Contracts are used for:
A tender process consists of:
A tender sets out the task, and can be for part or the whole of a project. When a contract is established the work from then is defined by the contract, making the tender separate to the contract. The tender can be used for principals engaging contractors or for the head contractor to engage sub-contractors. The goal is to have the job done at the required time, quality and price. Tenderers can be shortlisted for future works. Tenders take time, but are precise and reduce error relative to more direct contracting processes. Tenders can be open or competitive, selective (shortlisted) or negotiated (one contractor).
Contracts can be paid in:
Procurement strategies can also vary:
The principal starts with choice of design, but once they have contracted the work they are more constrained. Different contract forms encourage and support different key relationships. The contract form may encourage key suppliers to work for the benefit of the principal. The selection process (normally tenders) is a key step for the principal to choose strong partners, but is often dominated by price only because cash flow is always constrained. Contractors are focused on finishing and tend to have a hierarchical relationship with workers, meaning subcontractors are normally smaller and their selection is very price focused.
The principal may have consultants, but has a direct relationship with the contractor. This relationship is the head contract and is mostly managed by the superintendent (also known as the engineer). The contractor in turn contracts a subcontractor.
The principal has design consultants (architects/engineers), but also contracts subcontractors through a construction manager. The principal may have legal relationships with these subcontractors, or they may be only with the construction manager.
The principal uses a contractor. The contractor has consultants and subcontracts the work.
The principal contracts a designer, then hires a contractor and moves the designer contract to the contractor. The relationship between the designer and principal is managed through the contractor after the move.
The principal has consultants, has a head agreement with a project manager and a construction contract with a main contractor. The project manager watches the contractor on behalf of the principal.
There is an alliance of the owner, designer and constructor who are managed by:
The alliance contracts subcontractors and suppliers.
Alliances have some pros:
There are also some cons:
Alliances can save money compared to a traditional contract as there is no need to contract for risk contingencies. The formation of an alliance can be:
Typically the painshare/gainshare is chosen by the owner and nominated to the market, with the gainshare being 50% unlimited and the painshare being 50% limited to the Non-Owner Participant (NOP) fee. This limit on the painshare is likely constraining value for money. With a capped painshare, the owner carries the rest of the risk which decreases the motivation for the NOP to act as carefully as if the painshare was uncapped.
The government creates a project company (SPV) which has sponsors and shareholders, financiers and contracts experts. The company revenue is sent to the financiers through an escrow agent.
PPPs and alliances are common for large projects. Current trends in PPPs are:
Current trends in alliances are:
A PPP can vary in the share of risk and operation between private and public.
A design can go wrong with:
An international risk management framework. Posits that risk management is good for:
The ISO 31000 process begins with the principle of value creation and protection. Values include:
The framework is centred on leadership and commitment. It includes a flow of:
The process consists of:
At the same time there needs to be communication and consultation, as well as monitoring and review.
Risk evaluation can be both qualitative and quantitative. These can include financial assessment, qualitative assessment and experience. The range of the estimate is established with a sensitivity analysis which tests each key assumption over a range. There are also statistical probabilities attached to each risk scenario.
The ISO 31010 risk management contains information about running a risk assessment rather than managing risk.
Construction risks can include:
In managing risks, it can be helpful to prioritise some and aim to allocate the risk to the party best capable of managing them. Using history can help understand potential risks. Surveying or using other tools can help check different people's views. Various organisational bodies may also have views on understanding and dealing with different risks.
A typical risk management process includes:
Risk is allocated to another party when:
In managing risk it helps to:
Breaking down the risks into various levels can be useful to assess their core components and devise specific solutions.
Insurance types can include:
The government can incur risks in:
Private companies can incur risks in:
The government can mitigate risk though:
Uncertainty creates construction risks though:
Poorly manages risks can lead to:
Timing risk can be due to starting building before the design or previous step is finished. This can cause a portion to be reworked, presenting the timing risk.
Observed risk is calculated at every step via a comparison of actual operations to planned and declared operations. Observed risks include:
Regulatory risk includes:
Physical risks are easy to keep track of. Examples include:
Other risks include:
Network risks are that services will be removed or stop being provided. They can arise where there is competitive activity, from government conflict. This risk can be managed by checking what the network dependencies are early in project planning.
Interface risks are risks that the method or standard of delivery of the contracted service will frustrate the delivery of the core services.
The law can be broadly divided into criminal and civil law. Criminal law is offences against the state and are prosecuted by the state. Civil law is comprised of commercial, personal injury and public law. Most legal issue concerned with Technology, Engineering and Construction (TEC) projects fall within commercial law.
The source of Australian law is the constitution. The constitution sets up the government and any law contrary to the constitution is invalid. The constitution splits up the government into the Parliament, Executive and Judiciary branches. Statute Law are acts of Parliament whereas Common Law is decided by precedence of court cases. The courts have a hierarchy, with the high court at the top. The courts are then split into state and federal arms with 3 or 4 levels.
TEC projects principally engage with contract law, negligence and misleading or deceptive conduct. Examples of engineering contracts include:
A contract can be comprised of terms and conditions, schedules prepared by lawyers. The scope of works and/or project brief is prepared by engineers and lawyers. The specifications and drawings are prepared by engineers.
It is important to identify the parties that contract, the documents that comprise the contract (including any oral ones), the risk allocation between parties, and any other relevant legal principles (e.g. negligence or misleading or deceptive conduct).
A contract consists of:
The terms of a contract can be:
Misrepresentation/Mistake/Duress/Unconscionable contract lies on:
Negligence consists of:
Misleading and Deceptive conduct is specified in the Trade Practices Act 1974 and the Competition and Consumer Act 2010.
Restitution (Quantum Meruit) differs to contracts. Restitution is that a person is entitles to be paid a reasonable sum for any works rendered at the request of another personal. There does not need to be a contract before the works have begun. This restitution needs to be a reasonable amount. Most restitution claims come from failed contracts.
A Promissory Estoppel is where one party make promises to another knowing that the other party will rely on them. Where one party acts to the detriment of those promises, it would be unfair to allow the first party to succeed from the promises.
Some types of contracts are:
The choice of contract depends on the level of involvement/control wanted and the knowledge of design objectives. Fixed price contracts are the most used delivery method and work well when the final product is well known. Cost plus is the opposite of fixed price and can be useful when the final product is unknown/changing. It can be good to have the designer and builder/operator to work together for the initial period so that they can collaborate with issues with designs. Generally the design and construct contract has more initial overhead but can be cheaper overall and can deliver a superior product due to the better communication between the designer and constructor.
A fixed price contract is fixed price provided things operate normally. There will be adjustment for unexpected situations. A turnkey project is a project where the key is handed over at finish and there is no input. This is the ideal fixed price contract and accounts for things going wrong.
A cost-plus contract is good when the design brief can change. Theoretically it doesn't have additional cost, but can encourage slow completion and gouging. As a result, there is often a cap implemented.
Design and construct contracts are complex, with only the design brief being delivered. It makes sense to consult with the principal on the design before construction begins as then any problems can be solved early.
Design Build Operate contracts have the contractor operate for a period of time. The idea in this is that the contractor can find errors and solve them before it is handed over.
For the largest contracts PPP and alliance contracts tend to be used. Alliance contracts align all parties, incentivising all parties to perform and allows each party to apply their expertise. PPP allows private contractors to build and operate entirely on their own for a period, often at little cost to the principal. The alliance requires few lawyers whereas the PPP requires many.
The AS2124-1992 contract is the older general standard construct contract. The AS4000-1997 is the new standard construct contract. It is part of the wider AS4000 contracts. The SE Asia equivalent is the FIDIC Construction Contract (Red Book). These are General Conditions of Contract, rather than technical codes/standards.
Applications for a contract are tenders. They have moved to explaining the results of the tendering process, due to the increased costs and complexity of tendering. A submitted tender forms an implied contract where the tender will be judged correctly. Often price is the most important factor, being that the cheapest tender wins the job. A tender bid can be very complex, consisting of designed content rather than an expression of interest and capabilities.
A superintendent is a person nominated by both parties in the contract but is not subject to the contract. The superintendent has a dual role:
Practical completion is complete except for minor omissions or defects which:
It is important to have a sufficiently broad definition in the contract such that completion is qualified but not overly broad as to unnecessarily extend the contract.
Liquidated damages are damages paid to the principal by the contractor for failure to meet practical completion by the date for practical completion. Rather than go to court, these damages are included in the contract. It has become popular to cap the liquidated damages, but this can cause disputes if the project meets the cap. Nil liquidated damages can be contracted and may result in a lower tender price but will be enforced by the courts. Any penalty clause in a contract will not be enforced by a court, although liquidated damages differ from penalties.
Broadly speaking, delays can be categorised as:
For delays caused by the principal qualify for an extension of time and increase in costs without question. These can include access, bad drawings/information, no delivery of resources, etc. Delays caused by the contractor shouldn't qualify for an increase in time and costs, but can in poorly written contracts. These can include equipment breakdown, suppliers, strikes, etc. Delays caused by no-one need to be negotiated between the parties subject to the contract. These can include weather, force majure, acts of god, etc.
The question of extension can include criticality of the delay and float of schedule.
If there is a delay, there can be increased payment to the contractor to compensate for the increased time covered. These can include working costs, damages, etc. but need to be worked into the contract. The superintendent may give direction which may cause delay or an extension to the tender offer which can entitle an increase in costs paid to the contractor. There is a tender program required so that all parties are aware of a schedule and can understand any possible delays.
In the chance of a delay, there is a given amount of time that is contracted in which the principal and/or superintendent must be notified. These are generally enforced by courts, and if notice is failed to be given within a time bar it is invalidated. Notice within the time bars can allow for the resolution of a delay before it manifests.
The payment process generally consists of:
Generally contractors try to inflate their claims to get paid earlier, but superintendents tend to be more accurate in their valuations. These claim periods can be monthly to incentivise continual work. There may be a clause for whether offsite goods can be included in a payment, such as to cover deposits, or to the extent to which these can be covered. For smaller jobs, there may be only a single payment claim, as the job doesn't go for long enough to warrant multiple.
A contract needs quality requirements in contract documents consisting of drawings and specifications. These need to be specific and technically complete. There may be implied terms in the documentation, e.g. for things which may vary from time to time. The drawings may also reference codes as a guide of the standard of work.
There can be systematic quality assurance for a project. These programs can be specified and compliance can be included in the contract. Despite these programs, there can still be a further need to check for compliance with the design specifications. All quality assurance programs should be in addition to each other and any existing programs.
Defects are parts which do not comply with the drawing specifications. This can include welds, concrete pours, etc. Finding defects is the role of the superintendent, and can annoy the contractor. There can often be defects which can be hard to find, as testing samples will inherently miss some faults. When the superintendent finds defects, they will notify the contractor to rectify the defect and should it fail to be rectified they can bring in a third party to rectify it at the contractor's cost. A third party can be brought in after a third notice is provided to the contractor.
The defects liability period covers the time after practical completion when found defects are the responsibility of the contractor to solve. These defects are found by the principal and is required to notify the contractor to rectify the defect. Should the contractor fail to rectify, a third party can be contracted by the principal at the contractor's expense. It is an obligation and a privilege of the contractor to rectify defects in this period. The cost of rectification by the contractor is significantly less than for a third party, often resulting in the contractor rectifying regardless of fault. At the end of the defects liability period the principal returns all the money held under the contract, ending the relationship with the contractor. Should defects arise after the defects liability period, the contractor is still liable despite there being no security. This requires the principal to take the contractor to court to require them to rectify the defects.
Security can be provided in the form of cash retention or as a bank guarantee. Cash retention is monies held by the principal, whereas a bank guarantee is a guarantee from a bank to pay the principal. Cash retention is very easy, so is often used in low value contracts. It is rare that the principal has to provide security. It is common to provide 5-10% of the total payments as security, which is taken incrementally throughout the contract.
A contractor may prefer to have a bank guarantee as it assures them greater cash flows. A bank will only give a bank guarantee to a contractor who would be able to pay it, and the contractor would see the fees from the guarantee as a cost of construction, so should include it in the tender. A contractor could obtain an injunction from the courts to prevent the principal from using the guarantee, however once the case is begun that guarantee is likely to be lifted to ensure the guarantee is as good as cash.
When the contractor comes to the site, until the date of practical completion, the contractor has the care of the site. It is the contractor's responsibility to fence, secure, protect, insure, etc. the site. Should something happen to the site, it is the contractor's responsibility to repair or replace any damaged items. This also means that the principal does not have access to the site during construction, and must obtain approval from the contractor to visit the site. There are some excepted risks, such as radiation or principal's interference from which the principal is liable.
The contract can require the contractor to have insurance to cover risks, such that the contractor is capable of covering any problems that may arise. Such insurances can include:
The insurance is often effected by the principal.
Project insurance is used when there are many contractors, and is put in place by the principal. This tends to be expensive, so there is an increasing trend to self-insurance.
Professional Indemnity insurance covers any professional work done. This is a odd insurance, as the claims may be made in a different year to when the works were done. PI is formatted as a claims made policy, where the insurance covers when the claim was made, not when the work was done. This is a complex and expensive type of insurance.
Cross-Liability insurance stops the insurance company from suing any of the people named in the policy having an insurable interest. This enables the people nominated to sue back to recover the monies lost in the claim.
The contract will specify what is to happen when one of the parties is failing to abide by the contract. Should the contractor fail to perform their duties, the principal can present them with a notice outlining their failures. A big reason is delayed progress, which can be on anyone or no one's fault. The principal must give the contractor notice and the ability to rectify any problems before perusing the default. Should the contractor fail to rectify the problems notified, the principal can take those works out of the contractor's hands or terminate the contract.
If the principal does not make fulfil their duties, then the contractor can provide the principal with written notice. Should the principal rectify the problems after notice is received, then the contractor can terminate the contract.
Should the principal become insolvent, it is a sort of default that cannot be cured. In the case of insolvency, notice of termination can be issued immediately. Likewise should the principal become insolvent, the contractor can immediately terminate the contract.
Generally disputes are long, costly and may only recover part of the lost cost.
In the case of a dispute, litigation begins with one party filing a writ with the court. The writ lists the names of the parties, the amount being claimed and usually will attach the first document that sets out the detail of the claim, called the “statement of claim”. This is a fairly standard document which needs to be filed with the court and presented to the defendant. The defendant will then prepare and file the defence rebutting the claims made in the writ and may file a counterclaim. This will continue until both parties have filed a sufficient number of claims, and all the claims collectively are called “the pleadings”.
After the pleadings are filed, the parties will move to discovery, where both parties will provide the other will all documents relevant to the dispute. Discovery can take a long time and be very expensive.
After discovery, the trial begins. For the trial, witness statements are taken in writing to ensure that the witness is consistent. The winner of the trial may have some of their costs paid by the loser. As a result there may be an offer of compromise made to settle early. Offers and counteroffers are made repeatedly throughout the process, and may be used to justify awarding costs.
Throughout the trial, witnesses are called up, examined and cross examined. The examination is to elicit testimony and the cross examination is to rebuke the testimony. This is a slow and arduous process, it also can be quite theatrical.
At the end of the trial, the judge will give a judgement, ask for any offers made and may award costs.
Instead of going to court, the parties decide to use a third party expert to judge the dispute. It requires the consent of both parties, which may be a separate agreement or be included in the contract. Arbitration is preferred to litigation as it is faster and more efficient, however it has become very similar to the litigation process. The process is also overseen by the courts.
Both parties agree to use an independent expert to resolve the dispute. Each party submits their points to each other and the expert and the expert will give a determination. This can be much faster than arbitration or litigation, as well as much cheaper. This is similar to the origins of arbitration.
Mediation is a structured settlement voting process. This has helped increase that the courts will see cases and has diverted cases. They are voluntary, however the court may not see the case unless it has been mediated. It is a very fast process, involving the parties more than lawyers. Both parties are invited to present their cases to the mediator. After the parties are separated, and the mediator moves between them bringing offers and counteroffers. Eventually both parties settle and the dispute is resolved.
Mediation can take less than a week, and doesn't require any expensive experts.
A dictionary definition of tender is an offer in writing to execute work or supply goods at a fixed price. This can be broadened to include competitive tenders, and tenders for more varied works which may have a variable cost. Often the tendering process is competitive, with many parties bidding against each other for the same scope of works. AS4120-1994 is the Australian standard code of tendering. Each tender bid needs to be for the same work, and must be independently produced by each bidder. Different rules can apply for different types of tenders, and as such there is a range of legislation and industrial codes to regulate tendering.
The tender process consists of:
In order to prepare tender documents, the principal needs to have developed the project to a sufficient stage to be tendered, including cost estimates. The more complete and accurate, the more accurate the cost estimates. Project feasibility needs to be considered too, including:
The early phases of the tender preparation require an evaluation of the potential return on investment. This needs to account for many factors, including design costs, plant/equipment costs, total erected or constructed cost (engineering, labour, materials, services and commissioning) and the total capital employed. There can also be a sensitivity analysis done early in development to find pain points. Pretender cost estimates can be produced with a range of standard publications and with cost professionals.
Tendering is the first time the interests of the ultimate contractor and principal come into contract. The quality of documentation and thoroughness with which it has been prepared will determine the accuracy of the tenders received, and ultimately affect the contractual relationships and progress on the project. The principal must determine the form of procurement for the tender before it is presented. Tendering can be public, selected or negotiated. Public tenders have a notice published publicly and there is no restriction on the respondents. Selective tendering has tenders called from a limited number of tenderers due to their suitability to undertake particular work. Negotiated tendering is suitable where the market cost of work is well understood to a high degree of accuracy and the work is well defined, and is a negotiation between two parties to determine the details of the contract. Negotiated tender can be the last stage in a selective tendering process. Tender procedures should be clear, communicated and adhered to. They consist of:
Once the principal has prepared and issued the tender documents, the tenderer must understand and develop:
Once the tender responses have been received, the tenders need to be evaluated. The tenders need to be opened and evaluated, as the headline price may not be accurate to the tender brief. The evaluation process must be deliberate and editable, with evaluation based on clear, weighted, criteria. The analysis should consider price escalation formulae, proposed equipment, program and rates. There is a need to consider whether a visit to the contractor's works is necessary. Additionally, there can be political pressure in awarding a contract.
The RACI matrix defines and documents project roles and responsibilities. Knowing at every step who is engaged, how and why will improve the chances of a tender process' success.
| Responsible (R) | Accountable (A) | Consulted (C) | Informed (I) |
|---|---|---|---|
| People who do the work | Person who is the “owner” of the work | People who need to give input before the work is done and approved | People who need to be kept “in the picture” |
| They must complete the task or objective or make the decision | They must approve the task, objective or decision when complete | These people are “in the loop” and active participants | They need updates on progress or decisions |
| Several people can be jointly responsible | Success requires that there is only one person accountable | They do not need to be consulted, nor do they contribute to the completion of the task or decision |
A high level approach to market process consists of:
Different people can fulfil different roles throughout the market process.
One needs to continuously evaluate the RACI stakeholders. Such evaluations include:
Companies rely on ICT consultants to obtain:
IT Consultants are skilled in:
The tender preparation roles are responsibilities of the principal are:
| Role | Responsibility |
|---|---|
| Bid Manager | Project Management of the Tender Preparation process |
| Business Analyst(s) | Engage with End Users to define the functional requirements/evaluation criteria |
| Solution Architect(s) | Translates End Users' requirements into a technical solution and collects the non-functional requirements/evaluation criteria |
| Lawyer/Legal Counsel(s) | Provide the draft contract and other legal documentation |
| Technical Writer(s) | Create the tender documentation set based on inputs from the Bid Manager, Business Analyst, Solution Architect and Legal Counsel |
| Creative(s) | Format the various documents in a consistent manner, add graphics and illustrations; package for publication |
The contractor may also have some roles in the preparation of a tender:
| Role | Responsibility |
|---|---|
| Business Development Manager | Develop relationships with Business Executives (i.e. the CIO) and the Bid Manager well before the Tender is issued |
| Solution Architect | Understand the Principal's non-functional requirements and prepare one of more possible technical solutions for the Principal to consider |
| Presales Consultant | Develop an understanding of the Principal's strategic objectives and functional requirements; advise a possible technical solution |
| Creative | Prepare a Capability Statement to inform the Principal about the Contractor's capability to meet the Principal's objectives and requirements |
The contractor's tender response roles are:
| Role | Responsibility |
|---|---|
| Bid Manager | Manage the tender response process |
| Presales Consultant(s) | Translate functional requirements into a technical solution |
| Solution Architect(s) | Incorporate non-functional requirements into that technical solution |
| Project Estimator | Estimate the software licenses, hardware resources as well as the project size to implement and operate the technical solution |
| Lawyer/Legal Counsel | Review and mark-up the draft supply contract; negotiate |
| Copy Writer/Creative | Prepare/Layout the technical solution documentation/tender response document |
| Business Development Manager | Manage the clarifications; prepare the commercial proposal and tender offer price; lead the commercial and legal negotiations |
The principal's tender response roles are:
| Role | Responsibility |
|---|---|
| Bid Manager | Project Management of the Response Management and Evaluation process. Recommend the Preferred Tenderer to the Accountable person |
| Business Analyst(s) | Assist the End Users evaluating the functional requirements responses. Document the evaluation process |
| Solution Architect(s) | Evaluate and score the architectural and non-functional requirements responses; e.g. scalability, security, systems integration |
| Procurement Analyst | Evaluate and score the commercial responses; e.g. pricing, service levels. Negotiate final pricing with the Preferred Tenderer |
| Lawyer/Legal Counsel | Review the Contractors' responses to the Principal's draft supply contract. Negotiate contractual terms with the Preferred Tenderer |
ICT projects can have a Prime Contractor who is both Accountable and Responsible. Here the Prime Contractor uses subcontractors to complete part of the work for them. Alternately, the Principal can be Accountable and the Systems Integrator is Responsible. Here the Principal uses a Systems Integrator to deliver a multi-contract solution.
A subcontractor's responsibilities are:
The Prime Contractor's responsibilities are;