Initial Considerations • Inception & Feasibility • Design (traditional) / Concept (package deal) • Authority Approvals • Determining Procurement & Pricing Structure • Determining Other Risk Allocations • Conditions & Contractual Documents • Tendering
Procurement & Pricing Linked • Design Responsibility? Determinative of Best Pricing Structure Norm • Turnkey/Package/Design & Build = Lump Sum Pricing • Traditional Structure = Re-measured BQ Pricing • Hybrids = Mixed Pricing Mechanism
Procurement & Pricing Linked • Type of Work – Sub-Structure = Re-measured BQ – Super Structure = Lump Sum – Preliminaries = Lump Sum – Specialist Design & Construct NSCs = Lump Sum – Underground Complex & Innovative Work = Cost Reimbursable with Target Cost Incentives and Dis- Incentives
Lowest Price or PQM ? Developer’s Risk – Lowest Price • Claims Orientated Contractor? • Insolvent Contractor? • Under-Perform & Delays? • Poor Workmanship? • Under-Design? • Replacement Contractor Cost?
PQM • Weightage to Quality • Project Specific Proposal – Technical & Time • Past & On-Going Projects – On time or Delayed – EOT or LAD – Quality Performances (QLASSIC/CONQUAS etc.) – Safety Record (DOSH) – Green Building Certification History
Lump Sum Pricing • Agreed Price/ Firm Price? • ↑↓ Quantities of Work = No Changes • ↑↓ Scope of Work = Variation • ↑ ↓Limit of Work = Variation • w/wo BQ + Drawing + Specification • BQ for Progress Payment Purposes? • BQ : Misrepresentation? Exclusion Provision? • Limit of Works = Drawing + Specification
Lump Sum Pricing • One-Off Payment at End • Stage / Milestone Payment • Interim % Completed Payment • Contract Sum Analysis • Rationalization of Prices for Variations • Fluctuation Clauses – Currency – Materials (Fixed Sums)
Why Lump Sum? • Competitive Pricing • Owner’s Cost Certainty or is it? • Better Scope Definition • Allocation of Risk Clearer • Faster Tender Preparation Process? • Incentive for Efficiency with Prospect of Loss? • Focuses Team on Same Target
Effect of Lump Sum • Tendering Process Longer • Attracts Higher Price : Contingency Pricing • Contractor’s Risk Higher • Drawings & Specifications Certainty? • Cannot Fast Track • Project Control must be Strong • All Information Available Provided? • Attracts Claims Orientated Contractor • Increased Risk of Disputes - Variations
LS: Pitfalls & Avoidance • Design finalised and certain? – Budget explosion ↑ Delay Tender? – Fast Track: Contingency Pricing in Rates – Provisional Sum Works/ Provisional PC Sum Works (PAM 2006 removed Provisional PC Sum Works?) – BQ as Schedule of Rates? 1 st Stage Tendering based on Competitive BQ? – Is the Schedule of Rates thorough?
LS: Pitfalls & Avoidance • Avoid Contingency Pricing – Provide all Information in Possession but without Assurance on Veracity or Accuracy – Site Visit – Sufficient Time to Study Conditions within Site and Access to and within Site – Geo technical information but with Exclusion as to Accuracy – Deemed Knowledge protects Legal Exposure but Not Contingency Pricing
LS: Pitfalls & Avoidance • Lump Sum for Geo-technical Works – Danger of Contingency Pricing if no Information or Qualified Information – Allow Contractor to carry out own soil Investigations : Not many do • Pre-qualified and selective tenderers allowed to assess geo-technical conditions (possible 2 stage) • Allowance for the tenderers that carry out their own geo-technical studies if they are later not appointed • Alternative: Tender First and then Right to Re-Price Tender if Compulsory Investigation drastically different
LS: Pitfalls & Avoidance • Front End Loading on Works – Contract Sum Analysis – Rationalisation of LS Possible
Re-measured Pricing • Price = Fluctuations on Quantities x Rates • BQ = Approximate Quantities • BQ = Rates Determined by Contractor • BQ = Scope of Works but Quantities can Fluctuate • Schedule of Price = Variations • Re-measured at the end : Physical or Take-offs from as-builts
Re-measured Pricing • Safest Win-Win Approach • Rates can Fluctuate? • Material Price Index Fluctuation (need rationalization) • Formula increase/decrease if Quantities increase/decrease • Where Quantities Remain Uncertain – soil / substructure piling • Fast Track Project
BQ: Pitfalls & Avoidance • Design finalised and certain? – Budget explosion ↑ Delay Tender? – Fast Track: Contingency Pricing in Rates – Provisional Sum Works/ Provisional PC Sum Works (PAM 2006 removed Provisional PC Sum Works?) – Allow Rate Fluctuation based on % ↑↓ • Extrapolated/Pre-Weighted Rate? • Rationalised Make- up Rate with Only Factor ↑↓ • Labour Efficiency Factor Rate ↑↓ • Margin Spread % Factor ↑↓
BQ: Pitfalls & Avoidance • Mitsui Construction Co v The AG of Hong Kong – ignore contingency pricing for provisional quantities • BQ ↑↓ Preliminaries ↑↓? – Increased Quantities affects Quantity based Preliminaries : Supervision/QAQC etc. – Critical path quantities – within same time • Is the take-off for BQ accurate/precise? – Under-Quantified Items: Profit Loading – Chance of budget burst ↑ – Independent Checker Pre- Tender? Cost ↑
BQ: Pitfalls & Avoidance • Are the profits front loaded? – Proper Rationalisation is Required – Rationalisation Provision in the Contract or BQ (PAM 2006 : Errors to be Rationalised) – Not Errors but Unreasonably Weighted Rates – To ensure Equal Profit Margin Spread – SO’s view of rationalisation deemed final unless proven to be unfairly end loaded
BQ: Pitfalls and Avoidance • Standards of Measurement clear? – Is the Preamble to BQ thorough & clear? – Is the Malaysian SMMs made applicable? – What about other SMMs that are wider? – SMMs do not cover every area of Work! – Is there industry practice? (PAM 2006: SMM sanctioned by ISM & currently in force?) – Have “extra overs” been allowed in the BQ?
BQ: Pitfalls & Avoidance • BQ Description of Works v Drawings & Specifications – ↑ Descriptions = ↑ Ambiguity/ Discrepancy (Pam 2006 = quality of work set out in BQ?) (PAM 2006 = error in description to be corrected by SO = variation) – Priority Provision? No Contra Proferentum – Duty to Identify & Raise : Tender & Before Commencement : Bound by Clarification – Duty to Rectify at Costs if not Sought Clarification
BQ: Pitfalls & Avoidance • BQ: Not all items of Work Listed – Preliminaries Contingency Pricing for Works Not Listed but Shown in Drawings – Deemed Priced into other Items Listed – Inclusive Price Principle • Seems to have been abandoned by Malaysian standard Forms • Temporary works priced under preliminaries and deemed part of obligation considered sufficient
BQ: Pitfalls & Avoidance – Inclusive Price Principle • What about Works that are not Mentioned or Shown but a reasonable experienced contractor would realise is Indispensably and Contingently Necessary: Deemed Priced in Rates and Items in BQ • Indispensable = work that is necessary for Final Works to comply with Contractual Requirements • Contingently = work that is necessary to complete the Final Works • Needed to cover for any missing BQ Items of Work AE Farr Ltd v Ministry of Transport (excavation of temporary work space not covered under BQ: variation)
The questions to ask? • Is cost control a major consideration? • Do you wish to control the contingencies? • Is a bid competition required? • Prefer max or min owner involvement? • Do you/consultants have skill and experience –design, cost control, supervision, contract administration?
The questions to ask? • Do you want single source responsibility? • Do you require the contractor to provide project funding? • Are the project design, scope and specifications clearly defined? • Are the quantities certain? • Is there minimal scope changes expected? • Is it Fast Track?
The questions to ask? • Is the schedule tight? • Is the project environment volatile or stable? • Does the project involve primarily new technology? • High Quality Control Standards Required? • Contractual Remedies Provided & Can be Controlled?
Pricing Turnkey/Package/D&B • How do you compare the best price where designs differ? – 2 Stage Tendering • Cost & Time • Losing Tenderers Cost? • Design Optimisation? – Design Checkers? Increases Cost & Defeats Purpose – Avoid Competition in Under-Designing
O&G: FEED Contracting + LS • Front End Engineering Design – 2 Stage Construction – 1 st Stage: Feasibility, Concept, Development Opportunities, Sanctioned Budget + Schedule & Design – Specialist Contractor who Develops for Owner – Value Engineering at its Highest & Cost Efficient Development Methodology Inclusive – Best Cost & Time from Contractor’s Perspective – 2 nd Stage: FEED Contractor Project Manage - Execution
FEED Needed • Innovative Design & Construction • Patented Systems Required • New Technology • But Cost is High but Returns Great • Production Sharing/Risk Sharing
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