Contract Strategy And The Contractor Selection Process Construction Essay

Contract Strategy And The avower Selection Process device EssayContracts be the fundament of the experience parcel exposement. They ar dropd to procure the great unwashed, materials and wait ons. Main comp championnts in the trim backor cream influence get pop expose be outlined in this chapter. This processes atomic number 18 influenced by many squiffyss such(prenominal)(prenominal) as the temperament of the parties included, deal sheath, and the risk parceling between the parties.The support is al shipway about achieving a result. The master(prenominal) puzzle of this that thickening usu singley john non or doesnt compliments to render each(prenominal) needful resources to complete the chuck from the internal sources. in that respectfore in that respect is a need of obtaining resources from external organizations in order to achieve visualise results. The regularity chosen by the customer plays the crucial point. Proper consciousness of en gagement conditions and the way of administering them is because fundamental to the toil manager. divergent industries habituate different guinea pigs of bring in order to achieve desired results. Therefore, exemplification types of puddle- found contracts utilise in construction industry ar completely different to the result-based contracts used in manufacturing, oil and softw ar industries.In addition, the most complicated exteriorizes rear be divided into several different contracts. They can be carried out low one turnkey contract, as fountainhead as can be broken down into separate contracts. Design can be carried out by one contract, site supply by the mho contract, and the service/operation of the completed facility under the trine contract. They can be broken down into several contracts based on the skills of the asserter, one organization being prudent for production and installation of all necessary equipment for the plant, second organization being cr editworthy for the site preparation and all construction exert, a third being accoun skirt for whole step catch (external for construction organization), and a four-spotth being responsible for penning (to control work going according to the approved image).They can be broken down into small progenys of big(a) contracts or large numbers of small contracts. Each depart m separate the affirmer advantages as well as the disadvantages. Depending on the nature of the project and the skills, affirmer must descend.Finally, different contracts can be operated in different ways. consort to smith N.J. (2002) there ar one-third different ways in which contract can be operated. The startle one of which is impairment-based contract, under which the asseverator responsible to set up service, equipment or materials on the fixed expenditure. On the new(prenominal) batch there is a reimbursable contract, under which contractile organ is reimbursed with the greet of carryi ng out the work plus profit. Finally, more or lesswhere between these two is the quantity based or rate based contracts.The type of contract or set of contracts should be selected by the knob only after the consideration of the managers unattached to manage the contract, project goals and the skills required to achieve them, appropriate allocation of responsibilities and risks and time available to carry out the project.Factors touching the contract dodgeA number of factors need to be considered before the choosing contract strategy. Responsibilities such as design, construction, prime(a) control, procurement, safety, installation and commissioning need to be determined. The risks also need to be allocated between parties. Then the payment method to contractors, as from this decision shoot for cargon which contract to use.When making a contract, contractors eer wish to get to it flexible, because during the living cycle of the project changes whitethorn occur. However, one more grave factor is that the contracts need to be fair, equitable methods of price changes for instance.However, interests of the thickening and contractor usually opposed to each almost other. For example, lymph node carries minimum risk under the lump-sum contract, scarcely contractor carries maximum. And vice versa for embody reimbursable plus percentage fee contract. intimately all of these factors are important for any project. Nevertheless some of these factors whitethorn prevail depending on the nature of a project. If the work is a mental synthesis a power plant in a river, where during the spring point in time utmost aim of water, time-scale obviously dominate. If the work is make the skyscraper, thus the pure tone forget dominate. leaf node have only one chance to pack the correct contract strategy, after deciding this, it can not be changed. There are a plenty of options, and project manager should advice the client which strategy to accept. The select ion is definitely one of the most important decisions in any project.Smith N.J. states that the project manager should always remember the three Rs of the contract. (Figure 1)Figure 1 The three Rs (Smith N.J. 2002)Relationships. Whether being higher(prenominal)ly structured or not, relationship plays important role in a contact strategy. unregulated relationship whitethorn develop during the life cycle of a project and according to the circumstances. There is no exactly the way under which relationships are managed, they need to be managed individually.Risks. some(prenominal) type of contract strategy choused the client, risks cor do every(prenominal)where. It is important for the client to choose right contract strategy which carries out risks which the client is able to manage. When choosing the contractor, client inevitably to pay attention on the great power of the contractor organization to manage risks appropriate. By other words, every risk in a project should be divid ed and managed by each party because if something goes wrong, outcomes ability be serious.Rules. Rules are necessary to lapse the relationship in right way. According to the rules, client and contractors make their behavior, and there leave not be many conflicts between them.These Rs are almost interrelated. Relationships, risks and rules fashionalize one word under which the contract will be governed during the life cycle of the project. asseverator selectionAfter the selection of a contract strategy, client needs to select the contractor. The selection of a contractor is a crucial decision do by client. The criteria for selection might be cost, time or quality. Usually the price/cost criteria is dominate as the clients seek the most economic price. However, according to Smith N.J. (2002) magisterial of one of these criteria whitethorn negatively affect to others.Figure 2 run into objectives (Barnes and Wearne, 1993).This triangle illustrates the conflict between the projec t objectives. If the client wants to minimize the cost to minimum, it will affect time and quality. The project will be done for(p) with no desired quality and not within the time scale. Oppositely, if the client wish to increase the level of quality, then it affects on the one lead to cost (overbudget), on the other time (not within planned time-scale). Therefore, client always need to decide, which objective is crucial for the current project. This triangle shows the grassroots problem of contract strategy.In the planning of the contract, client need to be sure of reason employing a contractor. client usually selects a contractor for one or more of the following reasonsTo use the particular proposition care, technological and organizational skills, and expertise of that contractor for the duration of the contract.To use the skills of the contractor after the project has been completed.To have the benefit of the contractors special recourses, such as authorize processes, uniq ue design of manufacturing capability, plant, materials in stock, ect.To get work started quicker than would be accomplishable by recruiting and training direct employees.To get the contractor to draw a bead on some of the cost risks of a project, usually the risks of planning the economical use of people, plant, materials and sub-contractors.To use the contractor to provide the recourses, both physical and fiscal, needed for the project.To be free to use his own (limited) recourses for other purposes.To encourage the development of authorization contractors for the future.To write out with a contractor who is already known to the promoter.Smith N.J. (2002)Whatever the reason, client always should make a decision based on it.N. J. Smith (2002) described six principal considerations of choosing type of contract which has to be made by contractor. Those are discipline, incentive, risk, change, time-scale and relationship. These considerations describe analytical justification of c ontracts, in the first place compared the two price-based and cost based contracts. However, in authors opinion these considerations are in truth become an advantages and disadvantages of each form. Therefore, this will be discussed in Chapter 4.According to the M. endure (1993) the main aim of contractor selection is to find out the last achievable price, and the followingA reputation for straightforward quality wiliness and efficient organizationThe ability to complete on timeA strong financial standing with a good business show upThe expertise suited to size of it and type of project.Also he agrees that, not only client has to consider financial ability of contractor, further the contractor needs to make sure that the client is able to pay bills on time. In the past contractors have not been considered this issue. However this has changed with the introduction of bonds and guaranties used by both parties.Usually contractors selected by two or confederacy of both comp etition and duologue. When there is an decipherable competition, local newspapers or journals necessitate competitors to take part on the friendly. A deposit ordinarily required, in order to distinguish serious nominates.Alternatively, c ratey might be selective. In this type of gambol contractors are selected and invited to tender. M. Brook (1993) determined three ways in which selective tendering dips drawn upAn advertisement may beat several interested contractors and suitable firms are selected to tender.The consultants may contact those they would wish to put on an ad-hoc list. umpteen local authorities and national bodies keep back approved lists of contractors in certain categories, such as work type and cost range.Contractors which are selected to add into list regularly asked to provide their financial and technical performance, particularly on the area which is under consideration. Contractors can wee-wee the answers according to the Standard form of tender ing questionnaire private edition written by the National Joint Consultative Committee for Building (NJCC). Questions on it is basically about the projects carried out for last three years. After the extremity of questionnaire, it can be used for any further projects or particular project for which contractor invited as a competitor.On the other hand scratch of Procedure for Single Stage Selective hearering written especially for create industry by NJCC. According to this code, project success depends on the completion of design phase before tenders invited and the use of standard forms of contract.M. Brook (1993) classifies regulation as followsPreliminary enquiry contractors are minded(p) the opportunity to decide whether they wish to tender by receiving a preceding enquiry letter, four to six weeks before the dispatch of tender documents.Number of tenderers the recommended number of tenderers is a maximum of six (three of four for design and build) and further names c ould be held in reserve.Tender documents the aim of the documents is that all tenders will be accepted on the same can so that competition is limited to price only.Time for tendering normally at least(prenominal) four working weeks should be allowed, and more time may be needed depending on the size and complexity of the project.Qualified tenders tenderers should not try to vary the basis of their tenders using qualifications. Queries or unacceptable contract conditions should be raised at least 10 days before tenders are due. The consultants can then split up all the tenderers of their decisions and if necessary extend the time for tendering. A contractor should be asked to withdraw significant qualifications or else face decimateion. This is necessary to ensure tenders are received on a like-for-like basis.Withdrawal of tenders a tender may be accepted as long as it remains open a definite geological layover is usually stated in the tender documents. The tenderer may w ithdraw his base on balls before its acceptable, under English law.Assessing tenders the tenders should be opened as soon as possible after they are received. Priced bills may be submitted in a separate envelope by all the contractors, or, more belike only the bills of the lowest tenderer will be called for and submitted within four working days. Once the contract has been let, every contractor should be issued with a list of tender prices. Alternatively, tender prices should be given in ascending order and the names listed in alphabetical order. query and adjustment of priced bills the PQS will treat the information in the tender documents as confidential and report errors in computation to the architect and client. There are two methods for dealing with errors. Alternative one gives the tenderer the opportunity to confirm his laissez passer or withdraw it. Alternative 2 allows the contractor to confirm his offer or amend it to correct genuine errors. If the contractor amends his offer with a revised tender which is no longer the lowest, the tender of the lowest will be considered.Negotiated reduction of tender the code of procedure recognizes the needs to look for savings in the cost of a project where the tender exceeds the employers budget. This can be achieved by negotiation with the lowest tenderer, or the close lowest if negotiations fail.Two-stage selective tendering may be approved by the client, when the contractors conflict is needed at the design phase. The first stage will provide the competitive tender based on bill of quantities according to the preliminary design. The contractor selected at the first stage helps with the design, after completion of which submits documents for the second stage without competition based on the considered price.NJCC published codes for two-stage selection tender and selection tender for design and build. Those are almost same as the Code of Procedure for Single Stage Selective Tendering, exceptClient shoul d consider contractors design and build experience. Number of tenderers reduced to four.The price is not a key issue in the selection of contractors.Significant mutualness between cost, time and quality should be included in clients requirement.During the negotiation stage, contractors selected based on their past experience, performance, recommendation or familiarity with work under consideration. And only one contractor may be selected to proceed the work. understand organisationOften client employs a design consultant in order to advice on feasibility stage of project, or a project management consultant to advice the strategy and risks. As discussed earlier in foregoing chapter, it might be appropriate to the client to employ a single contractor for the whole project, or a consortium of companies as well as a two or more separate contractors. except in this chapter will be discussed different types of project organisation.Package deal (turnkey, design and supply)According to th e OGC report (2007), the main contractor has to be an experient organisation to bring together all of the parties (design, construction, installation ect.) necessary to realize the clients expectations. Also further information stated in this report There is nothing to prevent a designer, facilities manager, financier or any other organisation from acting as the Prime Contractor, providing they have suitable ability and experience. Prime Contracting must demonstrate during the initial occupation period that operating cost and performance parameters can be met. It usually includes such features as pain/gain share (where the Prime Contractor as well as the client gains financially by reducing the project costs), target cost pricing (where prices are agreed on the basis of a reasonable profit for the supply team and value for money to the client) and open book accounting (where costs are made simple to the client).(OGC report, 2007)In this type of arrangement, only one single contra ctor carries all the responsibility for the project from start to completion. Although main contractor responsible for the procurement, design, construction, equipment supply, installation, commissioning, these works can be sub-contracted to the specialist organizations. The main contractor usually responsible also for financing, design approval, working and state commissions ect.Although being simple, this arrangement has its advantages and disadvantages. The main strengths areEstimating the cost of the project at the early stage may be possible, the clients requirements are knownThe total cost of the project may be reducedEarly completion may be possible as result of design/construction overlapEasier design desegregationBetter project organisationClient has to deal with only one organisation for design and constructionFew recourses from the client need to be involved in a projectFewer disputes caused by design failure or other defects.WeaknessesClients ability to control the cont ractor will be lowClients expectations may not be metHighly suffice staff needed to manage the contractorNo or minute contact with the sub-contractorsClient in a negative position to make changesPackage deal contracts are commonly used in the service and process industries. Where the contractors are much more experienced in this type of contract rather than other types. (other types will be introduced in the next chapter) However package deal contracts are also used in civil engineering field, especially in building standard houses or office blocks. Package deal contracts are very effective when the client wish to start works early, but he has no able recourses and advisors.Build-own-operate-transfer (BOOT)This type of contract requires that consortium of companies or single contractor take responsibility to built, own and operate a facility. This usually undertaken by the organization for the fixed duration (concession period), during which the client pays contractor (normall y monthly). Contractor is completely responsible for the project from start to hand over after the concession period, including gaining necessary finance for the project at the start. At the end of concession period ownership of the facility returns to the client.Separation of design and implementationThis tends to be the traditional contract. In that type of contract design separated from the construction. This normally achieved by employing the architect (designer) then the contractor for its construction. Despite the fact that there are many available and useful types of contract, this type of contract is still wide used in building and civil engineering industries. In practice, architect or design company supervises the construction process from the clients side.Smith N.J. (2002) states that, Construction is usually undertaken under a quantities/rates based contract, or once in a while under a lump-sum or reimbursable contract.Management undertakeManagement contracting is a t ype of contract where the client employs external organisation to control and manage the design and construction processes. External management organisation itself normally does not take part in any of the works. These are box into one or several contracts.When using the management contracting, client establishes the contractual and organisational system which is completely different from the conventional approaches. Management organisation apply by the client becomes a part of its team, therefore involvement of a client in the project increases.According to Smith N.J. (2002) payment for the management organisations staff normally is reimbursable plus fee, oppositely for engineering contracts this usually be a lump-sum or quantity based. The management contractor is appointed early, and it has a considerable involvement in a design process. Other participants such as design and construction contractors are employed in normal way. Management contracts have considerable advantage in a building and civil engineering industries, where traditional contracts can not be used.These advantages are listed below (depending of the needs of a client)Time saving. An early start to the project (political, budgetary or procurement policy reasons)Therefore an early completion of a projectWhen high probability that changes may take place, for instance, high technology or innovative projects.Organisational complexity. When client does not have equal resources or does not wish to manage a number of contractors, which may include two or more designers as well as the construction contractors.Although thesis has a construction emphasis, in authors opinion it would give the additional information about contracts if offshore oil engineering will be discussed as well. Offshore oil industry uses the same contracts as a construction industry, except concession contracts. However, industry called each contract in completely different ways. For exampleEPC engineer, procure, construct co ntractPC procure and construct contractE vulnerability engineer, procure, install, commission contractPIC procure, install and commission contract.In construction industry EPIC would be considered as a turnkey contract.The only one significant departure of oil industry from others is that oil industry contracts, including EPIC (turnkey equivalent) contracts, always tolerate in high level of clients involvement on the project.Direct wearyUsually clients does non wish to employ external contractors to install or make equipments or construction activities, instead clients may use their in-house recourses, maintenance or construction department for instance. This is known as a direct jab or direct works.Each activity, such as design, construction or equipment installation normally responsibility of different departments within the company. These initial agreements are very similar to the external contracts, but the conflicts and disputes between departments would be resolved in managerial level within the organisation rather than by external legal dispute resolution procedures.Bidding strategyThe tendering process begins with the invitation to tender. (from the contractors point of view).Usually in practice, building contractors does not submit truly competitive tender. After the receiving the invitation, contractor must decide whether to accept or decline tender. If contractor accept, competitive pinnace must be submitted, withal if the contractor does not accept, thebona fide tender still should be submitted. (definition of bona fide need here).Contractors always faced with to crucial decisions which are, whether or not submit competitive tender, and if so what is the bid price should be.Ansoff (1965) suggested five possible courses of action open for the contractorReject the projectProvisionally accept the projectAdd it to a reverse listRemove a project from the reverse list and replace it with the current projectUnconditional acceptanceHowever Skitmo re (1989) pointed out that the limited time available for tender restricts the use of reverse list, therefore normally contractors decide simply from two accept or reject options.Althouh contractor rejected the tender, it does not usually mean that the bid will not be submitted. If the contractor not interested in particular tender, but does not wish to reject (once contractor rejected the tender, it may not be invited to tender again), as it may cause problems in the future, contractor can submit the cover price.In practice, the decision whether or not to submit a tender depends on number of factors. According to the CIOB (1983), this decision depend on the type of work under consideration, if the contractor has an appropriate experience in particular area and necessary resources to build documents and carry out the work. However other authors agree that the key points in the decision would be the contractors present workload and availability of key personnel.Odusote and Fellows ( 1992) made significant effort in identifying the most important factors influencing the contractors decision. In this research, authors identify 42 considerations which are likely to influence the decision considered by other authors. Then constructed questionnaire and sent them to various building contractors each with a upset of approximately 8m (or higher) per year. Figure 3 below illustrates these factors based on respond of 48 UK building contractors (ranked in order of importance).Client-related factorsType of work nurture of the projectContractors current workloadEstimating workloadLikely profitability of the contractLocation of the projectForm of contractPhysical recourses to do the demarcationIdentity of consultantsTime available to tenderOdusote and Fellows (1992)On the other hand, an American survey handled by Ahmad and Minkarah (1990) identified 31 factors affecting the bidding strategy of top USA companies. Further this list of factors used by Snash (1990) in his stud y. Snash formulated a questionnaire according to the list of factors, and submitted them to the top UK contractors asking them to rank the most important factor. Finally he received responds from 80 contractors, and the table has been produced based on contractors respond.Figure 4 illustrates the top 20 factors affecting bid/no bid decision.Contractors need for workNumber of competitors tendering recognize in similar projectsCurrent work loadOwner/client identityContract conditionsProject typePast profit in similar projectsProject sizeTendering method (open/selective)Risk owing to the nature of the workProject locationType of contractAvailability of sufficient staffRate of returnProject cash flowTender periodAvailability of other projectsAvailability of labourCompleteness of the documents(Snash 1990)There is some similarity between two studies, however that does not necessary mean every contractor has to consider each factor. Some contractor may consider some, but others may consid er completely different factors. Contractor should decide rather bid or no bid in particular project regarding his own status and circumstances. By other words, regarding to curtilage (Odusote and Fellows, 1992) it can be said, that for large project, it would be decision of group of people rather than one individual.However, there is an alternative factor affecting bid/no bid decision. Contractors who have a number of contracts (portfolio of projects), can sense of balance their boilers suit risks by deciding to tender particular project. This approach first introduced in the financial sector, which basically says that the contractors can afford the risky projects if the overall risk can be reduced by balancing with the other less risky projects in contractors portfolio. Kangari and Riggs (1988) pointed out that this approach can not be used as successful as in the financial organisations. They concludedDiversification of the project portfolio can generally reduce but notelimina te overall risk exposureBid priceAfter the decision to tender, contractor will be faced by the next important decision which is bid price. Normally contractor estimates the bid price according to the necessary inputs on the process. The management process estimating the level of bid price called adjudication.A significant number of researches have been carried out for last 40 years about submitting the best bid price. Different studies concentrated various model of bidding. If one researchers developed the mathematical model, method based on historical data, statistical bidding models and econometric based model, others concentrated on less mathematical models such as compassionate decision-making process.However Moselhi et all. (1993) statesMarkup estimation is a decision problem that is so highly unstructured that it is difficult to analyse and formulate an adequate solution mechanism. It is both time consuming and complicated to identify all the related factors that form a rati onal basis for such decisions, analyse their individual strength, and then quantify their combined impact on the decision. The usual practice is to make bid decisions on the basis of intuition, derived from mixture of gut feeling, experience and guesses. This implies some sort of pattern recognition is used rather than computation or deep reasoning about the problem elements.Alternatively, Park and Chapin summarised their research thatMany different theoretical approaches to competitive bidding have been proposed and tested with variable results. Any of these strategies should improve the contractors bidding effectiveness, and whichever one works best for a particular competitive situation is obviously the best one to use. It will be worth whatever time is required to at least become familiar with the different approaches they all offer some good ideas, and even a bad plan is better than no plan at all.Factors considered by contractorsAdjudication is the process about getting the b est possible bid price, during which contractors should consider number of factors. Eastham (1987) identified 90 factors which are likely to affect the bid price. During the research questionnaire had been sent to ten contractors who identified only five most important factors. However those responds had not considered as important as in Easthams research.Subcontract requirementsType and size of jobCompetitorsClient and professionalsLabour requirements(Eastham 1987)Snash (1990) also identified factors affecting the bid price. This has been done through and through formulating the questionnaire.Degree of difficulty of the workRisk owing to the nature of the workCurrent workloadNeed for the workContract conditionsAnticipated cost of liquidated damagesOwner/client identityPast profit in similar work(Snash 1990)