Procurement Options for NZ Construction Contracts

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Tyrone Cannon
6 years ago
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1 1 P a g e Tool Box Resource Procurement Options for NZ Construction Contracts A wide variety of contract arrangements have evolved in NZ for use on construction contracts. The following describes the most common types used in the procurement of construction services. Form Description Traditional Tender Commonly used in open tenders the traditional tender is used where there is a requirement to go to the market with a comprehensive set of construction documents including detailed design drawings and schedules of quantities used for pricing purposes. The traditional tender is favoured by Principals who wish to be advised with some certainty of the likely tender process outcome, and by design teams who favour completing the design prior to the involvement of the contractor. In a traditional tender the Principal is usually represented by a Lead Designer or Engineer to the Contract who represents the authority under the contract from whom the contractor takes instruction/direction. Its main disadvantage is that such tendering can attract low entry price bidding which may result from the competitive tendering process where unequal bidders are included on the tender list. Commonly tainted by main contractors for its focus on low entry price ; this can convert into a high exit price outcome if there are major discrepancies in the tender documents. Principals would need to ensure its Design Team is well briefed and that the Lead Designer coordinates the various design inputs giving special attention to design clashes between the design elements/ disciplines. Errors made by the design team become the Principals responsibility under the contract and if design is poorly managed can be the leading reason for cost blow out on a project. Although used in publicly notified tenders it would be wise to pre qualify bidders to ensure the bids received are obtained from sound, appropriate and experienced contractors who can demonstrate capability to carry out and complete the works. If nothing else this provides a level playing field for tenderers. Negotiated Tender The tender aspect of this arrangement relates to the calling of competitive sub trade prices which are used to compile an overall contract price. Generally P&G and Margin costs are negotiated at fair market rates verified by a Professional QS. Negotiated Tender arrangements are preferred by Principals who have determined who their construction partner will be either through previous favourable relationships or because of other drivers such as: Reputation Project Scale Specialist Nature of the Work Proven delivery

2 2 P a g e Tool Box Resource Cost Reimbursable Cost Reimbursable Contracts are used where the scope of work is difficult to ascertain at the time the contract works need to start on site or in the case (i.e. Leaky Buildings) where it is impossible to determine the scope or pricing of particularly (although not exclusively)remedial works. Pure Cost Reimbursable Contracts have no fixed price component except for Margin but hybrid versions do surface from time to time. The basic principle behind Cost Reimbursable Contracts is that you only pay for the work that has to be done. Design Build Design Build contracting transfers design risk to the contractor who thus assumes a single point of accountability in the delivery of the project. Design Build allows contractors to provide buildability input to the design and generally is welcomed by Principals who desire certainty over time/cost/quality outcomes. In any Design Build contract or derivative thereof the design team although employed by the contractor and taking instruction from the contractor has a professional duty of care to provide the Principal with an indemnity that the design has been completed to the same norms as if the Principal engaged and directed the designer in a direct relationship. An example of DB is the City Library Building in Wellington. Novated Design Build Novation is a term used to describe the transfer of design responsibility to the contractor at a point of time during the design development and usually, although not always, prior to construction work commencing on site. Novated Design Build contracts are used where the Principal wishes to appoint the design team and progress the design up to a point that such direct control and input is satisfactory to the Principals wishes but that the preference moving forward is to transfer design development risk to the contractor. Novated Design Build Contracts have to be carefully thought through and documented to ensure common understanding of who carries what design risk. Although some Principals attempt and prefer to have the contractor accept all design risk from day one of design it is in fact unreasonable to expect the contractor to accept risk on matters he has had no input to and scant knowledge of. This in fact becomes fertile ground for contractual disputes and adversarial relationships. It should be expected that the contractor will price the design as it is presented immediately prior to novation on the basis and understanding that the Principal warrants that the design is correct, fit for purpose and compliant with the design brief and mandatory codes. If problems arise as a result of the design prior to novation being incomplete or incorrect then the Principal will carry that risk. If problems arise after the design has been novated to the contractor and such issues relate to design development under the contractors guidance and instruction and relates to design requirements introduced by the contractor then risk rests with the contractor of any consequences as a result of any change. A project example of Novated DB is Westpac Stadium in Wellington.

3 3 P a g e Tool Box Resource Construction Management Construction Management is a term that describes the primary operating focus of a particular construction company. Put simply Construction Management Firms are skilled and experienced construction supervisors, managers and cost administrators first and foremost and they tend to have no direct labour engaged in the physical works. A more traditional construction company is likely to employ its own labour force for undertaking concrete and carpentry trade work as a minimum. A CM firm may or may not own and operate major plant & equipment but those who operate purely to offer CM services tend to submit the provision to the project of such equipment to a contestable process. The main advantage using Construction Management is claimed to be that it provides transparency in the pricing of all the inputs that make up the physical works. Construction Management firms will be seen alongside traditional builders on many tender lists and like the traditional builder take contractor risk on pricing generally. All the major construction companies, FCC, MZ & Hawkins etc are able to offer CM services as an alternative delivery option. It is, not usually, the preference of companies to promote their CM services on a negotiated basis purporting to offer advantages that are not available in a competitive tender. Pure Construction Management Companies attempt to differentiate themselves from Builders offering CM services but in reality the same result can be achieved from both. Management Contracting Management Contracting can be undertaken by suitably competent individuals or organisations that primarily have the ability to provide high level supervision and administration of the contract works. They are differentiated from CM by their origins, being mainly a professional services delivery firm. MC arrangements can be engaged on the basis of a fixed cost for site supervision plus disbursements basis with an additional nominated % fee for profit based on the overall contract value or on a straight % fee based on the overall contract value. This method of contracting is popular where Principals seek to appoint key personnel to manage the risk on the project delivery without the cost of typical main contractors overhead establishment charges and profit being applied to the value of the physical works. All of the work is separated into work packages typically along the lines of traditional trades (although some work packages such as Base Building works will encompass several trades) and each work package contractor enters into a direct contract with the Principal. The Principal basically accepts the risk on subcontractor performance on the project which under other forms of engagement rests with the contractor. The MC s job is to apply professional diligence to the coordination of the disparate subcontractor inputs and lead the construction services delivery team.

4 4 P a g e Tool Box Resource The MC arrangement offers a cultural shift in managing contracts in that subcontractors are no longer subservient in the contractual hierarchy but instead fulfil the role of a specialist contractor expert in their field. An example of Management Contracting on a major project was the construction of Te Papa, where the work was split into separate specialist packages and coordinated and Managed by a CM. Management Contracting is favoured by Principals who are prepared to absorb an additional layer of risk with the expectation that MC will deliver a cost effective solution. Alliancing Alliancing has been introduced to NZ as a more relevant mechanism for sharing risk and gain on a major project where at the outset it is difficult to accurately assess what all the risks to a project are or going to be. Alliancing requires the Principal, the Design Team and the Contractor to abandon their existing operating structure and combine in an alternative vehicle (similar to a JV) whereby all become equal stakeholders in a single purpose project specific venture. Major projects in infrastructure works are most suited to this model and in recent times Transpower, The Department of Corrections and Transit NZ have all undertaken projects using the Alliancing model. Its primary success is in capturing the intellectual capability of the whole team who all act co jointly in the best interest of the project. Challenges along the way are resolved using the best available expertise inherent in such a team framework and project risks are thus not the sole ownership of any one party. Pain and gain are shared. Preferred Contractor Preferred Contractor Appointments are growing in popularity and are used where it is essential to demonstrate a contestable process in the procuring of a contractor but where the level of documentation is not far enough advanced to call for prices. Preferred Contractor tenders are typically called following a pre-qualification process which is narrowed down to a list comprising of who is adjudged to have the best ability to carry out the proposed works. The tender process usually provides for a weighted attributes submission the scoring of which is notified to the contractors in advance. Using weighted attributes, price alone does not become the determining factor in contractor appointment. Attributes are likely to be: Safety Record Quality, availability and experience of Personnel identified for the project Proposed Methodology & Programme Tendered Preliminary & General costs & Margin to be applied Response to the Contract Conditions applying to the project Tendered Fee for providing consultant contractor inputs The successful contractor once appointed then works with the wider project delivery team to provide buildability advice, confirm methods & programme and call prices for sub trade works.

5 5 P a g e Tool Box Resource The goal is to arrive at a final tender sum that the Principal can accept or reject. The Preferred Contractor is essentially a consultant contractor during this pre construction stage and may require a fee for such involvement separate to the contract. Common Practice sees this fee only collected when the contractor is dismissed from further involvement in the project where the contractor has failed to achieve an acceptable price for the works. An example of Preferred Contractor engagements is the WCC Housing Upgrade Project where this procurement process has delivered good results. General Notes: Every Procurement Option has its own positives and negatives but generally speaking each can serve the purpose for which they were intended. The biggest risk to contract failure is design information and the timely delivery of documents to the project team. There are two major recommendations that apply to all of the above equally: 1. Design Deliverables In recent years an initiative was undertaken to create one industry wide benchmark for design documentation. This was achieved by the Construction Industry Council who in conjunction with all project delivery team stakeholders created the industry benchmark for documentation known as The NZ Construction Industry Council Design Documentation Guidelines. This document has become an invaluable aide to designers, contractors and clients alike and defines design stages and the deliverables required of design stages. Design Stages Concept Design Phase Preliminary Design Phase Developed Design Phase Detailed Design Phase Construction design Phase It is recommended that Conditions of Contract and Procurement Options are referenced back to the CIC Guidelines. 2. Documentation Programme The creation and management of a Documentation Programme for a project should be a high priority on a project. It too often is not. The performance of the contract by parties to the contract often becomes focussed on adherence or otherwise to this document (it is a vital project management tool). The Design Manager of the project should be a defined role and the maintenance of the Documentation Programme should be as important as the attention given to the Construction Programme.

6 6 P a g e Tool Box Resource Payment Definitions Type Lump Sum Fluctuating Price (LS) A Lump Sum is agreed based on the Tender Documents but cost increases due to cost escalation are permitted Lump Sum Fixed Price (LSFP) A Lump Sum is agreed based on the Tender Documents and the contractor makes an allowance for cost escalation risk in their price make up. Foreign Exchange Fluctuations are typically a sticking point when agreeing a LSFP and where it is deemed that the contractors FOREX allowance is unacceptable the Principal may elect to retain FOREX risk. Contractors accepting FOREX risk will look to price the cost of obtaining Forward Cover and assess whether they will buy Forward Cover to lock in Exchange Rate pricing or take the commercial risk in house. Guaranteed Maximum Price (GMP) The most commonly misrepresented term of all engagement options. In its purest form is simply an agreed Ceiling Price for the project, one that cannot be exceeded except through Principal requested Variations to the scope of work. Schedule of Rates (SOR) Commonly used on Civils projects where the precise quantity of work cannot be quantified especially where the project contains a number of potential variables. Likely to be seen more on Leaky Building Projects where the actual scope is difficult to assess until the fabric of the building is removed and the extent of the repairs evident. General Note: The above describes the Common Descriptions used as Payment Definitions and it is important to understand the pros and cons that go with each model If you have a project that you need assistance on in defining the most suitable method to go forward rjha limited can assist and navigate you through the options.

Unit 3: The Traditional Procurement Route

Unit 3: The Traditional Procurement Route 3.1 Introduction This Unit briefly introduces the main features of the traditional procurement route as a widely used route that provides a good basis for examining