Contract Administration

By Samer H Skaik

Sometimes, clients face difficulty to procure projects due to absence of competitors. The risk of how to secure value for money is extremely high when dealing with one single contractor to quote and execute the works. This article gives significant guidelines for which client can follow to minimize such risk and achieve value for money:

1. Give priority for traditional accelerated procurement route:

By adopting this route, the contractor is appointed early during the design stage based on partial information made available by Design team. Due to early involvement in design stage, the contractor can add a significant input to the design and improve the billability since he is the only specialist who can carry out such works. This involvement will somehow ensure value for money.

1. Give intensive care to design development stage:

Design should be sound, efficient and integrated to avoid variations risks in construction stage which will affect the price certainty due to possible design errors, additions and omissions. Client advisor needs to supervise the design development precisely as first step to ensure value for money ad reasonable cost certainty. On the other hand, budget estimate should be done by the consultant upon the completion of brief design based on historical data. It should typically have an accuracy of 10% to 15% (Keith, 2008).

3. Go for single tendering process: (Negotiated – No competition)

In such scenario, the client should go for single tendering in which it approaches the contractor directly to quote for the project. Negotiation skills must be mainly adopted to ensure the price is as minimal as possible to secure the value for money. This process does require experienced clients and consultants to have influence on the contractor to reduce his price (Turner, 1997).

Effective procedures during the single tendering process must be adopted with the contractor to reach to a satisfactory level prior to sign the contract as follows (Marsh, 2000):

1. The client must inform the contractor of his intention to award the project on a single tender basis provided that the contractor shows cooperation in this regard. It is not advisable at all to deceive the contractor by inviting him to tender and give the impression that many other contractors are involved. This will definitely kill the confidence and affect the future negotiation process.

1. Formal agreement should be made with the contractor to consider his formal involvement in the project based on preliminary design and on the basis of negotiation.

1. Once design completes, the contractor should be requested to submit his firm prices based on all available information such as specifications, drawings, etc.

1. Technical agreement and programme of work should be secured prior to the commercial negotiation.

1. General and special conditions of contract should be forwarded to the contractor to consider them in assessing the risk and considering it in his price.

1. The contractor is to be instructed to prepare his detailed estimates as per the general practice. This estimate will be initially evaluated by comparing it with the estimated allocated budget.

4. Start the negotiation procedures to secure the value for money:

There are basically two methods to negotiate the price (Marsh, 2000):

ü  Simple Comparison Measures:

In this method, some priced items of the contractor are compared with similar ones known to the consultant from previous recent competitive tender. In this project, the difficulty arises when it seems to be impossible to compare any of the items on apple to apple basis, since the nature of the whole project is unique.

ü       Alternative method:

The contractor will be instructed to submit detailed break down of his firm prices separating out the markup and preliminaries from the dry cost. The dry cost will be separated into labour, material, equipment and vendors with precise quantities of each item.

Alternative method seems more suitable to be adopted in this project and further discussion of costs and prices can commence as follows (Marsh, 2000:

1. Once the alternative method is completed, brought in items and material can be checked against the relevant quotations or current market rates. It should be noted whether the vendor quotations are discounted or not. Labour costs and productivity can be easily checked and evaluated as per the country normal wage rates and productivity.

1. Construction method statement should be submitted to allow the client to check how the contractor will distribute his resources and combine them especially the plants. This is a significant factor in assuring that the prices are realistic.

1. Overheads, profit and contingencies should be negotiated and reasonably agreed. Negotiation skills play major role in this part to get the maximum reduction in the percentage.

1. Payment terms should be discussed in detail. It directly affects the pricing, since the contractor assesses his cash flow and the financial charges associated with reduced revenue. Since the project funding is available, the client is recommend to agree on relaxed interim payment to enhance the cash flow, which will result in cutting some costs.

1. Liquidated damages should be addressed and agreed. Client should make sure that the liquidated damages are appropriate since the timing is a critical aspect in this project.

1. Once all above procedures are performed and agreed, the contractor should submit a final lump sum fixed price tender.

1. Once the client issues the letter of acceptance, the contract exists and considered as if it resulted from normal competitive tendering. Any gain or loss by the contractor during construction should be dealt away from the client.

5. Improve price certainty by transferring risks:

It is recommended to transfer the potential risks such as the price escalation risk and bad weather to the contractor to secure price certainty. This can be achieved by appropriate wording in the contract clauses. The criteria is to transfer the risks to party best able to handle it which comes in line with the objective of value for money as well. However, it is unwise to transfer a risk to the contractor if it is difficult to assess (Mudoch & Hughes, 2000).

6. Appoint the same designer to supervise the construction stage:

Consultant who made the design is recommended to play supervising and monitoring role during construction to ensure the high quality and smooth progress. He will be effective in making the sound decisions in case of any design query raised during construction.

7. Suggest target cost contract as an alternative approach:

It is possible that the contractor objects to go for the lump sum contract following the above procedures. In this case the client can suggest going for cost plus contract incorporating target cost and guaranteed maximum price. Target cost will be derived from the pre-contract budget and cost plan. Maximum value for money can be secured by the project team by trying to reduce the costs as far below the target cost as possible (Morledge, Smith, Kashiwagi, 2006). Moreover, cost certainty can be reasonable in presence of realistic GMP. This approach can be effective by applying share gain/pain policy and open book accounts.

References:

1.       Keith, P. (2008), Construction Cost Management: Learning from Case Studies, Routledge

2.       Turner, A. (1997), Building procurement, (second edition), Palgrave macmillan, London.

3.       Marsh, P. (2000), Contracting for Engineering and Construction Projects,(Fifth Edition), Gower Publishing.

4.       Morledge, R., Smith, A. and Kashiwagi D. (2006), Building procurement, Blackwell Publishing, Oxford.

5.       Mudoch, J., Hughes, W. (2000), Construction contracts law and management, third edition, Spon press, New York.