Hardly a day passes without us being subjected to images of those former masters of the universe from Wall Street slumped at their desks with pained expressions. The global banking and equity markets remain very jittery and it is unlikely that things will change any time soon. All elements of the global economy are affected including the construction sector of course. With the value of construction and infrastructure projects in the UAE almost five times its estimated GDP value, the importance of delivering these projects on time without vast cost overruns is now a major concern as development finance to the Gulf construction industry could well slow down.
Alongside the global economic crisis, strains in the regional material and resources supply chain remain and many clients want to procure their projects on a fast track timetable to mitigate rising costs and tight credit lines.
We have witnessed a number of clients in the UAE reassessing their project delivery methods. A popular method now being considered is the appointment of a contractor by means of a two stage tender process to enable that contractor to be brought in at an early stage. Traditional one stage fixed price procurement methods can lead to high prices with significant cost contingencies and a slow programme schedule. Given there is no cheap money out there any more, costs and programme will be scrutinised more than ever before (this reminds me of the old joke about the definition of an engineer's estimate being the cost of construction in heaven!). So how does the two stage process work?
The first stage enables a contractor to be incorporated within the client's team and to, in the second stage, take a leading role in relation to the development of the design, the finalisation of the specification for the works and the establishment of the contract price. Contractors in competition submit tenders comprising their percentage profit margin, a percentage for site overheads and a lump sum for preliminaries, all based upon provisional design and works information. Each contractor also submits a fixed fee for undertaking preconstruction services during the second tender stage.
At the end of the first stage, the client selects his preferred contractor based on an evaluation of the commercial terms and appoints him on a pre-construction services agreement (PCSA). This agreement sets out the services which the contractor must complete during the second stage of the tender process. The PCSA will include the output specification in respect of the project, the current state of the definition of "works" for the project, the current edition of the design drawings and the contract which the contractor would be expected to sign at the end of the second tender stage. The form of contract could be a standard form of choice or could be entirely bespoke.
In order to give effect to the construction contract, the PCSA, would oblige the contractor to sign the construction contract. This does give rise to an element of uncertainty. That uncertainty could be removed by having a resolution procedure in place whereby a third party would determine what was "fair" in relation to price, design or specification, to the extent to which the contractor had challenged his obligation to sign the construction contract.
During the second stage, the contractor prepares the project's master schedule, a detailed method statement, component flows and pre-orders long lead items. The contractor will also be expected to employ mechanisms for dealing with overspends and underspends of packages against the contract sum and advise the client on liaising with all public authorities, safety, police, fire and security, designing documentation to attract performance of package contractors and any other services which the client may deem appropriate.
In addition the contractor obtains tenders from potential package contractors on an "open book" basis and works with the client and his consultants to develop the design and the specification. Tenders for the works are typically divided into packages. Upon receipt of the package contract tenders, the contractor consults with the client and his team to review the tenders on an open book basis and resolve any package contractor queries or qualifications. The successful package contractors' tenders would then be aggregated together and, with the contractor's profit and overhead percentages and preliminaries price, shall comprise the contract sum for the purpose of the construction contract.
At the end of the second stage, when the works have been fully designed, the contract price will have been decided and the works specified, and the contractor will enter into the design and construction contract. The contractor then proceeds to carry out and complete the design and execution of the works using the works and services of the package contractors but retaining overall single-point responsibility with the client. The client would have direct warranty agreements with package contractors.
Two-stage tendering allows a client to have the advantage of a contractor working as part of his design and project team during what would otherwise be the pre tender period. It is a procurement method which is likely to be a more and more visible procurement option in the Gulf as projects become subject to fast-track timetables and cost constraints imposed by an unstable outlook.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
