EPC tender evaluation, one stage or two stage bidding

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.

EPC philosophy

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:

  1. Check the fulfillment of the minimum performance criteria;
  2. 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);
  3. 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);
  4. 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.

Consortium or Joint Venture : the same or very different?

In certain countries and cultures, the words “joint venture” or “JV” and “consortium” may be used as synonyms. For the purpose of this article, we will adopt the usual differentiation between these, as observed during the past decades in the construction, infrastructure, oil & gas, power and renewable businesses.

Both a consortium and a JV (Joint Venture) are ways for two or more parties to join forces and participate to a tender. And, if successful, they will jointly execute the contract. Thanks to the “joint and several liability”, the employer is no worse off compared to dealing with a single contractor. In fact, joint & several means that the employer can go to either or both for fulfillment of the contract or recovery of damages. The employer is therefore in a better position, spreading the risk of in-execution over two or more companies.

From the above, can we assume that a consortium and an incorporated JV are more or less the same?

Let’s test this by looking at the facts. The list is a bit longer than anticipated with 12 points to compare. But, I hope, this is helpful to fully understand the implications of either solution.

1) Distribution of the scope of the works

JV’s are often used by parties that also have the competences to execute the whole works on their own. However, the project is perceived as too big or too risky to go alone. In a JV, their is no necessity to allocate the scope to specific parties from the start of the project.

A consortium requires a clear scope split between the parties. Care should be taken that nothing falls in between the scope of the consortium partners. Jointly they are obviously responsible for the total scope (the whole works) towards the employer. Each parties’ scope will be established at the time of concluding the consortium agreement (or soon after). Based on this, they will each prepare their part of the joint offer.

2) Percentage of a party in the JV or consortium

Often, employers ask contractors what is the stake of each party in the project.

This question feels completely natural for JV partners. They will easily give the precise figures of their participation: 50/50 or 60/40 or 40/30/30 etc. The figures are round numbers and remain constant all the way through the project execution, from signing the JV agreement up to conclusion of the project. The numbers represent the participation of each member in the JV, including the equity (if applicable).

For consortium partners, things are not so easy. As explained above, the important parameter for the partners is their scope of works. At the beginning, the parties only have an approximate idea of how much their scope will represent in the overall contract price. When submitting the joint bid, each parties’ proportionate share will be known: it is the percentage of their price in the overall price. This proportionate share will vary during the course of the project due to the inevitable change orders, price escalation (if applicable) and successful claims.

3) Allocation of resources

A JV will set-up and staff a whole project team including even support functions like human resources. The JV somehow “rents” resources from the consortium partners or from third parties.

In a consortium, each party uses its existing resources to execute the works. They can draw from their existing pool of resources without needing the approval from the other party.

The staff in a JV is more likely to have a “project” approach. They will naturally identify themselves with the performance and results of the project. The staff in a consortium often works within a matrix structure. They report partly to the project manager and partly to their function leader (e.g. engineering, sourcing, etc.) As a consequence, and unfortunately so, they probably think less “project”.

4) Sharing of risks

JV’s are usually chosen by civil contractors to share the risks of a project. Clearly, the risks are not allocated to individual partners but assumed by the JV.

In a consortium, the risks allocation goes together with the scope of works. For example, a consortium partner may be responsible for the supply of certain equipment that is subject to performance testing. The corresponding performance LDs are usually borne entirely by that party. Obviously, things get more complicated when the scope of several partners actually influence the overall performances of the project in an interdependent way. In that case, in the consortium agreement, precise allocation rules of the performance LDs have to be established.

So, consortium partners normally don’t share the risks but allocate it to a specific party. One exception is sharing of delay LDs above the % cap applied to a party’s proportionate share. Such “extreme delay LDs” are often allocated in accordance with the proportionate share of the parties.

5) Sharing of profit & loss

From all what is mentioned above, one can guess that the sharing of profit & loss is also very different for the two solutions:

For a JV, the parties share the profit (or loss) in accordance with their participation in the JV.

Within a consortium set-up, potential profit or loss depends on the relevant party’s performance on its scope. The actual profit is not known by the other partner. One party can be at a loss while the other is making profit and doesn’t have to compensate the other.

6) Sharing of costs

Due to the JV structure, the JV assume all the costs and therefore the parties automatically share the costs.

In a Consortium, parties can agree to have joint costs (e.g. for insurance) and are likely to share this in accordance with their proportionate share. However, due to the need to keep the parties “at arm’s length” for fiscal clarity, Consortium partners try to avoid sharing of costs and prefer to allocate costs to a specific party. For example, in the past, there was a usual practice for consortium members to provision, say 2% of their price, as the consortium leader’s fee. Nowadays, the preferred solution is that the consortium leader provisions its leadership costs (and establishes its price accordingly). This avoids invoicing between the consortium partners, which is not favorable for fiscal clarity regarding separation of profit & loss.

7) Price determination

The JV partners jointly decide the offer price. Together, they establish the project budget, the provisions and the resulting project margin.

In a consortium, each party has full power to decide on its respective price, provisions and margin. When adding the prices, often, the parties realize that the result is not competitive. This is especially true when they perceive risk on their partners and provision for it. Then, they start pushing each other to lower the price and increase the award probability. But they only have soft power to influence the other partner(s).

8) Decision power

In a JV, the nominated project director can act with a certain autonomy to make the project a success.

In a consortium, each party has its own project manager. Together they choose a leader, just to coordinate and be the “one face to the customer”. Usually, the party with the biggest scope becomes the leader. The leader cannot bind the parties without prior agreement from all. Only in very exceptional cases, can the leader act immediately. He must do so impartially and only to preserve rights for the consortium or avoid imminent damage. This can apply to an emergency situation related to health & safety or environmental damage.

It is important for the employer to understand the limits to the power of the consortium leader. The employer should avoid demanding immediate responses when the consortium leader doesn’t have prior approvals and his partner is absent. Agreeing on the spot would put him in breach of the consortium agreement. This will result in further dispute within the consortium and may backfire to the employer.

9) Legal entity, or not

An incorporated JV is in fact a new legal entity, although temporary, set-up by the parties to execute that specific project.

In case of a consortium, no new legal entity is created. It is just a contractual agreement for two (or more) existing entities to work together on that project.

10) Invoicing and payments

The previous point should make one thing clear: a consortium cannot invoice. The underlying entities, being the consortium partners, each have to invoice the respective progress on their scope. Usually, the parties provide a cover letter, summarizing the underlying invoices. Technically speaking, this cover letter is not an invoice. I’ve seen many employer representatives object to multiple invoices but… there is no other way around. A JV doesn’t have this problem.

The JV will have its own bank account. For a consortium, the parties could identify a single bank account and redistribute monies in accordance with their invoices. However, an employer can be pragmatic and accept to pay directly to the bank accounts of each of the consortium partners. With the joint & several liability, this doesn’t lead to additional exposure and will facilitate the life of the contractor (as the money will become available quicker to the parties without time lost with additional bank transfers).

11) Accounting and tax

An incorporated JV will have its own accounting and will take care of the payment of the taxes for the whole project. These will directly impact the project results and therefore the distribution of profit (or loss) among the parties.

For a consortium, each party handles its own accounting and taxes. Typical wording for a consortium agreement goes as follows: “Each Party shall be fully and solely responsible for paying all taxes, duties, social security contributions and similar charges (including penalties and interest) of whatever nature  levied in connection with its Scope of Supply, or relating to its personnel or its subcontractors‘ personnel, and shall carry out all necessary filings, registrations and fulfill all other obligations towards relevant fiscal authorities in relation thereto”

12) Default by the contractor or one of the parties

As mentioned above, the consortium partners are jointly and severally liable towards the employer. The employer can automatically go after each of existing entities that have signed the contract.

For a JV, employers need to check their recourse to the underlying entities. Parent company guarantees may clarify this. If not, this set-up could be far more risky for the employer in case the JV becomes insolvent.

If one party is in default, the other consortium or JV partner(s) has to find a replacement entity. Or otherwise perform the whole of the works. At least one similarity from the point of view of the contractors!

Conclusions

From an employer’s point of view, there may be no big difference between a JV and a consortium. However, the way contractors operate is completely different for both solutions. It is important for both the employer and the contractors to understand these differences. For the employer, this helps understanding the behavior of the contractor. For the contracting entities, each and every aspect of their relationship depends on the set-up: price, margin, scope, liquidated damages, invoicing etc.

The best choice between either solution can be derived quite naturally from the following:

  • Consortium: Each party knows how to perform a specific part of the scope but not the scope of the partner(s). Due to lack of understanding, they fear the risks on the partner’s scope and want to be isolated from it. For example, on a power plant, the civil works contractor and the electro-mechanical contractor usually work as a consortium.
  • Joint Venture: The parties want to share the risks and will execute the project through a common organization. This is the typical way of collaboration between two civil works contractors.

We encourage you to have a look at the rest of our blog, containing interesting articles on subjects like negotiation, contract risk management, FIDIC, dispute resolution etc.

Contract Management & Music, “I can’t get no satisfaction” (The Rolling Stones)

Because Contract Management should also be fun, we are now launching a series of posts based on popular music. This is the first one but keep tuned to https://afitac.com if you want to read the others when they come out. Better to bookmark or to connect to the LinkedIn page by clicking on the icon on the right.

So, here we go and start with “Satisfaction” from the Rolling Stones. If you want to listen to it in parallel to reading this post, you will find your way to YouTube here:

Satisfaction in contracts

Often, we find the word satisfaction in contracts in those provisions where the “works have to performed to the satisfaction of the Employer / Engineer”. For Employers that makes perfect sense! They are paying the Contractor for the works and hope to be satisfied with the results.

What’s the problem with this?

Contractors are not in the business of selling satisfaction; there are other businesses for that ;-). What Contractors do sell is to execute the works in accordance with the contract.

What are we missing? Wouldn’t the Employer/Engineer automatically be satisfied if the works are performed in accordance with the contract?

Well, if humans were like robots and programmed as follows: [if works are in accordance with contract, then be satisfied], there would probably not be much of a problem. But human nature is different. Mick Jagger is clearly singing it. He can’t get no satisfaction. “Cause I try and I try and I try and I try I can’t get no, I can’t get no”. However white his shirts would be, he wouldn’t be satisfied because of some unrelated issue. He didn’t like the man that was promoting the detergent.

It is very difficult for a Contractor to get the Employer 100% satisfied. That’s like aiming for perfection. Reasonable contracts do good efforts to avoid this pursuit of perfection. A good example are the provisions related to substantial completion. Minor defects can be put on a punch list to be resolved after the taking-over.

How to fix it when you encounter satisfaction in contracts?

Simply replace wherever is stated “the works shall be performed to the satisfaction of the Employer/Engineer” with “the works shall be performed in accordance with the contract”. That’s an easy fix.

I see some Employers/Engineers wonder that this will put a heavy burden on preparing the contract. Yes, a contract should be well made with a clear scope of works and clear rights & obligations. Don’t forget that executing the works is even more complex than writing the contract and the Contractor should concentrate on that. Not on the pursuit of pure satisfaction of the Employer/Engineer that may be unrelated to the works. I hate to imagine the compliance problems to reach satisfaction in contracts.

Put the right people on preparing the contract, keep it simple and avoid ambiguity (often introduced by either party with the intention to benefit from it, later on, in case of conflict).

If it is too much of a burden to correct the contract at the last minute or if there is resistance to change these words (“we have always written it”), you can still “program” the Employer’s Representative or Engineer like the robots we mentioned above. Put a definition around satisfaction. Something like: “wherever ‘to the satisfaction of the Employer/Engineer’ is stated in this contract, the Employer/Engineer is deemed to be satisfied if the works have been executed in accordance with the contract”.

Thank you, Mick, for helping people-working-on-contracts have fun when thinking about how contracts should be! Music helps us to relax. And that’s good for becoming reasonable and satisfied! More to come in future posts.

Click here for other blog posts of the series “Contract Management & Music”.

About AfiTaC

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 “newsletter@afitac.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 “advice@afitac.com”. 

Thank you FIDIC for explaining changes introduced with FIDIC Rainbow Suite (ed. 2017)

Maybe you have already received it from another source but this is a must-read. I therefore prefer to also share with you the FIDIC document available at the link below. It explains the changes from the first (1999) to the second (2017) edition of the Rainbow Suite (Red, Yellow and Silver Books):

http://fidic.org/sites/default/files/press%20release_rainbow%20suite_2018_03.pdf

After 20 to 30 minutes of reading, you will have a good understanding of the changes. Most of us have over a decade of experience with FIDIC 1999. We know the clause numbers and where to look for the appropriate mechanisms. Here you have a short summary of what I got out of reading the attached document and where to find the changes:

There are few but important changes to the contract structure and some relocated clauses:
  • Limitation of liability is no longer in Clause 17 but has been moved to become the last sub-clause of Clause 1.
  • Former “Force Majeure” has been renamed “Exceptional Event” and is delt with in clause 18.
  • Insurance has been moved to clause 19.
  • We now have 21 clauses. Former clause 20 is split in two parts to deal first with claims (new clause 20, also covering Employer’s Claims) and then only with disputes (new clause 21).
FIDIC cares about conflict/dispute avoidance:
  • There are encouragements to reach agreements between the Parties.
  • The role of the Engineer or Employer’s Representative is clarified in order to “act neutrally between the Parties” on certain issues and “to fairly consider the amount of interim payment due” (sub-clause 14.6).
  • FIDIC favours standing Dispute Avoidance/Adjudication Boards (now DAAB instead of DAB) under clause 21.
Step-by-step approaches also reflect this. The parties will know where they are in the process on the following subjects:
  • Claims and determinations (sub-clause 3.7).
  • Unforeseeable conditions (sub-clause 4.12).
  • Review of Contractor’s design (sub-clause 5.2).
  • Advance payment (sub-clause 14.2), interim payments (sub-clause 14.6) and Final Statement (sub-clause 14.11/14.13).
  • Termination by Employer (clause 15) and Contractor (clause 16).
  • Employer’s and Contractor’s claims for time and/or money (sub-clause 20.2).
  • Disputes (sub-clause 21.4)

Variations are an important source of conflict and are therefore further detailed:
  • Employer to show financial arrangements are in place for Variations (sub-clause 2.4).
  • Mechanism to recover in case an instruction does not state that it is a variation (sub-clause 3.4/3.5).
  • Determination does not just apply to claims but also to issues like: variations, payments, EOTs, day-works etc.
  • Contractor’s right to object to an instructed variation (sub-clause 13.1).
  • Additional entitlement for changes to permits/permissions/licences/approvals obtained for the Works (sub-clause 13.6).
And finally, further Project Management best practices are incorporated: 
  • Regular management meetings (sub-clause 3.6/3.8).
  • Detailed requirements for initial programme and updates (sub-clause 8.3). For example, the requirement for a supporting report to overcome effects of any delay.
  • Detailed test programme (sub-clause 9.1) and repeat testing (sub-clause 11.6).
  • Equal time bar for claims from both parties (sub-clause 20.2).
Conclusion:

We will all need some more time before we are as familiar with the FIDIC 2017 editions as we were with FIDIC 1999. Personally, I am happy to change. FIDIC has put good efforts in making their standard contracts more balanced (dispute avoidance, dealing with delicate issues like variations and programme and further introducing project management best practices). The ultimate goal remains, of course, to have a maximum of successfully completed projects, which meet the expectations of all parties and the end users.

Other publications concerning FIDIC can be found by clicking here.

About AfiTaC

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 “newsletter@afitac.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 “info@afitac.com”. 

Early completion bonus, win-win negotiation on EPC contract

In this case study, we will see how an early completion bonus can be a win-win opportunity for all the stakeholders of a project. Rather than spending time on pure price negotiations or worst-case legal subjects, the parties should collaborate to find win-win solutions and optimize the overall project value. 

Context

The context of this case study is a multicultural negotiation for a privately developed concession to build and operate a hydro-power plant during 30 years. The power plant included multiple turbine-generator units.

The main project stakeholders were the following:

  • The local Utility, the off-taker of the entire electricity production
  • The Project Owner, the private developer
  • The EPC Contractor
  • The EM Contractor, supplier of the turbine-generator units as a subcontractor to the EPC Contractor

At the start of the negotiations, the Owner wanted to have a single taking-over of the entire power plant. This was probably because the single taking-over date would be the starting point of the 30 years’ concession period and of the loan repayment.

Initial exchange of arguments:

The EM Contractor explained that, due to the nature of the project, there would be value in allowing a sectional take-over (i.e. a taking-over per unit). In fact, the hydro-power project was of the run-of-the-river type, with a regular flow of water that would remain unused for energy production until the last unit would be commissioned and the overall power plant taken-over.

Acknowledging the advantage, the Owner wanted the EM Contractor to operate the units during several months without taking-over.

The usual business practice is that the units should not be used for commercial operation before the taking-over. Use before taking-over (except for commissioning and trial run) triggers deemed acceptance in standard contracts. Also, the insurances are different for the construction phase (CAR insurance) and operation phase (equipment breakdown insurance).

early completion bonus

A win-win solution was found with an early completion bonus

The parties agreed to a mechanism of a single, final taking-over of the units which would be the reference date for the concession period. However, any unit that could be commissioned before this final taking-over would be transferred to (including a transfer of risk and insurance obligation) and operated by the Owner. An early completion bonus for each unit, digressive for the number of units put into service, was contractually foreseen from the start to motivate the Contractors all along the construction phase to find fast-track solutions.

The advantages for each of the stakeholders were as follows:

  • The Utility benefited from early generation, avoiding further outages that were regularly occurring in the country and replacing very costly emergency diesel generated electricity by the lower tariff hydro generated electricity.
  • The Project Owner benefited from their part of the bonus payments from the Utility (linked to the early operation). The early start-up of the electricity production improved the operators’ learning process leading to lower outages, higher availability and probably less warranty issues after the overall take-over of the power plant.
  • The EPC Contractor and the EM subcontractor benefited from potential early completion bonus.

Contract/Negotiation training

Actual impact of an early completion bonus

In spite of facing lots of challenges during the execution of the project (with considerable margin slippages), the Contractors managed to put into service certain turbine-generator units before the guaranteed taking-over date. The early generation was very welcome for the country and the Utility. The early completion bonus represented a relief for the extra construction costs that the Contractors incurred (also linked to acceleration measures). This outcome created a positive transition for the Owner from the construction to the operation phase.

Writing and agreeing on the complex early completion bonus mechanism consumed quite some time of the negotiation teams. But bringing the discussions to a win-win subject created a positive atmosphere during the contract negotiations based on trust, respect, transparency and pro-activity. This atmosphere was also beneficial to resolve other subjects that were not themselves win-win situations.

You can find other articles about negotiation on our blog afitac.com or by clicking on the following link: https://afitac.com/?s=negotiation

About AfiTaC

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 “newsletter@afitac.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:

EPC Contracts: win-win negotiation opportunities during contract nego?

You have read books, articles, blogs on contract negotiation. Or, even better, you did a real negotiation training. All have praised the importance of win-win negotiation.

There you find yourself in your next tough negotiation. All the discussions are on limits of liability, caps for liquidated damages, rights to terminate the contract etc. Subjects, where a bit more protection for one party, automatically means a bit less for the other party. You hesitate. Are those articles or training courses not realistic, not worth your time & money, just wishful thinking?

The answer is: Yes, they are OK; but you need to find some practical applications.

Win-win negotiations are really a powerful way to reach balanced contracts. But maybe the articles, books and training are a bit too theoretical for you to easily apply what you have learned in actual negotiations? You need to prepare for the negotiations, identify the needs – sometimes hidden – of your Client, rehearse the arguments, … Have you thought about some coaching to get going?

Stay tuned to this blog where we analyse some concrete case studies. You can also follow us on LinkedIn as “AfiTaC.com”.

Here you will find some links to relevant articles :

EPC Contract , win-win negotiation case study, early completion bonus
EPC Contract, win-win negotiation, LNTP on private investment project

For other articles on negotiation click here.

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 “newsletter@afitac.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 “advice@afitac.com”. 

Contract negotiation: after a long day of negotiation… 6 essential things to do

Intro

Negotiations often mean several consecutive days spent in a cold, air-conditioned, stereotype meeting rooms, many times without natural light, speaking and listening for hours, getting an overdose of coffee or diet coke, eating sandwiches in the meeting room to save time, … No doubt, we would all want to hear that, after a long day of negotiations, the best is to go out, eat some delicious food and have some beers in a bar because you deserved it. You did, but let us look at it a bit deeper to see if this is really the best approach.

Analogy

From time to time, I go with some friends to have a long weekend of cycling in the Alps. We are just amateurs, looking to improve ourselves and stay fit in spite of ageing. On such trips, what do we do in the evening knowing that a big tour is planned for the next day? Rather than celebrating the achievements of that day, we try to get some healthy food to have enough energy for the day after. We talk about our fresh achievements, difficulties and the challenges to come in order to be mentally prepared. We check our equipment. Last but not least, we get enough sleep. That overdose of food and drinks can wait, till the last day. And this we do just for fun…

So, what to do after negotiation ?

Contract negotiations can be as intensive as professional sports. Everyone expects a professional athlete to immediately turn the switch after a victory and think about recuperation and mental preparation for the next competition. Face it, you are well paid to be a professional negotiator and you believe you’re good at it. From my experience here are some things you should do, after the formal meetings, to make your negotiations a success:

1) Get enough sleep after negotiation

Many times, I’ve spent more than a week on consecutive negotiations with huge jet lag and hardly any sleep. After several days, fatigue made me loose my empathy, the ability to express my arguments in a positive way, to postpone a point when I could not conclude it. Sleeping is essential and you should do it whenever you can. Eating light and healthy, without too much alcoholic drinks, will help you get that sleep.

2) Debrief with you fellow negotiators

Each member of your negotiation team will have noticed different things during the day: body language, side comments, deal-breakers, negotiation margin etc. Spend some collective time to go through what each of you has learned about your counterparts: Who is resisting on what? Why? Can you give it and get something essential for your company in exchange? After a long day, your team members may want to turn the switch immediately (and go for drinks) but this is oh so important.

3) Give feedback to the management and the back-office after negotiation

Management and back-offices are naturally curious to know the progress of the negotiations, day-by-day. Even if you don’t have a lot of time, you must do the effort to keep them informed. It will keep the back-office teams motivated, the management engaged and brake your feeling of being “abandoned on the front-line”.

4) Launch those action points you took on you

You can’t answer everything immediately during negotiations. Specialist matters have certainly come up that require you to connect with the back-office. Also fresh validations may be required because you will have to agree something beyond your empowerment. If you did fulfil the previous point (continuous feed-back), you will be able to launch your action points quickly and get some advice or validation overnight. Being able to provide replies asap is one of the best ways to prove your company’s reactivity. It will push all parties to a complex negotiation to do the same and find solutions quickly.

5) Prepare yourself for the next session

Contract negotiations involve a huge amount of information. You can’t have all of it in your active memory. You should read, once more, the documents you will discuss the next day in order to refresh you memory, to establish the arguments you want to present in support of your case, to identify your fall-back positions.

6) Know when to stop formal meetings

Keep the actual negotiation time per day to a reasonable duration. To reach a deal, many people believe you have to negotiate to exhaustion. Spending 16 hours a day, or more, in a meeting room will be counterproductive for achieving a balanced agreement because you can’t do all the above actions. Fatigue and irritation will unavoidably come and reduce efficiency. Explain politely to your counterpart that you have to go and work on the action points you took on you and he or she will understand.

Conclusion

In conclusion we can say that, while it would be wonderful to enjoy life after a long day of negotiation, it is not to best way to be successful. Negotiation is a challenge that can be compared to professional sports. It requires anticipation, recuperation, communication and these things take a bit of your precious time. Including the sleep, the first five points above will easily take 10-12 hours. Maybe your fellow negotiators say “come on, lets have some drinks until the early hours”. My recommendation is to resist a bit and have those drinks at the end.

Click here for other articles on negotiation on this blog.

About AfiTaC

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 “newsletter@afitac.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 “advice@afitac.com”. 

Reliance data in EPC Contracts (like FIDIC Silver Book): how to establish it?

Introduction and definition

This article will analyse the concept of reliance data in EPC Contracts and provide a methodology to identify it. We can define reliance data as follows:

“Reliance data” (also named “rely upon data”) is the data identified in an EPC Contract that the EPC Contractor can take for granted. If this data changes during the course of the design or execution of the EPC Contract, a Variation Order should be agreed between the Employer and the EPC Contractor in order to implement the impact on the performance guarantees, the time for completion and the price.

Context in EPC Contract negotiations

The starting point of many EPC tenders and contract negotiations is as follows: the Owner / Employer provides the Contractor with the data he has in his possession regarding the project together with a specific statement that

«the Employer does not give any warranty as to the completeness, accuracy or fitness for purpose»

of that information. He does this to avoid any claim by the Contractor during the project execution on the basis that the provided information is inaccurate or incorrect. Sometimes the situation is even worse and the Owner / Employer simply tries to avoid giving any information.

In practice, withholding information is counterproductive as it does not enable the EPC Contractor to quote properly, with reasonable efforts. Contractors may walk away from the tender, overprice or underestimate the project’s cost. In the latter case, Contractors often create trouble during the execution phase in an attempt to limit their losses.

Reliance data in FIDIC

FIDIC 1999 Silver Book (Clause 5.1) requires the Contractor to scrutinize the Employer’s Requirements prior to the bid submittal. The Employer shall not be responsible for any error, inaccuracy or omission of any kind in the Employer’s Requirements except for data and information which are stated as immutable or the responsibility of the Employer and also except for data and information which cannot be verified by the Contractor. Having some data on which the Contractor may rely (reliance data) is therefore good industry practice and in line with the contract standards.

The difficulty starts when we want to precisely identify the “reliance data”, “baseline data”, “rely upon data” or whatever word is defined in the contract to introduce the same concept. The data is usually parked in an appendix containing a limited list of data for which the Employer takes responsibility.

Structured approach to identify rely upon data – “black box” concept

During those long contract negotiations, I had some thoughts about a structured approach to identifying reliance data. I came up with a “black box” concept:

  • Look at the project (to be executed) as a “black box”.
  • Whatever is in the box are the works to be executed. These are defined by a functional, not detailed/prescriptive, specification. Certain performance requirements are to be achieved usually by the time of taking-over. The reliance data should not include any information from within the “black box”.
  • On the other hand, this “black box” is somehow connected to and interacting with the environment. It is obviously physically attached to / founded on the outside world. It also receives some inflow. The “black box” can be impacted/shaken-up by the outside environment. The quality, magnitude and characteristics of these foundations, inflows and impacts are data that can, and often should, become reliance data.

Concrete example of identification of reliance data

reliance data

Let’s run this on a concrete example in order to make the “black box” concept more understandable. In the case of building a hydro power plant, the following can be reliance data:

  • Geo-technical baseline data: reference characteristics of subsurface conditions like rock classes (“foundations”)
  • Water quality: chemical composition of water quality for which the penstocks and turbine equipment should be designed; maximum water temperature to be taken into consideration for the design of the cooling system; hydrological data (“inflow”)
  • Grid connection information: data related to the transmission line and grid characteristics (voltage, frequency). The grid often still has to be expanded under a separate contract (“connections”)
  • Maximum wind speed or seismic acceleration coefficient: design requirements that the “black box” will have to withstand (“impacts”).

Contract/Negotiation training

Conclusions

In conclusion, having some concept of reliance data is healthy for a balanced EPC contract. Both the Employer and the Contractor shall reasonably reflect on this concept and the “black box” approach can be helpful. Jointly, they shall try to minimize the information to those design inputs that are essential and cannot reasonably be verified by the Contractor during the tender stage. This includes information that is

  • the result of long-term data series, or
  • inaccessible, or
  • needing unreasonable efforts and resources to obtain it while the Contractor is not sure to be awarded the contract.

This way, Employers will attract first class Contractors with optimized price levels and avoid conflicts during project execution.

 

You can find other articles on FIDIC on this blog by clicking here.

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 “newsletter@afitac.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 publications on LinkedIn and writing to us “info@afitac.com”.

Contract Risk Management for SME ‘s – Manage your risks like big companies do!

Introduction

This article provides useful information about contract risk management for SME ‘s.

Give a contract to anyone to read and see what they comment afterwards…

Most of us will find this a boring exercise, not sure what to look for. About half of us will find the contract conditions “quite OK” and the other half “absolutely unacceptable”. This has more to do with the personality of the reader than the actual contract conditions:

  • optimist vs pessimist;
  • more trustful or rather suspicious. 

Unless you are a contract expert with a solid experience and capacity to compare, in your head, against benchmark contracts, you will have a hard time to give a solid opinion and identify risk areas after a first reading.

How big companies work

Big companies have a solid staff to analyze such contracts. The commercial manager will look at the overall picture and will be supported by the legal department and several specialists (fiscal/tax, finance, insurance). They will systematically set-up a risk review system in which the team can identify, track, mitigate, establish value (risk provisions) and, last but not least, validate the risks that necessarily have to be taken by the company in order to secure a good deal.

Contract Risk Management for SME ‘s

TRaCRs – free tool for Contract Risk Scoring

What can you do as a small or medium size company (SME)? … Certainly not a massive recruitment.

But how then can contract risk management for SME ‘s be done without additional resources? … Having commercial managers with a broad enough spectrum is the objective but also a challenge. A good start is to have your commercial manager fill out the contract information in TRaCRs, which is an on-line tool that can be used free of charge (accessible at the following link: TRaCRs).

Twenty questions, carefully chosen to cover the whole spectrum of commercial and contract risk, will be asked. You just have to select the most representative answers. Automatically, this will establish the corresponding risk level on a scale from 0 to 5 for each topic. And also the Contract Risk Score for the overall project. 

Click here to get answers on 10 usual questions regarding Contract Risk Scoring.

With the Contract Risk Scoring report, you can hold decisive meetings

By e-mail, you will immediately get a report, listing the answers with their rating. Based on this report, good practice is to set-up a review board including the managers that will execute the contract and that are capable of judging the overall risk. Typically, you will start with “red flag” issues, having a rating of 5, and try to mitigate the risk, working down the list towards the lower ratings needing less attention. You can:

  • while still in tender stage, consider a deviation to the contract.
  • look for mitigation measures (e.g. establish an action plan to avoid that the risk materializes; measures that will keep the consequences of a risk event under control; insurance etc).
  • provision the risks based on their probability of occurrence and impact.
  • build a consensus within your team on risk-taking, which is a good foundation for successful project execution.

You can click here to get more information on typical decisions made with the Contract Risk Score.

The project’s Contract Risk Score

A Contract Risk Score for the whole project of below 30 means the contract has low risk. An example of this are projects with World Bank conditions.

Between 30 and 50, we find the projects with moderate contract risk.

Above 50, we can speak of a high risk project that should be followed-up with special care. 

Next steps & conclusion

If you find that the current questionnaire doesn’t match with the risks your company is facing, you can write to advice@afitac.com and ask for a more adapted version.

Most of us know that contract risk management for SME ‘s will be a “must have”, sooner or later.  To be a successful company in the long run, pro-actively managing the risks is essential. So, better to start now and not miss the boat!

You can find other articles on Contract Risk Scoring on this blog by clicking here.

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 “newsletter@afitac.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 publications on LinkedIn and writing to us ” advice@afitac.com “.

EPC and the freedom to find optimization

Introduction

For Contractors, working on an EPC Contract represents higher risks. Contractors have to face all the circumstances that occur during the Project execution, with few exceptions, and still achieve the expected outcome or intended purpose. The higher risk exposure can be offset for the EPC Contractor by having more freedom to find project optimization.

Important aspects for EPC Contracts

In a previous post, we have talked about “EPC or not EPC, that’s the question”

The following are important aspects in an EPC Contract to enable EPC optimization:

  • The specification should only be functional with a maximum of 50 to 100 pages and, ideally, far less.
  • The Employer/Owner should only describe what is expected as outcome from the Project after the Contract has been successfully executed.
  • The functional specification should not be prescriptive for methodology, specific supplies or detailed characteristics when not directly linked to the expected outcome.
  • The Lender Technical Advisor (LTA) and Employer’s/Owner’s Engineer should avoid to interfere, in a too detailed manner, in the project.

Freedom of Contractor to find EPC optimization

With the above aspects and approach, the EPC Contractor has the freedom to optimize the project while still remaining responsible for reaching the overall goal and the expected outcome(s).

Often, Engineering companies, working as LTA or Owner’s Engineers, are not so familiar with the EPC philosophy or would like to have a greater role in overseeing the project. However, they must accept that, in an EPC Contract, the most influential engineering role is embedded within the EPC Contractor’s organization (often fulfilled by a designated engineering subcontractor) and not as the Owner’s engineer or the LTA.

The Owner’s representative may also be reluctant to accept substantial EPC optimization, anticipating objections form the Owner or the Lenders.

Conclusion

EPC Contracts are an excellent way of working on certain projects. The parties should do the necessary efforts to make them work in an efficient and balanced way. The Contractor has greater responsibilities but also the right to find EPC optimization on the Project.

The freedom to optimize should equally be available to a designated subcontractor of the EPC Contractor (e.g. the technology provider) when subcontract conditions are substantially back-to-back with the main contract.

You can find other articles on EPC on this blog by clicking here.

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 “newsletter@afitac.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 publications on LinkedIn and writing to us “advice@afitac.com”.