L4 - Tendering Contracts and Procurement (Rev 3)

GENG3830

Engineering Project Management

Project Management Lecture 4

Procurement, Tendering and Contracts

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Learning Objectives

This lecture provides an overview of procurement, tendering and

contracts.

By the end of this session you should be able to:

List and describe the different methods of procurement

Describe the different types of contracts and factors in selecting the preferred contract type for a particular project

Demonstrated an understanding of contracts, tendering, tender assessment and contract award.

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Contents

Procurement

Contracts

Tender / bid processes

Bid / tender evaluation and assessment

Contract negotiations

Selection and contract award

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Why Do We Care? Example 1

Procurement, and in particular contracts, can have a huge effect on

a project and on a company.

2007 Clough engineering settled a contract dispute of $250M against it relating to the

BassGas development off SE Victoria.

It was reported that the settlement cost

Clough $70M to the joint venture (client).

Also worth noting that project commissioning was delayed for 2 years

and the project costs escalated from $400M to $750M following the

dispute which led to Clough being sacked as construction contractor

so, as with most cases, the dispute cost both parties significantly.

http://www.theaustralian.com.au/business/mining-energy/clough-settles-its-bassgas-dispute/story-

e6frg9df-1111114314362

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Oracle Corporation (US) was accused of failing to give promised

discounts under a supply agreement to the US federal government

resulting in the government paying more for products that it

should have.

In 2011 Oracle agreed to pay around $200M to the US Government

to settle the contract dispute.

http://losangeles-businessattorney.com/california-contract-litigation-oracle-loses-big-in-

contract-dispute-with-the-feds/

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In 2011 Qantas grounded its entire fleet for almost 2 days after a

contract dispute with its employees.

The grounding was estimated to have cost Qantas $20M per day,

with the total contract dispute estimated have cost nearly $200M in

just FY2011/12.

The grounding was also estimated to have cost $250M per day to

the Australian economy.

http://www.news.com.au/business/industrial-disputes-costly-for-qantas/story-e6frfm1i-

1226207880100

http://www.theaustralian.com.au/business/aviation/cost-of-qantas-crisis-hits-250m-a-day-and-

rising/story-e6frg95x-1226180980349

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Procurement

Procurement may be defined as:

the act or process of obtaining goods and/or services

Engineers may find themselves as either the client, supplier, or

both. Therefore, an understanding of both parties (the client and

supplier) in the procurement process is important.

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Procurement

Procurement requires the client to make specific choices

concerning their strategy for:

What works, if any, they want to outsource

How they want the works undertaken

How they want to pay for the works

How they want to allocate the works

How they want to enforce the agreement

Often the first decision associated with procurement on a project is

whether to use internal (in-house) resources or procure external

resources.

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Procurement Decisions

Procurement decisions are typically made taking into account

organisational culture/practice, availability of resources and techno-

economic feasibility issues.

Engineering economic techniques such as Net Present Value,

Interest Rate of Return, Cost Benefit Analysis and Sensitivity

Analysis are relevant here.

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Techno Economic Feasibility Analysis

Large project investment decisions represent major commitments

of resources and have serious consequences on the profitability

and financial stability of a company. In the public sector, such

decisions also affect the viability of project investment programs

and the credibility of the agency in charge of the programs.

It is therefore important to evaluate potential projects rationally

with regard to both:

the economic feasibility of individual projects, and

the relative net benefits of alternative and mutually exclusive projects.

A techno economic feasibility analysis (study) examines technical,

commercial and financial aspects of different project options.

It is generally the primary report for the formulation of the

investment proposal and a key step in defining the project and/or

procurement strategy.

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Techno Economic Feasibility Analysis -

Example

Deciding whether to purchase, hire/lease or refurbish a piece of

manufacturing equipment.

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Procurement Issues and Considerations

If external resources are to be used the following should be considered

and addressed:

Defining the scope

Identifying procurement options

Economic analysis of available options

Apportioning risk (between the client and supplier / contractor)

Detailing any procurement conditions (e.g. Conditions of Contract)

Detailing any applicable accreditation / prequalification requirements and/or standards.

Determining tendering or bidding and assessment procedures (if any)

Ensuring probity and confidentiality of the procurement process

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Contracts

Procurement of external resources will generally involve some form

of contract between the client and supplier.

There are many definitions of a contract including:

A legally binding agreement made between two or more parties, by

which rights are acquired by one or more parties to act on the part of

the other(s)

An agreement giving rise to legally enforceable obligations binding

the parties to it

All organised activities concerned with demolition, building,

landscaping, civil engineering, process engineering, mining and

heavy engineering

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Contract Basics

Contracts:

Define what will be delivered (Scope) and when (Time)

Define the standards to be complied with (Quality)

Define how much will be paid and when (Cost)

Assign risks to the contract parties (Risk)

Define procedures, roles and responsibilities for management of the contract

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Contracts

For a contract to be legally binding the following elements must

exist:

Offer and acceptance acceptance must be unconditional otherwise it is a counter offer

Intent to create a legal relationship

Consideration something of value must be given in return for something of value that is offered

Legal capacity the parties must be legally competent entities (individuals over 18 years old, companies, government agencies)

Legality of objects the object of the contract must be legal (i.e. you cant have a contract to do something illegal)

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Different Contract Types

Supply only (sales) contracts (e.g. supply of 100 timber power poles)

Plant hire agreements and contracts (e.g. hire of a dump truck)

Consultant and Profession services contracts (e.g. environmental assessments, design)

Construction contracts

- construct only (i.e. Shortland to Sandgate road project)

- design and construct (D&C) or EPC - engineer, procurement and

construction (i.e. Kempsey Bypass Bridges, Triple J Studio

Refurbishment)

- design construct and maintain (DCM) (e.g. Karuah Bypass,

Kurnell Desalinisation Plant)

- build own operate transfer (BOOT) (e.g. M7)

Alliance contracts (part of Hunter Expressway, Hunter8Alliance rail project, Air Warfare Destroyer Alliance )

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Different Contract Types

Internal

Resources

Construct Only

Contract

Design and

Construct

DCM and

BOOT

ALLIANCE

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Alliance Contracts as an Example

Alliance contracting is gaining increasing prominence in Australia with

many large Alliances currently underway or recently completed.

Alliances are normally reserved for higher risk projects, especially

where residual risk during the construction or implementation phases

cannot be quantified or allocated to industry.

The principles of Alliance contracting are:

A focus on project outcomes

Innovative contractual arrangements

Success of projects measured against key performance indices

An emphasis on openness and communication between participants

An equitable risk/reward balance that aligns the commercial interests of the parties.

Access to and contribution by the best resources of each participant with an emphasis on working together efficiently

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Hunter8 Alliance (Rail)

ARTC (client) has formed the Hunter 8 Alliance with John Holland Pty

Ltd (construction) and GHD Pty Ltd (designer) to design and build the

10.8 km, Maitland to Whittingham Third Track project.

http://www.hunter8alliance.com.au/

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Selection of Contract Type

Selecting a particular form of contract depends on many factors

which may include:

The client, their organisational structure, resources and expertise

The risk profile of the works

The value of the works

The availability of suitable contractors

The level of expertise / specialisation required

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Contract Documentation

The contract documents usually include:

Formal Instrument of Agreement (setting out all of the documents which comprise the Contract Documents, and the execution

clauses)

Conditions of Contract (setting out the detailed contractual terms)

Specifications

Reference documents (such as Standards, Guides, etc)

Drawings

Post-tender Correspondence

However, the specific terms of the Contract and documentation

used will likely vary from project to project, and particularly

industry to industry.

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Standard Contracts

In the majority of engineering (and many non-engineering)

industries in Australia, standard contracts are available and widely

used. Generally, these standard contracts have been developed to

reduce the costs associated with contract preparation and contract

administration plus minimise contractual disputes.

Typically these standard contracts consist of:

a set of standard clauses which generally do not get changed from project to project

a deed which both parties sign

one or more annexure which contain the project specific information.

Some examples of the above have been loaded onto Blackboard.

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Standard Contracts

In Australia, standard contracts are primarily developed by:

Standards Australia

Government authorities

Professional organisations (such as MBA, NSW Dept of Fair Trading)

Individual companies

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Conditions of Contract - Standards Australia

Many, many standard contracts are available. For example, the

following is a list of some relevant Australian Standards:

General Construction (AS2124, AS4000)

Design and Construct (AS4300 series)

Supply and Equipment (AS4910, AS/NZS4911, AS4912)

Management and Construction (AS4915, AS4916)

Trade Contracts (AS4917, AS4918)

Management of Assets (AS4919, AS4920, AS4921)

Consultant Contracts (AS4121, AS4122)

Miscellaneous (AS4120, AS4608)

Many of the above also have associated sub-contract conditions

(i.e. AS4901 relates to AS4000) to ensure that the provisions of the

main contract are transferred to any sub-contracts.

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Standards Australia - Examples

AS4000 General Conditions of Contract.

AS4910 General Conditions of Contract for the Supply of

Equipment with installation.

AS4917 Construction Management Trade Contract - General

Conditions

AS4919 General Conditions of Contract for the provision of asset

maintenance and services (Superintendents version).

AS4122 General Conditions for the Engagement of Consultants.

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Accreditation / Pre-Qualification

Many companies, in particular government agencies, have

introduced accreditation or pre-qualification requirements. These

have been introduced to assist in establishing minimum quality

standards for contractors, consultants and suppliers. They also have

the effect of reducing the number of companies able to bid /

tender for projects and therefore reduce costs for both the client

and potential tenderers.

Examples include:

Australian Defence Force, Telstra, ANSTO, Roads and Maritime Services NSW, VicRoads, Queensland Main Roads, ACT Urban

Services, Hunter Water, Energy Australia, NSW Department of

Services, Technology and Administration

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Accreditation / Pre-Qualification

In order to achieve accreditation through a particular agency a

contractor, consultant or supplier is typically required to obtain 3rd

party certification or client-specific pre-qualification. This process

normally involves providing evidence that they have a quality

system of the required standard and have experience and capability

in the particular area. Certification audits may also be required.

Typical accreditations include:

ISO 9000 (quality system)

RMS R40 (Roadworks projects to $40M) and others

NATA registration for testing laboratories

Building and Construction OHS Accreditation Scheme (Federal)

Workcover licenses for builders, plumbers, electricians, plant operators, HV electrical workers, etc

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The payment method used under particular contract typically is one

of the following

Lump sum (fixed price)

Schedule of rates

Cost plus

Incentive based

Alliance (cost recovery plus profit/loss sharing)

Combination of the above

Methods of Payment

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Standard Contract Conditions (Clauses)

Roles and responsibilities

Nature of the contract

Contract documents

Intellectual property

Insurance

Site

Time management

Working hours

Quality

Variations

Payment

Dispute resolution

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Standard Contract Conditions / Clauses

The Table of Contents from two typical major standard contracts

are included on Blackboard:

AS4000 General Conditions of Contract (used in private industry)

GC21 General Conditions of Contract (used by many government agencies)

Administration of contracts and some specific contract clauses to

be aware of will be discussed in detail next week.

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Contract Clauses Example 1

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33


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Contract Annexure Example

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Typical Tendering / Contracting Process

On very complex and/or high risk projects a two stage process may

be used to vet tenderers. In these cases stage 1 may involve

requesting and assessing Expressions of Interest (EOI) prior to the

undertaking tender process above. In this case only short-listed

companies would be invited to participate in the 2nd stage (i.e.

formal request for tender, submission of tender, etc).

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Care should be taken so that the work to be undertaken under a

contract is clearly and logically defined with regard to:

Request for Tender / Invitation to Bid

Each item of work to be carried out

Methods of measurement and payment to be use

Standards of quality to be achieve

The general obligations to be met by the parties

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Tender assessment is, in many ways, a risk management exercise

whereby the client aims to select the tender which represents the

best value for money. This is not always the lowest tender!

The use of non-price tender assessment criteria is one way of

mitigating procurement risks.

Tender Assessment

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Tender Assessment Methods

Tender assessment methods:

Lowest tender price

Price and non-price (1 stage using weighted criteria)

Price and non-price (2 stage EOI plus above)

Project specific

Evaluation commonly involves selecting the tender with the highest

tender evaluation score or ranking, taking into account all relevant

criteria. The scoring method must ensure the extra value indicated

by a higher score is worth any extra cost by using appropriate

weightings that strike an appropriate balance between non-price

value and price.

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Tender Assessment

Tender evaluation criteria may include:

Whole of life cost

Delivery time(s) offered

Quality offered

Previous performance of tenderer

Experience of tenderer and personnel proposed

Capability of tenderer, including technical, management, human resources, organisational and financial capacity

Conformity with tender requirements

OHS, environmental, etc practices and performance

The evaluation criteria should be consistent with the proposed

contract requirements and aim to identify the tender / bid offering

the best value for money.

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Tender Assessment Weightings Example

Scoring Guide Criteria: Personnel

Site/Project Manager Works Supervisor Site Engineer

4: > 10 yrs relevant exp. 3: Extensive experience 2: Previous experience

3: > 5 yrs relevant exp. 2: Some relevant exp. 1: Little or no exp.

2: Some relevant exp. 1: Little relevant experience

1: Little relevant experience

Criteria Weighting Contractor A Contractor B Contractor C

Tender Program 5 3 4 3

Performance 7 3 5 6

Quality System 4 1 3 3

OHS&R 6 3 4 5

Environmental 4 1 3 3

Personnel 9 4 6 8

Claims History 5 2 4 4

Non-Price Total 40 17 29 32

Price $500,000 $525,000 $530,000

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Probity and Transparency in Tendering

A key issue associated with the tendering of any contract,

particularly those where public money is involved, is probity to

ensure fair and open competition, and minimise the potential for

fraud and collusion.

The application of probity principles, generally require that:

All tenderers are treated fairly and equitably, consistent with the rules of natural justice and procedural fairness;

A transparent and appropriately planned and documented tender process is established, including a robust evaluation

methodology;

All confidential information is protected;

Strategies are in place to maintain the integrity of the tendering process when in-house bids may be involved;

Potential and/or actual conflicts of interest are identified and dealt with.

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Why Do We Care? Probity Example

A former manager at UNE was recently part of a NSW Independent

Commission Against Corruption (ICAC) inquiry relating to

acceptance of gifts in return for favorable treatment.

It is alleged that he sought and received benefits for himself in

return for improperly favouring a number of companies the

awarding of contract and for approving false invoices.

The former manager told the inquiry, "I still believe we were doing

good deals for the university. That was my rationale."

http://news.smh.com.au/breaking-news-national/uni-boss-admits-organising-bogus-invoices-

20120123-1qdlb.html

http://www.icac.nsw.gov.au/investigations/current-investigations/investigationdetail/187

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Depending on the industry, company and project, negotiations with

tenderers may occur after submission of the tender / bid.

These negotiations may be undertaken to:

Clarify aspects of the submission

Seek additional information

Seek to reduce the tender price (though this is generally not permitted for government contracts).

Change aspects of the work to be undertaken (i.e. change parts of the scope, drawings, documentation, etc)

A key aspect of post-tender negotiations is that any agreed

changes, and any associated correspondence, must form part of

the contract which is subsequently signed by the parties.

It is therefore important that all post-tender discussions are

accurately documented.

Contract Negotiations

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Contract award typically involves:

Notification of successful and unsuccessful tenderers

Arrangements for execution of contract documents

Obtaining copies of the Contractors' insurances

Obtaining of security deposits (if required)

Approvals and clearances by statutory authorities (if required)

Contract Award

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Request for Tenders RTA NSW

GC21 RTA General Conditions of Contract Table of Contents

GC21 RTA General Conditions of Contract Deed

GC21 RTA General Conditions of Contract Annexure

AS4000 General Conditions of Contract Table of Contents

Additional References on Blackboard

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Bid / Tender: An unconditional offer to enter into a particular

contract to provide goods or services at a certain price

BOOT: Build Own Operate Transfer

Contract: An agreement giving rise to legally enforceable

obligations binding the parties to it

Conditions of Contract: A document which sets out the detailed

contractual terms of a contract

D&C: Design and Construction

DCM: Design, Construction and Maintenance

EPC: Engineer, Procurement and Construction

Probity: Uprightness, honest and integrity

Procurement: The act or process of obtaining goods and/or

services

Some Terminology

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This review activity may assist in linking the different aspects

covered in this lecture.

List one example (activity) for each of the five (5) main types of contract

For each contract write a very brief scope statement (3-4 lines)

For each pair (of contract and example activity):

- Explain why they are appropriately matched

- Which, if any, standard conditions of contract could be

used?

- Which method of payment would be most suitable?

- Which party, if either, bears the most risk?

Note that there is no single correct answer for this activity and

there may be many multiple correct selections for each dot point.

Review Questions / Tutorial