PRE-CONTRACT ADMINISTRATION (DQS259)

TOPIC 3

CONTRACTUAL ARRANGEMENT

1.0 What is contractual arrangement?

An early decision on the preferred method of contract procurement is essential as it will impact
on the amount of pre-contract work, eg. Design, detailing, approvals, tender documentation
and etc that need to be undertaken by the project team.

2.0 Common Contract Procurement Methods

1) Traditional / Conventional Contract

2) Management Type of Contract

i) Management Contract
ii) Construction Management Contract

3) Package Deal Types of Contract

i) Turnkey Contract
ii) Design and Build Contract

4) Public Private Partnership

i) Private Finance Initiative
ii) Build Operate & Transfer Contracts
iii) Build, Lease, & Transfer Contracts

5) Fast Tracking Contract

6) Privatisation

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3.0 Factors to be consider when selecting a suitable Procurement Method

Factors Justification
Time Constraints duration of the design and construction stages, start and
completion date, a fast track schedule, phased completion
Cost Constraints budgetary control, price competition/negotiation, price certainty,
payment and cash flows
Finance payment system, short term or long-term finance by client or
contractor
Type and size of project standard or specialised technology, simple or complex
arrangement
Design and flexibility aesthetics, function, likely changes during the construction
Extent of design and well and completely designed or to be developed during
documentation construction
Current state of the appropriate contractors, workload, time and price competition
market
Allocation of risk whether client or contractor is the better at controlling the risk
Organization complexity of arrangement, contractual and procedural chain
Client’s own experience whether new or a regular builder, with in-house or outsource
and organization advisers

4.0 Traditional / Conventional Contract

4.1 Overview of Traditional Contract

Traditional Contracts are the most familiar types of contracts known in the engineering and
construction industry as they have been the main form of contract procurement for quite some
time.

4.2 Nature of Traditional Contract

The essential feature of traditional general contracts is the separation of the design from the
production i.e.: construction or installation. Responsibility for all design work is under
employer’s obligation. The contractor is only answerable for the construction aspects of the
contract (quality of material and workmanship.

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4.3 Characteristics

i) Speed
Takes more time for the design to be fully developed. Construction does not start until
after completion of the plans & spec.

ii) Certainty
Client knows their financial commitment before entering into construction contract.

iii) Flexibility
The design team has freedom to develop the design without excessive time or economic
pressures.

iv) Quality Level

This system provides good rating for quality, aesthetic appearance and high technical
complexity. (Design team – not work under pressure).

v) Complexity
For large projects require advance management systems.

vi) Risk Avoidance & Responsibility

Balance of risk.

vii) Price Competition

A longer period of overall design and construction may make the total project price
higher.

4.4 Organization Structure

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4.5 Sequence of Activities

The employer appoints a professional team

The employer or the professional team initiate the tender process

The contract is award, construction commences

Contractor hands over completed works to employer

4.6 Advantages of Traditional Contract

i) Familiarity of industry
ii) Better work control
iii) Single point of responsibility
iv) Permits use of specialist contractors
v) Flexibility of change
vi) Permit price certainty

4.7 Disadvantages of Traditional Contract

i) Slow line of communication
ii) Out of dated
iii) Relatively inflexible
iv) Slowest in overall project duration
v) Employer’s relatively limited
vi) Employer’s contractual remedies least clear

4.8 Standard Form for Traditional Contract

LOCAL FORM
i) Government/Public
- PWD 203A (Rev 1/2010) – Bills of Quantities Part of the Contract
- PWD 203 – Drawing and Specification Part of the Contract

ii) Private sector

- PAM 2006 – With Quantities Edition
- PAM 2006 – Without Quantities Edition

INTERNATIONAL FORM
i) JCT Standard form of Building Contract (1998 Edition)
ii) ICE Condition of Contract

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5.0 Package Deal Type of Contract

5.1 Overview of Package Deal Type of Contract

Package Deal Type of Contracts are the fastest growing method of contract procurement in
Malaysia. Package Deal Type of Contract involve Design & Build and Turnkey Contracts.

Design and Build

An arrangement whereby one contracting organization takes sole responsibility, normally on

lump sum fixed price basis, for bespoke design and construction for client. The main
contractor, the sub-contractors are employed within the same organizations, their
relationships are governed by hierarchy, rather than market.

Turnkey

A contract where the contractor provides the total resources required including the finance as
well as design, construction and fitting out. The contractor is responsible for everything to
realize the works. This would include financing, design, construction / installation, technology
transfer and maintenance.

5.2 Organization Structure

5.3 Characteristics of Package Deal Type of Contract

i) Speed
Saving in project time through overlapping design and construction. Activities can proceed
concurrently to a greater extent.

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ii) Certainty
Client knows his financial commitment early in the project. The nature of the contract
tends to minimize project variation.

iii) Flexibility
Any alteration and modification in design by client becomes less possible since the
liability of design is under the contractor.

iv) Quality Level

Some proprietary package deal products lack aesthetics appeal.

v) Complexity
Simple rather than complex; not require technical innovations.

vi) Risk Avoidance & Responsibility

Solely on contractor’s responsibility

vii) Price Competition

Relatively expensive compared to traditional. Contractors employ independent
consultants for design and financial aspects and high overhead costs.

5.4 Advantages of Package Deal Type of Contract

i) Single Point Responsibility

ii) Simplified Contractual Arrangement
iii) Speed of Procurement
iv) Permit Price Certainty
v) Products Fit for Purpose
vi) Design Benefits
vii) Better Buildability
viii) Improved Working Relationship

5.5 Disadvantages of Package Deal Type of Contract

i) Little flexibility to change

ii) Difficult to evaluate
iii) Uneconomic use of resources
iv) Employers requirement must be prepared Carefully
v) Higher professional fees outlay
vi) Minimum Employers Involvement
vii) Problems with design liability
viii) Unfamiliar to practitioners

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5.6 Sequence of activities

Pre-Contract Activities

Pre-Tender (Employer’s Requirement)

Tender Process (Selective Tender)

Contractor Proposal & Tender Evaluation

Technical Clarification & Negotiation

Award

Post-Contract Activities

Contractor’s Responsibility

Develop Line Drawings into Detail Drawings

Construction

Handing Over

Maintenance

5.7 Standard Form for Design & Build / Turnkey Contracts

LOCAL FORM
i) Government/Public
- PWD D&B/T (2002 EDITION)

ii) Private sector

- Putrajaya Form
- KLCC form
- KLSSB form
- KLIA/MAB Form

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INTERNATIONAL FORM
i) JCT form of contract
ii) ICE Condition of Contract

6.0 Management Contract

6.1 Overview of Management Contract

Management contract can be divided inti two (2) types:

i) Management contracting and

ii) Construction management

6.2 Management Contracting

6.2.1 Overview of Management Contracting

A form of contractual arrangement whereby a contractor is paid a fee to manage the building
of a project on behalf of the client. It is in essence, a contract to manage rather than a contract
to build. Client appoint managing contractor to work alongside professional consultant and
managing the project directly on the client’s behalf. The duty of the management contractor is
to give the construction management service in return for reimbursement on a fee basis.
Management Contractor does not carry out of the construction. They just monitor and
supervised all the sub- contractor appointed for the project.

6.2.2 Nature & Characteristic

i) It is derivative of traditional contract.
ii) The management contractor’s participation extends from the pre-contract to the end of
post contract stage.
iii) The management contractor is engaged to:
iv) planning and programming all stages of the project.
v) contribute his experience on buildability to the design process.
vi) coordination, time, cost and quality control over the works contractors’
vii) provide site facilities for the works contractors’
viii) The contract is normally priced on a cost reimbursement basis; the contract price
comprising the prime cost sum plus the contractor’s management fee.

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6.2.3 Organization Structure

6.2.4 Sequence of Activities

Inception & Feasibility

Design

Tendering

Construction

Handover & Maintenance

6.2.5 Advantages of Management Contracting

i) Speed from inception to completion

ii) Greater flexibility for changes
iii) Benefit of the contractor’s expertise
iv) Better communication line
v) Versatility in application
vi) Accommodate whole range of complex project

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6.2.6 Disadvantages of Management Contracting

i) Employer bearing high contractual risk

ii) Employer’s contractual remedies unclear
iii) Lack of price certainty
iv) Relatively expensive
v) Coordination problems
vi) Site security problems
vii) Limited Employer’s involvement
viii) Legal uncertainty

6.2.7 Standard Form for Management Contracting

i) JCT Std. Form of Management Contract 1987 – Between client and

management contractors works contract.

ii) WC1 & WC2 between management contractors and sub-contractors.

6.3 Construction Management

6.3.1 Nature and Characteristic of Construction Management

Construction management shares a whole range of characteristics with Management

contracts which can be summarized as:

• Construction manager is essentially a construction consultant such as designer for client.

• Construction manager has neither any direct contractual links with professional team.
• Construction management utilizes the services of several main contractors collectively to
carry out the actual construction on a fast-track basis.

Differences from Management Contracting:

In Construction management, the works contractors enter into direct contracts with the
employer; the construction manager not intervening directly in the contractual chain between
the parties to the individual works contracts.

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6.3.2 Organisation Structure

6.3.3 Sequence of Activities

Inception & Feasibility

Design

Tendering

Construction

Handover & Maintenance

6.3.4 Advantages of Construction Management

i) Speed from inception to completion

ii) Greater flexibility for changes
iii) Direct contractual relationships
iv) Better communication line
v) Enables direct payment
vi) Easier to effect termination
vii) Separation of design from management
viii) Employer’s involvement highest

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6.4.5 Disadvantages of Construction Management

i) Lack of price certainty

ii) Relatively expensive
iii) Coordination problems
iv) Legal uncertainty
v) Employer shoulders high risk
vi) Higher employer resources and administration involvement
vii) Enhanced employer responsibility
viii) Increased claims and disputes

7.0 Public Private Partnership (PPP)

7.1 Overview of Public Private Partnership (PPP)

What is PPP?

• Long term relationship between the public and private sectors that has the purpose of
producing public services and infrastructure.

• As cooperation between public and private sectors with a durable character in which actors
develop mutual products and services in which risk, costs and benefits are shared. These
are based on the idea of mutual added value.

• As an institutionalised form of cooperation of public and private sectors, on the basis of

their own indigenous objectives, work together towards a joint target in which both parties
accept investment risks on the basis of a predefined distribution of revenue and costs.

PPP model vary from simple commercialisation to full privatisation and very complex
approach. PPP is the umbrella name given to a range of initiative which involves the private
sector in the operation of public services. These models vary mainly by:

i) Ownership of capital assets

ii) Responsibility for investment
iii) Assumption of risk
iv) Duration of contract
v) Level of private sector involvement

PPP also is an arrangement where public and private sectors work together in implementing
economic projects. It focusses on value for money approach and timely implementation and
efficient facilities management. This arrangement also can be defined as a sharing or
partnership between public and private sectors in terms of risks, rewards and benefits of the
projects.

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7.2 Key Principles of Public Private Partnership (PPP)

i) Allocation of Risk
ii) Value for Money (VfM)
iii) Private Management Skill and Expertise
iv) Whole Life Service Approach
v) Output based Specification
vi) Performance based Payment
vii) Key Performance Indicators

7.3 Characteristic of Public Private Partnership (PPP)

i) Relationship between public and private sectors is based on partnership;

ii) Public sector procures specified outputs or outcomes of a service for a concession
period;
iii) Private sector determines the required inputs to achieve the specified output and the
private sector is given latitude to introduce innovation into their designs and
development to reduce overall costs;
iv) Payment for services is based on pre-determined standards and performance;
v) Promotes ‘maintenance culture’ where the concessionaires will be responsible for the
long-term maintenance of the assets throughout the operational tenure agreed upon;
vi) Integration of design, construction, finance, maintenance and operation – total
package;
vii) Transfer of assets at the end of the concession period becomes an option to the
Government;
viii) Optimal sharing of risks whereby risk is allocated to the party who is best able to
manage it;
ix) Whole Life Cycle Costing (‘WLCC’) whereby PPP projects are usually awarded based
on lowest total cost over the concession period compared to lowest construction costs
under the traditional procurement method-a paradigm shift in the form of procurement
objectives.

7.4 Types of Procurement under PPP Types

BOT Build Operate Transfer Most of the project under BOT method are
focused on economic infrastructure. Most
popular approach in Malaysia.
BLT Build Lease Transfer Most of the project under BLT method are
focused on social infrastructure projects.
BLMT Build Lease Maintain and Most of the project under BLMT method are
Transfer focused on social infrastructure projects.
BOO Build Own Operate Most of the project under BOO method are
focused on social infrastructure.
DBFO Design Build Finance Operate Most of the project under BOT method are
focused on economic infrastructure.
PFI Private Finance Initiative Most of the project under BOT method are
focused on social infrastructure. New initiative
approach in Malaysia

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7.5 Build Operate Transfer (BOT)

7.5.1 Overview of BOT

BOT means of project financing falls under the general heading of concession financing.
Project are totally financed, built and operate by a private developer or contractor and finally
transferred back to the Client after a substantial time period. The cost of project will be high
due to financing charges imposed by the Developer or Contractor. Developer or Contractor is
given a certain number of years of positive revenue to pay back any investment before the
Client take over. Normally, 20-30 years (Concession Period). Examples of completed project;
LDP highway, Kompleks Kerjaraya, International Islamic School at UIA, Gua Musang Rest
and Service Area, etc.

7.5.2 Organisation Structure of BOT

7.5.3 Advantages of Build Operate Transfer (BOT)

i) Realization of projects without spending

ii) More private sector involvement
iii) More innovative & efficiently managed projects
iv) Better value for money
v) Less risk burden on public sector
vi) Single point of responsibility
vii) Maximum incentive on private sector

7.5.4 Disadvantages of Build Operate Transfer (BOT)

i) Mere political ‘gimmics’

ii) Dot not lesson but merely transfer the financial burden
iii) Susceptible to favoritism
iv) Inefficient & cost not effective
v) Users have no direct redress against concessionaire
vi) Higher incidence of poor planning, bad design & poor maintenance

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7.6 Private Finance Initiative (PFI)

7.6.1 Overview of Private Finance Initiative (PFI)

• PPP is an arrangement where a government agency on the one hand and a private sector
entity enter into a long-term relation with a significant degree of risk sharing.

• In the UK there are three categories of PPP:

a) The transfer of private sector ownership into state owned business.
b) Where the public sector contracts to purchase quality service on a long-term basis.
c) Selling government services into wider market and other partnership arrangements.

• PPP offers a number of benefits including being a mechanism for financing infrastructure
development, achieve VFM and innovation solution.

• In PFI, the private sectors take the responsibility of providing a public service including
planning, financing, construction, operation and maintenance under a concession
agreement.

• At the end of the concession typically 25 years, the private sector transfer ownership of
capital asset to the government in good operating condition.

• The public sectors will specify the type and quality of service desired (output
specification).

• The government pays the private sector entity unitary payments for using the services
provided.

• The aim is to bring the private finance, management skills and expertise into provision of
public sector facilities and services.

• The main risk of design, building, financing and operation of the asset is transferred to the
private sectors.

• Three types of PFI:

a) Service sold
b) Financially free standing
c) Joint venture

7.6.2 Characteristic of Private Finance Initiative (PFI)

i) PPP involved two or more parties from public and private sectors with aim for mutual
added value.
ii) All parties have a shared responsibility and revenue for the outcome of the project
accordance with the party’s investment and risk acceptance.
iii) A continuity of relation is implied; sociological, economic aspects such as trust,
interaction, willingness to invest and shared responsibilities.

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7.6.3 Structure of Specific Private Finance Initiative (PFI)

7.6.4 Scope of Private Finance Initiative (PFI)

Financing Planning Designing Construction Operation and Maintenance

7.6.5 Advantages and Disadvantages of Private Finance Initiative (PFI)

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7.7 Build, Lease and Transfer (BLT)

7.7.1 Overview of Build, Lease and Transfer (BLT)

• This system means the project financing falls under the general heading of concession
financing – Ministry of Finance
• Projects are totally financed but build and operate by a private developer. It is finally
transferred back to the government after a substantial time/leasing period.
• During concession period, the private sector is given a certain number of years of positive
revenue to pay back any investment before government takes over the development.
• Normal period is between 20 – 30 years
• The most common examples of BLT agreement – government’s administration, army
camps, police dept, etc.

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