In the FIDIC Contract’s group on LinkedIn, the following question was raised about an EPC tender evaluation. I found this subject hugely interesting because it shows some recurrent underlying ideas about EPC; thanks a lot to the person raising it:
A tender for a desalination plant was called for on EPC contract basis on basis of single stage- two envelope system but offers received are on the basis of different make and technologies.It is employer’s thinking now that they should have called this tender on the basis of two stage- two envelope system as systems offered in each bid is substantially based on different technologies. Can they convert single stage to two stage bidding on the basis of selected technology even now or they call proposals afresh ? Your views requested.
This subject shows how Employers often struggle with the EPC philosophy during an EPC tender evaluation. They want to apply the EPC philosopy for its risk allocation: They are looking to transfer the maximum amount of risks to the Contractor. However, they are hesitant when evaluating offers received on EPC tenders. They prefer to compare “apples with apples” rather than doing a more complex evaluation with several variables: price + performance + construction period + O&M costs + etc.
Applying the EPC philosophy halfheartedly is a recipe for failure. EPC projects are always complex projects. The art to get them to work properly is to not only let the EPC Contractor bear a larger part of the risks. But also allow him to optimize the project as per his ideas and competences. We have published before on that subject in this blog:
How to evaluate on an EPC tender ?
Here is my reply to the question quoted above:
On a tender for an EPC Contract, the Contractor should be free to choose the technology as long as it respects the Employer’s Requirements. These Employer’s Requirements should be functional instead of prescriptive. I imagine it was the case because different bidders have submitted compliant bids with different technologies.
The important part of these Employer’s Requirements are the performance guarantees. For a desalination plant, I imagine that this concerns the quantity of water produced per time period (cum/h) to a certain water quality.
The Employer should evaluate offers that fulfill or exceed the Employer’s Minimum Requirements based on their price, the actual performance guarantees and any other established evaluation criteria (like operation and maintenance costs). During EPC tender evaluation, often, the personnel of the Employer is afraid to do so with different technical solutions. They would like to make the offers technically uniform and just evaluate on price. That’s very much against the spirit of an EPC Contract.
Single stage, two-envelop evaluation process
So, how to properly evaluate EPC tenders (still quoting my reply in LinkedIn)?
I am personally in favor of the single stage, two-envelop solution. Steps:
- Check the fulfillment of the minimum performance criteria;
- For those bids that pass step 1, quantify the technical solution based on the performance criteria, e.g. quantity of water produced per time period, energy consumed in the process, effluents, construction time etc. The bidder’s performance on each of these criteria should be given a monetary value (e.g. how much is worth one month of shorter construction period);
- Only after concluding step 2 proceed to open the price envelop so that the technical performance evaluation is not biased by the prices (i.e. avoiding biased evaluation of the technical criteria due to knowledge of the price gaps);
- The preferred bidder is the one who has the optimal solution of price + performance criteria that have been evaluated on monetary basis.
What not to do ?
And, what should the Employer certainly not do:
It would be unfair to the bidders to transform this process now in a two-stage process. Especially when allowing bidders to adjust their technical solution to the one preferred by the Employer; preferred after seeing the Contractors’ proposals. Furthermore, it is likely to lead to contract award to a Contractor that did not intend to implement the chosen technical solution. This was probably because they are less familiar with it. And that leads very often to under-pricing a technical solution and “succes” in the second stage. As we all know, that is looking for trouble on complex projects (like desalination plants).
I know several Contractors, specialized in EPC Contracts, that would be horrified by this situation. They invest substantial amounts in preparing an optimized EPC bid. They can’t accept that their good ideas would be thrown on the table for all the competitors to use. I imagine these competent EPC Contractors will simply decline to participate to such a tender.
What is your opinion about this subject? We welcome you to comment here below.
AfiTaC.com is the blog on commercial and contractual subjects for the Project Businesses (Construction, Infrastructure, Oil & Gas, Power & Renewable, Water Supply & Sanitation, etc). Its objective is to stimulate reflection, learning, convergence to balanced contracts and positive dispute resolution. You can subscribe to our newsletter by writing to “email@example.com”. You can also connect to our LinkedIn page. Engagement with the readers is what keeps us going. So, don’t hesitate to exchange with us by commenting here below, liking our publication on LinkedIn and writing to us “firstname.lastname@example.org”.