Procurement - theargeo.orgtheargeo.org/shortcourses/projectmanagement/t3_Procurement_and... · •Tendering process most common ... or selective tendering should a negotiated tender

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


Procurement

• The acquisition of goods, services or works from an external source.


Workflow Swap recommended


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


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


Construction

• Tendering process most common

• Varying types of tendering possible

• Often more than one contract

• Varying contract types


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


Tendering/Bidding Elements


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


Tendering Forms

• Typically:

• Letter of Tender

• Technical Proposal

• Proposed personnel (CV and responsibilities)

• Tender Security

• Qualification forms

• Project references

• Financial

• General and specific experience


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


Must balance

Tender Procedures Fair and

open Confidentiality and disclosure


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)


Methods of Tendering

• Open Tender

• Closed Tender

• Negotiated Procedure

• Best and Final Offer


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’


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.


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.


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.


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.


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.


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.


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


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.


Procurement decisions

• Breakdown into contracts – few/many

• Stage of development

• Involvement of Owner

• Financing

• Risks

• Timeframe

• Etc.


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


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


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


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


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.


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


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


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


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


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


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


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?


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.


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


Design Tender - disadvantages

• Separates responsibility between design and execution

• Design often incomplete when construction work begins


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


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


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


Design Tender vs Design Build


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


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


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


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


EPCM vs EPC

• 3. Construction Contracts - Types


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


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


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


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


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.


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.


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.


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