Table of Contents
ENGM90006 - Engineering Contracts and Analysis
Contracts
Contracts are used for:
- Buying materials or services
- To set down the rules of a transaction so there is a legal process to follow if a dispute arises
- To ensure careful consideration of the transaction is completed before the transaction occurs
- To get the price down
A tender process consists of:
- Objective decision
- Design of a project brief
- Expression of Interest
- Shortlist of responses
- Request for Proposal is developed and sent to shortlist
- Evaluate tender responses and negotiate
- Award the tender
- Execute the contract
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:
- Cost plus
- Fixed price
- Schedule of rates
- Maximum price guarantee
- Incentive schemes
- Term payments
Procurement strategies can also vary:
- Traditional
- Construction management
- Design and Construct
- Alliance
- Early contractor engagement
- Public Private Partnerships (PPP)
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.
Contract forms
Traditional
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.
Construction management
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.
Design and construct
The principal uses a contractor. The contractor has consultants and subcontracts the work.
Novation of a contract
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.
Project management
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.
Alliance
There is an alliance of the owner, designer and constructor who are managed by:
- And alliance board
- An alliance leadership team
- A wider team mostly from the constructor
The alliance contracts subcontractors and suppliers.
Alliances have some pros:
- High focus on collaboration
- Risks are shared between partners
- Partners can be selected on price competition and non-price factors
- Allows for an integrated plan from the designer, builder and owner, bringing all key experts together
- Allows for flexibility
There are also some cons:
- Often the project is poorly defined when the alliance starts
- There is a lack of clarity on price and scope at an early stage
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:
- Full price competition where shortlisters develop a fully priced bid
- Partial price competition where shortlist bidders develop elements of the Target Outrun Cost (TOC)
- Non-price competition where the bidder is selected on non-price parameters from a shortlist and the alliance develops the TOC, Project Alliance Agreement (PAA) and painshare/gainshare
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.
Public Private Partnerships
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:
- Co-capital contributions
- Unsolicited bids are encouraged
- Tax depreciation changes
- Demand risk being managed by government
- Some emphasis on recovery costs, but mostly on efficiencies
- More services being included, and a streamlined model for smaller scale projects
Current trends in alliances are:
- Strong use of early contractor involvement (ECI)
- Continued use of alliances in roads but changes coming in water sectors
- Competitive alliances appear to carry high tendering overheads
- Some recovery of bid costs
- Industry dominated by two major groups
A PPP can vary in the share of risk and operation between private and public.
Contract risk
A design can go wrong with:
- Commercial issues, e.g. reputation
- Safety
- Design doesn't match the final product
- Scope creep
- Cash flow problems
- Subcontractor problems
- Miscommunication
- Software error
- Design mistakes
ISO 31000 risk management
An international risk management framework. Posits that risk management is good for:
- Organisations of all types and sizes face external and internal factors and influences that make it uncertain whether they will achieve their objectives
- Managing risk is iterative and assists organisations in setting strategy, achieving objectives and making informed decisions
- Managing risk is part of governance and leadership and is fundamental to how the organisation is managed at all levels, and it contributes to the improvement of management systems
- Managing risk is part of all activities associated with an organisation and includes interaction with stakeholders
- Managing risk considers the external and internal context of the organisation, including human behaviour and cultural factors
The ISO 31000 process begins with the principle of value creation and protection. Values include:
- Integrated
- Structured and comprehensive
- Customised
- Inclusive
- Dynamic
- Best available information
- Human and cultural factors
- Continual Improvement
The framework is centred on leadership and commitment. It includes a flow of:
- Integration
- Design
- Implementation
- Evaluation
- Improvement
The process consists of:
- Scope, Context and Criteria
- Risk Assessment
- Risk Identification
- Risk Analysis
- Risk Evaluation
- Risk Treatment
- Recording and Reporting
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
Construction risks can include:
- Site risk
- Design, construction and commissioning risk
- Financial sponsor and financial risk
- Operating risk
- Market risk
- Network and interface risk
- Industrial relations risk
- Legislative and government policy
- Force majeure
- Asset ownership risk
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:
- Tendering content, processes and procurement
- Contracting content, processes and procurement
- Insurance management
- Precedent agreements
- Internal systems and procedures
- Training
- Claims control
- Ensure effective legal/commercial resources
Risk is allocated to another party when:
- The risk is withing that party's control
- The party can manage or mitigate the risk
- the preponderant economic benefit of controlling the risk lies with the party in question
- Placement of risk is in the interest of efficiency, planning, incentive and innovation
In managing risk it helps to:
- Specify in the contract the obligations of parties so that the risk may be allocated to one party or shared
- Not try to price unquantifiable risks
- Have experience as risk aversion diminishes with experience
- Risk aversion disappears for competitively tendered projects in mature markets and in developing economies, the government may need to accept greater risk
Breaking down the risks into various levels can be useful to assess their core components and devise specific solutions.
Insurance types can include:
- Workcover
- All of Project insurance (e.g. theft and weather damage)
- Public indemnity
- Professional indemnity
List of construction risks
The government can incur risks in:
- Concept and project initiation
- Output specification
- Managing stakeholders
- Deal risk and engagement
- Market risk
- Political risk
- Retained risk
- Ongoing management including service and/or complaints
- Transfer of asset to another party
Private companies can incur risks in:
- Market forces
- Structure and pricing of a bid
- Finance and guarantees
- Innovation
- Revenue and probity
- Design and operation
- Operation and maintenance including ongoing management
The government can mitigate risk though:
- Thorough research before issuing tenders
- Strategic planning and possible regulatory frameworks
- Care with their tender practices and evaluation
- Quality of technical advice (consultants)
- Reduction in scope for unintentionally taking back risk
- Contingency plan in case of default
- Insurance
- Management and control
Uncertainty creates construction risks though:
- Industrial factors
- Complexity and changing technologies
- Uniqueness of projects
- OH&S and industrial relations
- Dynamic nature
- Skill shortages
- Different team compositions for each project
- Multiple organisational interests/goals/objectives
Poorly manages risks can lead to:
- Time, cost and quality not being met, and unlikely to meet stakeholder expectation
- Damaged reputation, loss of funding or governmental support
- Lack of future projects
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:
- Bidding costs/competition/deal flow
- Site specific issues
- Quality of construction
- Environment
- Network
- Interface
Regulatory risk includes:
- Legislative
- Sovereign and government policy
- Regulatory regime, pricing principals and compliance requirements.
Physical risks are easy to keep track of. Examples include:
- Unexpected site conditions
- Unexpected climactic conditions
- Likelihood of schedule delay
- Material cost
- Contractor coverage
- Labour cost
- Duration
- Safety hazard
- Complexity
- Plant cost
- Liquidated damages
Other risks include:
- Price of supply of equipment and subcontracts
- Innovation in construction methods and design
- Relationship with subcontractors
- Commercial advantages in quoted prices from subcontractors (low prices are a risk)
- Number of major suppliers (enough to create competition)
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.
Law
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:
- Contract between engineer and principal for design
- Contract between principal and contractor/manufacturer for construction/manufacture
- Other roles include:
- Superintendent
- Expert witness
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).
Elements of a contract
A contract consists of:
- Offer and Acceptance
- Consideration
- Intention to Create Legal Relations
- Certainty
- Some contracts must be in writing
The terms of a contract can be:
- Oral, Written or Implied
- Incorporated
- Order of Precedence
- Conditions/Warranties
- Implied Terms
- Collateral Contracts
- Exclusion/Limitation Clauses
Misrepresentation/Mistake/Duress/Unconscionable contract lies on:
- Representation or Term
- Effect of Misrepresentation
- Common Mistake
- Duress/Unconscionable Contracts
Negligence consists of:
- Proximity
- Economic Loss
- Standard of Care
- Damage
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.
Types of contracts
Some types of contracts are:
- Fixed price contracts/Cost plus
- Design & construct/design build operate
- Project management agreement/construction management agreement
- Managing contractor contract
- Warranted maximum price contract
- Alliance contract
- Build Own Operate Transfer (BOOT)/PPP Project
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.
Documentation
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.
Tenders
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.
Superintendents
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:
- Independent assessor/certifier functions
- Assessment of project claims and issue of progress certificates
- Assessment of claims for extra payment for variations to the contract
- Assessment of claims for extension of time
- Assessment of quality of materials and workmanship in accordance with the contract documents
- Assessment of claims for extra payment (such as under the latent conditions provisions) under the contract
- Agent of the principal
- Notification of successful and unsuccessful tenderers
- Arrangements for execution of contract documents
- Vetting of Contractors' insurances
- Vetting of security deposits
- Approvals and clearances by statutory authorities
- Advice on rate of progress and expenditure
- Recommendations on contractual actions to be taken by the principal
- Management of site staff
Time under contract
Practical completion
Practical completion is complete except for minor omissions or defects which:
- Do not prevent the works from being reasonably capable of being used for their intended purposes
- Reasonable grounds for not promptly rectifying them
- Rectification will not prejudice the convenient use of the works
- All tests required under the contract have been completed
- Any other particular requirements set out expressly in the contract
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 damaged
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.
Extension of time
Broadly speaking, delays can be categorised as:
- Delays caused by the principal
- Delays caused by the contractor
- Delays caused by no-ones fault
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.
Delay costs
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.
Time bars
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.
Payment under contract
The payment process generally consists of:
- Progress claim
- Progress certificate
- Progress payment
- Valuation of progress claims
- Priced bill of quantities
- Payment for offsite goods
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.
Quality and defects under contract
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
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.
Care of the works
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:
- Contractors All Risk Equivalent of owner's insurance
- Public Liability/Third Party Liability Damage to parties as a result of the contract works. Public liability is fairly cheap as it is uncommon to claim, and is put in place by the principal
- Workers Compensation Compliance with legislation requirements
- Other insurances
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.
Default/Termination
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.
Dispute resolution & Negotiation
Generally disputes are long, costly and may only recover part of the lost cost.
Litigation
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.
Commercial Arbitration
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.
Expert Determination
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
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.
Tendering
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.
Tender process
The tender process consists of:
- Preparation of the tender documents by the principal
- Preparation of the tender process by the principal
- Preparation of the tender responses by the tenderers
- Evaluation of the tenders and selection of successful tenderer.
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:
- Project evaluation
- Land planning
- Project development
- Project procurement
- Project delivery
- Asset management
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:
- Invitation to tender
- Provision of documents
- Tender addenda
- Closing of tender period - Tenderers must not be late
- Opening of tenders
- Assessment of tenders and negotiations
- Award of contract
Once the principal has prepared and issued the tender documents, the tenderer must understand and develop:
- The scope of work, including design, procurement, construction/installation, commissioning, and post contract requirements
- The tender team
- The form of the contract
- The site of works
- The size and complexity of the project
- The work methodology that will be applied to complete the work
- The project staffing requirements
- The program of work (including separable portions), the dates for completion
- The different trades and sub-contractors that will be required
- Risks arising from either the contract or the works
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.
ICT tendering
Roles and responsibilities
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 |
Approach to market process
A high level approach to market process consists of:
- Define Requirements
- Specify Evaluation Criteria
- Create Document(s) / Schedule(s)
- Issue/Publish
- Answer Vendor Questions
- Receive Responses
- Evaluate & Clarify
- Negotiate & Recommend
- Award & Debrief
Different people can fulfil different roles throughout the market process.
Stakeholder analysis
One needs to continuously evaluate the RACI stakeholders. Such evaluations include:
- Are there too many R's
- Does one stakeholder have too much of the project assigned to them?
- No empty cells
- Does the stakeholder need to be involved in so many of the activities?
- Can Responsible be changed to Consulted?
- Can Consulted be changed to Informed? (too many cooks)
- Buy-in
- Does each stakeholder totally agree with the role that they are specified to play in this version of the model? Such agreement should be included in the project's documentation
- No R's
- Who is doing the work in this task and getting things done? Whose role is it to take the initiative?
- Too many R's
- Is this another sign of “too many cooks” to keep things moving?
- No A's
- Who is Accountable? There must be one 'A' for every step
- More than one A
- Is there confusion on decision rights?
- Stakeholders with accountability decide how the work should be done and how conflicts are resolved
- Multiple A's invite slow and contentious decision-making
- Every box filled in: Do all the stakeholders really need to be involved
- Are there justifiable benefits in involving all the stakeholders, or is this just covering all the bases?
- A lot of C's
- Do all the stakeholders need to be routinely Consulted?
- Or can they be kept Informed and raise exceptional circumstances if they feel they need to be Consulted?
- Too many C's in the loop really slows down the project
- Are all true stakeholders included in the matrix?
- Sometimes this is more of a challenge to ensure, as it's an error of omission. This is often best addressed by the management team
Preparation of a tender
Companies rely on ICT consultants to obtain:
- External advice and recommendations to improve their existing IT infrastructure
- Support with the selection and implementation of standard software and Software as a Service (SaaS)
- Access the expertise of other consultants
- Help during a One Time Project (OTP) for which they themselves do not have permanent or sufficiently qualified employees
- Outsource all aspects of every IT-related task of their organisation
IT Consultants are skilled in:
- Giving advice
- Translate from technique to business and vice versa
- Effective communication
- Technical and IT knowledge
- Effective IT Management
- Business insights
- Business Management
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:
- General
- Subcontractors are engages by a Prime Contractor to perform a part of the works that the Principal tendered for
- Subcontractors often are engaged to provide skilled labour, but they may also provide hardware or software or hosting services
- The Prime Contractor is responsible for the work performed by the subcontractor
- During tendering
- The subcontractor provides responses to relevant functional and non-functional requirements
- Reviews and accepts relevant parts of the Principal's draft supply contract to enable 'back-to-back' contract arrangements with the Prime Contractor
- Provides a commercial proposal and price to the Prime Contractor to the work the subcontractor will undertake
The Prime Contractor's responsibilities are;
- During Tendering
- The Bid Manager nominates subcontractor(s), often with the assistance of Solution Architects and Business Development Managers
- The Business Analyst(s) and Solution Architect(s) assign functional and non-functional requirements to the selected subcontractors review and clarify the subcontractor responses; incorporate the subcontractor responses into the Prime Contractor's tender documentation
- The Project Estimator requests a quote from the subcontractor for the goods and services they are contributing to the technical solution and adds it to the overall technical solution estimate
- The Legal Counsel shares the Principal's draft supply to the selected subcontractor; reviews, clarifies and incorporates the subcontractor responses; drafts a supply contract to be executed between the Prime Contractor and the subcontractor