Notes Contracts & Procurement Jan2015 Cai

ARAB ACADEMY FOR SCIENCE, TECHNOLOGY AND
MARITIME TRANSPORT
GRADUATE SCHOOL OF BUSINESS

MBA PROGRAM
PMD 916
PROJECT CONTRACTING & PROCUREMENT
Hesham Bassioni
PhD, MBA, ME, BSc, PMP
January 2015
Sessions Layout (Tentative)
Group Weekends (Fridays)
Lec. Date Topic(s) Assignments Reading Assignment
Introduction Textbook – Chapter 1
Project Procurement Management in Textbook – Chapter 7
1 23/01/2015 CW Sheet 1
PMBOK PMBOK – Project
Principles of contracting Procurement Management
Contract types: fixed price & unit price
CW Sheet 2 Textbook – Chapter 2
2 30/01/2015 Invoicing in fixed price & unit price
Report 1 Textbook – Chapter 3
Price Escalation Clause
Cost reimbursement contracts
3 06/02/2015 CW Sheet 3 Textbook – Chapter 2
Contractor fee diagram
Project Delivery Systems
4 07/02/2015 CW Sheet 4 Textbook – Chapter 2
Tendering methods
CW Sheet 5
5 13/02/2015 Tendering process Textbook – Chapter 8
Report 2
Contract & tender documents
6 20/02/2015 Mid Term (L1 – L4)
Claims / Change Orders & Dispute
Textbook – Chapter 9
7 27/02/2015 Resolution CW Sheet 6
Highlights from Egyptian Laws
8 06/03/2015 Highlights from Egyptian Laws CW Sheet 7 Textbook – Chapter 5
FIDIC Conditions of
9 13/03/2015 FIDIC Contracts CW Sheet 8
Contract – Red Book,
1999
20/03/2015 Final Exam
PMD 916 – Project Contracting and Procurement
Introduction
• A project is an endeavour that is undertaken to deliver a product, service or result.

• Project Management is concerned with meeting project objectives.
• Project objectives can be divided into main
and secondary objectives:
Main goals are
1. Scope
2. Time
3. Cost
4. Quality
A trade-off exists between these main objectives, such that the improvement of one can be
at the expense of the others. Other goals include
1. Safety
2. Environment
3. Society and community
4. Stakeholders’ interests
5. Project teamwork and harmony
• To achieve these project objectives, several parties interact through different kinds of
contractual agreements.
• Project parties/stakeholders include:
1. Owner
2. Consultant
3. Contractor
4. Other parties/stakeholders
1. Owner:
- An owner can be a public entity (governmental or non-governmental) or a private entity
or a person
- Responsibilities of the owner include:
a) defining the needs and criteria of project (e.g. production of a refinery)
b) defining any special requirements for the project (e.g. nominated supplier)
c) studying the business case and feasibility of the project
d) setting the project budget, required completion dates and milestones
e) providing financing to the project
f) setting the level of involvement of each party including the owner
g) follow-up the progress of the project
h) procure and acquire the services and products of other parties
2. Contractor:
- Owner can choose to contract the project to one prime contractor or several work package
contractors
- Responsibilities of the contractor include:
a) provision of materials, equipment, manpower, financing, services, or know-how in
accordance to contract documents, specifications and designs
Prof. Hesham Bassioni 1

b) preparing / providing shop drawings and submittals

c) preparing an accurate estimate and realistic schedule
d) delivering project on time, within budget and with specified quality and scope.
3. Consultant:
- Depending on the type of project, consultancy services can be utilized.
- Sometimes called the Engineer, Designer, or Architect (in case of construction projects)
- The project can be one or multiple consultants
- Responsibilities of the consultant include:
a) provision of specialized technical, contractual, or management expertise
b) producing design alternatives
c) conducting feasibility studies
d) providing detailed designs (e.g. architectural, structural, mechanical and electrical)
and specifications to meet owner’s requirements
e) reviewing shop drawings and approving submittals
f) conducting on site or periodic inspections / supervision
g) reporting progress to owner and oversee contractor payments
4. Other Parties:
A. Subcontractors:
- contracts with the prime contractor to perform some specialised work
- subcontractors can offer prime contractors specific experiences, additional resources
or financing
- work of subcontractor is the responsibility of the prime contractor in terms of the
contractual relationship between the owner and contractor
- a nominated subcontractor or supplier can be chosen by the owner for a special quality
or experience
B. Governments:
- provide regulations and a legal, political and economical environment for the project
C. Suppliers:
- provide specific material or equipment in addition to specialised expertise
Many other project stakeholders exist that have some type of effect on projects, such as
banks, labour organisations, the community, …etc.

Project Procurement Management in PMBOK
A contract is a legal document between a buyer and seller that represents a mutually binding
agreement that obligates the seller to provide the specified products, services or results, and
obligates the buyer to provider monetary or other valuable consideration.
The contract includes terms and conditions and can incorporate specifications or special
requirements. Professional organizations have documented policies and procedures specifically
defining the procurement rules and specifying who has authority to sign and administer such
agreements on behalf of the organization. The project management team may utilize support
from consultants or specialists in contracting, purchasing, law or technical disciplines.
A strong relationship exists between the contract conditions and terms and some identifiable
risks. The wording of the conditions and terms can result in avoiding, mitigating or transferring
risks between the buyer and seller.
Depending on the type of project the seller can be a contractor, subcontractor, vender, service
provider, or supplier, and the buyer can be a client, customer, prime contractor, governmental
agency, service requestor, or purchaser. Most of the principles discussing in Project Procurement
Management is, to a certain extent, applicable to non-contractual intradivisional work in the case
of internal projects or with other units of the project team’s organization.
Project Procurement Management, as a concept, includes:

• The processes necessary to purchase or acquire products, services, or results needed from
outside the project team.
• The contract management and change control processes required to develop and administer
contracts or purchase orders issued by authorized project team members.
• Administering any contract issued by an outside organization (buyer) that is acquiring the
project from the performing organization (seller), and administering contractual obligations
required from the project team by the contract.
Project Procurement Management processes include:
1. Plan Procurement Management.

Includes the process of documenting project procurement decisions, specifying the approach,
and identifying potential seller, as follows:
a. Documenting project needs to be met by acquiring products, services, or results from
outside of the organization, versus those project needs that could be accomplished by the
project team.
b. Deciding whether to acquire from outside (make-or-buy analysis), how to acquire it, how
much is needed and when to acquire.
c. Choice of contract type, project delivery system, seller selection method (tendering
method), and selection process (tendering process). These choices are termed as the
project procurement strategy.
d. Procurement management plan developed
e. Procurement statements of work developed giving sufficient detail such as specifications,
quantity desired, quality levels, performance data, period of performance and location
and terms of delivery.
f. Production of procurement documents to solicit prospective buyers, e.g. tendering
package, Invitation for Bid (IFB), Request for Proposal (RFP), Request for Quotation
(RFQ), Terms of Reference (TOR).

g. Seller selection criteria identified, whether limited to purchase price or extended to other
criteria such as life-cycle cost, technical capability, experience, project approach,
financial capacity, production capacity, business size, warranty …etc.
h. Consideration of potential sellers.
i. Production of qualified seller/vendor lists.
j. Decisions of this process can influence the project schedule, resources, costs, and risks.
2. Conduct Procurements.
Includes the process of obtaining seller responses, selecting a seller, and awarding a contract,
as follows:
a. The process of obtaining seller responses, selecting a seller, and awarding a contract.
b. Sellers can advertise procurements in newspapers, media, trade publication or
notification boards/internet sites.
c. Internet searches have recently had a significant impact on advertising bids or identifying
potential sellers.
d. Conducting bidder conferences to ensure all prospective sellers have a clear and common
understanding of the procurement and that no bidders receive preferential treatment.
Responses to queries are incorporated into contract documents as amendments/addenda.
e. Conducting negotiations to contract price, terms and conditions, financing, schedule, and
other relevant matters. Negotiations can be on a single or multiple basis with sellers.
f. Contractor/seller selection can include techniques such best value or best economic value
or weighted evaluation scores.
3. Control Procurements.
Includes the process of managing procurement relationships, monitoring contract
performance, and making changes and corrections as appropriate, as follows:
a. The process of managing procurement relationships, monitoring contract performance,
and making changes and corrections as needed.
b. Contracts are administered by both the buyer and seller for similar purposes.
c. Conducting inspections and audits to verify compliance of seller with work process,
deliverables and contract terms and specifications.
d. Monitoring payments to the seller and ensuring the contractual payment terms are met.
e. Responsible for managing change orders, change requests, or administration of claims.
f. Managing any early terminations of the contracted works or breaches/deviations from
contract and managing disputes.
g. Ensuring documents and records are kept in order in relation to contract terms and to
support change orders, claims, penalties, or liquidated damages (record management
system).
h. In large projects with multiple providers, a key aspect of contract administration is
managing interfaces among the various providers.
i. Procurement or contractual administration staff can often be functionally separate than
the project organization, despite being part of the project team. Procurement
administration can include assessing seller performance for future projects.
4. Close Procurements.
Includes the process of completing each project procurement, as follows:
a. Completing and formally finalizing each project procurement.
b. Involves verification that all work and deliverables are acceptable.
c. Involves finalizing open claims and disputes, updating records to reflect final results.
d. Formally closing all responsibilities and litigation concerning a contract.
e. Lessons learned documentation for future project procurements.

Procurement Management Plan

Part of the project management plan that describes how the project team will acquire goods and
services from outside the performing organization. The procurement management plan can
include:
• Types of contracts to be used;
• Risk management issues;
• Authority levels of project management team in procuring services & goods;
• Standardized procurement documents;
• Managing multiple suppliers;
• Coordinating procurement with other project aspects such as scheduling and performance
reporting
• Handling of long lead items
• Handling of make-or-buy decisions and linking them into the estimating & scheduling
processes

Principles of Contracting
• The legal definition of a contract is “a mutual agreement between two or more parties to do
something”.
• Contracts should satisfy the following elements:
a. Capacity or competent parties.

- for a party to enter into a contractual relationship s/he has to be competent, i.e. has to
have the capacity of signing the contract.
- minors, intoxicated, or mentally incompetent persons do not have the capacity or
competence of entering a contractual relationship
- if an incompetent party signs a contract, it is considered legally void.
b. Consent or mutual agreement.

- offer and acceptance exists
- contractual parties are not forced, mistaken, tricked, nor deceived into the contract
c. Cause or consideration.
- something is given in return for something else, i.e. the contractor offers his services
(including labor, equipment, and financing) in return for the owners compensation.
d. Legal subject matter.

- contract should be legal and not contradict with any prevailing laws, e.g. a building
that is being built in contradiction to existing laws or for an illegal purpose. Another
example is forcing an interest rate that is against existing common law.
e. Proper form.
- contracts should be in writing (i.e. not oral contracts)
- contracts should have a certain form (explained later in the course), e.g. contain:
general conditions, special conditions, drawings, specifications, addenda and
agreement.

Basic Contract Types
• Many slightly different classifications of contract types exist, but they all more or less
come under the following main categorization:
Construction Contract
Types
Price-based contracts Cost-based contracts

(e.g. lump sum & unit price)
1. Lump Sum Contract
- Contract is based on a single fixed sum for the entire project, regardless of the actual quantities
performed.
- Lump sum however can be either categorised as lump sum with fixed price (also called firm
fixed price FFP) or lump sum with adjustable price. Adjustments can be based on financial
incentives related to agreed metrics in terms of cost, schedule, or technical performance (fixed
price incentive fee contracts FPIF) or can be based on provisions to adjust contract price based
on changed conditions such as inflation changes or cost increases of specific commodities
(fixed price with escalation or fixed price with economic price adjustment contract FP-EPA).
- The project requirements should be well defined and designs and quantities accurately
completed. The contractor can use the quantities in the Bill of Quantities (BOQ) or estimate
his own quantities. In either case, this is his responsibility and he assumes its risk.
- Payments are made according to a ‘Schedule of Values’ that is based on milestones within the
project.
- Lump sum contracts are suitable when projects are well defined, designs are completed, and a
minimum number of variations / changes are expected. Another case where lump sum
contracts are used is the contrary, where the scope of work is difficult to define (e.g. demolition
or repair works) or highly technical and specialised (e.g. chemical process plants). Although
cost-based contracts can be suitable for such contracts, owners might not have enough trust in
the contractor’s accounting system and prefer a lump sum contract.
- Contractors are usually selected through traditional competitive bidding or negotiation.
- The increased risk bared by the contractor can cause quality and performance problems.
Contractors can cut costs in various vital areas to increase their profits, thus affecting the
quality of work performed. Furthermore, contractors inflate their prices when changes are
requested of them.
- A problem inherent with this type of contract is that it takes relatively longer time to prepare
the full design and accurate quantities.

2. Unit Price Contract
- Contract agreement is on the unit price of each cost item and not its quantity, thus the contractor
is paid the agreed unit price times the actual quantities, as per actual performance.
- This type of contract is also called measurement, admeasurement, remeasurement, unit-rate,

schedule of rates, or bill of quantities contract. Sometimes termed as fixed unit price contract.
- A variation is the Time & Material Contracts (T&M). Often used for staff augmentation,
acquisition of experts, and any outside support when a precise statement of work cannot be
quickly prescribed. Unit labor or material rates can be present by the buyer and seller.
- Project design might not be complete at the time of tendering and signing the contract, and thus
the bill of quantities in this contract type contains approximate quantities for guidance to
contractors.
- The contractor is paid frequently in a periodic manner, according to the actual quantities
performed within a certain period. Therefore, standardising the method of measurement is
essential in such contracts.
- The overlapping of design and tendering allows the project to be completed in shorter time.
- This type of contract is widely used and well understood. It also provides flexibility during
performance for owner changes.
- The selection procedure of this contract is usually through traditional tendering.
- The problem with this type of contract is that the final price of the project is not know until the
project ends, which can pause as a problem to owners with restricted or complicated funding
procedures.
- The risk of overrunning the unit price is that of the contractor, whereas, the risk of actual
quantities is that of the owner. However, when the actual quantities (or total price of an item)
vary greatly some contracts and laws allow the modification of the unit price.
Price Adjustment/Escalation:
- Prices in both Unit Price or Lump sum contracts can be adjusted or escalated based on certain
conditions (usually economic conditions) such as inflation during the life of the contract.
- A typical formula used for adjustment/escalation is the following (FIDIC Red Book 1999):
Embellishments
‫ܮ‬௡ ‫ܧ‬௡ ‫ܯ‬௡
ܲ݊ = ܽ + ܾ + ܿ +݀ +⋯
‫ܮ‬଴ ‫ܧ‬଴ ‫ܯ‬଴
- Whereas:
The adjusted contract / work item value = Pn × The original contract / work item value
Pn is the adjustment multiplier
n is the period within the project life, being month, year, or other period.
a is a fixed coefficient representing profit and overheads portion of the contract / work item
cost.

b, c and d, are coefficients representing the estimated portion of each cost element of the
contract / work item cost
Ln, En, Mn are the cost indices or reference prices for period n.
L0, E0, M0 are the base cost indices or reference prices on the base date.
3. Cost-Reimbursement Contract
- In this type of contract, the contractor performs the work and is then compensated or reimbursed
for his actual direct costs plus a fee for his overheads and profit. Also called a cost-plus contract
- The fee can be:

a. A fixed fee (cost plus fixed fee contract CPFF)
b. A fixed percentage of work
c. A fixed fee with a guaranteed maximum price (GMP)
- Usually used when it is difficult to identify the scope of work and enough trust exists in the
contractor’s accounting documentation. Also used when work is needed to start immediately
or when major changes are expected within the project.
- The selection process of contractors is usually based on negotiations.
- The advantages of this type of contract are its high flexibility during the project and the fast
starting of project.
- The problems associated with this type of contracts is the total cost of project is not known
until the end of the project and the absence of incentive for the contractor to control costs and
perform in an efficient manner.
Target Costing
- In order to offer the contractor an incentive to perform efficiently and control costs in cost plus
contracts, a target cost is established with sharing of savings or excess costs.
- If the actual cost of performance is less than the target cost, the contractor shares the profit with
the owner. The same can be done for excess costs.
- Such contracts are termed cost plus incentive fee contracts (CPIF)
The Risk Factor in Contract Types
- Risk is inherent in projects and financial risk is greatly affected by the type of contract. The
contractor is at risk of profit reduction or conversion to a loss. The owner risks paying a total
cost greater than what he expected.
- The risk allocation between the contractor and the owner can be envisaged as per the following
figure, with the lump sum contract (Bill of firm quantities) and cost-plus with a percentage fee
on both ends of the spectrum.

Contractor's risk
Bill of firm quantities
Bill of approximate quantities
Schedule of rates
Cost-plus & GMP - target cost
Cost-plus & fixed fee
Cost-plus & % fee
Owner's risk
Risk Allocation According to Contract Type

Project Procurement Methods / Delivery Systems
• An important decision to be made by the project owner is the project procurement method,
which is sometimes called the project delivery options / methods or the project organisational
options / choices / arrangements.
• The main project procurement methods can be categorised as:
1. Traditional Method
- Sometimes referred to as the Design – Bid – Build (DBB) method.
- Design is conducted by the consultant / architect, without the contractor’s involvement. The
contractor is then awarded the contract, and agrees to construct / build the project.
- The relationships between the project

parties can be seen in the shown figure. Owner
- A contractual agreement exists between the

owner and his professional advisers (i.e. Consultant /
consultant / architect) to design the project Architect
and supervise its performance.
- Another contractual agreement exists Contractor

between the owner and the contractor to
construct / build the project.
- Other contractual agreements exist between

Domestic Nominated
the contractor and subcontractors that can Subcontractor Subcontractor
be either domestic to the contractor or
nominated by the owner.
- The owner’s professional advisors can be under the umbrella of a single consultant / architect
(whether in-house or subcontracted) or can each have a separate contract with the owner, and
thus co-ordinated by the owner’s staff.
- The owner can also have a single contract with one prime contractor or several contracts, each
with a separate prime contractor, such as on a package basis. Again, having several prime
contractors carry out the work requires high co-ordination from the side of the owner, and can
might be better managed by a project manager as can be seen in the following sections.
- All types of contract types are possible with this procurement method, but unit rate is the most
common with some use of lump sum.
- The problems associated with the traditional method of project procurement rise from the
increased complication of some projects that proposes the increased involvement of the
contractor at earlier stages of the project. This led the way to alternative methods of
procurement, as discussed in the next sections. In addition, project stages are sequential, which

can take extended periods of time. This is particularly a problem with the increased costs of
performance and interest rates, thus raising the cost of financing.
- On the other hand, the advantages of this procurement method lie in the clear roles of various
parties and the wider control of the owner over the project (in terms of time, cost and quality).
This control is also extended to the project design to meet the owner’s original project
requirements and criteria.
2. Design and Build
- The contractor in this procurement method is responsible for both the design and
implementation of the project. The contractor also is responsible for planning, organising and
controlling the project, and in general, fulfilling the owner’s project requirements and criteria.
- The relationships between project parties

can be seen in the shown figure. Owner
- The main contractual relationship is

between the owner and the contractor for Advisory
designing and delivering the project. Consultant
- The contractor can have contracts with

subcontractors (domestic or nominated)
Contractor
and design professionals, or use in-house
staff and resources.
- The owner might still contract with a

professional advisor, or use in-house Domestic Nominated Design
Subcontractor Subcontractor Professionals
staff, to oversee the contractor’s designs
and project implementation
- The contractor might enter into some type of joint venture agreement with a design professional
to deliver the design / build contract.
- The owner might have started the design with a design professional or architect, then the design
is completed by a design and build entity. The original design professional / architect is termed
the “bridging architect”, and the design and build entity assumes the full responsibility of the
design.
- Design and build is sometimes referred to as a package deal or turnkey arrangement.
- Payment is usually on a lump sum basis, with intermediate payments related to phases of work
or milestones.
- The main advantages of this method of procurement are that time can be shortened by design
and implementation overlap, responsibility of design and implementation is with a single entity
thus significantly reducing conflicts and disputes.
- The main problems with this type of procurement are its inflexibility to owner’s changes
(usually quite expensive in this arrangement), the possible reduction in quality when hidden

cost savings occur, and the inherent conflict of interest between the roles of the designer and
contractor.
- In the oil and gas industry and with process and offshore projects Engineering, Procurement
and Construction (EPC) contracts are common where contractors offer design, procure and
build the project in a manner similar to turnkey projects.
- A variant of the design and build procurement method is the Build Own Operate Transfer
arrangement (BOOT) or sometimes called BOT. In this type of arrangement the contractor
totally finances the project, instead of the owner, and in return, a concession period is provided
to the contractor to own and operate the project for his own financial benefit. The project is
returned to the original owner after the concession period.
3. Management Contracts
- Increasing in its popularity since the 70s, the management contracts method of procurement
depends on the owner hiring a management contractor to manage and coordinate the design
and implementation of the project. The management organisation does not usually execute any
of the design or project works, which is usually distributed into work packages.
- There are two main variations of management contracts: management contracting and project
management.
Management Contracting:
- A contractual relationship exists with the

management contractor to organise, Owner
supervise, and manage project works in co-
operation with the owner’s design
professionals.
Management Design
- The work package subcontractors enter into Contractor Professional
a contract with the management contractor.
- The design professional is usually employed

by the owner. If the design professional is
employed by the management contractor, WP1 WP2 WP3
the procurement scheme is called design Contractor Contractor Contractor
manage.
- The management contractor is similar to the contractor of the traditional procurement method,
except that he usually does not perform any of the work and is involved in the project from the
beginning stages, including design.
- The management contractor can use lump sum or unit price contracts with each of the work
package contractors.
- Advantages of this type of procurement include: the sharing of work among several contracts
including related risks (especially in large projects); time saving by overlapping design and
implementation and from project manager’s experience in carrying out the project; the

involvement of the project manager’s practical knowledge in the design; and the ability of
entering into separate firm price contracts for different work packages.
- The problems associated with this procurement arrangement include; the uncertainty of the
final project cost; the risks created due to the absence of an overall tender price for completing
the works; and the need for high coordination among work package contractors.
- Management contracts are usually used when an early start to the project is required, design
and implementation are expected to overlap, project is technically complex and changes are
expected throughout the project thus needing the expertise of the project manager, and when
the owner has insufficient staff or specialisation for supervising the project and a considerable
number of contractors are expected to be coordinated in the project.
Project Management:

project manager to organise, supervise, and
manage project works in co-operation with
the owner’s design professionals.

contractor of each work package with the
owner, i.e. the project manager acts
basically as an agent to the owner.
- The owner usually contracts directly with a

design professional.
- The payment arrangement between the project manager and owner is usually on a cost-plus fee
basis, whereas the contracts for each work package contractor is through normal lump sum or
unit rate contracts.
- The advantages of this procurement arrangement includes: the close integration of project work
to the management of the project; close cooperation between project manager and designer
helps overcome technical and managerial obstacles; and design and implementation are
performed in parallel and work packages are performed in succession as the design of each is
completed, thus shortening the project time.
- The main problems encountered in this method of procurement include: presence of more than
one consultant and a number of contractors; and the final price of the project is uncertain until
the last work package is contracted.

Important Procurement Management Concepts
• A Procurement Strategy for a project is determined in the Procurement Planning phase of

the project and in the early planning phases of the project and includes: Contract type;
Project Delivery System; Tendering method; and Tendering process.
• In considering project procurement methods, some important concepts need to be

highlighted. For example, Fast-tracking is referred to the acceleration of project time
through overlapping some of its phases, such as between design and implementation. Joint
ventures or consortiums refer to several parties usually contractors agreeing to form a legal
alliance in one or more projects.
• Another important concept is partnering. Partnering in this context refers to a procurement

option, identified by the Latham Report, by which conflict is minimised. The partner (a
contractor) is initially appointed through tendering or negotiation. The owner and partner
try to create a relationship (sometimes long-term) with shared goals and the intention is to
create a ‘win-win’ situation for both parties. It has been proven that partnership relationships
reduce costs, improve quality and shorten project time.

Tendering Methods
1. Open Tendering
- Open to any contractor, thus ensuring fair competition.

- Advertising for the tender is conducted in newspapers or any other media.
- Bid bond or deposit is required to cover costs of tender documents, but mainly to ensure
seriousness.
- Not necessarily to choose lowest price.
- Contracts can be of any payment type from a payment standpoint.
- The norm in most governmental agencies, but is decreasing in its use in some countries.
Advantages:
- No favouritism and encouragement of competition and new contractors.
- Preventing contractor rings and agreement among tenderers.
- Ensures lower costs in the short term. Argued by some that it causes increase in costs in the
long term
Disadvantages:
- Risk of inexperienced firms winning contracts and causing various problems over the life of
the project, and probably raising the price of implementation in the long term.
- The success rate of winning tenders is decreased with the increased number of firms competing
for contracts, which raises the cost of preparing tenders as a percentage of project cost.
- Tender lists can be quite long and problematic in assessing.
- Larger and more experienced contractors tend to avoid open tendering, unless forced to.
2. Selective Tendering
- A certain number of contractors are invited to tender (say 4 – 8).

- The selected contractors are supposedly seen as suitable for the project.
- Sometimes called single stage selective tendering.
- Double stage tendering has a first stage similar to single stage selective tendering. In the first
stage no prices or preliminary prices are discussed on mostly a single contractor is selected. In
the second stage negotiations are conducted for finalising prices. In double stage tendering, the
contractor can be involved from the early stages of the project.
Advantages:
- Ensures only capable and approved firms enter into the tender.
- Tends to reduce the total cost of tendering in the long term than in open tendering.
Disadvantages:
- Tender values tend to be higher than open tendering in the short term.
- Possibility of agreement among contractors or of favouritism.

3. Negotiated Tendering
- Can be with a single or group of contractors

- If with one contractor it is called nomination or direct order or single tendering.
- General notion is that it has higher costs, but it is argued that it delivers better value / quality
and can possibly have lower long term costs.
Advantages:
- Involvement of the contractor in the early stages of the project
Disadvantages:
- Cost of work in the short term is higher.
4. Serial Tendering
- Tender documents are for a project (or phase of a project) that is repeatable in similar projects.
- Used in repetitive type projects.
Advantages:
- Contractor uses his offices and storage on site and is familiar with project. This can make the
contractor more efficient in following phases.
Disadvantages:
- Success of this tendering method depends on the honest of the owner.

Tendering Process
• The process of tendering differs depending on the procedures of the owner. Following are
examples of the tendering processes.
A. Egyptian Government Procurement Law
A summary of the tender process is:
1. Finding contractors to tender, either through advertisements in open tendering or creating a

short list in selective and negotiated tendering.
2. Contractors submit a technical tender and a financial tender including the bid bond and other
documents.
3. Only contractors who are judged as technically capable are selected for the next step.
4. The least cost bid / tender is selected among the contractors whom were technically accepted.
B. The Code of Practice for Project Management - CIOB
A summary of the tender process is:
1. Preparing the tender list:

- selection of contractor short list
- advertisement and compiling the list of tenderers
2. Arrangements for tender:

- preparing and issuing tender
- queries and site inspections
3. Receipt and opening of tender:

- receiving tenders
- opening tenders
4. Tender appraisal:
- arithmetic checking of tenders
- correction of mistakes
- contractor selection
5. Awarding the contract:

- letter of acceptance and letters of regret
- contract documents

Contract Documents
1. Agreement
- Includes information concerning the owner, contractor, date and place of project.
- Includes a definition of work in the project.
- Includes provisions for pricing method (e.g. lump sum, cost plus, … etc.), time allowed for
performance, and penalties for late delivery.
- May refer to other documents that become part of the contractual agreement, such as the
geotechnical report.
- Some standard forms of agreement exist such as JCT & NEC in the UK, AIA in the USA, and
FIDIC for international contracts.
2. Conditions of Contract
General Conditions:
- Conditions applied to projects in general
- For example, definitions, duties and responsibilities of project parties, contract time, reporting,
payments, changes, schedule, claims, termination of contract … etc.
- Some standard forms for general conditions can be used, such as JCT & NEC in the UK, AIA
in the USA, and FIDIC for international contracts.
Supplementary Conditions:
- Written to the needs of a particular project
- For example, owner provided equipment, drawings, permits, special site requirements, offices,
signs, site access, site security, night work, insurance requirements, equipments or materials
provided by owner, … etc.
- Might contain modifications to general conditions, although this might not be advised as these
changes might not be legally or practically proven.
3. Drawings
- Includes all types of drawings for project.
- For example, architectural, structural, mechanical, electrical, fire protection, landscape,

plumbing, shoring, … etc.

4. Technical Specifications
- The specifications are for each work item in the Bill of Quantities.
- Provides qualitative and quantitative requirements for materials, equipment and

workmanship.
- Can be descriptive, performance (e.g. tests), proprietary, or reference specifications.
- Has preference over drawings in case of any contradictions.
5. Bill of Quantities
- Itemized by all the work items required by the project. Can be itemized according to a standard
system, such as Construction Specification Institute (CSI) Master Format.
- Columns exist for units, quantities, unit price, and a total price for each item or sub-item.
6. Addenda
- Any changes, clarifications, or corrections to the project definition, conditions, designs or

specifications during the bidding period are sent to all bidder in the addenda (i.e. addenda to
contract)
7. Bonds
- Bid Bond.
A security to owner against contractor's refusal to sign contract or proceeding with project
when selected. i.e. ensures contractor seriousness.
- Performance Bond.
A security to owner against contractor's inadequate performance within the project.
- Payment Bond.
A security to owner against contractor's inability or refusal to pay labours and suppliers.
8. Contractor's Bid / Proposal / Tender
- Can be in a standard form, as per owner's preference, to ensure similar bid formats and to
highlight any irregularities.
9. Notice to Proceed
- A letter from owner to contractor advising the date of which the contract time commences.

Tendering Documents
• In addition to the agreement, conditions, specifications, BOQ, and possibly drawings, the
following documents are available for tendering:
1. Invitation to Tender / Bid
- A notification to contractors that a bid is requested.
- Can be in the form of a letter, advertisement or request for proposals (RFP), depending on the
tender method.
- Information should include: owner's name and address; name of project; brief description of
the project; name of architect / consultant; place where bidding documents are available; date
of tender closure; and time and place of tender opening.
2. Instruction to Tenderers / Bidders
- Provides guidelines for preparing and submitting tenders.
- Ensures that all bidders have the same information about the project.
- Information should include: defined terms / glossary; standard form for proposal; how to
submit requests for questions; site inspections; guidance for filling the proposal form; receipt
and opening of bids; withdrawal of bids, how contract is awarded; rejection of bids; and
postponement of opening proposals.

Highlights from the
Egyptian Civil Law Concerning Procurement Contracts
• Construction contracts are discussed in the Egyptian Civil Law – Part 3 – Chapter 1. The
following are highlights from this law:
A. Contractor:
- Contractor is responsible for the quality of the work, even if part of it is done or supplied by
another party.
- Contractor has to remedy any defective work, or work that contradicts with the construction
contract.
- Owner has a right to terminate contract if contractor does not remedy after owner's
notification, or if remedy is impossible.
- The construction supervising construction and the contractor are jointly responsible for the
constructed facility for a guarantee period of 10 years starting from the project takeover. An
architect or design consultant who did not supervise the works, are not accountable for the 10
year guarantee period.
- Any clause in the contract that decreases the 10 year guarantee period is considered void,
unless the life of the facility is less than 10 years.
- A 3 year period exists for owner to present a legal lawsuit against the contractor starting from
his knowledge of the defect or failure of the facility.
B. Owner:
- Owner has to takeover the facility in the earliest possible time after construction is finished. A
legal takeover can take place if the facility is complete, contractor sends a notification to the
owner to takeover, and owner refuses takeover.
- Once owner takes over the facility, any outstanding / remaining payments are due to the
contractor.
- If an accident causes any destruction of the facility, before the owner takes over, the
contractor is held financially responsible. In such case, if owner had supplied equipment or
material, then the contractor is responsible for compensating the owner.
- If owner failed to take over or accident was his mistake or because of his defected materials
or equipment, contractor has the right to original payment and compensation.

- In a unit price contract:

if contractor finds a significant increase in quantities, he should immediately notify the
owner with the estimated increase in contract price, or else his right in additional
payment is lost.
if the increase in contract price is large, the owner can stop construction, terminate the
contract, pay the contractor for finished works, without any compensation for lost profits
or works.
- In a lump sum contract:

contractor has no right to increase contract price, unless some error is made by the owner
or by a mutually agreed change order.
Any changes should be in writing, unless the original contract was verbal.
If material or labor prices increased, contractor has no right to increase contract price,
unless a general or national disaster occurs.
C. Subcontractor:
- Contractor can subcontract some or all of the work, but remains responsible for it in front of
the owner.
- Subcontractors and contractors' workers have the right to legally ask the owner for any
unpaid dues concerning the facility. They also have preference, in case of legal seizure upon
the owner or contractor, in the proportion of their debts.
D. Contract Expiration:
- Owner can expire the contract at any time, but has to compensate the contractor for all his
expenses and for expected profits, unless the contractor used his time in other work.
- Contract expires if continuation of work is impossible.
- Contract expires if contractor could not complete contract for circumstances beyond his
control.

Highlights from the
Egyptian Government Procurement Law (Law 89 for Year 98)
• This law is applicable to all government agencies including ministries and local
governorates.
• Tendering methods applicable in the law are:

- Open tendering ‫المناقصة العامة‬
- Selective tendering ‫المناقصة المحدودة‬
- Local tendering ‫المناقصة المحلية‬
- Group negotiation ‫الممارسة العامة أوالمحدودة‬
- Direct order or single negotiation ‫األمر المباشر‬
• Some highlights from the law:
- A bid bond should be paid with each bid either in cash or as a guaranteed bank check or
letter of credit.
- Egyptian companies have a preference over foreign companies in selection within 15% of
their bids.
- A retention is required from the company awarded the contract as security to the owner.
- Contractor is responsible for all specifications, drawings and designs.
- Safety is the responsibility of the contractor towards all workers or government property.
- Penalties are due for each week of delay with a maximum of 10% of the contract price.
- Government has to pay invoices within 2 months of its issuance, or else interest charges
are due according to the discount rate of the Egyptian Central Bank.
- If the contract period is over a year, contract prices can be revised or escalated every
contractual year.

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ARAB ACADEMY FOR SCIENCE, TECHNOLOGY AND

GRADUATE SCHOOL OF BUSINESS

• A project is an endeavour that is undertaken to deliver a product, service or result.

Prof. Hesham Bassioni 1

b) preparing / providing shop drawings and submittals

Prof. Hesham Bassioni 2

Project Procurement Management in PMBOK

Project Procurement Management, as a concept, includes:

Project Procurement Management processes include:

1. Plan Procurement Management.

Prof. Hesham Bassioni 3

Prof. Hesham Bassioni 4

Procurement Management Plan

Prof. Hesham Bassioni 5

• Contracts should satisfy the following elements:

a. Capacity or competent parties.

b. Consent or mutual agreement.

d. Legal subject matter.

Prof. Hesham Bassioni 6

Basic Contract Types

Price-based contracts Cost-based contracts

1. Lump Sum Contract

- Contractors are usually selected through traditional competitive bidding or negotiation.

Prof. Hesham Bassioni 7

2. Unit Price Contract

- This type of contract is also called measurement, admeasurement, remeasurement, unit-rate,

- The selection procedure of this contract is usually through traditional tendering.

Prof. Hesham Bassioni 8

- The fee can be:

- The selection process of contractors is usually based on negotiations.

The Risk Factor in Contract Types

Prof. Hesham Bassioni 9

Bill of approximate quantities

Cost-plus & GMP - target cost

Cost-plus & fixed fee

Cost-plus & % fee

Risk Allocation According to Contract Type

Prof. Hesham Bassioni 10

Project Procurement Methods / Delivery Systems

• The main project procurement methods can be categorised as:

- Sometimes referred to as the Design – Bid – Build (DBB) method.

- The relationships between the project

- A contractual agreement exists between the

- Another contractual agreement exists Contractor

- Other contractual agreements exist between

Prof. Hesham Bassioni 11

2. Design and Build

- The relationships between project parties

- The main contractual relationship is

- The contractor can have contracts with

- The owner might still contract with a

- Design and build is sometimes referred to as a package deal or turnkey arrangement.

Prof. Hesham Bassioni 12

- A contractual relationship exists with the

a contract with the management contractor.

- The design professional is usually employed

Prof. Hesham Bassioni 13

- A contractual relationship exists with the

- A contractual relationship exists with the

- The owner usually contracts directly with a

Prof. Hesham Bassioni 14

Important Procurement Management Concepts

• A Procurement Strategy for a project is determined in the Procurement Planning phase of