By Roland Badger
Many contracts for capital projects result in dispute resolution, arbitration or even litigation. It is almost impossible to foresee all the potential difficulties a contract may encounter, however, such uncertainty can be mitigated by the adoption of professional documentation and understanding of the risks, liabilities and obligations accepted by each of the contract parties prior to executing the contract. This process can and should be instigated from the first inception. LR Consultants are specialized in identifying these challenges and can create specific mitigation plans to avoid the possible impact of these changes in the project economic assumptions.
Some of the potential areas for consideration are reviewed in this article.
Contract Strategy
An initial strategy should always be drafted to crystallise the decisions necessary for the formulation of the documentation, tender process, award, contract execution and subsequent closeout. The bullet points to be considered will, of course, decide on the size and complexity of the subject project however the following is a reasonable checklist:-
- Scope of Work
- The extent of the scope of services (Engineering, Procurement, Construction, Commissioning, Start-Up etc)
- Tenderer list
- Tender schedule
- Tender strategy (Single Source, Negotiation, Competitive Tender etc)
- Terms and Conditions of contract
- Remuneration strategy
- Invitation to Tender documentation and process
- Tender evaluation criteria
- Project management
Some of the above are deliberated below
Scope of Work
The Scope of Work (SoW) for any contract at a high level is normally reasonably obvious. Scope growth and variations do however form the main reason for disputes and cost creep. The potential for such growth will, of course, depend upon responsibilities under the scope of services and remuneration strategy. Irrespective of that it is important to ensure that the SoW is as detailed in intent as can be for the project phase. It is recommended that focussed attention is given to the inclusion of the SoW at all battery limits and the responsibilities for interfaces with third party contractors, statutory authorities and others are clearly defined.
Scope of Services
The scope of services will depend upon the chosen strategy with respect “Front End Engineering Design” (FEED), Detailed Design, Procurement, Commissioning and Start-Up. The interaction between these and the Construction activities are of course inter-related, however, whichever is selected it is important to ensure that the boundaries of the various scopes are understood and clearly defined. One recurring example is the propensity for “gaps” between the extent of company supplied equipment and bulks and the contract requirement for contractor supplied fixings and consumables.
Tenderer List
It is important to ensure that the list of tenderers invited to submit bids are suitable for the type, size and complexity of the project and are financially capable of fulfilling their obligations. It is therefore advisable on large scale projects to prequalify the tenderers based upon the criteria considered essential by the project team. It is recommended that such process, should be structured and evaluated against criteria pre-agreed in the project team, to enable management of disappointed prospective bidders.
Tender Schedule and Strategy
The tender schedule should be realistic and include sufficient scope for requested extensions by the tenderers. The schedule should include adequate time for a full and proper evaluation of the submissions.
Whilst Negotiation as a strategy may result in a reduced tender schedule, it will probably not provide the same commercial benefits as competitive tender and is unlikely to prevent disputes unless the extent of the Scope of Work is fully attested by the contractor prior to or at contract execution.
Terms and Conditions of Contract
There are several standard forms available however for large value capital projects, it is worth engaging external counsel to bespoke contracts based upon specific requirements. The responsibilities, liabilities and obligations of both parties in the T+Cs should be considered and fully understood before tender.
Remuneration Strategy
There are a variety of remuneration strategies, through reimbursable to lump sum. The choice will depend upon the scope of services and the level of risk the client is prepared to accept. A high-level chart of remuneration strategy and against risk profile is below.
Tenderers of course allocate the risk profile during tender stage and include, theoretically at least for such profile.
Invitation to Tender (ITT) Documentation and Evaluation Process
The ITT is a combination of inputs from a variety of project team discipline requirements.
It is recommended that, as diagrammatically represented for a sample project, the compilation of the ITT should include technical reviews and workshops to ensure that no “gaps” between the individual discipline technical and reporting requirements evolve during the execution phase.
The tender process should be well documented and should include a formal approach to registering and responding to all technical and commercial clarifications during the tender process. All such responses amounting to revisions the tender requirements should be incorporated into the eventual contract.
Tender Evaluation Process
It is suggested that a documented evaluation procedure is compiled with a structured basis to reduce the potential for subjective technical evaluation. The technical submission can be evaluated using a question-based submission with a percentage weighting for each response. The resultant percentage score can either be considered as a go/no go basis (based on a previously agreed “pass mark”) or the technical score can be evaluated as a weighted percentage together with a normalised commercial evaluation.
Commercial evaluations should ensure that all aspects are considered.
A graphical representation of a potential evaluation of a lump-sum based tender in US$ is below
Final Documentation
The above evaluation returns a preferred bidder. The potential contract value is of course based upon the tender submission rather than evaluation value. The parties should engage prior to execution to ensure that any technical clarifications are included and that as many omissions, exclusions, exceptions and deviations are resolved amicably and incorporated prior to finalisation of the contract documentation.
With a solid and understood contract, the potential for disputes is reduced, however, it is worth mentioning that during execution it should always be remembered that
“Change = Variations = Potential for Dispute”
LR Consultants are fully versed in tender processes and contract document preparation. Our team is available to facilitate, assist or actively author such documentation as your project may require. Please contact us to discuss your requirements.