Project Delivery Systems and Commercial Management Management 1.pdf · between contract...

Project Delivery Systemsand

Commercial Management

Raufdeen Rameezdeen PhD

» In the previous session we looked at the legal basis of a construction contract

» How a contract is managed during project execution?

It is the duty of a QS to manage commercial aspects of a construction project

The aim of this session is to explore the relationship between contract administration and commercial management of a project based on FIDIC 1999

» Profit at the end of a project

» Maintenance of working capital throughout

Aims of commercial management ?

Profit in a Project

» Value addition

» How much money spent on resources & OH

» The difference between value and expenditure is the “profit”

Profit

Project Income

Income is different from value addition

Depends on when you receive the income and how much

– Time for invoicing

– Time for certification

– Amount of retention

WORKING CAPITAL

Cumulative exp. curve

Cum. income curve

Amount of WCdifference betweenexp. and income

-15

-10

-5

0

5

10

15

20

Jan Feb Mar Apr May June July Aug Sep Oct/Jan Feb

Working Capital Curve

Bank Borrowing?

Contract Administration

Monitoring performance and ensuring that

both parties meet the commitments made

in the contract

In a contract, rights and obligations of the parties are mutually interchanged

Rights Obligations

Client To get the work done as per Q,T, and C targets

To pay as per agreed terms and conditions

Contractor To get paid…….

To produce ……

Contract administration deals with Obligations

Rights Obligations

Client To get the work done as per Q,T, and C targets

To pay as per agreed terms and conditions

Contractor To get paid…….

To produce ……

Obligations are related with three parameters

Obligations

To pay as per agreed terms and conditionsTo produce ……

Time

CostQuality(Scope)

Fundamental changes appearing in business principles in recent times

The Standard Conditions of Contract in the traditional approach is based on principles of mutual mistrust

However, Partnering is based on principles of mutual trust

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Mutual Mistrust Vs Mutual TrustImpact on Project Management

Management with a contract based on mutual trust

Schedule control Cost control

Laborcontrol

Equipment &materialcontrol

Procurement control

Quality control

Subcontractorcontrol

Informationcontrol

Management with a contract based on mutual mistrust

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How to fix the Type contract Planning

Investigation

Conceptualdesign

Basic design

Detail design

Construction

Operation

Project Managem

ent

Maintenance

Contract type for the project shall be based on the concept of who has responsibility, and what kinds of responsibility and the Abilities of owner Abilities of Contractor Technical Difficulties Level of uncertainties Condition of finance Others

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（Full-Turn Key Contract）

（Design & Build Contract）

（Lump Sum Contract）

（Re-measurement Contract ）

Project Execution Schemes and Types of Contract

Planning Investi-gation

Conceptdesign

Basic design

Detail design Construction Maintenance

Types of contract vs. Risk allocation15

（Full-Turn Key Contract）

Full-Turn Key Contract


Conceptdesign

Basic design

Detail design

Construction Maintenance

This type of contract will mainly be applied to performance guarantee projects, like a

chemical plant or a power plant

The area of responsibility covered by the owner/ consultants

The area of responsibility covered by the contractor

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Design & Build Contract

（Design & Build Contract）


Conceptdesign

Basic design

Detail design




This type of contract is commonly use for function oriented projects, like residential buildings. Nowadays, this has stared

to apply to infrastructure projects as well17

Lump-Sum Contract

（Lump-Sum Contract）


Conceptdesign

Basic design

Detail design




This type of contract is commonly used for a project that has complete design drawings and specifications when it is bid

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Re-measurement Contract

（Re-measurement Contract ）

This type of contract is commonly used for infrastructure projects in the international construction

market place




Concept design

Basic design

Detail design


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FIDIC Standard Forms to Suit Different Procurement Methods

Contract Latest Edition Application

Red Book 1999 Civil work (designed by Employer)

Yellow Book 1999 Plant, Electrical works, Mechanical works (Design-Build)

Silver Book 1999 EPC

Green Book 1999 Minor works

White Book 2006 Consultancy agreement

Blue Book 2006 Dredging work

Gold Book 2007 Design-Build-Operate

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Work Scope in FIDIC Contracts

Contract Engineering Design Construction Operation

Red Book

Yellow Book

Silver Book

Green Book

Gold Book

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Characteristic of Re-measurement Contract (FIDIC Red Book 1999)

The amount of the progress payment is determined by using a BQ and unit pricesAs a result, the total contract amount is not determined until all the works are completedA re-measurement contract has a flexibility built-in to deal with a Change of Conditions of the Contract that may arise during execution of the projectThus, a contract can be made even though the project drawings and/or specifications have not been fully completed

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Contents of Bill of Quantities1. Preamble

Explaining each item listed in the BQ, the rules of measurement and payments, etc.

2. Work items3. Preliminaries and General Items

・Temporary facilities・Temporary roads, water & electricity supply

systems.・Indirect Items. insurance cost, bonds, etc,.

4. Day works schedule5. Others

・Provisional sums ・Prime cost sums

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Measurement and Evaluation

Variations and Adjustments

Contract Price and Payments

FIDIC Clauses 12, 13 & 14

Clause 12 - Measurement and Evaluation

Measurement is separated from Evaluation

Measurement is undertaken for payments as well as for records

Measurement deals with establishing the Quantities of work whereas Evaluation the Value

Who undertake measurements for payment?EmployerEngineerContractor

Establishing a New Rate

Note the detailed requirements for a new rate under items (a) and (b)

Procedure:– From relevant rates in the contract– Reasonable cost + reasonable profit

Sub Clause 12.3

Clause13 – Variations & Adjustments

Who designs the work involved in a value engineering proposal?

EmployerEngineerContractor

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Pricing of Variations

Order of precedence:

1. Prior agreement2. Applicable rates or prices in the Contract3. Rates or prices in a priced BQ, schedule

of rates (which are not part of contract docs)

4. Reasonable rates or prices including profit and overheads

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29

Pricing of Variations (cont.)

• Any deductions shall include for profit but not overheads

• The price of the variation shall be added to or deducted from the contract sum.

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Pricing of Variations (Cont.)If no prior agreement, pricing at BQ or contract rates is normally sufficient for most casesHowever, there are two situations where BQ or contract rates will not suffice:– The variation will take the original contract works past

the practical completion date. The Contractor will have not allowed for inflation of plant/materials/labour beyond this date.

– Where there is no comparable item in the BQ for the varied work

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Pricing of Variations (Cont.)If no prior agreement and use of BQ/Contract rate not appropriate, then last resort is reasonable rates or pricesReasonable rate or price may be:– Actual cost of work (plant/labour/materials)– Plus any extra preliminaries– Plus delay damages if variation will delay contract

past PC date – Plus reasonable rate for head office overhead and

profit

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Variations for Convenience of Contractor

Sometimes Contractor may request a variation,Eg, Contractor having problems sourcing material A, so requests whether it can substitute material B.The Engineer may agree and direct the requested variationSuch variation is allowed to be conditionalEg, this variation is given subject to the Contractor warranting that the selected substitute material shall be fit for its purposeAlso, such variations shall not entitle the Contractor to either extra time or extra money

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Establishing a New Rate

Note the detailed requirements for a new rate under items (a) and (b)

Procedure:– From relevant rates in the contract– Reasonable cost + reasonable profit

Sub Clause 12.3

Item Description Additions Deductions (a) Floor carpeting (See attached

measurement sheet for costing details)

1,125,000

(b) Terrazzo flooring as per BQ number M23

455,000

Net variation 670,000

Variation processing cost (this may be subject to a contract clause as a minimum cost or % of the cost)

5,000

Total Variation (C/F to Variation Accounts)

675,000

Variation Accounts

Variation No.6 - Flooring

T SQUARE & ASSOCIATES VARIATION ACCOUNTS FOR THE MONTH OF MARCH 2012Contractor : A B C Builders

Project : Panorama Condominium

Additions Deductions

Original Contract Sum 42,500.000Variations Approved up to Last PC 2,250,000Variations Approved for August

Variation Quotation No.6 675,000Variation Quotation No.7 525,000Variation Quotation No.8 300,000Sub Total 675,000 825,000Net Value of Variations (150,000)

Adjusted Contract Sum 44,600,000

Adjustments

Provisional sums – undefined work

Prime cost sums – Work done by nominated subcontractors and gov. authorities

Provisional Sum

Include a provisional sum of QAR1220 (one thousand two hundred and twenty) for connecting end of drain to be the soakage pit.

Prov. Sum

1220 00

Prime Cost Sum

Include the prime cost sum of QAR8000 (eight thousand) for patent partitions to be executed by nominated sub-contractors.

Add for profit

General attendance

PC Sum

%

%

Item

8000 00

Include the prime cost sum of QAR 550 (five hundred and fifty) for ironmongery to be supplied by nominated supplier.

Add for profit

PPC Sum

%

Prime Cost Sum(Cont.)

550 00

Prime cost sum for patent partitions

Add for profit (10%)

General attendance

Cangaroo Interior Ltd., A/C No. 2134

Profit (10%)

General attendance

Total

Less omission

Net addition C/F to Grand Summary

8000.00

800.00

1200.00

10000.00

8500.00

850.00

1200.00

10550.00

(10000.00)

550.00

Omissions Additions

Adjustment of PC & Provisional Sums

Price Fluctuations

Often building projects, particularly, large building projects are undertaken over a long period of time. It is more than likely that the price of material used in a job and the rates of pay of the workmen will increase and even in some instances fall during the life of the contract.

Rise and Fall is the adjustment made to the contract price to offset or compensate for any rises and falls that occur during the period of contract.

Methods of Dealing with Fluctuations

Payment on actual

Formula method (price indices)

Dayworks

Dayworks means payment for actual hours spent carrying out an operation as against payments made based on prices given in the tender. For this reason a record of such work must be kept and signed by the party carrying out the work and paying for it.

Daywork records

The minimum information recorded should include:

Hours worked by those engaged in dayworkHours machines were hired Material used for daywork purposes

ABC BuildersProject : Panorama Condominium

Invoice No……………………………………………Date ……………………………….

Date Details Hours Rate Amount

04-03-2012 1 Labourer assisting unloading timber

2.0 hr 100 200

18-03-2012 2 brick layers, 3 hr. each building test panel (not in contract)

6.0 hr 150 900

1 labourer assisting 3 hrs. 3.0 hr 100 300

INVOICE TOTAL 1400

Clause 14 - Contract Price and Payment

Application for payment certificate

Issue of payment certificate

Payment

By Contractor to Engineer

By Engineer to Employer

By Employer

Payment Modalities

Lump Sum – Yellow and Silver Book

Re-measurement – Red Book

Cost reimbursement – Not used by FIDIC except for Daywork

Types of Payments

Payment on completion

Stage payments

Progress payment

Progress PaymentsThe Contractor is paid progressively as the work proceeds. The Superintendent who issues progress certificates bases this on assessed work value. A certificate states that a certain amount of work has been completed and therefore the work should be paid for.

Contractual ImplicationsThe conditions of contract, normally stipulates:– When progress payments are to be made.– The method of presentation by the builder of his claim for progress

payments (the information to be provided).– Method for fixing the value of work executed including variations, and

unfixed materials on site.

Payment Terms

– Minimum amount of interim certificates

– Frequency of interim payments

– Period for checking and certification

– Period for payment

– Unfixed materials and plant

Within how many days the employer should make a payment upon receipt of contractors statement?

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Retention

Security for client

Deducted from each certificate as per the conditions of contract

Maximum retention as per the conditions

WORKING CAPITAL

Make sure WC is adequate

It can strain on final profit

Profit

Profitdifference at end ofproject between exp.and income

Company Working Capital

Aggregate forecast forcompany WC needs

WC Deficit

Points to takeKnow your contract thoroughlyDevelop an eye for detailsDetect changes earlyUpdate your financial plan regularlyVariations and adjustments are opportunitiesNegotiate with confidenceProactive contract administration to avoid straining your WC WC affects profitLook for increased profit

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End of session – Questions?

Project Delivery Systems and Commercial Management Management 1.pdf · between contract...

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