings in time can be achieved by shutting one’s eyes to reality. It just does not work that way.

The project sponsor is responsible for distilling the answers to these questions into a set of objectives which will be used to decide on the procurement system to be used and will form the basis of the criteria upon which tenders will later be assessed.

EXAMPLE

An example of a set of objectives for the design and construction of a processing plant is set out below:

• The capital budget for the project is £5 million which includes a 10 per cent contingency. The annual operating budget covering staff, labour, consumables and spares is £1 million.
• The project is required to be in commercial operation within 24 months of the decision to go ahead.
• The profitability of the project is sensitive to an increase in the capital costs over 10 per cent or the operating costs over 15 per cent. Any delay in completion would cost the company around £40 000 a week in lost income.
• The company is only interested in a proven process which is already in use elsewhere. Any contractor would have to demonstrate a reference plant for which he was responsible for the design and construction and which had been in successful operation for a minimum of 12 months.
• The plant is to be of high quality with an operating life of 25 years. The plant will operate continuously other than for a two-week annual shut-down. Key items of the plant (to be identified) must be guaranteed for ten years against any defect which would cause a plant stoppage.
• The plant must be capable of processing 50 tons per hour of raw material. The processed material should have a purity level of at least 97 per cent with a yield of 90 per cent. At any purity level below 95 per cent or a yield of less than 80 per cent the plant would not be commercially viable.
• The client will personally finance the project.
• The chosen site is within an industrial complex owned by the company. The main risk is the non-achievement of the purity and yield levels which is to be solely the contractor’s. The client will accept no responsibility for the design of the plant.
• The plant is to be designed so that an additional production line capable of handling 25 tons of material an hour could be installed with the minimum of interruption to production. Provision is to be made for this addition in the sizing of the power and other supplies to the plant and any common facilities.

METHOD AND RESPONSIBILITY

From the definition of the objective in time and a study of the resources both available and required the team can proceed to the planning of the method to be used and the responsibilities to be allocated to achieve the objective. It is never sufficient to say that certain goods are to be supplied, plant manufactured or works constructed by a defined date without at the same time thinking of what might be called ‘the three Ws’. This then is the third law of contracting: ‘that for each contract/project there must be stated: what – by whom – and by when’.

The most commonly used systems of procurement, the allocation of responsibilities within each, their respective advantages and disadvantages and the key decision criteria are examined in the next chapter.

CHAPTER TWO
The contract plan

Following the decision to procure a construction project a contract plan needs to be prepared for the total project, not just for the letting of the principal contracts, but for every activity which has to be carried out to bring the project to its conclusion, including those which are to be performed by the employer himself. Nor in its totality is it concerned solely with engineering and construction. It should cover the provision of funding and all those associated activities such as purchase of land, obtaining of wayleaves, planning permissions and the like and even recruitment of staff/labour and agreements with the unions for working at new locations or with different operating procedures. With a new process plant or other production facility it may need to cover the conclusion of offtake agreements with future purchasers of the product since these may be a vital part of the financing arrangements for the construction works. Indeed with a project which is to be financed primarily on the security of the profits to be expected from its operation, such as a new gas-field, the Channel Tunnel or new motorway construction, the lenders will be concerned with ensuring that every item which can possibly affect the level of profitability has been taken into account in the planning process. The same approach should be adopted by any employer concerned with a new project, large or small, since too many projects have failed to produce their intended benefits because of a failure to anticipate, plan for and implement those associated activities.

Having drawn attention to that issue it is intended within the scope of this work to concentrate on just those actions which are related directly to engineering and construction works.

The contract plan selects the procurement route to be used for the execution of the project. Since the publication of the Construction Task Force Report Rethinking Construction in July 1998 and the adoption of many of its recommen dations by the Government, the emphasis in planning has been placed firmly...