GENG3830

Engineering Project Management

Project Management Lecture 4

Procurement, Tendering and Contracts

Learning Objectives
This lecture provides an overview of procurement, tendering and
contracts.
By the end of this session you should be able to:
List and describe the different methods of procurement

Describe the different types of contracts and factors in selecting

the preferred contract type for a particular project
Demonstrated an understanding of contracts, tendering, tender
assessment and contract award.

Contents
Procurement
Contracts

Tender / bid processes

Bid / tender evaluation and assessment
Contract negotiations
Selection and contract award

Why Do We Care? Example 1

Procurement, and in particular contracts, can have a huge effect on
a project and on a company.
2007 Clough engineering settled a contract
dispute of $250M against it relating to the
BassGas development off SE Victoria.
It was reported that the settlement cost
Clough $70M to the joint venture (client).
Also worth noting that project commissioning was delayed for 2 years
and the project costs escalated from $400M to $750M following the
dispute which led to Clough being sacked as construction contractor
so, as with most cases, the dispute cost both parties significantly.
http://www.theaustralian.com.au/business/mining-energy/clough-settles-its-bassgas-dispute/storye6frg9df-1111114314362
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Why Do We Care? Example 2

Oracle Corporation (US) was accused of failing to give promised
discounts under a supply agreement to the US federal government
resulting in the government paying more for products that it
should have.
In 2011 Oracle agreed to pay around $200M to the US Government
to settle the contract dispute.

http://losangeles-businessattorney.com/california-contract-litigation-oracle-loses-big-incontract-dispute-with-the-feds/
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Why Do We Care? Example 3

In 2011 Qantas grounded its entire fleet for almost 2 days after a
contract dispute with its employees.
The grounding was estimated to have cost Qantas $20M per day,
with the total contract dispute estimated have cost nearly $200M in
just FY2011/12.
The grounding was also estimated to have cost $250M per day to
the Australian economy.

http://www.news.com.au/business/industrial-disputes-costly-for-qantas/story-e6frfm1i1226207880100
http://www.theaustralian.com.au/business/aviation/cost-of-qantas-crisis-hits-250m-a-day-andrising/story-e6frg95x-1226180980349

Procurement
Procurement may be defined as:

the act or process of obtaining goods and/or services

Engineers may find themselves as either the client, supplier, or
both. Therefore, an understanding of both parties (the client and
supplier) in the procurement process is important.

Procurement
Procurement requires the client to make specific choices
concerning their strategy for:
What works, if any, they want to outsource
How they want the works undertaken
How they want to pay for the works
How they want to allocate the works

How they want to enforce the agreement

Often the first decision associated with procurement on a project is
whether to use internal (in-house) resources or procure external
resources.
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Procurement Decisions
Procurement decisions are typically made taking into account
organisational culture/practice, availability of resources and technoeconomic feasibility issues.
Engineering economic techniques such as Net Present Value,
Interest Rate of Return, Cost Benefit Analysis and Sensitivity
Analysis are relevant here.

Techno Economic Feasibility Analysis

Large project investment decisions represent major commitments
of resources and have serious consequences on the profitability
and financial stability of a company. In the public sector, such
decisions also affect the viability of project investment programs
and the credibility of the agency in charge of the programs.
It is therefore important to evaluate potential projects rationally
with regard to both:
the economic feasibility of individual projects, and
the relative net benefits of alternative and mutually exclusive
projects.
A techno economic feasibility analysis (study) examines technical,
commercial and financial aspects of different project options.
It is generally the primary report for the formulation of the
investment proposal and a key step in defining the project and/or 10
procurement strategy.

Techno Economic Feasibility Analysis Example

Deciding whether to purchase, hire/lease or refurbish a piece of
manufacturing equipment.

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Procurement Issues and Considerations

If external resources are to be used the following should be considered
and addressed:
Defining the scope
Identifying procurement options
Economic analysis of available options
Apportioning risk (between the client and supplier / contractor)

Detailing any procurement conditions (e.g. Conditions of Contract)

Detailing any applicable accreditation / prequalification requirements
and/or standards.
Determining tendering or bidding and assessment procedures (if any)
Ensuring probity and confidentiality of the procurement process
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Contracts
Procurement of external resources will generally involve some form
of contract between the client and supplier.
There are many definitions of a contract including:
A legally binding agreement made between two or more parties, by
which rights are acquired by one or more parties to act on the part of
the other(s)
An agreement giving rise to legally enforceable obligations binding
the parties to it
All organised activities concerned with demolition, building,
landscaping, civil engineering, process engineering, mining and
heavy engineering
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Contract Basics
Contracts:
Define what will be delivered (Scope) and when (Time)
Define the standards to be complied with (Quality)
Define how much will be paid and when (Cost)
Assign risks to the contract parties (Risk)
Define procedures, roles and responsibilities for management of
the contract

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Contracts
For a contract to be legally binding the following elements must
exist:
Offer and acceptance acceptance must be unconditional
otherwise it is a counter offer

Intent to create a legal relationship

Consideration something of value must be given in return for
something of value that is offered
Legal capacity the parties must be legally competent entities
(individuals over 18 years old, companies, government agencies)
Legality of objects the object of the contract must be legal (i.e.
you cant have a contract to do something illegal)
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Different Contract Types

Supply only (sales) contracts (e.g. supply of 100 timber power poles)
Plant hire agreements and contracts (e.g. hire of a dump truck)
Consultant and Profession services contracts (e.g. environmental
assessments, design)

Construction contracts
- construct only (i.e. Shortland to Sandgate road project)
- design and construct (D&C) or EPC - engineer, procurement and
construction (i.e. Kempsey Bypass Bridges, Triple J Studio
Refurbishment)
- design construct and maintain (DCM) (e.g. Karuah Bypass,
Kurnell Desalinisation Plant)
- build own operate transfer (BOOT) (e.g. M7)
Alliance contracts (part of Hunter Expressway, Hunter8Alliance rail
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project, Air Warfare Destroyer Alliance )

Different Contract Types

Internal
Resources

Construct Only
Contract

Design and
Construct

DCM and
BOOT

ALLIANCE

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Alliance Contracts as an Example

Alliance contracting is gaining increasing prominence in Australia with
many large Alliances currently underway or recently completed.
Alliances are normally reserved for higher risk projects, especially
where residual risk during the construction or implementation phases
cannot be quantified or allocated to industry.
The principles of Alliance contracting are:
A focus on project outcomes
Innovative contractual arrangements
Success of projects measured against key performance indices
An emphasis on openness and communication between participants
An equitable risk/reward balance that aligns the commercial interests
of the parties.
Access to and contribution by the best resources of each participant
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with an emphasis on working together efficiently

Hunter8 Alliance (Rail)

ARTC (client) has formed the Hunter 8 Alliance with John Holland Pty
Ltd (construction) and GHD Pty Ltd (designer) to design and build the
10.8 km, Maitland to Whittingham Third Track project.

http://www.hunter8alliance.com.au/

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Selection of Contract Type

Selecting a particular form of contract depends on many factors
which may include:
The client, their organisational structure, resources and expertise
The risk profile of the works

The value of the works

The availability of suitable contractors
The level of expertise / specialisation required

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Contract Documentation
The contract documents usually include:
Formal Instrument of Agreement (setting out all of the documents
which comprise the Contract Documents, and the execution
clauses)
Conditions of Contract (setting out the detailed contractual terms)
Specifications

Reference documents (such as Standards, Guides, etc)

Drawings
Post-tender Correspondence

However, the specific terms of the Contract and documentation

used will likely vary from project to project, and particularly
industry to industry.

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Standard Contracts
In the majority of engineering (and many non-engineering)
industries in Australia, standard contracts are available and widely
used. Generally, these standard contracts have been developed to
reduce the costs associated with contract preparation and contract
administration plus minimise contractual disputes.
Typically these standard contracts consist of:
a set of standard clauses which generally do not get changed from
project to project

a deed which both parties sign

one or more annexure which contain the project specific
information.

Some examples of the above have been loaded onto Blackboard.

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Standard Contracts
In Australia, standard contracts are primarily developed by:

Standards Australia

Government authorities

Professional organisations
(such as MBA, NSW Dept of Fair Trading)

Individual companies

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Conditions of Contract - Standards Australia

Many, many standard contracts are available. For example, the
following is a list of some relevant Australian Standards:
General Construction (AS2124, AS4000)
Design and Construct (AS4300 series)
Supply and Equipment (AS4910, AS/NZS4911, AS4912)
Management and Construction (AS4915, AS4916)
Trade Contracts (AS4917, AS4918)
Management of Assets (AS4919, AS4920, AS4921)
Consultant Contracts (AS4121, AS4122)
Miscellaneous (AS4120, AS4608)
Many of the above also have associated sub-contract conditions
(i.e. AS4901 relates to AS4000) to ensure that the provisions of the
main contract are transferred to any sub-contracts.
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Standards Australia - Examples

AS4000 General Conditions of Contract.
AS4910 General Conditions of Contract for the Supply of
Equipment with installation.
AS4917 Construction Management Trade Contract - General
Conditions
AS4919 General Conditions of Contract for the provision of asset
maintenance and services (Superintendents version).
AS4122 General Conditions for the Engagement of Consultants.

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Accreditation / Pre-Qualification
Many companies, in particular government agencies, have
introduced accreditation or pre-qualification requirements. These
have been introduced to assist in establishing minimum quality
standards for contractors, consultants and suppliers. They also have
the effect of reducing the number of companies able to bid /
tender for projects and therefore reduce costs for both the client
and potential tenderers.
Examples include:
Australian Defence Force, Telstra, ANSTO, Roads and Maritime
Services NSW, VicRoads, Queensland Main Roads, ACT Urban
Services, Hunter Water, Energy Australia, NSW Department of
Services, Technology and Administration

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Accreditation / Pre-Qualification
In order to achieve accreditation through a particular agency a
contractor, consultant or supplier is typically required to obtain 3rd
party certification or client-specific pre-qualification. This process
normally involves providing evidence that they have a quality
system of the required standard and have experience and capability
in the particular area. Certification audits may also be required.
Typical accreditations include:
ISO 9000 (quality system)
RMS R40 (Roadworks projects to $40M) and others
NATA registration for testing laboratories
Building and Construction OHS Accreditation Scheme (Federal)
Workcover licenses for builders, plumbers, electricians, plant
operators, HV electrical workers, etc

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Methods of Payment
The payment method used under particular contract typically is one
of the following

Lump sum (fixed price)

Schedule of rates

Cost plus

Incentive based

Alliance (cost recovery plus profit/loss sharing)

Combination of the above

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Standard Contract Conditions (Clauses)

Roles and responsibilities

Nature of the contract
Contract documents
Intellectual property
Insurance
Site
Time management
Working hours
Quality
Variations
Payment
Dispute resolution
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Standard Contract Conditions / Clauses

The Table of Contents from two typical major standard contracts
are included on Blackboard:
AS4000 General Conditions of Contract (used in private industry)
GC21 General Conditions of Contract (used by many government
agencies)
Administration of contracts and some specific contract clauses to
be aware of will be discussed in detail next week.

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Contract Clauses Example 1

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Contract Clauses Example 2

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Contract Clauses Example 3

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Contract Clauses Example 4

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Contract Annexure Example

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Typical Tendering / Contracting Process

On very complex and/or high risk projects a two stage process may
be used to vet tenderers. In these cases stage 1 may involve
requesting and assessing Expressions of Interest (EOI) prior to the
undertaking tender process above. In this case only short-listed
companies would be invited to participate in the 2nd stage (i.e.
formal request for tender, submission of tender, etc).
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Request for Tender / Invitation to Bid

Care should be taken so that the work to be undertaken under a
contract is clearly and logically defined with regard to:

Each item of work to be carried

out

Methods of measurement and

payment to be use

Standards of quality to be
achieve

The general obligations to be

met by the parties

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Tender Assessment
Tender assessment is, in many ways, a risk management exercise
whereby the client aims to select the tender which represents the
best value for money. This is not always the lowest tender!

The use of non-price tender assessment criteria is one way of

mitigating procurement risks.

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Tender Assessment Methods

Tender assessment methods:
Lowest tender price
Price and non-price (1 stage using weighted criteria)
Price and non-price (2 stage EOI plus above)
Project specific
Evaluation commonly involves selecting the tender with the highest
tender evaluation score or ranking, taking into account all relevant
criteria. The scoring method must ensure the extra value indicated
by a higher score is worth any extra cost by using appropriate
weightings that strike an appropriate balance between non-price
value and price.
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Tender Assessment
Tender evaluation criteria may include:
Whole of life cost
Delivery time(s) offered
Quality offered
Previous performance of tenderer
Experience of tenderer and personnel proposed
Capability of tenderer, including technical, management, human
resources, organisational and financial capacity
Conformity with tender requirements
OHS, environmental, etc practices and performance
The evaluation criteria should be consistent with the proposed
contract requirements and aim to identify the tender / bid offering
the best value for money.
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Tender Assessment Weightings Example

Criteria

Weighting

Contractor A

Contractor B

Contractor C

Tender Program

Performance

Quality System

OHS&R

Environmental

Personnel

Claims History

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$500,000

$525,000

$530,000

Non-Price Total
Price

Scoring Guide Criteria: Personnel

Site/Project Manager

Works Supervisor

Site Engineer

4: > 10 yrs relevant exp.

3: Extensive experience

2: Previous experience

3: > 5 yrs relevant exp.

2: Some relevant exp.

1: Little or no exp.

2: Some relevant exp.

1: Little relevant experience

1: Little relevant experience

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Probity and Transparency in Tendering

A key issue associated with the tendering of any contract,
particularly those where public money is involved, is probity to
ensure fair and open competition, and minimise the potential for
fraud and collusion.
The application of probity principles, generally require that:
All tenderers are treated fairly and equitably, consistent with the
rules of natural justice and procedural fairness;
A transparent and appropriately planned and documented
tender process is established, including a robust evaluation
methodology;
All confidential information is protected;
Strategies are in place to maintain the integrity of the tendering
process when in-house bids may be involved;
Potential and/or actual conflicts of interest are identified and
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dealt with.

Why Do We Care? Probity Example

A former manager at UNE was recently part of a NSW Independent
Commission Against Corruption (ICAC) inquiry relating to
acceptance of gifts in return for favorable treatment.
It is alleged that he sought and received benefits for himself in
return for improperly favouring a number of companies the
awarding of contract and for approving false invoices.
The former manager told the inquiry, "I still believe we were doing
good deals for the university. That was my rationale."

http://news.smh.com.au/breaking-news-national/uni-boss-admits-organising-bogus-invoices20120123-1qdlb.html
http://www.icac.nsw.gov.au/investigations/current-investigations/investigationdetail/187

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Contract Negotiations
Depending on the industry, company and project, negotiations with
tenderers may occur after submission of the tender / bid.
These negotiations may be undertaken to:
Clarify aspects of the submission
Seek additional information
Seek to reduce the tender price (though this is generally not
permitted for government contracts).
Change aspects of the work to be undertaken (i.e. change parts of
the scope, drawings, documentation, etc)
A key aspect of post-tender negotiations is that any agreed
changes, and any associated correspondence, must form part of
the contract which is subsequently signed by the parties.
It is therefore important that all post-tender discussions are
accurately documented.

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Contract Award
Contract award typically involves:
Notification of successful and unsuccessful tenderers

Arrangements for execution of contract documents

Obtaining copies of the Contractors' insurances
Obtaining of security deposits (if required)
Approvals and clearances by statutory authorities (if required)

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Additional References on Blackboard

Request for Tenders RTA NSW
GC21 RTA General Conditions of Contract Table of Contents

GC21 RTA General Conditions of Contract Deed

GC21 RTA General Conditions of Contract Annexure
AS4000 General Conditions of Contract Table of Contents

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Some Terminology
Bid / Tender: An unconditional offer to enter into a particular
contract to provide goods or services at a certain price

BOOT: Build Own Operate Transfer

Contract: An agreement giving rise to legally enforceable
obligations binding the parties to it
Conditions of Contract: A document which sets out the detailed
contractual terms of a contract
D&C: Design and Construction
DCM: Design, Construction and Maintenance
EPC: Engineer, Procurement and Construction
Probity: Uprightness, honest and integrity
Procurement: The act or process of obtaining goods and/or
services

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Review Questions / Tutorial

This review activity may assist in linking the different aspects
covered in this lecture.

List one example (activity) for each of the five (5) main types of
contract

For each contract write a very brief scope statement (3-4 lines)

For each pair (of contract and example activity):

- Explain why they are appropriately matched

- Which, if any, standard conditions of contract could be
used?
- Which method of payment would be most suitable?

- Which party, if either, bears the most risk?

Note that there is no single correct answer for this activity and
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there may be many multiple correct selections for each dot point.