5 Contract Types
5.4 Construction contracts
5.5.1 Electrical and mechanical plant designed by the contractor5.5Plant and design-build contracts
NOT FOR CONTRACT USE
58
5 Contract Types
Contracts for the supply and installation of plant and equipment, as opposed to civil works construction, involve the design, manufacture, supply, installation, and commissioning of specially engineered plant and equipment, such as turbines, generators, boilers, switchyards, pumping stations, telecommunications equipment, process and treatment plants, and the like for power, water, sewerage, telecommunication, and similar projects.
Procurement of works covering the supply and installation of plant and equipment has traditionally closely followed the same procedure as for construction works described above, however with certain significant differences. The differences are due to the disparity between the two types of projects, of which the following
features can be especially noted:
- much of the plant is manufactured off-site at a factory, whereas for construction work the execution of the work is for the most part carried out at site;
- the detailed design of the plant is the responsibility of the contractor, with usually only concept or preliminary design being done by the employer;
- the contractor is usually associated with a plant manufacturer or supplier alone or associated with a civil works contractor;
- payment is mainly on a schedule of payments based on achievement of predefined measurable progress or milestones; and
- testing and commissioning are more comprehensive and stringent on a plant project.
5.5.1 Electrical and mechanical plant designed by the contractor 5.5 Plant and design-build contracts
This procedure for the procurement and engagement of the contractor for the execution of engineering works, usually works of civil engineering construction, e.g., infrastructure, buildings, hydropower plants, roads, railways, tunnels, and bridges, has been the norm for many decades both for national and international projects. It is applicable to civil works construction projects of all sizes, from medium to very large and complicated projects, where the employer (or his consultant) has prepared the design, or most of the design.
FIDIC’s recommended procedure for obtaining tenders for such a construction project is set out in Chapter 11 – Obtaining Tenders: Construction Contracts.
A typical management structure for a traditional construction project is shown in Fig. 5.3.
Larger and more complex than minor works projects, traditional construction projects involve civil engineering and building works required by an employer who, unless he carries out the design in-house, would normally commission a consulting engineer to design the works. It is to be noted that traditional construction projects often also include some elements of contractor-designed civil, electrical or mechanical engineering work.
Under the usual arrangements for this type of project:
- the employer:
- provides the finance;
- appoints a consulting engineer to carry out the design work and prepare the bill of quantities;
- appoints the engineer to administer the contract, monitor the construction works and certify payment.
- the engineer (on behalf of the employer) may initiate variations;
- the employer wishes to be kept fully informed;
- payment to the contractor will be according to a bill of quantities or lump sums for approved work done;
- the employer seeks to ensure an equitable sharing of construction risks in the contractual arrangements, e.g., he takes the risk of unexpected adverse ground conditions; and
- owing to the decision to carry a part of the construction risk, the employer accepts that the quantities are estimated and overruns may occur to the original contract sum and, possibly, the completion date.
If these arrangements suit the employer’s requirements, FIDIC recommends using the FIDIC Conditions of Contract for Construction for Building and Engineering Works designed by the Employer, commonly known as CONS or the 1999 Red Book.
NOT FOR CONTRACT USE
5 Contract Types
With regard to the design of the plant and/or equipment, this is the responsibility of the contractor, who will design his plant or equipment to fulfil outline or performance specifications set by the employer or his consultant, normally contained in the document entitled ‘employer’s requirements’.
Thus, when the consultant prepares the tender dossier he will usually only include drawings to show the location, size, connection points, interfaces, and limits of delivery of the plant or equipment and such other information as may be necessary for the contractor, but no detailed design of the plant or equipment itself.
Notes concerning the preparation of the employer’s requirements are given in Appendix 5.5.1.
The essential differences indicated above often require that the total payment will be divided into a number of lump sums, corresponding to completion of the various important stages of the work. Payment will then be made when each
‘milestone’ is achieved, for example, 20% of the contract sum as advance on contract signature, 30% on completion of manufacture of the plant, 10% on shipping, 10% on arrival at site, 20% after installation and successful commissioning, and the final 10% after compliant performance testing.
The procurement process, while still in accordance with the usual principles of international competitive bidding, may be carried out according to two distinct procedures. The first is
‘single-stage tendering’ and the second is ‘two-stage tendering’.
Single-stage tendering
The procedure for single-stage tendering for plant and equipment is very similar to that for construction works described above. The consultant prepares the tender dossier for which an output or a performance specification is included (which contains the employer’s requirements, but does not include the detail design of the plant) which is distributed to interested contractors/suppliers.
Fig. 5.4 – Electrical and mechanical plant contracts and contractor-designed construction contracts: typical management structure
EMPLOYER
CONTRACT DOCUMENTATION CONTRACT
DOCUMENTATION
SUBCONTRACT DOCUMENTATION
SUBCONTRACTOR SUBCONTRACTOR
SUBCONTRACTOR
For electrical and mechanical plant, and for engineering works, designed by the contractor. Sometimes called design-build contracts.
Use FIDIC Client/Consultant Model
Services Agreement (White Book)
Use FIDIC Conditions of Contract for
Plant and Design-Build (1999 Yellow Book)
SUBCONTRACT DOCUMENTATION
ENGINEER Functional link CONTRACTOR
SUBCONTRACT DOCUMENTATION
NOT FOR CONTRACT USE
60
Usually the tenderers will have been chosen through the prequalification process, but in cases where there is only a limited number of possible
contractors/suppliers the invitation to tender may be sent directly to all of them.
When the tenders are received they are
evaluated by the employer or his consultant according to the evaluation criteria contained in the tender dossier. As before, invariably the ‘lowest evaluated tender’ or the one considered to be the ‘economically most
advantageous’ tender is the successful one. When the contract has been awarded, payment is made to the contractor on a lump-sum basis on the successful completion of each stated ‘milestone’. This single-stage tendering procedure for plant and equipment
procurement has been the norm for many decades.
Two-stage tendering
The second procedure, the two-stage tendering procedure, has been introduced mainly for the purpose of allowing contractors/suppliers more chance to offer their own solutions to the employer’s requirements. The reasons for and essential features of the two-stage tender process can be expressed as follows:
1 Most systems or equipment requirements can be solved in more than one way [1].
2 By employers specifying only the required function, i.e., ‘functional’ or ‘performance’ specifications, contractors and suppliers are free to present their own solutions. The employer can therefore benefit by choosing the most beneficial solution.
3 However it is not usually easy to compare different solutions and determine which is the most beneficial.
4 The World Bank and other International Financing Institutions have as their procurement policy that
contracts should be awarded to the qualified bidder who offers the ‘bid offering the lowest evaluated cost to the Borrower’ [2].
5 For turnkey contracts or contracts for large complex plants or works of a special nature or for procurement of equipment which is subject to rapid technological advances, The World Bank, the European Bank for Reconstruction and Development and other IFI’s allow a two-stage bidding process [3], as follows:
- In the first stage the employer provides a conceptual design or performance specification to which bidders provide unpriced technical proposals. These technical proposals may include a list of any deviations to the technical and commercial conditions in the employer’s documents or any alternative technical solutions (provided that such deviations or alternative solutions do not change the basic objectives of the project) [4].
- Following evaluation by the employer of the first-stage bids, the employer may conduct a clarification meeting with each qualified bidder [5] where the whole bid is reviewed. Any required modifications will be noted in a memorandum.
- The second-stage bid [6] will consist of an updated technical bid incorporating all required modifications, plus the commercial bid.
- The employer will check that all modifications and conditions have been complied with and then award the contract to the lowest evaluated bidder.
The two-stage tendering process is acceptable and standard practice on international projects for the supply and installation of large and/or complex plants and/or equipment [7].
The two-stage tendering process lends itself to procurement based on performance-type specifications.
A useful paper setting out the advantages and
5 Contract Types
References
[1] Consider various methods for: water or sewage treatment plants; harbour handling equipment; railway rolling stock;
IT equipment; manufacturing plants; transmission lines; and virtually any other plant project, and even civil works such as bridge construction, buildings and road construction.
[2] World Bank Guidelines for Procurement Sub-Clause 2.4.
[3] World Bank Guidelines for Procurement Sub-Cause 2.6.
[4] World Bank SBD Supply and Installation of Plant and Equipment – Two Stage – ITB Sub-Clause 9.2 [5] World Bank SBD for Supply and Installation of Plant and Equipment – Sub-Clause 18.1.
[6] World Bank SBD for Supply and Installation of Plant and Equipment – Sub-Clause 19.1
[7] Both the single stage and the two stage tendering procedures are described and embodied in the World Bank Standard Bidding Documents for Supply and Installation of Plant and Equipment dated November 1997 (Revised January 1999). Appendix 5 – Two-Stage Bidding Procedure Flowchart shows the procedure for the World Bank’s two-stage tendering process.
NOT FOR CONTRACT USE
5 Contract Types
As an alternative to the design of building and engineering works being carried out by the employer or his consultant, it is sometimes decided that the design should be carried out by the contractor, and that it should be the contractor who is responsible for the design and that the completed works will be fit for purpose and otherwise satisfactory. This arrangement is usually called ‘design-build’.
Under design-build contracts the employer provides his employer’s requirements and the contractor shall design and build/construct the facility in accordance with these.
Thus design-build contracts are similar to plant contracts, as described in Sub-Section 5.5.1 above. However, instead of designing the electrical, mechanical or other plant, the contractor will in this case design the building or
engineering facility before he builds/constructs it.
As for plant contracts, the contractor will design and build/construct the works according to outline or performance specifications set by the employer or his consultant. When the consultant prepares the tender dossier he will usually only include drawings to show the outline, conceptual or preliminary design of the building or facility, together with the location, limits of delivery and such other information as may
be necessary for the contractor, but no detailed design of the building/facility itself.
A useful discussion setting out the advantages and disadvantages of Performance-Based Procurement (PBP) as well as the basic features of this procurement approach is to be found at Appendix 5.5.2.
The tender dossier will comprise similar content to that of a construction contract. However, as for a plant contract, the technical specifications of the construction contract will be replaced by the employer’s requirements which must contain all the technical and other requirements, which the employer wishes the contractor to carry out or comply with. Also, as for a plant contract, a schedule of payments will usually replace the bill of quantities.
Notes concerning the preparation of the employer’s requirements are to be found at Appendix 5.5.1.
The procurement process, while still in accordance with the principles of international competitive bidding, may be carried out according to either single-stage tendering or two-stage tendering as described above in Section 5.5.1 for a plant contract.
disadvantages of Performance-Based Procurement (PBP) as well as its basic features is to be found at Appendix 5.5.2.
Management structure
A typical management structure for a traditional electrical and mechanical plant project is shown in Fig. 5.4.
Larger and more complex than minor works projects, traditional plant projects involve the design, manufacture, delivery, erection, testing, and commissioning of mechanical and electrical plant by a contractor to an outline or
performance specification prepared by the employer.
Under the usual arrangements for this type of project:
- the employer:
- provides the finance; and
- will appoint the engineer to administer the contract, monitor the design and manufacturing activities, the installation and erection on-site and construction work and to certify payment; and
- the engineer may initiate variations; and
- the employer wishes to be kept fully informed, and - payment to the contractor will be according to achieved
milestones generally on a lump-sum basis; and - the employer seeks to ensure an equitable sharing of
construction risks in the contractual arrangements; and - owing to a decision to carry a part of the construction risk,
the employer accepts that overruns may occur to the original contract sum and, possibly, the completion date.
If these arrangements suit the employer’s requirements, FIDIC recommends the use of the FIDIC Conditions of Contract for Plant and Design-Build for Electrical and Mechanical Plant, and for Building and Engineering Works, designed by the Contractor, commonly known as P&DB or the 1999 Yellow Book.