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6th African Rift Geothermal Conference | ARGeo-C6 Short Course 1 | Project Management for Geothermal Development
Procurement
Basics and main types
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
What is procurement?
Procurement Basics
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
Procurement
• The acquisition of goods, services or works from an external source.
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
Workflow Swap recommended
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
General
• Bid – offer in bid/tender process that only involves money
• Tender – offer in tender process that includes non quantitative sections
• Tenderer becomes Contractor upon bid acceptance and issue of Letter of Award
• The Tender then becomes the Contractor‘s Proposal
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
Selecting a procurement method
• Various influencing factors:
• Organization type (private/public)
• Scope of works involved (i.a. complexity)
• Funding (Lender’s requirements)
• Location (conventional practice)
• Market – expected quality of bids
• Number of prospective bidders
• Prior experience
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
Construction
• Tendering process most common
• Varying types of tendering possible
• Often more than one contract
• Varying contract types
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
Common Tender Documents
• Tender Procedure
• Conditions of Contract and Contract Forms
• General Conditions
• Particular Conditions (if standard CoC used)
• Contract Forms
• Employer‘s requirements / Technical Specifications
• Schedules
• Drawings
• Supplementary Information
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
Tendering/Bidding Elements
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
Tender Procedures
• Irrespective of method, all procurement processes should operate under a Tendering procedure
• Provided prospective tenderers to:
• Describe project briefly
• Instruct what tender requires
• Instruct regarding tendering dates and submission
• Show qualifying criteria
• Provide tendering forms
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
Tendering Forms
• Typically:
• Letter of Tender
• Technical Proposal
• Proposed personnel (CV and responsibilities)
• Tender Security
• Qualification forms
• Project references
• Financial
• General and specific experience
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
Tender Procedures
• Main principles: transparency, accountability, objectivity, fairness and non-discrimination
• Ensures that the bidders understand how their bids will be evaluated
• Makes clear to bidders what they are to provide and how to construct their bids
• Meant to ensure open and fair proceedings
• No method of tendering nor any other means of procuring works can guarantee avoidance of troubles
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
Must balance
Tender Procedures Fair and
open Confidentiality and disclosure
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
Ethiopian Public Procurement Law
• The Ethiopian Federal Government Procurement and Property administration Proclamation No.649/2009
• Supplementary Federal Procurement Directive issued in June 2010 by the Ministry of Finance and Economic Development
• Regulation providing for public procurement and property disposal services establishment issued in July 2010 (regulation no. 181/2010)
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
Methods of Tendering
• Open Tender
• Closed Tender
• Negotiated Procedure
• Best and Final Offer
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
Open Tender
• Owner advertises his proposed project, and permits as many contractors as are interested to apply for tender documents.
• Sometimes a deposit from applicants is required, the deposit being returned ‘on receipt of a bona fide tender’
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
Open Tender - disadvantages
• Wasteful of contractors’ resources
• As chances of gaining the contract are small, contractors may not study the contract in detail to work out their minimum price, but simply quote a price that will be certain to bring them a profit if they win the contract.
• Risk that low bids could prove unsatisfactory, but hard to verify because certainty of information not always available.
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
Selective tendering
• Contractors invited to apply to be placed on a selected list of contractors to be invited to bid for the project.
• Contractors applying are given a list of information they should supply about themselves in order to ‘pre-qualify’.
• Owner can select only contractors who have adequate experience, are financially sound, and have the resources and skills to do the work.
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
Selective tendering cont.
• Pre-selection is to the Owner’s advantage as submitted tenders should all meet expectations
• Contractor knows he has a reasonable chance of gaining the contract - incentive to study the tender documents thoroughly and put forward his keenest price.
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
Selective Tendering -disadvantages
• As contractors are pre-qualified it is difficult to reject the lowest bid, even if it appears dubiously low – unless that is due to some obvious mistake
• Contractor’s circumstances can change after he has submitted his tender.
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
Negotiated Tenders
• The owner selects a contractor of his choice to submit prices for a project.
• Usually for specialized work or when particular equipment is needed as an extension of existing works, or for further work following a previous contract.
• Can be used when there is a very tight deadline, or emergency works are necessary.
• Good chance of success as more often than not, it is based on previous satisfactory relationship.
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
Negotiated Tender
• Contractor submits his prices - if there are any queries these are discussed and usually settled without difficulty.
• Mistakes in pricing can be reduced, so both parties are confident that the job should be completed to budget if no unforeseen troubles arise.
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
Negotiated Tender - disadvantages
• Rarely used for public works as standing rules of public authorities do not normally permit them.
• A private employer or company not subject to such restraints can always negotiate a contract, and many do so, particularly for small jobs.
• Even when a negotiated tender is adopted it is usual to prepare full contract documents so that the contract is on a sound basis.
• Production of the documents also means they are available for open or selective tendering should a negotiated tender fail, or should the chosen contractor be unable to undertake the work
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
Best and Final Offer
• Contractors place bid via the internet, total cost visible to all bidders
• Bidders provide specific timeframe to lower their offers
• Bid preparation differs considerably from standard practice
• Bids usually lower than cost estimate but can sometimes end up higher.
• Highly unpopular arrangement.
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
Procurement decisions
• Breakdown into contracts – few/many
• Stage of development
• Involvement of Owner
• Financing
• Risks
• Timeframe
• Etc.
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
Geothermal Projects
• Complex and time consuming research and modeling of resource
• Uncertainty and risk
• High degree of specialization involvement
• Long timeframe – from concept to realization
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
Contract Breakdown
• Pieces work to be done into packages (big/small, many/few)
• Decision to invest = all risk with Owner, contracts used to shift risk
• Project matures, risks decrease
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
Geothermal
• Seldom the case that all works contracted to single entity (research, drilling, design, contruction, plant, commissioning)
• Common Practice:
DRILLINGDESIGN OR OWNER‘S ENGINEER
CIVIL + ELECTRICAL
WORKSPLANTResearch
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
A Contract
• Simple definition:
• A contract is a legally binding or valid agreement between two parties.
PARTY A PARTY B
GOODS, SERVICES, ACTION, VALUE, ETC.
CONSIDERATION
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
Contract elements
• Offer and acceptance
• Intention to create binding relations
• Consideration to be paid for the promise made
• Legal capacity of the parties to act
• Genuine consent of the parties
• Legality of the agreement
• An agreement that lacks one or more of the elements listed above is not a valid contract.
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
Construction Contract Lifecycle
• Construction and Plant Contracts
CLOSURELIABILITY STAGETESTING AND
COMMISSIONINGAUDITING AND
REPORTINGOBLIGATION
MANAGEMENTEXECUTIONAPPROVAL
CONTRACT NEGOTIATIONS
TENDERING/ PROCUREMENT
CONTRACT AMENDMENTS
CLAIMS & DISPUTES
DRAFTINGIDENTIFICATION
OF NEED
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
Construction Contracts
• The owner decides what type of contract and contract stipulations are used and prepares the contract.
• => Responsible for ambiguitiy and/or conflicting clauses/information
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
Risk in Construction projects
• Risk and uncertainty unusually high
• Project singularity
• Long time from commencement to finalization
• Complex deigns and construction
• Input from many professions needed
• Complex relationships between activities
• Numerous external factors of influence
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
Construction Contract Types
• Construction Contracts may be classified according to the method chosen for execution:
• Design Tender (General Contracting/DBB)
• Design Build (EPC/Turnkey)
• EPCM
• BOT
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
Contract Types
• The selection of a fit contract depends on:
• Nature of project
• Size of project
• Risk allocation
• Design responsibility
• Planning constraints
• Methods of payment
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
Choice of contract type
• The Owner must consider:
• Lenders constraints
• How involved does he want to be
• Complexity and scope of project
• Design status once construction commences
• Customary construction practices in Country
• Requirements or needs related to preparation tasks
• Is the proper experience related to construction methods, skilled labour and management available
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
Choice of contract type cont.
• Is the contractual knowhow and management capability available within Owner‘s organisation?
• What is the economic forecast for statistics which influence construction
• How large and experienced are the local contractors and possible sub-contractors?
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
Design Tender
• Conventional construction contract in which a contractor takes on the responsibility of building according to a design provided by the owner
• The contractor is responsible for his workmanship and provided materials – not the design.
• Contract Price is usually decided through a Bill of Quantities from the Owner that shall encompass the Works as a whole.
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
Design Tender - advantages
• Most owners and contractors are familiar with this set-up
• Allows for considerable involvement of Owner with the design
• The Owner commonly contracts an independent supervisory entity to manage the contract and its execution
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
Design Tender - disadvantages
• Separates responsibility between design and execution
• Design often incomplete when construction work begins
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
Design Build
• Owner prepares his requirements for project
• Contractor designs and builds and is responsible for both
• Turnkey/EPC contracts are examples of Design Build
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
Design Build - advantages
• Responsibility for design and construction lies with a single party (Contractor)
• Fixed Price
• Disputes regarding hand over of construction drawings/design disappear
• Time to completion is less, work can commence earlier (fast-track)
• The design is often more „doable“
• Fewer claims
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
Design Build - disadvantages
• Responsibility for design and construction lies with a single party (Contractor)
• Fixed Price
• Disputes regarding hand over of construction drawings/design disappear
• Time to completion is less, work can commence earlier (fast-track)
• The design is often more „constructable“
• Fewer claims
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
Design Tender vs Design Build
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
EPCM
• Engineering, Procurement, Construction and Management
• Contract between Owner and Consultant
• Designer acts as Owners representative and draws up contracts between Owner and plant producers as well as contractors.
• EPCM designers do not take full responsibility of final project nor overall cost
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
EPCM - responsibility
• An EPCM consultant is responsible for:
• Design
• Original Cost Estimate
• Original Schedule
• Procurement
• Management of the various contracts
• Coordination between the works of the various contractors
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
EPCM- advantages
• Favored by lenders
• Lower Cost
• Variation process easy
• Cuts down time for completion
• Work can begin although full financing is not in place
• Quality of design and workmanship often higher
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
EPCM- disadvantages
• No one party of contract responsible for design and execution
• Owner must dedicate a substantial amount of his staff to proceedings
• No standard EPCM contract exists
• Legal costs higher than for EPC due to number of individual contracts in force
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
EPCM vs EPC
• 3. Construction Contracts - Types
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
BOT
• The Contractor uses his access to financing to construct for public entities in exchange for operating the final project and a payment at transfer
• The public owner is provided the project after a set length of time
• Financing is now in the hands of the Contractor
• The Owner has now relieved himself of all risk related to financing
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
BOT - advantages
• Projects led to fruition that would otherwise not be finalized, i.e. through customary financing methods
• The design will take ease of operation into full account
• The main body of risk regarding construction and operation is shifted to the Contractor
• Time to completion kept at a minimum
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
BOT - disadvantages
• Difficulty in attracting lenders or investors – very few such projects are finalised
• Complex process
• The credibility of the project can suffer if the public body is seen as being to close to the contractor
• Often countries with economic problems and thus politically unstable
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
Methods of Payment
• Three main methods are used to define payment for plant and/or work performed in construction contracts:
• Lump Sum
• Unit Price
• Cost Reimbursement/Open Book
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
Taget Estimate
• The contractor is paid a bonus fee or pays damages in accordance with how good his original estimate of direct costs was.
• Predetermined split between the savings or additional cost is set forth, as is the time for completion.
• A breakdown schedule for these bonuses/damages is common.
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
Guaranteed Maximum Price
• If a project is very well defined it is possible that the owner would prefer to place all risk regarding project cost and time to the contractor.
• The owner pays the contractor all spent costs plus a fixed fee but the sum of such payments has a maximum ceiling.
• The owner profits from savings.
• The contractor loses if there is cost overrun.
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
Guaranteed Maximum Price cont.
• AWO or variation requests should be at a minimum and at best none as definitions should be in place prior to contract signing. All hell can become loose if the scope changes.
• Suits well for turnkey projects.
ARGeo-C6 Short Course 1 | Geothermal Project Management Addis Ababa, Ethiopia | 31 Oct – 1 Nov, 2016
6th African Rift Geothermal Conference | ARGeo-C6
Short Course 1 | Project Management for Geothermal Development
Organized by: United Nations University Geothermal Training Programme (UNU-GTP)
Financed by: Icelandic Ministry for Foreign Affairs – ICEIDA and Nordic Development Fund
Coordinator: Ingimar G. Haraldsson, UNU-GTP
Lecturers: Anthony Ng‘ang‘a Ngigi, Geothermal Development Company, Kenya
Carine Chatenay, Verkís Consulting Engineers, Iceland
Peketsa Mwaro Mangi, Kenya Electricity Generating Company, Kenya
Yngvi Gudmundsson, Verkís Consulting Engineers, Iceland