Framework agreements and term contracts – client …

1 CESA 2011 Conference and exhibition Framework agreements and term contracts client perspective Dr Ron Watermeyer DEng, FSAICE, FIStructE, FICE. est 1969. Soderlund and Schutte Fundamental considerations in delivery Quantum - cost service delivery targets (and jobs created). quality / delivery /. performance time Bottom line infrastructure delivery needs to meet expectations What is a term contract ? ISO 6707-2 (1993) Building and civil engineering - Vocabulary - Part 2: contract terms defines a term contract as a contract that enables the client to order work during a prescribed period at agreed rates Applied using a price list over the term of the contract to: goods and services simple construction works of a repetitive nature over a defined site Price based strategy - difficult to apply where site establishment charges are incurred quantities vary significantly between orders What is a Framework agreement ?

2 ISO 10845-1(2010), Construction procurement Part 1: Processes, methods and procedures A Framework agreement is an agreement between an employer and one or more contractors, the purpose of which is to establish the terms governing contracts to be awarded during a given period, in particular with regard to price and, where appropriate, the quantity envisaged Allow the employer to procure on an as-instructed basis (call offs) over a set term without necessarily committing to any quantum of work Supply contracts batch order Services contracts task order Works contracts package order University (Wits) Braamfontein campus Demand for services New undergraduate South Block science centre for Sunnyside residence West Campus Generator set Wits Art Museum Chamber of Mines / 4th quadrant and refurbishment East Campus Generator set Current paradigm client appoints a professional team to design the works Open tenders are called once the production information has been finalised by the professional team (production information = final detailing, performance definition, specification, sizing and positioning of all systems and components).

3 Contractor prices the production information Contractors are contracted on a bills of quantity basis for a single project (which may or may not include budgetary items to cover aspects of the works which have not been finalised). Wits programme for construction Project 1: Chamber of Mines / 4th quadrant (Jan 2009). Project 2: East and West Campus Generator sets (July 2009). Project 3: New undergraduate science centre (November 2009). Project 4: Wits Art Museum (April 2010). Project 5: Refurbishment of Chamber of Mines (Oct 2010). Project 6: South Block for Sunnyside residence (November 2010. 6 separate contractors to manage in terms of separate contracts or one contractor for all 6 packages? Packages in a Framework contract Hand over Scope works Packages works delivered C Develop over a term o Construct P by a single concept for works #1 contractor n works c Design works Document e works p t P P.)

4 P #4. #2 #3. Package orders etc Procuring a service over a period of time University of the Witwatersrand Package #1 Package #2. Start November 2009. Start January 2009. Chamber of Mines Undergraduate Science fourth quadrant Centre phase 1. Start Package #3 Package #4 October2010. Refurbishment of Chamber April 2010 of Mines Same contractor but Wits Art Museum different professional teams Principles Framework agreements are entered into following a competitive selection process need to establish the following as a minimum: - the basic terms of the contract - the term of the contract (3 -4 years). - the scope of the work which may form the basis of a task / batch / package order - the basis by which contractors are to be remunerated for instructed work - the manner in which competition between Framework contractors may take place Essential elements of a Framework A package / task is work within the scope of work of a Framework agreement which is instructed within a stated period of time (start and end date).

5 A package / task order is an instruction to carry out a task and may only be issued within the term of the agreement Start date Framework contract End date Start Start End End . Start End Start End Package orders A Framework contract is only entered into with those who have the capability and capacity to carry out the likely work Key question Question: How does one appoint a contractor in the absence of a scope of work? Answer: Look at: cost based pricing strategies as apposed to price based strategies rates based contracts (where P and G /. establishment costs are fairly constant and work is very straightforward) use a price list and adjust on the basis of cost plus Cost reimbursable contract (services). Professional services Time based charges Services Cost of: people employed by the contractor Plus a fee plant and materials which work subcontracted includes equipment overheads less disallowed cost and profit Cost reimbursable contract (works).

6 Wages and Working + area salaries (People). Fee includes overhead profit and + percentage overheads Materials and Plant at open + Charges market rates Fee +. Equipment at agreed rates, market related rates or % of hire list Fee includes profit and + Hourly rates for employees overheads (manufacture and fabrication or design) plus % overheads Fee Subcontract costs Cost reimbursable contract (works). Wages and Working + area salaries (People). Fee includes overhead profit and + percentage overheads Materials and Plant at open + Charges Question: Fee How is market rates cost +. controlled? Equipment at agreed rates, market related rates or % of hire list Fee includes profit and + Hourly rates for employees overheads (manufacture and fabrication or design) plus % overheads Fee Subcontract costs Controlling costs Convert time based charges into a lump sum Require contractor to subcontract most of the work (management contract cost plus).

7 Target cost Where more than one Framework contractor is appointed for the same scope of work, can conduct mini competition between Framework contractors - can base on rates / pricing parameters contained in Framework contract Target cost contract Target Price (initial). Target Price (final) adjusted for compensation events Final cost . Sharing of pain cost savings /. (share of gain (sharecost overruns of savings). overrun). payment to contractor (cost + fee). Scenario 1: Scenario 2: Contractor gain Contractor pain Target contract with an activity schedule The three corner stones of Earned Value Management are: Planned Value the authorized budget assigned to the scheduled work to be accomplished Values in activity schedule Earned Value the value of the work performed expressed in terms of the budget assigned to that work Completed and partially completed activities at a given point in time Actual Cost total costs actually incurred and recorded in accomplishing work performed during a given time period Actual cost Target price contracts Procurement of contractors Option 1 (design is not sufficiently developed).

8 Tenderers tender cost parameters Target price negotiated when sufficient information available to price the works Option 2 (design is sufficiently developed to price). Tenderers tender cost parameters Assumptions are made about any uncertainties so that the tenderers can price the works (adjust target if assumptions turn out to be incorrect quantum of reinforcement). Tenderer tenders a target price case studies inform practice note #1 Scaling up delivery and accelerating empowerment (Aug 2006). In a nutshell Use larger contracts Use longer contracts Adopt a programmatic and a systems approach eThekwini - Asbestos Cement (AC) Pipe Replacement Project University of the Witwatersrand - Construction and refurbishment of buildings on East and West Campus Both projects applied public sector rules Water project eThekwini Water and Sanitation (Durban) : Pilot project aging AC water mains (estimated length of 1750km were costing the city around R580m / annum (repair and water losses).)

9 Project identified as a pilot EPWP project for large contractors over a period of 3 years appointed one programme manager + 4 design consultants + 4 contractors ( Framework agreements ). in June 2007 following a competitive tender process contractor required to replace and maintain pipes in a water district completed in June 2010 at a cost of R1,6 b Outcomes Productivity: 80 km of water mains replaced Winner of the each month. 2009 KAMOSO Socio economic: award for Best 3800 temporary unemployed workers Construction employed to excavate trenches and are Project in the rotated every 4 months to allow others to Infrastructure financially benefit Category for Temporary workers paid 21% of total project excellence in expenditure. the 16 subcontractors (or co-contractors ).

10 Implementation developed to increase their share of the of Expanded construction work from 10% to 20% over Public Works time (almost all went up two CIDB gradings). (EPWP) A full time mentor engaged to assist the co- contractors in the establishing of business systems Staff demands on client : one staff member University of the Witwatersrand First major capital project (2007) using the traditional approach 30% over budget with 1/3 of overrun only known 4 months after completion 2008 call for tenders for a Framework contract with target price being tendered for 1st package 1st package (Chamber of mines) in Framework contract . handed over within budget (R70m). 2nd package (New Science Stadium). early contractor involvement which enabled budget to be reduced from R210 m to R178m - constructed in two phases to get an early start - completed on time with R1m overrun 3rd package (Art Museum).