Rationalising public procurement of complex construction projects by the price component selection The 6 th International Public Procurement Conference (IPPC), August 14–16, 2014, Dublin, Ireland Pertti Lahdenperä VTT Technical Research Centre of Finland
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Rationalising public procurement of
complex construction projects by
the price component selection
The 6th International Public Procurement Conference (IPPC),
August 14–16, 2014, Dublin, Ireland
Pertti Lahdenperä
VTT Technical Research Centre of Finland
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Early team
involvement
and joint
development:
Why?
Involvement of
multidisciplinary
expertise in
critical design
Closer team
integration and
improved
collaboration
Cost of late
design
changes
Ability to impact
cost and total
value
Qu
an
tity
/vo
lum
e
Involve key players here !
Accrued
costs of the
project
Uncertainty in
relation to cost
and total value
Qu
an
tity
/vo
lum
e
Design ConstructionConcept
ImplementationDevelopmentConception
Fix the target cost here !
Do the development jointly !
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Selection criteria – common characteristics
Preliminary price component
submitted by tenderer
Binding price component
offered by tenderer
Owner’s calculation
(tenderer’s unit prices)
Owner’s cost estimate
(same for all competitors)
Determinated by the owner
(owner’s consultant) based on
varying types of cost data:
&Targets of assessment
· past performance
· organisation
· know-how and experience of section managers
· project strategies, approaches and management plans
· alliance skills and affinity
· collaboration capability
· concept design / design commentary
Capability / Quality Comparative price
”The most economically advantageous tender”
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Case 1: Road tunnel
with junctions
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Case 1: Formulation of comparative price
Designers’ fee is calculated as
a percentage of direct design
costs
Direct costs are based on owner’s cost
estimate
Contractor’s fee is fixed in
euros
The comparative price is the sum of the
fees and costs
Direct
Design
Costs [€]
Fee [%]
Binding price component offered by tenderer
Owner’s cost estimate (same for all competitors)
Fee [€]
Direct
Construction
Costs [€]
+ ++
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Case 2: Water treatment plant
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Case 2: Formulation of comparative price
Fee is calculated as a percentage of the sum of other costs
Direct costs are based on client’s cost
estimate
The comparative price is the sum of the
dollar fee and other costs
Management and
preliminaries costs, risk
provision and fee are those tendered by competitors
Direct Costs [$]
Preliminaries [$]
Project Overhead [$]
Fee [%]
Risk and Opportunity [$]+
+
+
Binding price component offered by tenderer
Owner’s cost estimate (same for all competitors)
+
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Case 3: Road bridge and surroundings
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Case 3: Formulation of comparative price
Fee is calculated as a percentage of the sum of other costs
Tenders are binding as to bridge and
project overhead
costs
The comparative price is the sum of the
dollar fee and other costs
Prices of the balance of works are
preliminary
Bridge Target
Outturn Cost
[$]
Balance of
Works Budget
[$]
Contingency [$]
Project Overhead Target Outturn Cost [$]
Contingency [$]
Fee [%]
Project Overhead Contingency [$]+
+
++
+
Binding price component offered by tenderer
Preliminary price component submitted by tenderer
+
10
Case 4: Arterial road with junctions
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Case 4: Formulation of comparative price
Fee is calculated as a percentage of the sum of all other costs
Cost of warranty work is expressed as a percentage
of construction works costs
The comparative price is the sum of the
dollar fee and other costs
Priced Works
Lump Sum [$]
(Package 1)
[$]
(2)
Defect Correction Costs [%]
Project Overhead [$]
Fee [%]
Risk and Contingency Provision [%]
+
+
+
[$]
(3)
+
[$]+ [$]+
+
Works Costs, other works [$]+
Binding price component offered by tenderer
Owner’s calculation (tenderer’s unit prices)
Owner’s cost estimate (same for all competitors)
+Risk provision is calculated
as a percentage of
estimated direct project
costs
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Bases for definition of price components
Case 1:
Road tunnel
with junctions
Case 2:
Water
treatment plant
Case 3:
Road bridge and
surroundings
Case 4:
Arterial road with
junctions
· Fee
· Cost escalation * **
· Risk contingency
· Project overhead
· Preliminaries costs
· Direct costs, structure-specific***
· Direct costs, section-specific****
· Defect correction
*) Part of risk contingency. **
) Part of direct costs.
***) Direct costs are tendered in the case of certain structures of a diverse project.
****) Direct costs are tendered in the case of a certain section/area of a wider project.
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Additional cost management measures
(open books process)
Final stage competitors are subjected to financial audits where the level of
costs of realised projects can be assessed to serve as a benchmark.
The proponents are expected to include their pricing bases in their tenders for
additional auditing and to serve as benchmarks.
Major purchases of the project are to be jointly subjected to competitive
bidding later and, at the minimum, the prices are to be market-tested.
An independent third-party estimator is involved to assess the
appropriateness of the target outturn cost and the cost items it consists of.
A financial auditor is involved to verify costs incurred and financial
management in general (financial systems, reporting and invoicing).
The owner’s budget guiding the joint development is based on two estimates
completed independently and is made strict compared to the general cost level.
The owner has the right to terminate the project for convenience, but the
owner has to pay a fair compensation for all services carried out by then.
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Early team involvement and joint development:
When?
For complex projects involving a lot of uncertainties
Project type
Unique, the like of which have never or very rarely
been implemented
Stakeholders
Many key stakeholders with conflicting needs that are
difficult to engage with multiple proponents
Technology
Requires new processes or unique application of familiar
methods e.g. due to experimental construction
Construction work
Major engineering difficulties can be expected and
duration of work is hard to forecast
Risk
identification
Risks and their impacts cannot be determined and
dealing with risks requires collaboration between actors
during construction
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Lessons learned
Experiences from the use of price component selection have been highly
positive: other benefits overrule possible challenges
Aim at a comprehensive comparative price may lead to the same doubts that
have been found problematic in pure price competition
The use price components may make procurement more challenging, unless
the contents of the components have been clearly defined
The comparison of tenders is challenging and the owner often has to work to
make the tenders commensurate before deriving genuinely comparable prices
Price component selection is not expected to be the answer to all situations
and projects: it is for challenging projects requiring innovative approaches
The practice should be combined with the principles of transparency of
information (open books practice) including external auditors and estimators
An emphasis given to the creation of collaborative, trustful relationships among
the team members to make the joint development effort more effective