Managing Fabrication Contracts - read

SARAWAK SHELL BERHADSABAH SHELL PETROLEUM COMPANY LIMITED

Contracts Management WorkshopRegional Course

Miri, Sarawak (06-10 May 2002)

Managing a Major Offshore Fabrication Contract

Paul Pandian

EPK-PRJ

SSB/SSPC

Contracts Management Course Managing a Major Fabrication Contract

CONTENTS

1. Fabrication costs.......................................................................................................................... 1

2. Fabrication tenders: impact on programme..................................................................................2

3. Similarities with engineering contracts.........................................................................................3

4. Useful references......................................................................................................................... 4

5. Areas of interest and influence.....................................................................................................5

6. Tender documents....................................................................................................................... 6

7. Specifications............................................................................................................................... 7

8. drawings....................................................................................................................................... 8

9. LS tenders: design provided.........................................................................................................9

10. LS tenders: EPC......................................................................................................................... 10

11. BOAQ tenders: design provided.................................................................................................11

12. BOAQ tenders: EPC................................................................................................................... 12

13. Technical evaluation................................................................................................................... 13

14. Commercial evaluation...............................................................................................................18

15. Pre-award clarification................................................................................................................20

16. Award......................................................................................................................................... 21

17. Kick-off meeting.......................................................................................................................... 22

18. Bonds, guarantees & retention money.......................................................................................23

19. Contract documentation.............................................................................................................25

20. Erection sequence & planning package.....................................................................................26

21. Monitoring progress.................................................................................................................... 27

22. Progress payments.................................................................................................................... 28

23. Managing changes..................................................................................................................... 29

24. Pricing changes.......................................................................................................................... 30

25. Loadout & seafastening..............................................................................................................31

26. Handling claims & disputes........................................................................................................32

27. Delays & extension of time.........................................................................................................33

28. Acceleration claims.................................................................................................................... 34

By: : Paul Pandian (SSB/SSPC), 21-Apr-2002 (i) Filename: document.doc


1. FABRICATION COSTS

(1) TOTAL PLATFORM COST BREAKDOWN (%)

PLATFORM A B C D E

TOTAL COST (USD - MOD) 63M 53M 53M 235M 182M

DESIGN 8 % 6 % 6 % 5 % 5 %

CO. MATERIAL 14 % 24 % 24 % 21 % 26 %

FABRICATION 48 % 48 % 48 % 60 % 53 %

OIC 28 % 20 % 20 % 9 % 10 %

HUC 2 % 2 % 2 % 5 % 6 %

(2) TOPSIDES COSTS

DESCRIPTION COST RANGE (USD/MT)

WEIGHT RANGE (MT)

RISER TOPSIDES 13-16K 500 - 2,000

DRILLING TOPSIDES 16-19K 1,000

COMPRESSION MODULES 27-34K 1,200 - 1,800

LIVING QUARTERS 15-20K 1,300 - 2,100

INTEGRATED DECKS 15-18K 8,000 - 9,000

(3) SUBSTRUCTURE COSTS

WEIGHT RANGE (MT) COST RANGE (USD/MT)

500 - 1,000 4- 5K

1,000 - 2,000 4 - 6K

2,000 - 5,000 4 - 5K

8,000 - 10,000 3K

By: : Paul Pandian (SSB/SSPC), 21-Apr-2002 Page 1 of 34 Filename: document.doc


2. FABRICATION TENDERS: IMPACT ON PROGRAMME(1) DESIGN PROVIDED BY COMPANY (LS)

(2) DESIGN PROVIDED BY COMPANY (BOAQ)

(3) EPC (LS)



3. Similarities with engineering contractsDescription Building Civil Fabrication

Work location Owner: compact area Owner: spread out Contractor's yard

Under-ground work 10 - 20 % Up to 60% No

Variation clause Yes Yes Yes

Delay & EOT clause Yes Yes Yes

Bonds, guarantees, retention Yes Yes Yes

HSE clauses Yes Yes Yes

QA/QC clause Yes Yes Yes

Default & termination clauses Yes Yes Yes



4. USEFUL REFERENCES(1) Construction law

(a) Hudson's Building & Engineering Contracts (I.N. Duncan Wallace)

(b) Keating's Building Contracts (Donald Keating, John Uff, Anthony May)

(c) Construction Law in Malaysia & Singapore (Robinson, Lavers, Tan & Chan).

(d) The Law Relating to Building Contracts: Cases & Materials (Chow Kok Fong).

(e) Construction Contract Claims (Chow Kok Fong).

(f) Engineering Law and the ICE Contracts (Max Abrahamson)

(g) Construction Contracts (Keith Collier)

(h) Emden and Gill's Building Contracts and Practice (Alfred Emden, William Gill).

(2) Quantity Surveying: Practice Manuals.

(3) Standard methods of measurement: Civil, building and industrial.

(4) Costing: Man-hour manuals, Page & Nation and Franklin & Andrews.



5. AREAS OF INTEREST AND INFLUENCE(1) Schedule

(a) Realistic contract duration based on proven track record.

(b) Reasonable and realistic dates for delivery of Company materials. These dates should fit in with the erection sequence and construction programme.

(c) Ensure that Company provided info (drawings, specs, vendor data, etc.) will be available in timely manner.

(d) Materials to be supplied by the Contractor should be those that can be comfortably supplied within the contract duration.

(2) Cost(a) Clear and consistent documentation.

(b) Reduce areas of risks and uncertainties.

(c) Reasonable terms and conditions.

(d) Work scope clearly defined.

(e) Drawings: as complete as possible.

(f) Standard specifications: Include only what is relevant.

(g) Tagged items (equipment, valves & instruments): Provide specs (or TRP's).

(h) If TRP's are provided: prepare separate TRP's for Fabricator supplied items.

(i) For LS contracts, if MTO's are available, provide soft copies (info only).

(j) Pricing summary and breakdown should follow work breakdown structure - to be used as common reference for pricing, planning and monitoring progress. Provide clear tables (spreadsheets) to avoid errors in summing and transfer.

(k) If work is not properly defined, do not seek LS prices.

(l) If drawings and/or specs. are not available, cover with provisional sum items.

(m) If quantity is uncertain, use BOAQ for selected sections of the work.



6. TENDER DOCUMENTSSection A: Tender Acknowledgement

Section B: Instructions to Tenderers

Section C: Form of Tender & Appendices

Section D: Contract Documents (arrangement & precedence).

Part 1: Form of Agreement

Part 2: Conditions of Contract

Part 3: Schedule of Prices and Rates

Part 4: Scope of Work

Part 5: Provisions by the Contractor

Part 6: Provisions by the Company

Part 7: Specifications

Part 8: Drawings

Part 9: Administrative Procedures

Part 10: Contractor's Execution Plan



7. SPECIFICATIONSTypical classes of documents and precedence (EPC contract):

(1) Amendments to the Specifications

(2) Basis of Design Reports

(3) Conceptual Design Reports and Studies

(4) Project Specifications

(5) Technical Requisition Packages (TRP)

(6) SSB Design and Engineering Practices (DEP-SSB)

(7) Standard Engineering Specifications (SES)

(8) Material Engineering Specifications Codes (MESC)

(9) SIEP Design and Engineering Practices (DEP-GEN)

(10) Technical Requisition and Associated Procedures (QAP)



8. DRAWINGS(1) Typical types of drawings and precedence:

(a) Project drawings.

(b) Standard drawings.

(2) P&ID's take precedence over Piping and Instrument drawings.

(3) Tender based on AFB drawings. AFC drawings will be issued upon award.

(4) Drawings will include "Holds". These are areas where either the info is subject to confirmation or where there is no information. Bidders must price all info within "Holds".

(5) Empty "Hold" means "zero cost". Avoid empty "Holds". Show details and put them on "Hold" - this way price and schedule aspects will be included.

(6) Vendor data incorporation (VDI): Contractor must price for impact of VDI for all contractor supplied items.

(7) For Company supplied equipment: VDI will have cost impact - to be paid under change order.

(8) MTO/BOM on drawings are for info only: Contractor to ascertain kind, class and quantity of materials required.



9. LS TENDERS: DESIGN PROVIDEDDocuments required:

(1) Detailed scope of work.

(2) Detailed drawings.

(3) Standard Specifications for general material and workmanship.

(4) TRP's for all Contractor supplied tagged items (equipment, valves & instruments).

(5) Material Engineering Specification Codes (MESC).

(6) Yard pre-commissioning work scope and check-sheets.

Notes(a) MTO's are not necessary, but useful. Quantities are estimates only. Contractor to

ascertain quantities.

(b) Do not provide weight control report unless requested by bidders. If you wish to issue this to bidders, clarify that these are estimated weights and that they contain various allowances for weight growth. Provides as INFO only. Bidders to verify its completeness and accuracy.



10. LS TENDERS: EPCDocuments required:


(2) Conceptual design drawings.

(3) Basis of Design Reports

(4) Conceptual Design Reports and Studies


(6) Preliminary specs for all Contractor supplied items.

(7) MESC.

(8) Yard pre-commissioning work scope and check-sheets.

Notes:(a) MTO's are not necessary, but useful. Quantities are estimates only. Contractor to

ascertain quantities.

(b) PROVIDE weight control report: for information only.



11. BOAQ TENDERS: DESIGN PROVIDEDDocuments required:


(2) Conceptual design drawings.


(4) Specs for all Contractor supplied tagged items.

(5) MESC.

(6) Yard pre-commissioning work scope.

(7) BOAQ (and SOR if necessary).

Notes(a) Do not provide MTO. May cause confusion if different from BOAQ. If necessary, limit its

usage to material specs only

(b) BOAQ quantities should allow for growth and design development.

(c) PROVIDE weight control report: for information only.



12. BOAQ TENDERS: EPCTHIS OPTION IS NOT RECOMMENDED.



13. TECHNICAL EVALUATIONTA1 QUALIFICATIONS TO TENDER AND CONTRACT CONDITIONS

(a) Review with care. If bidder's qualification is reasonable, accept and inform other bidders for consistency.

(b) If qualification is unreasonable, explain the rationale for Company's requirements clearly so that bidder can assess their risks and price accordingly.

(c) Remember that you did not invite bidder to disqualify his bid.

(d) Be prepared to change the ITB requirements if necessary.

(e) Where different bids are involved (e.g. Topsides and Jacket), address qualifications separately: different considerations may apply.

(f) Tabulate qualifications and Co. response and send out soft copy.

(g) If necessary, conduct clarification meeting. Agreed MOM should be signed off before meeting is over.

TA2 PROPOSED ALTERNATIVES

(a) Should only consider if the base tender is acceptable.

(b) Should be equal or better than the ITB requirements.

TA3 PROJECT TEAM & KEY PERSONNEL

(a) Dedicated project team.

(b) All functions and disciplines covered.

(c) Personnel meet minimum requirements (qualification and experience).

(d) Sufficient personnel to cover the anticipated work load.

(e) Who will do detailed engineering and procurement?

TA4 METHOD STATEMENT

(a) Erection sequence.

(b) Loadout method.

(c) For EPC: Level 2 CPN and narrative on integration of detailed design, engineering, procurement and fabrication are required.

TA5 WORK PROGRAMME

(a) Level III CPN based on Erection Sequence: check for consistency.

(b) Realistic activity durations.

(c) Planned man-hours consistent with proven norms.

(d) Planned manpower (no. of men) consistent with planned man-hours using weekly regime (40 to 48 hours per week).

(e) Adequate equipment.

(f) Equipment capacity consistent with erection sequence.

(g) Procurement plan based on CPN.

(h) ROS dates for company supplied material should not be earlier than Company's planned delivery dates.



(i) Check Company material on critical path.

(j) Check start/finish dates (ES-EF = LS-LF).

(k) Notice for mobilising 3rd. party loadout equipment.

TA6 SUBCONTRACTING PLAN

(a) Scope of work to be subcontracted: must avoid loss of control and be consistent with method statement.

(b) Method of selection and schedule. Schedule to be consistent with CPN.

(c) If already selected, review their experience and track record.

(d) If in doubt, get letters of support from proposed subcontractors.

TA7 PROCUREMENT PLAN

(a) Should be based on the overall CPN.

(b) Should include ROS date, delivery time, tender evaluation and award, tender period and preparation of purchase requisition (including technical specs and MTO's).

(c) This will help to identify info requirements (dates for drawings and specs, both preliminary and final).

TA8 PREVIOUS AND CURRENT WORK

(a) Previous work: Should include contractual duration and actual duration. Used to assess bidder's track record.

(b) Current work and bids submitted: Used to access available yard capacity. Plot histogram. See example below.

(c) Yard capacity is based on:

(i) Highest quarterly tonnage achieved (historical records) and bidders' performance at that level. If poor performance, this number is reduced.

(ii) Area used to achieve above tonnage.

(iii) Area now available x tonnage per quarter per hectare.

(iv) Workshops, loadout facilities, equipment, etc.

(v) Project management personnel.

(vi) Management systems (QA/QC, HSE, procedures, etc).

(d) In Malaysia, yard capacity is rated annually by CORAL (joint operators' initiative).

(e) When calculating tonnages, for Topsides use total weight; for Substructures, excludes weight of piles and conductors.

(f) Tonnage should be spread evenly from start of fabrication to MCD.



TA8 PREVIOUS AND CURRENT WORK (cont'd)

(g) Graph such as the one shown below cannot positively confirm that capacity is available. For specific jobs, you need to consider yard layout, especially loadout timing of jobs ahead of you.

By: : Paul Pandian (SSB/SSPC), 12-Mar-2001 Page 15 of 34 Filename: document.doc


13. TECHNICAL EVALUATION (cont'd)TA9 COMPULSORY INSURANCES

(a) Refer paper on insurance (Day 5).

TA10 CONSTRUCTION PLANT AND EQUIPMENT

(a) List of current owned plant and equipment.

(b) List of proposed plant and equipment for the project - identify which are owned and which are hired.

(c) For hired equipment, confirm availability and notice requirements; especially for major lifts.

(d) Bar chart for proposed plant and equipment (should be consistent with CPN).

(e) Craneage requirements for heavy lifts.

TA11 FABRICATION YARD LAYOUT

(a) Layout should show existing jobs and tendered work.

(b) Layout of the work during assembly stage (more area required).

(c) Ensure adequate space for movement of equipment, especially cranes.

(d) Ensure no constraints on loadout (timing and movement).

TA12 QUALITY ASSURANCE DOCUMENTATION

(a) Does bidder have established QA system?

(b) Is it practised on site?

(c) Is QA system to ISO 9000?

(d) Does bidder have adequate QC procedures to cover the work?

TA13 HSE PROGRAMME

TA14 FINANCIAL STATEMENT

TA15 PROPOSED FUNDING

(a) Please refer to separate papers on these.

TA16 TENDER BULLETINS

(a) Bidders to list all tender bulletins that they have received.

(b) Although bidders are usually asked to confirm receipt of each tender bulletin at the time of actual issue, this precaution is strongly recommended.

(c) Tender sum is based on original tender documents plus all tender bulletins issued.



TA17 INFORMATION FOR JOINT AWARD

(a) When two or more packages are bid together, bidders have to be evaluated for each individual package and for combined package scenario.

(b) Bidder to demonstrate that they have the technical and financial capacity two or more packages.

(c) Yard layout plan to show that both work packages can be accommodated.

(d) An overall organisation chart covering the detailed engineering, procurement and fabrication phases for of both packages.

(e) Additional measures to be taken by the Bidder to ensure the timely and satisfactory completion of both packages.

TA18 BIDDER'S PROFILE

(a) Usually available from PETRONAS, but often out of date.

TA19 LOCAL CONTENT

(a) Often an essential criteria.

(b) Check latest breakdown required. Typical breakdown:

(i) engineering including PMT,

(ii) materials,

(iii) construction manpower and

(iv) services (including transport and construction equipment).

TA20 SGBP CHECKLIST

(a) See separate paper.



14. COMMERCIAL EVALUATION(1) General(a) Check "Copy" against "Original" to ensure that they are the same before you start.

Usually it is the "Copy" that is used for evaluation. Also check soft copy.

(b) Check to see that the submission is complete.

(c) Check bidder's submission to see that there have been no undisclosed changes to the pricing format (breakdown, units of measurement, etc.).

(d) Check that currencies have been properly specified.

(e) Where commercial clarifications are permitted, clarify where necessary. Failure to clarify when offer was first made will amount to acceptance. Later clarification after award may be difficult.

(f) If commercial clarification is not permitted (e.g. in SSB) include provision in tender documents to clarify same before award.

(g) Forex: if pricing in foreign currencies is allowed, what exchange rates to use? Ideally, it should be selling rates published by the lead banks 1-2 weeks before bid closing. In SSB, we use Bank Negara (Central Bank) rates on the day of bid closing.

(h) If there are drastic changes in exchange rates between bid closing and commercial evaluation, do sensitivity analysis for Tender Board's review. Might not be able to use this to pick the successful bidder. Race is already over.

(i) Establish evaluation model on a total cost to Company basis. The Total Conditioned Cost should:

(i) cost impacts.

(ii) discounts

(iii) Company's own project management cost.

(iv) transportation cost from yard to field.

(v) Normalisation costs for any disclosed omissions by bidders.

(j) If you are allowed to do sensitivity analysis on the unit rates, include an item for anticipated (post-tender) changes in your model. Using estimated quantities, apply bidder's unit rates and add amount to Total Conditioned Costs.

(k) If a discount has been offered, make sure it is clear how it will operate in the event the final contract price upon completion differs substantially from the tender sum.

(l) Where bidder has qualified (in the technical submission) that his price excludes certain items, normalise bids by inserting highest price quoted by other bidders.

(m) Where bidder has qualified (in the technical submission) that his price excludes certain risks, normalise bids by inserting Company's estimate for insuring against that risk. Get Tender Board approval in technical evaluation report.

(2) Lump Sum Tenders(a) Check price breakdown to ensure that totals tally with summary and any price stated in

the form of tender. If there are discrepancies, what mechanism have you put in place to cover this situation? Commercial clarification?

(b) Has the bidder priced all items? If there are any unpriced items, are they covered in the other prices quoted? What do your tender documents say?

(c) Input cost impacts submitted in response to technical clarification. Ask bidders to confirm the number of such submissions before commercial opening.



(d) Ensure that prices are not "front-loaded" (i.e. activities completing early attract disproportionately high amounts). Does your contract allow you to rationalise the price breakdown (without changing the total) before signing the contract?

(e) Are there any unusually high or unusually low prices (obvious errors)? Rationalise prices before signing contract?

(f) Review bidder's unit rates to identify any "rogue" rates (i.e. unusually high or unusually low rates). Clarify these rates if possible.

(g) Where clarification is permitted, price anticipated changes based on clarified rates.

(h) Where alternate rates have been provided, ensure it is clear beyond doubt when these would be applicable.

(i) Are there any unpriced unit rates? How do your tender documents cover this?

(j) Compare price summary and breakdown of all bidders and identify major discrepancies and possible causes.

(k) If your model includes anticipated changes, make BOAQ and price using unit rates. Check for major differences between bidders and identify cause. This is one way to identify "rouge" rates.

(3) BOAQ Tenders(a) Is the commercial evaluation going to be based on the tender BOAQ or an updated

BOAQ? If updated BOAQ, ensure that it includes all known changes since the tender and forecast changes up to completion. This should be sealed before opening of the commercial packages.

(b) Do you have a schedule of rates (SOR) linked to the BOAQ (e.g. RHICOMS from Rider Hunt International)? If so, the rates need to be checked.

(c) If you are using only BOAQ, how will you treat any unpriced items? What does the contract say? Costs included elsewhere?

(d) Input all cost impacts submitted after bid closing in response to technical (and commercial) clarifications. Confirm number of submissions before opening bids.

(e) Identify "rouge" rates and clarify.

(f) Use clarified rates. Check computation (quantities x rates).

(g) Based on the original BOAQ, compare price summary and breakdown of all bidders and identify major discrepancies and possible causes. Do the same with the updated BOAQ.

(h) For each bidder, compare original and revised price summary and breakdown. These 3 comparisons should help to identify "rouge" rates.

(i) For other items, please refer (1) and (2), above.



15. PRE-AWARD CLARIFICATION(1) Past experience shows that contracts that went through a pre-award clarification were

more successfully completed.

(2) More problems are created than solved by the rush to award as soon as approval is given.

(3) The more urgent the project, the more reason to clarify before award.

(4) Due to long tender cycle (6-9 months), many things would change between tender and award and these should be addressed before award, e.g.:

(a) change in scope of work/growth.

(b) design changes under development.

(c) changes in delivery dates for Company supplied materials.

(d) incomplete AFC package, if any, and phased release of drawings and specifications.

(e) changes in Contractor’s tender proposals (personnel, equipment, methods, etc.).

(f) Get firm commitment to complete by original duration based on AFC package.

(5) In addition, if commercial clarification was not permitted, those issues highlighted in Item 14, above, should be sorted out at the pre-award meeting.

(6) Maintain a list of all issues arising so that they can be easily sorted prior to this meeting.

(7) Review past clarification meeting, kick-off meeting, lessons learnt and audit findings to identify potential issues.



16. AWARD(1) Are you ready to award? Are Company deliverables ready? Example:

(a) AFC drawings.

(b) AFC specifications and TRP's.

(c) Confirmation that Company materials will arrive as promised.

(d) Have the MOM for the pre-award clarification meeting been signed off?

(e) Are the Company site representative and site team ready?

(f) Agenda for kick-off meeting.

(2) If you are not ready to award, issue a letter of intent only



17. KICK-OFF MEETING(1) Issue agenda for kick-off meeting. Ensure all standard items are covered.

(2) Add any project specific items.

(3) This is an administrative meeting to introduce the parties and set he scene for the rest of the contract - it is not for clarifying shortcomings in the tender or changes since the tender.

(4) If contractual issues are involved, schedule separate session before the kick-off meeting.



18. BONDS, GUARANTEES & RETENTION MONEY(1) These, together with insurances are some of the early submittals after award of the

contract.

(2) Performance bond:(a) Issued by banks, usually for 10% of the contract price.

(b) Provides financial guarantee by an independent party for the due performance of the work.

(c) In the event of default by the contractor, Company can call the bond. The amount received from the bank will cover the additional cost involved in getting a second contractor to perform or complete the work.

(d) Should be provided within the stipulated time (usually 1-4 weeks after award).

(e) Ability to provide bond is an indication of the market's confidence in the contractor.

(f) Failure is serious - default. Does your contract allow you to terminate the contract for failure to provide bond?

(g) Ability to provide bond should be an essential criteria in the technical evaluation.

(3) Parent company guarantee:(a) Company relies on this more than the bond. Our interest is less in recovering loss

but more in getting the job done.

(b) In the event of failure by the contractor, we want the parent company to take over and complete the work. If parent company is not able to do it, they should get another contractor to do it.

(c) Get guarantee within stipulated duration. Failure to provide guarantee should lead to default. Does your contract cover this?

(d) Get letter at tender stage that in the event of an award, parent company is willing to provide guarantee.

(e) At tender stage, evaluate parent company. Do they have the financial means (independent of the subsidiary) to get the job done?

(f) Where a JV submits tender, parent company guarantee must be given jointly and severally by the parent companies of the JV partners. Get bidder to provide letters from they parent companies of their willingness to do so during the tender stage.

(4) Retention money:(a) Money deducted from each progress payment to build up a fund for rectification of

defects. Usually 10% of each payment. Half of this will be released after completion of the work. The balance will be released after expiry of the warranty period.

(b) At completion, there will be a joint-inspection at which a punch-list of defects and outstanding work will be made up.

(c) If contractor is not able to clear the punch-list items, these will be have to be completed offshore by others. Agree with contractor for back-charging mechanism.

(d) Do not release the first 5% retention money if the punch-list is extensive. Wait until costs from offshore are available.

(e) Before releasing the second 5% retention money, arrange for joint offshore inspection of the work. Make up defects list. Agree who is liable and who should rectify this. After rectification, release retention money.

(f) Warranty period is for benefit of contractor: He can rectify the defects cheaper than others can. Therefore, if there are defects, he should be notified immediately and



offered the first chance to rectify the defect. Failing which, third parties may be brought in and costs back-charged as agreed.

(g) In the event of defects appearing after the expiry of the warranty period, the Contractor will still be liable if it can be shown that it was a latent defect arising from the Contractor's work. When we ask the Contractor to rectify the defect, we are not asking him to fulfil his obligations under the Warranty Clause - we are asking him to rectify his breach of contract (in this case, defective material and/or workmanship or even design in the case of an EPC contract). In Malaysia, the time to bring an action for defective work is defined by law under the stature of limitations. The right to bring actions in tort for negligence is 6 years from when the damage occurs. To sue for breach of contract, it is 6 years from completion.



19. CONTRACT DOCUMENTATION(1) Prepare draft contract documents as early as possible. Issue to the contractor's

commercial department (not project team) for review and agreement.

(2) Issue also to contractor's project team and Company's site team at kick-off meeting. Often they may not have been involved in the tender. They will need this to start work until the signed contract document is available.

(3) The draft contract documents must incorporate the following:

(a) Bidder's commercial submission.

(b) All relevant tender correspondence.

(c) Tender bulletins.

(d) Technical clarifications and contractor's responses.

(e) All cost impacts arising from technical clarifications.

(f) Commercial clarifications and contractor's responses.

(g) Pre-award clarification meeting.

(4) The above MUST NOT be appended to the original tender documents. The essence of the documents should be distilled and added to the original documents by cutting and changing the original as necessary.

(5) Take the opportunity to rectify any obvious errors, discrepancies and shortcomings in the original tender documents. Discuss and agree with contractor.

(6) Make copies of the original tender documents and all tender correspondence.

(7) Go through each item in the tender correspondence and strike them off as you incorporate them into the draft contract documents. Add clear cross-references.

(8) Mark-up draft contract documents to show all changes and show source of change (e.g. TB-4, Item 3 for "Tender Bulletin No. 4, Item No. 3").

(9) Part 10: Bidder's planning package needs to be updated to reflect actual award date. Select only what is clearly relevant for the contract; e.g. method statement, erection sequence, planning package, organisation chart, procurement plan and subcontracting plan.

(10) Failure to prepare proper contract documents means that dozens of people will have to suffer with clumsy and confusing documentation for years. This will be a constant source of misunderstanding, claims and disputes.

(11) Get the contract signed.

(12) Appending tender correspondence to Part 10 of the contract should be avoided because:

(a) Status of these documents is not spelt out anywhere.

(b) These were the most recent correspondence; hence, they supersede certain parts in the original tender.

(c) In interpreting the contract, Part 10 is the lowest in the hierarchy.

(d) It is naïve to assume that in the event of a dispute, these correspondence will provide the solution; when in fact they can be easily thrown out for not being properly incorporated.



20. ERECTION SEQUENCE & PLANNING PACKAGE(1) Prior to being included in the contract (Part 10), this needs to be reviewed and updated.

(2) In particular, based on current delivery dates for Company material, is the original erection sequence affected. Example, delay in delivery of a package may mean that it now needs to be skidded in rather than lifted as originally planned and therefore more expensive.

(3) On the other hand, earlier than anticipated deliveries may now mean that the equipment usage can now be optimised; hence, cost reduction. Cost benefits should be agreed and documented.

(4) Where Company materials are clearly going to be late and will have an immediate impact of the completion date, decide how to handle this info. One alternative is to negotiate the latest possible dates the contractor is willing to accept without a cost impact.

(5) This part of the contract will usually be used to support contractor's later claims on delays, extension of time and acceleration. It is therefore important to get it right.

(6) Major equipment usage should be identified.



21. MONITORING PROGRESS(1) Usually done on weekly basis using the agreed CPN. Purposes:

(a) Check planned vs actual progress.

(b) Forecast the completion date. You want to know about delay not when it happens, but several months ahead so that you can do something about it.

(c) Report value of work done (company's liabilities).

(2) How to monitor progress? There are many elements involved, such as:

(a) Design and engineering activities, which influence everything downstream (man-hours).

(b) Procurement, small manpower cost but high impact on project (number of PO's placed).

(c) Material deliveries, which involves high cost, but not much effort by contractor ($$ of material delivered).

(d) Fabrication, which involves high manpower and equipment and long duration (fabrication tonnage / fabrication man-hours).

(3) Considering the many different elements involved, the only common currency is money. The contract price breakdown should therefore be converted to percentage. These should then be distributed to cover all the activities in the CPN. Each activity is then monitored on a weekly basis and the progress accrued.

(4) If progress is monitored this way, the progress report for the last week of each month can be used to make payments without much further work.



22. PROGRESS PAYMENTS(1) Three common methods of payment:

(a) Lump sum upon completion.

(b) Stage payments (milestone payments).

(c) Progress payments based on value of work done.

(2) Each of these have a major impact on the contractor's cash flow and hence on the contract price.

(3) Assume a $10m contract, 12 months contract duration, 12 months warranty period, 5% retention money (released upon completion), 10% pa interest, 10% profit; then financing cost will be as follows:

Item Description Costs ($)

Milestone VOWD

1 5% Performance bond 31,250 31,250

2 Payment guarantees (MS 1 &2) 78,750 0

3 Cost of finance (milestone payment) 522,083 0

4 VOWD less 5% retention money 0 207,083

5 Total cost to Company 632,083 238,333

6 As a percentage of contract price 6.32% 2.38%

(3) Where payment is being made based on progress % and activity weightages, ensure that the current contract price is accurate and the weightages reflect recent changes.

(4) Where payment is being made based on VOWD against individual items in the contract price breakdown, field verify progress.

(5) Where you are using a remeasured contract (i.e. based on BOAQ), measure the work done each month and pay only for measured work.

(6) Change orders: Pay agreed CO at full value based on % progress achieved. For change orders in dispute, use Company estimate for payment. Be conservative in this. Use lower band values. If in doubt, do not pay until CO price has been agreed.

(7) Amount payable each month is calculated as total amount payable to date less all previous amounts. This helps to correct any errors in previous payments.



23. MANAGING CHANGES(1) Changes should be ordered in a timely manner so that they can be properly incorporated

into the work programme without disruption. Usually, this will mean that contractor should be informed of changes as early as possible. Where major changes are under design, the contractor should be advised to put on "Hold" related engineering, procurement and construction activities. Information should be released in stages, so that contractor can revise their procurement and fabrication sequence as necessary.

(2) Changes ordered late or out of sequence (w.r.t. the work programme) can lead to disruption and delays; i.e. additional costs over and above contract unit rates.

(3) Company has a detailed change order mechanism. Failure to follow this mechanism will be treated as a breach of contract unless waived by contractor.

(4) Follow procedures: Issue RFQ, review RFQ, issue CO, issue VO.

(5) RFQ: Specify mode of payment. Sometimes you may have to specify completion dates when you do not want the original date to slip.

(6) CO: If cost and schedule impact cannot be agreed, issue CO based on Company's best estimates. This should be the amount that we are willing to pay without any further ado.

(7) VO: When cost and schedule impact has been ascertained, issue VO to revised contract price and completion date.

(8) Set up and maintain RFQ register.

(9) Set up and maintain CO Register. This should record:

(a) CO No.

(b) RFQ No.

(c) CO issue date.

(d) Description.

(e) Justification.

(f) CO value as issued by Company.

(g) Basis (UR, LS, CP, DW).

(h) Cost breakdown (material, fabrication, others).

(i) Type of change (e.g. project services, design change, additional work, transfer to contractor and adjustment to provisional sums.).

(j) Remarks.

(10) Current contract value = original contract sum + CO's issued.

(11) Forecast contract price = original contract sum + CO's issued + CO's to be issued.

(12) Changes can be ordered even when the contractor is in a period of delay.



24. PRICING CHANGES(1) Changes could take various forms, such as, additions, deletions and modifications to the

work. It could involve change in materials, method of construction, testing, etc.

(2) It is not necessary to agreed costs before issuing CO's.

(3) Contract unit rates apply unless it can be clearly shown that the variation is not similar to work described in the contract or is being carried out under different conditions.

(4) For additional work or varied work ordered after the main work is completed, straight application of unit may not be sufficient. Some combination of unit rates, cost-plus or dayworks may be necessary. For example:

(a) An order to extend the jacket legs after the legs have been rolled up.

(b) Any internal work after the main work has been closed up.

(c) Addition of supports below equipment after the equipment has been erected.

(d) Where small quantities of additional material need to be ordered after all the original material has been delivered.

(5) For deletions, unit rates will usually apply and in full. Unit rates may not apply when the amount of work being deleted is so much that the remaining work has to be carried out using a different method of construction.

(6) Where work cannot be priced using unit rates (e.g. modification work), estimated man-hours and dayworks rates may be used to agree LS quotations.

(7) Dayworks rates are payable only when the work has been ordered on a dayworks basis. Timesheets should be signed each day by both parties.



25. LOADOUT & SEAFASTENING(1) Important to specify clearly scope of work and responsibilities as several parties are

involved, namely: Company, Fabricator, Offshore Installation Contractor, Fabricator's ballasting subcontractor, loadout subcontractor and structural subcontractor.

(2) Main items to specify in contract:

(a) Loadout duration.

(b) Number of barges to be used and size of barges.

(c) Materials to be supplied by Offshore Installation Contractor (such as lifting slings and shackles, rigging platforms, seafastening materials).

(d) Who will provide seafastening drawings?

(e) Who will provide ballasting pumps?

(f) Type of ballasting equipment? Individual pumps or integrated system?

(g) Loadout reversal system: is it required?

(h) Who is responsible for ballasting to tow conditions?

(i) Final seafastening to be done after ballasting to tow conditions.

(j) Any additional strengthening to structure due to Fabricator's loadout method; to Fabricator's account.

(k) For lifted loadout: Fabricator to use its own slings.

(l) Notice required to fix barge arrival date.



26. HANDLING CLAIMS & DISPUTES(1) Common short-comings in handling claims and disputes:

(a) Failure to clearly identify and define issues/costs.

(b) Failure to discuss with contractor.

(c) Failure to comply with contract terms and conditions.

(d) Failure to inform Management.

(e) Failure to obtain timely Management approval.

(f) Poor communication of offers.

(2) Some lessons learnt:

(a) Identify and define issues/costs clearly. Seek advice early. Most issues may have highly technical basis, not commercial.

(b) Is there a basis for the claim in the contract?

(c) Establish validity of claim. At this stage do not consider costs.

(d) If claim is valid, how should it be priced? Is there a basis in the contract for costing?

(e) If there is no basis in the contract for cost, how do you establish a basis?

(f) Inform Management of all claims and disputes and get clearance before negotiating with Contractor.

(g) Inform Contractor that all agreements reached at working level are subject to Management approval.

(h) Seek MTB approval before making written offers.

(i) All offers should be made “Without Prejudice”.

(j) Acceptance of Contractor’s offers should be communicated after seeking MTB approval.

(k) Keep commercial personnel involved until contract is closed out.



27. DELAYS & EXTENSION OF TIME(1) Extension of time clauses are for the benefit of the owner (Company), not for the

contractor's benefit. They allow the owner to extend time in the event of breaches by the owner; e.g. delays in issuing drawings, delays in delivering Company supplied materials, etc.

(2) You must have a specific clause in the contract that allows you to extend time in the event of breaches by Company. Otherwise, the breaches cannot be remedied without the contractor's agreement and the liquidated clause cannot be applied.

(3) There may be other clauses in the contract that cover extension of time; e.g. the change order clause.

(4) SSB do not have a standard EOT clause. For fabrication contracts, we have been using a version from the MLNG-2 contracts. This covers breaches by Company. We do not have a wrap-up clause (as in FIDIC or ICE contracts).

(5) On the other hand, in order to be able to reduce the contract duration, you need to have a specific clause in the contract allowing you to do so. SSB/SSPC's Clause 34: Programme does not specifically cover this, although it appears to.

(6) If owner causes delay, contractor will be entitled to an EOT. To get him to complete by the original date will amount to an order to accelerate. For this, you need a specific clause in the contract.

(7) An EOT can be granted before the delay, during the delay, after the delay or even after the original or revised completion date.

(8) EOT is measured against the CPN current at the time of occurrence of the delaying event, not the original CPN.

(9) Where there are several delaying events (some by owner, some by contractor), it is important to identify the one that caused time to be extended. This will then determine if contractor is entitled to an EOT or is liable for liquidated damages.

(10) Say the original completion date is 30/06/2000. We are now at 15/07/2000 and the work is still incomplete. Based on the current programme, current status of work and plans for the outstanding work, the contractor's forecast completion date is 31/08/2000. Can Company order additional work or vary the work? Yes, Company can order additional work.

What will then be the revised contract completion date? Using the updated CPN (showing completion of 31/08/2000), the additional work should then be added to determine the new forecast completion date (say 15/09/2000). Assume that the work is actually completed on 20/09/2000, then:

(a) EOT = 15/09/2000 minus 31/08/2000 = 15 days.

(b) Revised contract completion date = 30/06/2000 plus 15 days = 15/07/2000.

(c) Delay = 20/09/2000 minus 15/07/2000 = 67 days.



28. ACCELERATION CLAIMS(1) An acceleration claim is a claim for loss in productivity.

(2) Reducing the contract duration does not automatically lead to an acceleration claim. For example, if the contract duration is reduced from 15 months to 14 months at or before award, it may simply mean that the contractor has to start work with more manpower and equipment than he originally planned. Some materials may need to be air-freighted. An across-the-board increase in cost will be difficult to prove.

(3) If additional work is ordered, contractor has first got to prove that:

(a) The completion date is extended.

(b) Revising the fabrication sequence will not allow completion by the original date.

(c) Establish the duration to be recovered by acceleration.

(d) Prove that additional measures are necessary to complete by the original date.

(e) Quantify the additional measures and cost it.

(4) Difficult for Contractor to prove claims conclusively before completion. Difficult for Company to disprove this claims without reliable basis or data.

(5) Some common difficulties and pitfalls:

(a) Failure in formulating and quantifying claims properly.

(b) Lack of reliable productivity data for local fabrication contracts.

(c) A rush to agree costs as an incentive for timely completion before undertaking the additional effort.

(6) Some lessons learnt:

(a) When in doubt, do not admit liability.

(b) These kind of claims are difficult to formulate and prove. Onus of proof is on Contractor.

(c) Instruct Contractor to maintain contract completion dates and maintain accurate and jointly agreed records of all additional efforts (such as overtime, additional manpower and equipment, etc.).

(d) In the event the claims are proven valid, these records can be used for costing.

(e) Do not make offers until Contractor has proven the basis and quantified the claim.

(7) Whatever the amount computed, use some other alternative methods to check its validity.


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