W27_SJP_Knowledge Enhancement for GPC ELPC Examinations (Part 6)

Issue Identification and Appraisal

Blogs 22 thru’ 26 have covered some of the knowledge shortfalls that require enhancement to increase my opportunity of a successful result in the GPC ‘Expert Level’ examination.

The GPC’s self-assessment questionnaire uncovered a few deficient knowledgeable areas that need addressing. In order to better understand the subject areas development of blogs to assist learning about the areas is a way to better absorb the content. The final few blogs will all have the same problem statement, “What subject areas need knowledge advancement prior to undertaking the GPC Expert Level Project Controls examination?”

Feasible Alternatives

The deficient subject areas can be termed feasible alternatives, and these are:

  • Monte Carlo Simulation – covered in Blog 23
  • Configuration Management – covered in Blog 24
  • BIM Modelling – covered in Blog 25
  • Project Forensics – covered in Blog 26
  • Stakeholder Engagement – covered in Blog 22
  • Contract Selection
  • Management Competencies

The above list is based on the results from the GPC’s self-assessment which was performed in May’2017 and is a summary of seven areas that need enhancement in the coming weeks. Hopefully a blog can be developed for each item during the remaining weeks the course runs. For Blog 27, the subject will be “Contract Selection”, a subject that the author has had to work with for the majority of his working life in the Oil & Gas Industry.

Develop the Outcomes for each

Each remaining blog will develop an outcome for each “Feasible alternative” (FA) subject as the subject gets reviewed, it will not identify an outcome for the other FA’s in that blog.

“Contract Selection” has a dedicated module for it, Module 5 – “Managing contracts” which has six sections to it.

Below is the list of items that this blog will address.

Table 1 – Contract items in GPCCAR Self-assessment

As can be seen from the assessment there are 7 groups which encompasses 9 items.

Selection Criteria

The criteria for this blog is found in several areas in the GPCCAR, as well as some online research;

  • M05-1 “Introduction to Managing Contracts”
  • M05-3 “Select Project Delivery Method/Contract Type”
  • M05-4 “Tendering and Bidding the Project”
  • M05-5 “Managing the Contract (Owner and Contractor)”
  • M05-6 “Closing the Contract (Owner and Contractor)”

Analysis and Comparison of the Alternatives

Let’s look at the GPCCAR sections, where possible the wording has been crafted to the authors own wording, however in some situations what has been written is not different to how the author would have word-smithed it whereby full credit goes to the GPCCAR authors as noted in the references below. In all the blogs 23 thru’ 27 this has been the case, and there has been no intent to plagiarize any work by others.

Item 1 – The processes associated with managing Contracts module (GPCCAR Module 05.1.2)

Figures 1 and 2 are the process maps for the Owner and Contractor respectively.

Figure 1 – Owners Process Flow Chart for Managing Contracts (GPCCAR)

Figure 1 illustrates the “Inputs” as being; Owners Business Case, WBS, and Risk & Opportunity analysis. The key deliverable is to be able to put the project out to bid, evaluate the bids and award a Contract to the successful bidder(s), and assumes that the scope of work is complete (with no omissions, etc.,) and defined in the contract documents, and is complimented with a fully resource and cost loaded CPM schedule (Performance Measurement Baseline – PMB) outlining how the Contractor intends to execute the project.

Figure 2 – Contractors Process Flow Chart for Managing Contracts (GPCCAR)

Figure 2 illustrates the important differences between that of the Owner’s process, largely due to the fact that the scope has been defined by the owner in the Contractual Documents, provided the Contractor with sufficient information to reasonably identify risks which should be included within his/her bid proposal. The key document for the Contractor is the NTP (Notice to Proceed) allowing commencement of work upon execution of the Agreement.

Item 2 – The purpose of the Managing Contracts Module (GPCCAR Module 05.1.1)

This section introduces the tools, techniques and methodologies for managing and what is contained in the module has been identified as being “best tested and proven” practices which have been found to work on “most projects, most of the time”. It discusses the differences between owner and contractor project controls departments in particular the relative importance of contracts. In large Owner organizations, contract preparations/management is performed by a separate functional department to that of project controls, while the Contractors Project Controls organization appear to be more hands-on.

If the objective of both owner and contractor is to mitigate claims (claims avoidance) and disputes, then linking these internal functions with the teams that deal with the day to day running of contracts is imperative. The key to having this type of environment is to ensure that the Scope of Work (SoW) is well defined by the Owner containing minimal or no ambiguities (and those that exist have provisions for changes by the Contractor).

The role of the Project Control Practitioner (or Professional) in managing contracts although not widely recognized or appreciated, is vital to successful management of the project.

Item 3 – The background supporting the Managing Contracts Module (GPCCAR Module 05.1.3)

In most large organizations, contract preparation and management is done by a separate department to that of Project Controls, often the functional responsibility of the legal or contract & commercial departments. While this makes sense, if the objective of an owner or contractor to minimize or eliminate disputes and claims, then whichever functional department contracts is under needs to be proactive in working closely with project controls, in particular, the forensic analysts, to structure contracts in a way designed to reduce if not eliminate disputes and claims and if they do occur address them promptly and proactively rather than let them drag on. The role of project control practitioners in managing contracts is perhaps one of the least appreciated or recognized roles and responsibility a project control department has, particularly from an owner’s perspective. Based on the 2015 KPMG research, it is clear that projects are failing with far too much regularity. Which is why, project control professionals need to know and understand the magnitude of the problem as well as know and understand the leading causes of project failures caused by poor contracting practices. Why is this important to know and understand? Because project control professionals are in the unique position to influence, mitigate or prevent these failures from happening.

Causes of Project Failures “In terms of what was causing these disputes, the issues most typically identified were:

  • a failure to properly administer the contract,
  • ambiguities in the contract documents,
  • a failure to make interim awards on extensions of time and to give associated compensation,
  • incomplete design information or employer requirements and conflicting party interests”.

As can see the majority of these items are contract related. The report concluded by stating that:

  • “although the value of disputes seemed to be decreasing and the trend toward settling them was becoming less formal”:
  • “… disputes are still costing the industry unnecessary time and money and greater focus is still required to help avoid the dispute from the very outset through better contract document design, production and administration, as well as improvements in the level and standard of relevant design information.”

The recommendation is to produce “better contract document design, production and administration” in terms of what this means for the project control practitioner, getting the “right” or “best” contract is of critical importance. Summarizing, as evidenced by the proliferation of claims, disputes and litigation, not to mention the rather abysmal “failure” rate of projects, it is clear that “contracting” as it is currently practiced is not working, either for owners or for contractors. So how to start to fix this problem?

Contract TYPE is determined by Project Scope Definition

Contracting type is determined by scope definition and one of the most frequent and often fatal mistakes is for owners to select a contracting type which is inappropriate to the real or true percentage of scope defined at the time they put the contracts out to bid. Using a contract type which is inappropriate to the level of scope definition is a guaranteed recipe for disaster.

Figures 3 and 4 show the Risk allocation based on Scope Definition in two differing formats.

Figure 3 – Scope Definition and Risk Allocation by Contract Type (GPCCAR)

Figure 4 – Detailed Explanation of Figure 3 (GPCCAR)

Unfortunately, the tendency of many if not most owners is to try to pass along as much risk as possible to the contractor, using firm fixed price contracting, with either no appreciation or a false understanding of how much scope they are really including in their contract documents. Then when the owner starts to get change requests, they blame the contractor when in fact, scope definition is not the contractor’s responsibility at all but the owners. For a contractor, ambiguous or conflicting scope represents a potential OPPORTUNITY, which as good business people, they are obligated to their shareholders and owners to exploit. Explained another way, if owner organizations are receiving large numbers of change orders, they need to look internally at their own scope definition process first before blaming the contractors for being “greedy”.

Another “root cause” problem which owners are often guilty of and that is they rarely if ever give any thought to what risks the contractor can possibly manage if at all (i.e. External Risks from our Risk Register) or whether any specific risk can better be managed by the owner rather than the contractor.

Item 4 – Contract selection (GPCCAR Module 05.3.3.1)

There are Ten Contract types and Five Project Delivery Methods – refer to Figure 5

Figure 5 – Project Delivery Methods and Contract Types Compared (GPCCAR)

The following Matrix shows the Pros and cons of the Contracting Types

Figure 6 – Contract Types, When Used and Pros/Cons (GPCCAR)

The Matrix below provides Delivery Methods

Figure 7 – Project Delivery Methods (GPCCAR)

Item 5 – Reverse Auctions & Agreements (GPCCAR Module 05.4.3.3 & 05.4.3.8)

Reverse Auction – Is a process where bids are posted on the internet with each subsequent bid being lower than the previous bid. One of the reasons for owners requiring unit prices and / or cost and resource loaded schedules as a prerequisite to issuing the notice to proceed is to enable their project control departments to conduct a “due diligence” assessment, analyzing the unit costs and activity costs to ensure that the contractor has not unbalanced the bidding. Unfortunately, bid shopping and reverse auctions are routinely encouraged by owners, to the point where in some countries, laws have been passed prohibiting both. However, especially in the Middle East and Asia, this practice is pervasive, and over the long term only hurts owners as it drives the legitimate contractors out of business leaving only the less scrupulous still in business.

Agreements – The reason this is important to the project control professional (PCP) is; As an OWNER’s PCP, the agreement needs to contain all the elements outlines, if it doesn’t contain all these elements the PCP’s organization is being set-up up for higher pricing (the more ambiguous the contract documents the more likely to get large spreads between the high and low bidders) and the more likely the organization will get hit with change orders. There are many contractors out there who specialize in finding discrepancies in the contract documents then “buy” the project by bidding low, with the expectation they will make money on change orders. A PCP is well positioned as a subject matter expert to guide his/her project team and management into putting together complete and well written contracts.

The Basic building blocks of a contract are:

  • Contract Drawings
  • Technical Specs
  • General Conditions
  • Supplemental/Special Conditions and the Contracting forms
  • Agreements (the actual contract document between owner and contractor)
  • Bonds (performance, Bid, Performance, etc.,)
  • Certificates (Insurance, Business, Technical, etc.,)

“Prior to bidding” any or all of the above building blocks can be modified by the Contract Team (Architect, Engineer, etc.,) by issuing Addenda(s)/Addendum(s), which is then incorporated into the “Bid Package” which is issued to bidders to submit their bids/tenders. Upon determining a suitable bidder either by choosing the lowest bidder, best technically qualified, or after negotiations, the Agreement is formulated and sometimes can include a section for bid clarifications if these formed parts of the negotiations. The agreement needs to be executed by having the designated/authorized owner and contractor personnel sign and date the pages as required. Once there is an executed contract the issuance of a “Notice to Proceed” (NTP) can be implemented allowing work to officially commence. Should future changes occur, these would covered under the Management of change sections of the Agreement (See Module 10).

Item 6 – Elements of Enforceable Contract (GPCCAR Module 05.5.3.2)

There are five elements needed in order to have an enforceable contract; Offer, Acceptance, Exchange, Capacity and Legality.

  • Offer – a promise or commitment with definite clear terms
  • Acceptance – of the offer exactly as made. Any modifications to the original offer are called “a counter offer” and are subject to acceptance
  • Exchange – of something of value
  • Capacity – to perform financially, technically and legally
  • Legality – intent, methodology or deliverables Contracts cannot be enforced to do something which is illegal

Item 7 – Liens (GPCCAR Module 05.6.3.3)

Meaning of Lien – A lien is an encumbrance on one person’s property to secure a debt the property owner owes to another person. The statement that someone’s property is “tied up” describes the effect of liens on both real and Personal PropertyLien is a French word meaning “knot or binding” that was brought to Britain with the French language during the Norman Conquest in 1066. [The Free Dictionary]

Claim on the improved property by the contractor, subcontractors, laborers, and material suppliers for the monies owed to them. In general, a mechanic’s lien takes precedence over any mortgage on that property because, it is assumed, the value of that property has increased to the extent of the lien. Also called materialman’s lien. Given that in many parts of the world, owners are paying their prime contractors but in turn, the primes are not paying the subcontractors, many global organizations with property in countries which do have lien laws (nearly all countries which are based on English law) are requiring the prime contractors to obtain release of liens from their subcontractors, suppliers and vendors. This is something of significant importance for project controllers to know and understand because if the subcontractors and vendors are being starved for working capital, then it impacts the production rates on the project.

Selection of Preferred Alternative

There are no preferred alternatives in this case, all 4 items listed above are needed to enhance current knowledgebase ahead of the GPC ELPC Examination.

Monitoring Post Evaluation Performance

Post evaluation monitoring will be to see if what has been provided above has been fully understood and useful to assist successful passing of the examination, and then used on future projects to demonstrate the effectiveness and value of what a Project Control Practitioner provides to the project team, and decision-making process.

References

 

One Reply to “W27_SJP_Knowledge Enhancement for GPC ELPC Examinations (Part 6)”

  1. Perfect Steve…… This is exactly the kind of “Cliff Notes” or “Schaums Outline” that you need to be creating in preparation for your 5 hour long, open book exam.

    BR,
    Dr. PDG, Jakarta, Indonesia

     

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