CEDA has published the Effective Contract-Type Selection in the Dredging Industry paper to help contractors and suppliers unravel the commercial constraints and risks faced when defining the legalities of a project. DPC gives an overview
As contracting in the dredging and offshore industries becomes more diverse, contractors and suppliers appointed by the project owner to carry out the work and supply equipment have to adapt to the contractual setup, manage and apportion their risks, and identify how to procure their service providers.
Turnkey and engineering, procurement, and construction (EPC)-type contracts are becoming commonplace in the industry and bring their own benefits and challenges, explains the paper, which was prepared by CEDA’s Working Group on Effective Contract-Type Selection (WGECS).
The document breaks down the selection process into three steps. The first step is a generic procurement process flowchart highlighting the main points that should be taken into account by those procuring works, resulting in the selection of the contract type. The second sets out the key aspects to consider when assessing the contracting method. The third and final step is an objective scoring methodology that combines the output of the first two steps.
No ‘off-the-shelf’ fix
Choosing an effective contract type for dredging projects is not a simple decision made by selecting an ‘off-the-shelf’ standard contract, the report advised. The first step, as explained in the paper, provides a flowchart that helps identify the scope of the project. Different types of dredging – for example, maintenance, capital, land reclamation – carry different risks and require different solutions. Any preparatory work, such as engineering, permits, or financing requirements, should also be identified at this stage, along with any requirements during the project’s execution, including monitoring, inspections, and surveys.
Once the project is sufficiently defined, the next step is to identify how the project is packaged. Most projects are based on a work breakdown structure to assist the engineering effort, and a number of issues should be taken into consideration, such as whether elements of the project should be outsourced, and if so, how the contracts should be divided.
Dividing works into various contracts may lead to more interfaces, and increase the risk for owners who may be responsible for disputes arising out of improper alignment of the interfaces. Division of works may lead to opportunity, however, with the cost of the overall project/contract expenditure being less. During a risk/opportunity analysis, technical aspects, legal and financial matters, geographical locations, and spatial and safety elements, should all be considered.
After a work division is decided, what type of contract is best suited to the project?
The advisory paper lists six standard contract models:
- Construct only – charter
- Construct only – remeasurable
- Construct only – lump sum
- Maintenance-/performance-based – lump sum
- Design & construct – lump sum
- Design & construct/EPC – lump sum
After a work division is decided upon following a risk and reward assessment, the report lays out steps to analyse which contract is best suited to allocate the risks and rewards. If the previous steps lead to the conclusion that various project works are combined, this will lead to an integrated contract, the paper advised.
In this phase the risk allocation of the work packages is important. Although the previous steps may result in shifting risks towards a contractor, it may not always be feasible to exclude all risks sought to be shifted away. It will therefore necessary to consider which party is best equipped and prepared to absorb certain types of risk.
It notes that important risks include the quantities of material to be dredged, the probability of variance of scope, the physical site conditions, the chemical substance of dredged material, and weather and wave conditions.
When selecting the contract, parties should consider the following questions:
- Is it clear what the result of the contract should be?
- Is it reasonable and calculable to ask for a lump-sum price or should there be unit rates or a mixture of both?
- What is the right proportion to distribute or allocate the risks in terms of money?
- Is the project owner capable of managing the contract and the specified result?
When the project and contract(s) are agreed, then the way to select a contractor needs to be chosen. For public authorities, these bodies should comply with the public procurement laws in their countries. For private clients, alternative procurement mechanisms should also be considered. When deciding on a contractor, the paper suggests that parties consider whether the contract should be awarded not only on price, but also on quality.
The final point to consider, as part of this first step, is the execution of the project. Choices will need to be made on how to monitor the quality of the works, including the use of quality management and certificates of the contractor, monitoring systems, and independent inspections.
Step two involves assessing the most suitable procurement method or contracting type. CEDA considers the matter to comprise certain ‘key aspects’ that can be appraised or ‘scored’ against to determine the best method for the project and parties involved. See table above.
CEDA also pinpoints and identifies several sub-aspects within each key aspect, noting that users can utilise, amend, or prioritise the sub-aspects, giving them the relevant weight in ‘scoring’ these items.
In the third step, scoring can take place. For each key aspect, a relative ‘score’, ranging from 1 to 10, can be assessed and applied. In assessing the score, the user can choose to utilise or develop its own sub-aspects and to weight the importance of each.
Each of the six ‘scored’ key aspects can then be compared against other results or the standardised results offered by CEDA in the paper. The resulting information provides valuable insight, advice, and guidance to inform the user on what the optimum contract type may be for any particular project.
CEDA hopes to have provided a means by which dredging contracts can be further optimised and delivery efficiency can be improved.