Procurement Strategies

Procurement Strategies
Project Management Conference Yellowknife, NT November 26, 2019 Helmut Johannsen, P.Eng., C.Arb., FCIArb. Counsel, Singleton Urquhart Reynolds Vogel LLP ©Helmut Johannsen

Introduction Presentation will give a brief overview of various procurement strategies, project delivery systems and contracting models Presentation includes discussion of various contracting models but these will be glossed over unless someone has particular questions on a specific model Everyone is invited to ask questions, provide comments and engage in discussion

Goals of Procurement Process

Goals of Procurement Process
Owner’s Goals: Maximize Opportunity for Market Participation Encourage partnering Project sizing Steady capital planning Obtain Competitive Pricing Timing of bid call Type of procurement process Demonstrate Fairness and Transparency While relying on exclusion and discretion clauses

Goals of Procurement Process (cont’d)
Owner’s Goals (cont’d): Secure Resources for Project Allocate/Transfer Risk A balanced approach to risk allocation “Testing the waters” through request for prices for alternate risk allocation Avoid “unbalanced” bids/proposals Achieve Project Success: on budget, on schedule

Goals of Procurement Process (cont’d)
Contractor’s Goals: Level Playing Field Fair and Transparent Process Reasonable Probability of Success vs. investment (bid) Reasonable Allocation and Management of Risk (real and contract) Achieve Project Success For non-standard procurement documents, goal to be only compliant bid/proposal? Primary goal is to obtain contract for reasonable price and schedule

A Strategic Procurement Process

A Strategic Procurement Process
Conduct an internal needs and time frame analysis Conduct assessment of potential suppliers/contractors Conduct due diligence to identify pool of suppliers/contractors EOI/RFQ process to solicit interest Don’t plan a party unless sure someone will show up! Develop a procurement strategy Sole source? Relationship analysis and management? Consider REOI/RFQ processes to “short list”? Competitive process –RFP, Request for Bid, etc. Strategic partnership – alliance, integrated project delivery, etc. Implement the procurement strategy

A Strategic Procurement Process (cont’d)
Strategic Procurement Process is all about early risk identification and management, which means identifying and addressing methods to manage the following well in advance of drafting procurement documents: General project development risks (e.g. land, finance and regulatory approval issues) Procurement process risks (e.g. non-compliant proposals/tenders, alternative proposals, fairness) Contract performance risks (after contract award) Critical to understand risk tolerance of parties and appetite for any proposed risk allocation

No “one size fits all” approach Comply with NWT Procurement Guidelines but avoid blind adherence to standard approach, forms and precedents as every project is different Size and complexity Mix of new construction/expansion/renovation Single project or staged construction/ turnover Schedule/budget pressures/market competitiveness Number of construction/operation interfaces Market appetite for project/risks Requirement to obtain competitive bids/proposals and potential “consequences” should drive effort to identify and manage risks, not project size or value

Procurement policy often procedure driven and inflexible Procurement environment increasingly complex Performance incentives/disincentives often difficult to implement Limited ability to influence Contractor team Must take what you get. “Best Value“ vs Low Bid difficult to define and achieve. High degree of public scrutiny of public sector creates fear of challenge and reprisal

Some Comments on Evaluation Process Internal process or disclosed process? “Fairness” vs. Adherence to Process? How to combine technical and financial scores? Evaluation criteria or only categories disclosed? Ambiguity of criteria? Criteria for scoring – high school or zero out? Issuing instructions for evaluators Policy re use of “Evaluation Manuals” Policy re making notes during evaluation process

Some Comments on Evaluation Process (cont’d) Khoury Real Estate Services Ltd. v. Canada (Minister of Public Works) (1996) 33 C.L.R.(2d) 294 (Fed.T.D.). RFP to provide modern office space in Fredericton for Federal Government No overall standard of evaluation in RFP Khoury applied for basis of scoring of its proposal Held: Tendering rules apply. Owner must demonstrate it acted fairly and ordered to disclose internal documents regarding evaluation/scoring of proposal

Use of Overly Prescriptive Specifications Consistent with internal procurement policy? Is the objective to exclude based on past poor performance? Or is objective a hidden preference for specific bidder? Defensible? How to demonstrate “best value”? Fairness by inclusion of “Or Equivalent”? Consider market sounding prior to request for bids/proposals to explore alternatives

Use of two envelope system If pricing disclosed prior to technical evaluation: Purpose of two envelope system? Fairness in technical evaluation? Use/abuse of Q&A, RFI, Pre-tender Minutes and Addenda

Basic Risk Management

Basic Risk Management Theory Reality
“risks should be borne by the party best able to handle and manage the risk” Reality Distinction between: “handling and managing” the risk; and willingness to accept or ability to bear consequences if and when risk materializes Reality often over-rides theory and transfer of risk has cost consequences Optimum allocation is not maximum transfer of all risks Contractor willingness to accept risk often depends on ability to pass risk to subcontractors/suppliers

Basic Risk Management (cont’d)
Risks rarely allocated/transferred completely and someone usually retains a residual risk This is often overlooked in practice e.g. subsurface risk Owner allocates to contractor, who allocates to subcontractor But – contractor and subcontractor may have liability caps and / or exculpatory provisions Result: owner retains some residual risk e.g. “insured risks” When risks transferred to insurers, there may be limits of liability, specific exclusions and gaps in coverage Result: owner and/or contractor retains some residual risk

General Comments on

Procurement Strategy Consider whether project development is a single track or three concurrent tracks: Track I: Environmental/Regulatory Process, to obtain necessary permits, licenses and approvals Track II: Industry Competition/Procurement Process, to obtain competitive, conforming bids/proposals Track III: Owner’s Other Commitments/Obligations, to obtain and satisfy all other requirements (funding, acquisition of property rights, off-take agreements, internal approvals, etc.) Each track has risks that impact other tracks, including: Schedule Additional obligations/liabilities Project viability

Procurement Strategy (cont’d)
Owner’s Procurement Risks Receive no bids/proposals Receive non-compliant bids/proposals Some non-compliant or All non-compliant No competition All bids/proposals exceed budget Budget unrealistic Contract terms, scope, specifications poor/ambiguous Too much risk transfer Owners/consultants don’t assess/price risk same as contractors Potential need to disclose evaluation criteria Expensive procurement process Failed process and/or litigation

Contractor’s Procurement Risks Rejection of non-compliant bid/proposal Compliant bid/proposal rejected in favour of non-compliant bid/proposal Unacceptable risk allocation Must qualify and risk non-compliance Consider abandoning process Uncertainty over owner’s evaluation criteria Expensive procurement process Bid/proposal costs may be included in contract price rather than considered general overhead Failed process Mistake in bid/proposal

Numerous processes available Request for Expressions of Interest (REOI) Pre-qualification Process (RFQ) Request for Quotes Request for Proposals (RFP) Request for Tenders (RFT) Poor process and/or poor risk allocation may be obstacles to finding pool of interested and qualified bidders or lead to non-compliance Consider doing market research before finalizing process for major projects (pool of potential participants & appetite for risk)

Procurement Process may be influenced or dictated by: Stakeholder requirements/constraints Regulatory/environmental permitting and approval processes and requirements First Nation issues/obligations/commitments Requirements for public invitation or private invitation Public owner or private owner Potential use of/need for “FEED Contracts” Pre-qualification vs. short-listing Requirement for competitive tendering vs. sole source negotiation

First: Develop Overall Project Delivery Strategy May include 1 or more Contract and Pricing Models Second: Identify Contract Model(s) that best reflect desired risk allocation Third: select Pricing Model that best reflects desired pricing (only partly related to Contract Model) The above are covered in more detail later in presentation slides

Some Procurement Process Issues

Request for Tenders or RFP or Sole Source
Threshold Issue: Request for Tenders, RFP or sole source negotiation? Want mandatory use of same contract/performance requirements? Allow departures from contract requirements? In tender/proposal? In negotiations following identification of highest-ranked submission? Want submissions to be fixed price & irrevocable? Want “bid security”? If so, what kind, for what purpose and how will it be enforced? Will there be Fairness Monitor/Process Monitor? Willingness and ability to entertain bilateral meetings and change commercial terms prior to closing?

Alternates and Negotiation
Alternates and Alternative Proposals Consider whether alternates permitted Evaluating alternates within base proposal Evaluating alternative proposals Defining winning criteria - Base Proposal or Alternate Proposal Opportunity for others to match alternates Negotiation Governed/limited by RFP/Request for Tenders Bid shopping vs. negotiation Sequential vs concurrent negotiations

Leading Edge/Bleeding Edge Risk
New technology? Pushing the envelope? New application? European vs. N.A. practices? History of comparable work? Bridges vs. schools? Contract value > 150% of previous largest contract No substitution for knowledge and experience Of consultants Of contractors/subcontractors/suppliers People experience vs. corporate experience Leading edge/bleeding edge often increases difficulty in negotiating risk allocation

Manage Pricing Risk Manage risks by appropriate pricing model:
Use a mixture of lump sums, unit prices, cash allowances, etc. Obtain fixed price for part of the scope of work, with cash allowance for other parts that are incomplete or may require large contingencies Bid Form/Price Breakdowns Does it inadvertently allow for unbalanced bids? Influence on evaluation if broken down poorly? Quantity variations? Manage risks by “Early contractor involvement”? Is there realistic “exit strategy” if dissatisfaction occurs?

Schedule Risk Good Work. But I think we might need just a little more detail right here!

Schedule Risk (cont’d)
Realistic schedule vs politically driven schedule Allow sufficient time for preparation of bids/negotiations Allow sufficient time for performance of work Set contract completion date in advance of required completion date to ensure adequate contingency exists against delays and potential liability for delays to subsequent contracts dependent upon completion E.g. leases, purchase contracts, production commitments 3 years to plan and design but only 30 days to tender and then 3 months to construct! Beware of schedule erosion during protracted negotiations

Schedule Risk (cont’d)
Identify and clarify distinction between “Contract Schedule” and “Construction Schedule” Contract Milestone Dates only change as result of Change Orders Can owner constantly reject contractor’s submission of monthly updated Construction Schedule if it shows Contract Schedule will not be met? Consequences of accepting or rejecting the updated Construction Schedule Issue: requiring detailed Construction Schedule to be submitted with bid/proposal and bound into Contract For complex projects consider alternative approach to scheduling requirements in procurement docs & contract

Design Liability Risk Liability limits and duration of liability
Consider using applicable law of other jurisdiction in certain cases E.g. many civil law jurisdictions do not allow professionals to limit liability in same manner as in common law jurisdictions Type of contract often defines extent to which owners can hold designer liable for design Architect/Engineering Services contract EPCM (can result in unanticipated procurement costs) EPC/Design-Build Alternative approaches to mitigating design risk when E&O insurance not available or policy limits inadequate for risk

Subsurface Condition Risk
No such thing as too much geotechnical investigation prior to tendering Consider joint geotechnical program during tendering to manage the risk and reduce contingencies regardless of who bears the risk Consider risk sharing specific items E.g. where slope stability or potential presence of rock is an issue, perhaps: Contractor bears first portion of additional costs Owner and Contractor share next level of costs Owner (or Contractor) bears remainder

Subsurface Condition Risk (cont’d)
Is there opportunity and time for investigation Risk allocation/management Baseline geotechnical report? Field investigations funded by owner during proposal competition? Issues re disclosure of field investigations by other proponents to owner/successful bidder Failure to disclose information can change initial assumed risk allocation

Subsurface Condition Risk (cont’d)
Risk allocation can be illusory On one project to be constructed on steep slope there was serious risk of slope failure that could cause project to fail and substantial damage to adjacent structures Request for bids put all risk of subsurface conditions on contractor All the “big players” able to withstand the risk if slope failure occurred declined to bid Contract awarded to a small contractor who accepted the risk BUT if risk materialized small contractor had inadequate financial resources and would be bankrupted Question: Who really bore the risk? Question: Would owner’s risk have been reduced if it had changed original risk allocation to attract bids from the “big players”?

Typical Owner’s Approach to Subsurface Conditions
Reduce “upfront costs” –minimal advance investigation Transfer ALL risk to contractor Only disclose what you have to BUT: If disclosing information, generally must disclose all information in possession or control Engage in risk sharing only when necessary and preferably as little as possible. Examples Share risk of quantity over-runs (e.g. rock bolts or slope stability) Tiered allocation of risk, as seen on some P3s (first $x m to contractor, next $y m from contingency reserve and/or shared 50/50 with owner, and over $z m to one or other, or give grounds to terminate without cause, etc. Use a GBR – but drafting and interpretation issues can arise

Typical Contractor’s Approach to Subsurface Conditions
Minimize “out of pocket” proposal preparation costs Minimal or no subsurface investigation during bid period Full reliance on material provided by owner, however inadequate it may be Qualify proposal (if possible, depending on jurisdiction and rules governing tendering/proposals) Include a sufficient contingency reserve in price, but then reduce it under competitive pressure either before proposal submission or during contract finalization

Project Delivery System
And Contract Models

Project Delivery System vs Contract Model
Project Delivery Strategy and Contracting Strategy used interchangeably but they are different Project Delivery System (PDS): A logistical decision by the Owner by which it decides how the different agents who participate in the project will be related to the owner and among themselves A PDS is an organizational structure adopted by owners for the management of the design and construction of a project (Masterman, 2002) Or, the particular contractual arrangements for the approach implemented or utilized to accomplish a project´s goals including organization, risk allocation, assigning of responsibilities, pricing and payment obligations (Juliana, Ramirez and Larkin, 2005)

Project Delivery/Contract Model (cont’d)
Follows the PDS adopted by the Owner A form of contract that specifies the risk allocation that is generally assumed to apply and govern the relationship between the parties, such as CCDC, Government standard form, etc. May include one or more pricing models, which in turn may change the risk allocation generally assumed to apply by the Contract Model (e.g. Unit Price vs. Lump Sum).

Project Delivery/Contract Model (cont’d)
Summary: Project Delivery System is strategy for delivery of the entire project Sometimes, this will involve a single contract model e.g. single CCDC 2 contract for a building Sometimes, this can involve multiple contract models Changing Project Delivery System should always be considered as in following example

Case Study: Roadwork Contract
Original PDS: Request for Bids issued for major road relocation and interchange construction project to Owner’s design, using non-standard construction contract documents and consultant’s own specifications Problem: Lowest bid was almost 40% over budget Project given to new Project Manager with instructions to get project under original budget Project Manager established project management team comprised of an engineer, a construction expert and an experienced construction lawyer

Case Study: Roadwork Contract (cont’d)
Alternate PDS Approach Developed Project broken into numerous contract packages based on type of work and appropriate contract/pricing models Logging Clearing and grubbing Fencing Relocation of watermain and existing service connections Relocation of hydro, telephone, etc. Provision of alternate access for local residences Construction of new roadworks Installation of lighting and traffic control Original specifications discarded and replaced with specs based on standard form MoT and municipal specs

Case Study: Roadwork Contract (cont’d)
Result: Potential for disaster averted After logging completed and clearing & grubbing underway, major (3m elevation) survey error discovered in original surveys and drawings Re-packaging provided opportunities for local specialized and First Nations contractors and thus more competition Net savings of more than 40% over original price in single D-B-B contract Potential for claims mitigated by contracting strategy Project completed within schedule under original budget

Contract Models Following are examples of some Contract Models, discussed in more detail in later slides D-B-B Construction Management Construction Management - CM at Risk EPC / D-B / Turnkey model EPCM model Alliance model PPP/concession model Integrated Project Delivery (IPD) Contract model reflects Owner’s risk allocation decisions

Pricing Models Following are examples of some Pricing Models
FP (Fixed Price) GMP (Guaranteed Maximum Price) GMUP (Guaranteed Maximum Upset Price) UP (Unit Price) TP (Target Price) Cost+ (Cost Plus) Combination (stipulated &/or unit &/or reimbursable prices) OB (Open Book) Pricing Model governs payment and so can be used with any Contract Model

1. Design-Bid-Build (D-B-B) Model
The traditional method of project delivery, in which an owner: contracts directly with a consultant to prepare the owner’s detailed design, drawings and specifications for the project, and contracts directly with the contractor to construct the project to the owner’s design, drawings and specifications. The construction contract is typically (but not always) administered by the owner’s consultant/engineer.

1. Typical Design–Bid–Build Relationship
OWNER PREPARE DESIGN DESIGN CONSULTANTS CONSTRUCTION TO OWNER’S DESIGN ADMINISTER CONTRACT CONTRACTOR

1. D-B-B Model (cont’d) Some Disadvantages Some Advantages
Difficult to fast track Quality and completeness of documents critical Design Specifications Drawings Contract Change Orders expensive (delays and extras) Market dependent Ill-suited for renovations & expansions Some Advantages Well understood Single design contract and single construction contract Often fixed price GC at risk for Price Schedule Quality OH&S Single bonds Predictable Standard form contracts

2. Construction Management Model
The project delivery method in which: Owner contracts with a Consultant to prepare the Owner’s detailed design, drawings and specifications for the project Owner contracts with a CM to provide CM services, including obtaining bids/proposals from Trade Contractors as agent for Owner, preparing contracts for execution (by Owner or CM as agent for Owner), and administering contracts for Owner Owner contracts with trade contractors (or authorizes CM to act as its agent for that purpose) for construction of the project to Owner’s design, drawings and specifications. Example: CCDC 5A Construction Management Contract for Services

2. Typical CM Relationship
OWNER PREPARES DESIGN ADMINISTERS TRADE CONTRACTS DESIGN CONSULTANTS CONSTRUCTION MANAGER TRADE CONTRACTOR TRADE CONTRACTOR TRADE CONTRACTOR TRADE CONTRACTOR CONSTRUCT TO OWNER’S DESIGN

2. CM Model (cont’d) Advantages: Allows Owner to fast track project
CM can work with Consultant and prepare and issue tender packages for individual trades as design packages for that trade are finalized rather than wait for full design to be finalized CM can provide expertise and constructability reviews to Owner and Consultant prior to tendering trade packages Provides flexibility As CM provides professional service and price normally not fixed, allows public owner a little more flexibility in selecting CM based on experience, reputation and track record

2. CM Model (cont’d) Disadvantages:
Not a lump sum contract so final cost uncertain Significant portions of the total services for which the CM is paid are not subject to competitive bidding If fee based as percentage and for time, built in incentive against controlling/reducing costs and schedule CM bears little risk for performance of Trade Contractors, schedule, defects, deficiencies, or final cost Trade packages often awarded before design of trade package completed and fully integrated with rest of design CM normally not responsible for cost over-runs

3. CM at Risk Model The project delivery method in which Owner contracts with CM, much as in pure CM Model, BUT CM accepts some risk, depending on contract, such as: Putting fee at risk if cost/schedule exceeded Accepting some (or all) construction risk Often CM transitions at some point from pure CM to General Contractor Example: CCDC 5B Construction Management Contract for Services and Construction

3. CM at Risk Model (cont’d)
Advantages: Similar to pure CM with additional advantage of making CM have some “skin in the game” Theoretically allows conversion from pure CM to regular lump sum General Contractor

3. CM at Risk Model (cont’d)
Disadvantages: Similar to pure CM but with additional disadvantages If CM to give guarantees of equipment performance, built in incentive to get Consultant to over-design and over-specify, thereby increasing cost No competitive tensions for project delivery price or schedule Transition from pure CM to General Contractor dependent on agreement on lump sum price as design nears completion Little incentive on CM to provide competitive price for lump sum at transition point, often resulting in completion of construction on cost plus basis with few controls over cost or schedule CM at Risk contracts must be very carefully drafted to include a mechanism that automatically builds final lump sum price (e.g. by using fixed GC cost plus cash allowances).

3. CM Models & Early Contractor Involvement
Early Contractor Involvement (“ECI”) is simply a contracting model allowing Contractor to become involved and potentially start work before design is complete CM and CM at Risk are both methods of ECI “Open Book” contracting with general Contractor can also be an ECI method – but unlike CM the Contractor usually responsible for defects/deficiencies/acts/errors/omissions of subcontractors GMP – “Guaranteed Maximum Price” contract (often Guaranteed Minimum Price in practice) can be another method of ECI where contractor involved early

4. EPC / D-B / D&C / Turnkey Model
Method of project delivery in which one party, typically (but not always) an owner, contracts with another party (EPC/design-build contractor) to provide and be responsible for both design and construction that meets the specified statement of requirements. It can be used for an entire project or for only a specific scope of work for part of a project.

4. Theoretical EPC Contractor Relationship1
PERFORMANCE SPECIFICATIONS OWNER OWNER’S CONSULTANT DESIGN TO PERFORMANCE SPECIFICATIONS, PROCURE AND CONSTRUCT ADMINISTER CONTRACT(?) EPC CONTRACTOR LABOUR SPECIALTY SUBCONTRACTORS VENDORS 1Note: EPC Contractor assumed to be a single integrated firm

4. Typical EPC Relationship
PERFORMANCE SPECIFICATIONS OR OWNER’S REQUIREMENTS OWNER OWNER’S ENGINEER DESIGN TO OWNER’S REQUIREMENTS AND CONSTRUCT ADMINISTER CONTRACT(?) EPC CONTRACTOR DESIGN CONSULTANTS SUBCONTRACTORS VENDORS Note: EPC Contractor on larger projects may be a joint venture, consortium, special-purpose vehicle, etc.

4. EPC / D-B/ D&C/ Turnkey Model (cont’d)
Advantages Single point responsibility Opportunity for innovation and faster project delivery Efficiency (design & construction expertise together) Fitness for purpose No real alternative for proprietary technology Fewer changes and implementation simplified Reduction of claims (or number of claims) Increased flexibility to address changed conditions Reduced administrative burden for owner Cost savings and more certainty of final price Improved risk management for owner Greater ability to evaluate contractors on factors other than cost

4. EPC/D-B/D&C/Turnkey Model (cont’d)
Disadvantages Loss of control and reduced owner involvement in design Cost of tendering (to all parties) Difficulty/time comparing different designs Cost of risks and contingencies Danger of Design-Build becoming Build-Design Environmental/regulatory processes Limited pool of qualified Design-Builders QA/QC largely in contractor’s hands Disputes tend to be larger and more complex Management of long term risks Some lack of project definition prior to contract award

4. EPC/D-B/D&C/Turnkey Model (cont’d)
Some Questions/Issues Availability of industry accepted standard form contracts? Adaptability of standard forms to different projects? Any projects it is not suitable for? Myth of “fixed price” contract? Key issues from contractor’s perspective? Key issues from owner’s perspective? Is Bankability a concern? If so, how does it affect contract? Why is this method more suitable for a project than other methods? Any Mitigation Strategies? To reduce confusion over conflicting understandings of roles/responsibilities/risk allocation To reduce to one or more parties (and contingencies) Insurance as Risk Transfer Mechanism

5. EPCM Model Method of project delivery in which an owner contracts with another party (typically an engineer) to: provide design, drawings and specifications procure equipment and construction by entering into contracts as (disclosed or undisclosed) agent for the owner with suppliers and contractors administer and manage the equipment and construction contracts on behalf of the owner balance authority and responsibility between EPCM contractor and owner

5. EPCM Model (cont’d) Confusion can arise when everyone does not have the same understanding: Engineer- Procure - Construction Management vs. Engineer - Procure – Construct – Manage (i.e. same as EPC / Design-Build) VERY different from EPC! Basically combining Consultant and CM into one Panacea or Spawn of the Devil?

5. Typical EPCM Relationship
OWNER EPCM CONTRACTOR DESIGN / SERVICE PROVIDERS CONSTRUCTION CONTRACTORS VENDORS EPC CONTRACTORS

5. EPCM Model (cont’d) Some Advantages Some Disadvantages
Fast track friendly with “just in time” design Flexible start and stop Experienced CM assists management of design/ construction interfaces High Owner/Consultant demands Owner can weigh trade/supplier pricing against risk transfer Some Disadvantages Risk of changes & late design Multiple contracts/Interfaces Performance, cost, schedule, quality, OH&S at Owner’s risk Difficult to control cost Requires experienced owner knowledgeable of risks Lack of project definition prior to contract award Patchwork quilt of bonds Can blur risk/responsibility between the “E” and the “CM”

5. EPCM Model (cont’d) Questions/Issues
Availability of industry accepted standard form contracts? Adaptability of standard forms to different projects? Any projects it is not suitable for? Myth of “fixed price” contract? Key issues from contractor’s perspective? Key issues from owner’s perspective? Why is this method more suitable for a project than other methods? Any Mitigation Strategies? To reduce confusion over conflicting understandings of roles/responsibilities/risk allocation To reduce to one or more parties (and contingencies)

6. Alliance Model Collaborative approach to delivering construction projects. Incentive-based relationship contract in which the parties agree to work together as one integrated team in a relationship that is based on the principles of equity, trust, respect, openness, no dispute and no blame. All parties are bound to a risk or reward scheme where they all share savings or losses, depending on the success or otherwise of the project.

6. Alliance Model (cont’d)
Unique in requiring involvement of owners, consultants, contractors and key stakeholders to be involved much earlier than in traditional contracting models Shared risk and reward, requiring more transparency among all parties and more integration of resources, processes, and expertise than under traditional contract models

Much focus on: Relationship building; Collaborative working; Aligned objectives; Principles such as: Best for project Win-win rather than win-lose No dispute Open book Consensus Project governance / escalation procedures

6 Alliance Model (cont’d)
Advantages Risks are shared Useful in complex projects where costs and schedule difficult to assess at outset Can eliminate or at least reduce risk of claims and disputes through inclusive and collaborative legal and commercial arrangements May enable parties to work together in an open and productive manner and strive to achieve business goals of everyone in the relationship. Disadvantages Not well understood Not everyone has experience in alliance contracting Degree of uncertainty about budgets and delivery dates May not be bankable Organization of an alliance contract often more difficult as multiple parties involved

“Taken together, a partnering/alliance contract and incentive contracts do not necessarily result directly into better project performance but through relational attitudes and how they play out into actual teamworking behavior.” Mohammad Suprapto, Hans Bakker, Herman Mooi, Marcel Hertogh, How do contract types and incentives matter to project performance? (International Journal of Project Management, 2016, p 1071)

7. PPP/P3/Concession Model
Method of project delivery in which a private company is given a concession to provide some combination of finance, design, build, operate and maintain a facility or infrastructure (powerplant, airport, toll road, etc.) normally built and operated by the government. At the end of the concession period, ownership and/or operation of the facility is usually transferred to the government.

7. PPP/P3/Concession Model (cont’d)
No universal definition of P3 The term “P3” covers a wide range of projects, depending on asset ownership, risk sharing, financing and operation Generally not “partnerships” in the legal sense All P3s are intended to serve the public interest Players in construction pyramid need to know how P3s work and where they fit in

Depending on the jurisdiction, PPP contracts can be one or more of: Design-Build O&M Contract Design-Build-Finance-Operate Build-Own-Operate Build-Own-Operate-Transfer Buy-Build-Operate (where private sector buys public asset, upgrades/builds and operates) Operation Licence (e.g. IT projects) Finance Only (e.g. bond issue to finance project)

Disadvantages Regulatory/Legislative framework may not allow Often driven by commercial and financial lawyers/consultants with little experience in construction Public sector can lose control of design and equipment selection Contractors accept significantly more risk so must include sufficient contingency or ensure risks can be accepted insolvency Gaps in “back to back” contracts can increase risk to Concessionaire Advantages Solves public sector lack of funds Public sector can off-load more risk Public Sector gains certainty over budget and schedule Public Sector protected by imposing significant LDs to protect Owner against almost all loss

8. Integrated Project Delivery
“New kid on the block” A project delivery system that seeks to align interests, objectives and practices through a team-based approach.

8. Integrated Project Delivery (cont’d)
Integrated Project Delivery (IPD) is a project delivery approach that integrates people, systems, business structures and practices into a process that collaboratively harnesses the talents and insights of all participants to optimize project results, increase value to the owner, reduce waste, and maximize efficiency through all phases of design, fabrication, and construction. IPD principles can be applied to a variety of contractual arrangements and IPD teams can include members well beyond the basic triad of owner, architect, and contractor. In all cases, integrated projects are uniquely distinguished by highly effective collaboration among the owner, the prime designer, and the prime constructor, commencing at early design and continuing through to project handover. (Good Resource)

8. Integrated Project Delivery (cont’d)
CCDC 30 – 218 Integrated Project Delivery Contract “addresses issues specific to integrated project delivery (IPD) projects including scope allocation, payments, changes, conflict management, termination, insurance and contract security, and liability allocation. The pricing structure is cost plus with a target price. The profits of the design/construction team are identified and allocated to a risk pool that remains at risk subject to the achievement of mutually agreed project objectives.” Early indications look promising, but more experience required to assess success

Summary Selection of Contract Model depends on:
Contractual relationship – key features Risk Allocation – key risk allocation features Types of projects its commonly used for Three “practice tips” : Do not rely on name of contract; instead ensure there is a common understanding of underlying allocation of risks in the contract. There is a distinction between the contracting model & the pricing model: one does not necessarily dictate the other Pricing model can undo assumed risk allocation of contracting model

Conclusion Selection and implementation of optimal Project Delivery System, Contract Model and Pricing Model can improve likelihood of a successful project. But: “We tend to exaggerate the importance of contracting approach to project success or failure. No contracting approach guarantees success; most contracting approaches can succeed. Contracting is a second-order concern.” Edward Merrow, Industrial Megaprojects, Concepts, Strategies and Practices for Success (John Wiley & Sons, 2011), p. 253

Thank You

Procurement Strategies

Similar presentations

Presentation on theme: "Procurement Strategies"— Presentation transcript:

Similar presentations

About project

Feedback

Log in

Auth with social network:

Procurement Strategies

Similar presentations

Presentation on theme: "Procurement Strategies"— Presentation transcript:

Similar presentations

About project

Feedback