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Pricing conditions under a few standard forms of Contracts are discussed below:

Call-off Contracts pricing:

No guarantee of minimum Contract Price or consumption of Services should be committed to the Contractor.

OR

Provide some guarantee on consumption (on a case by case basis).

Include a detailed breakdown of rates for various Work/Service elements in a tabular form. For longer Contract durations with escalation, escalated rates or applicable escalation formula with all necessary conditions should be clearly highlighted.

Fixed costs towards insurances, bank guarantees, and such other costs that are not dependent on the scope or its extent should be separately indicated and preferably not included as part of the rates as, in case of early termination, claims can be examined fairly and settled amicably.

Project management Consultancy (PMC) Contract Pricing:

Typically, a PMC Contract pricing is a collection of manpower unit rates (hourly/daily/weekly/ monthly) for various positions of personnel involved with the Services plus rates and costs for other services.

For the purposes of price comparison and selection of the lowest cost Tenderer, an estimate of the quantity required should be arrived at. Two distinct practices are adopted with respect to the use of estimated quantities in an ITT:

  1. Seek an estimated Contract Price thru inclusion of estimated quantities, with a clear condition that quantities are provided only for Tenderers understanding of Clients’ extent of requirements and information, without commitment or guarantees and; or
  2. Seek rates only and calculate the estimated total price to arrive at the lowest price Tender. This is often done with a view that any indication of an estimated Contract price / quantities could convey or imply a commitment to Contractor, which however is not the case if the Contract conditions are clear.

If necessary, a sensitivity analysis should be carried out in case quoted prices between Tenderers are too close to call and/or where quoted rates do not give enough confidence to the selection of a particular Tender.

In addition to the core manpower rates, the schedule could contain lump sums /rates for various other specialised services where scope could be well defined, such as:

  • Data collection;
  • Procurement services related to Client identified long lead items (LLI’s), assistance during EPC phase, preparation of ITT documents, etc;
  • Subcontracted works such as geotechnical investigations/ survey’s, HSEIA, ergonomics studies;
  • Other requirements.

Front End Engineering and Design (FEED) and engineering consultancy Contracts:

FEED and engineering consultancy Contracts in most cases contain a broad statement of requirements (SOR) with a certain degree of accuracy on the definition of the end product. As always, if the SOR is evolved or end product fairly well defined, there are minimum unknowns and a lump sum pricing (Deliverables + CTR’s or Manhours and Rates) could be well suited. On the other hand if the unknowns are very many and not quantifiable, a reimbursable pricing is adopted.

Pricing basis:

Lump sum on Deliverables and CTR’s;

Pricing is a list of all required deliverables (as identified in the work scope) with price for each deliverable. Along with prices, detailed CTR (Cost, Time and Resources) sheets are requested with the cost, time and the resource required for the deliverable(s). This type of pricing is normally used where required deliverables under a Contract are clearly known.

Cost, Time and Resources (CTR) – provides a detailed description of the Resources required, Time taken and the cost for completing a deliverable in an design and engineering Contract. In addition, it also confirms Contractors understanding of Client requirements under the scope.

Lump sum on Manhours and Rates;

Pricing is a collection of rates and manhours with extension of total amount for various positions/categories of personnel employed for the Services.

The evaluation and selection of the lowest Tenderer in both the above cases is a mere comparison of the estimated cost and if it remains inconclusive, a sensitivity analysis should be carried out.

Reimbursable (fully/partly) on man-hours and rates;

Pricing for a reimbursable Contract would assume a similar structure to that of the lump sums except that they do not contain a fixed lump sum price commitment. They contain rates for various categories/positions of Contractor personnel or price per deliverable with CTR’s.

Preferably a limit on total financial expenditure could be included to ensure there are no cost overruns on the Contract on the other hand such limit may promote expenditure to such a limit. Hence this provision should be selectively and appropriately used.

Thus as discussed elsewhere, key to successful conclusion of a reimbursable Contract is effective Contracts Administration and periodic review of Contractors progress with respect to schedule and budget. However a reimbursable pricing allows flexibility and early start of work while fuller definitions of requirements are still under development.

In case of reimbursable manhours and rates pricing, a Client estimate of hours should be used for an objective assessment and selection of the lowest cost Tender.

In case quoted prices between Tenderers are too close to call, a sensitivity analysis should be carried out.

In addition to the core prices in each of the above, the schedule could contain various lump sums for firm scope such as:

  • Data collection;
  • Procurement services related to Client identified Long Lead Items (LLI’s), assistance during EPC phase;
  • Preparation of EPC ITT Documentation;
  • Subcontracted works such as Geo technical investigations/survey’s, HSEIA, Ergonomics studies, etc.;
  • Other requirements.

Engineering, Procurement and Construction (EPC) Contract Pricing:

EPC Contracts are most often on a fixed lump sum price basis.

In a fixed and firm lump sum EPC Contract, Tenderers are required to estimate upfront what the Works/Services will cost. Once the Contract is in place the Contractor is responsible for any and all cost-overruns. Contracts contain provisions for variations or change orders if Contract defined site or other work conditions are at variance with the actual conditions, materially.

The structure of an EPC Contract pricing section is non standard of all formats. It could vary from a collection of a few lump sum line items on a single page to a number of pages at the other extreme, with detailed descriptions, various schedules and elaborate attachments.

A simple example could be as follows:

No

Description of Price

Unit

Quantity

Rate

Amount

1

Mobilisation, site set up, site survey, data collection, design & engineering, data sheets, calculations, specifications, submission of various procedures, as-built documents, operation and maintenance manuals, etc.

 

 

 

 

2

Supply and Delivery of all required materials and equipment
(Further breakdown of items as and if necessary)

 

 

 

 

3

Construction / fabrications Works
(Further breakdown of items as and if necessary)

 

 

 

 

4

Installation works
(Further breakdown of items as and if necessary)

 

 

 

 

5

Testing and Commissioning

 

 

 

 

6

Optional items
(Further breakdown of items as and if necessary)

 

 

 

 

7

Provisional sums
(Further breakdown of items as and if necessary)

 

 

 

 

8

Other estimated costs

 

 

 

 

9

Demobilisation and site clearing

 

 

 

 

10

Various tables of unit rates and prices to be used in case of any variations to the scope

 

 

 

 

 

Total Estimated Contract Price

 

 

 

 

In a Lump Sum price table, detailed information requests of unit, quantity, rate and amounts are quite normal in a well defined EPC Contract that serves various purposes such as to determine Tenderers understanding of requirements, invoicing and others.

Variations in a large EPC or FEED or such lump sum Contracts are inevitable. Thus for arriving at the cost of changes, the price schedule contains various schedules of unit rates for computing and assessing the value and ultimately compensating the Contractor for such variations/changes. The schedules could consist of unit rates for:

  • Manpower;
  • Plant and equipment;
  • Materials;
  • Work units;
  • Fabrication;
  • Installation;
  • Other rates.

Engineering, Procurement and Construction Management (EPCM) Services Contract Pricing:

An ideal strategy for construction Works is a fixed lump sum EPC Contract. However, in fast track projects where an early start of work at site is required pending full development of engineering and design, the EPCM form of the Reimbursable type of a Contract is used to make the design Contractor responsible for its design based on which the construction contractor carries out the actual construction work. The other services that EPCM provides is procurement services and supervision of construction works.

The price schedule is a combination of fixed prices/rates for defined scope and reimbursable elements. Fixed fees/lump sums generally attempt to limit Client's exposure to costly overruns, wherever possible. The Contract strategy should ensure there is no unnecessary risk imposed on the Contractor for which he would include associated costs and ultimately the Client would have to bear such unnecessary cost. For reimbursable items of work performed over an extended period of time escalation provisions could be considered to reduce risks of cost increases.

Contractor is paid Costs (net cost of wages, materials, burden, transportation, all-in rate for hire of machinery, messing & accommodation, third party invoiced cost for bought out items, fabricated items, etc) against work done as measured, while the Fee representing Contractors overheads and profit is paid against performance (milestones achieved) to relate motivation to work progress. It thus becomes important for the Contracts Engineer to define in detail the makeup of rates and prices and include in the Contract all such possible rates and prices.

In manpower intensive construction Contracts the Fee can be paid per manhour worked, since progress of work can be measured and related to the number of hours put in. The Fee could also be paid, calculated as a percentage of final costs.

A typical EPCM pricing could look as in the table below:

No

Description

Price

1

Fixed Fee

Fixed Lump Sum

2

Home Office Services
(Maximum Guaranteed Manhours
Cost for Home Office Services)

Manhours X Rates

 

Contractor shall be paid @ US$ ____ per hour upto GMM Hours to cover costs of Home Office Services related to reproduction of drawings, documents, data processing, printing, secretarial services, stationery, telephone, fax, etc

3

Field Services

Target Manhours X Rates

4

Provisional Items

Manhours X Rates or Lump Sum for  fixed subcontracts

 

Total Estimated Contract Price

(1+2+3+4) ____________

 

Client approved business trips by Contractor shall be reimbursed as follows:

  • Economy class airfare at documented cost
  • Per diem allowance of US$ _____ without overnight stay
  • Per diem allowance of US$ _____ with overnight stay

Per diem allowance shall cover all expenses of boarding, lodging, laundry, trips, local telephone, transport, living and daily expenses.

 

Fixed Fee shall be adjusted ± @ ___ for Client approved variations

Fixed Fee

Fixed Fee includes all indirect costs, Contractors overheads and profit for performance of the Services (costs other than those specifically reimbursed separately). The primary reason for providing a separate fixed fee is to give the Contractor enough incentive to complete the Services and ultimately realise its profits and overheads faster.

Fixed Fee is a fixed lump sum amount (and payment against it is made in accordance with milestones achieved).

Total dollar / currency value should be separately stated.

Fixed Fee is not subject to Client audit i.e. if the Services were performed in less or more manhours than what is guaranteed in the Contract, the Fixed Fee does not change except in case of Client requested variations to the Contract.

In case of approved variations, payment of Fixed Fee per manhour / or other basis is agreed.

Fixed Fee adjustment is not allowed as a result of:

  1. Contractor's errors or omissions in estimating the extent of Services in the Contract;
  2. Changes in the costs of inputs and currency movements or any other items;
  3. Any overtime work performed by Contractor to meet obligations;
  4. Revisions in time sequence by Contractor;
  5. Remedy of any deficiencies in Services;
  6. Existence of Force Majeure as defined in the Conditions of Contract;
  7. Corrective work as performed by Contractor pursuant to the warranty or Defects Liability provisions of this Contract;
  8. Standby manhours approved by Client;
  9. Variation in Field Services manhours;

Home Office Services Cost

For Services carried out at Contractors Home Offices, Contractor is paid:

  1. Fixed manhour rates for various categories of personnel based on actual hours worked, against approved timesheets/documents. These rates should be bare rates without any overhead and profit element since these are covered in the Fixed Fee.

    There is also a practice of “Guaranteed Maximum Manhours (GMM) Cost” adopted in situations where Contractor agrees not to exceed a Maximum Manhours ceiling in the performance of the services. In case engineering and design as part of home office services are on GMM basis, a full breakdown of the guaranteed maximum manhours and cost should be included with detailed Conditions related to adjustment of manhours , fixed fees, variations, etc.

  2. In addition to the bare manhour rates described above, Contractor could be paid a certain fixed rate per manhour to cover costs and expenses related to Home Office Services such as reproduction of drawings/documents, computer usage, secretarial services, office supplies, special stationery, books and documentation, business communications, courier services and such related costs.

  3. For Client personnel based in/visiting Contractors offices during the Contract execution, Contractor is reimbursed for services provided on usage.

Field Services Cost

For Field/site Services (as part of the construction works by other contractors), Contractor is paid fixed manhour rates for various categories of (construction management) personnel based on actual hours worked, against approved timesheets/documents. This part of the Services is fully on a reimbursable basis, based on the construction contractors work and schedule. However on a best schedule estimate basis a “Target Hours” required to complete the work is established and consequently an estimated “Field Services Cost”.

Other Costs

Actual verifiable costs related to field/site Services such as: project office, office supplies, communication and reproduction, secretarial and clerical services, etc are reimbursed to Contractor.

If Contractor is required to visit sub-contractors facilities for monitoring, approving, inspecting fabrication work or visit vendors in connection with the Services, Contractor is reimbursed cost of business trips by its personnel to include airfares, subsistence/per diems, boarding and lodging, transport, business communication and other such costs as approved by Client.

A summation of the above four cost elements is then arrived at and an Estimated Contract Price” established for various reasons and purposes. A limit of expenditure / not to exceed amount could be stated in the Contract, expenditures beyond which would be subject to Client’s written approval.

To a clear narrative of the pricing, detailed tables of all costs that makeup the estimated Contract price should be attached alongwith conditions and rates for approved business trips by Contractor, per diem / subsistence allowance rates and such rates and costs should be clearly included.

Process License Agreements:

The pricing for a License Agreement is typically made up of:

  1. A royalty for the Process license, in consideration of the grant of rights to use the process and know-how.
  2. Process Design Package (BDEP): cost of preparation / development of the engineering and design package.
  3. Rates for engagement of construction advisors and/or process experts during various stages of the Contract, if any.

Term Maintenance Contracts:

Term maintenance Contracts are quite usual in an operating plant environment where services such as air-conditioning, lighting, painting services, UPS, cathodic protection, scaffolding, civil works, fire proofing and such others are required from time to time / periodic basis to keep a plant in operating condition. To derive optimum benefits, such Contracts are entered into for a term normally between 1-3-5 years.

The pricing comes in two distinct categories by their very nature:

a) Skilled/specialised manpower hired to work directly under Client supervision and demobilized at the end of Contract- used where the scope is not known accurately but Services are routinely required and carried out at Clients risk.

In this case, the pricing is a collection of various specialised manpower unit rates with rates separately for overtime work and cost for materials supply, if any, all paid against approved timesheets normally on a monthly basis.

A typical Table could look like this:

Item
No.

Description

Unit

Rate
/Unit

Personnel
required

Hrs.
Per
Annum

Total
Hrs.

Total
Est.
Yearly
Cost
 (Hrs. X Rate)

1.

All inclusive mobilisation cost
(including trade tools) of

 

 

 

Foremen / Supervisor

L/S

 

2

N/A

N/A

 

Tradesmen

L/S

 

20

N/A

N/A

 

2.

Foremen / Supervisor

 

 

 

 

 

 

2.0

Standard Rate

Hour

 

2

2,496

4,992

 

2.1

Overtime rate (OT1)

Hour

 

2

156

312

 

3.

Tradesmen

 

 

 

 

 

 

3.0

Standard Rate

Hour

 

20

2,496

49,920

 

3.1

Overtime Rate (OT1)

Hour

 

20

156

3,120

 

4.

All inclusive cost of demobilisation
(including trade tools) including site clearing, of 

 

Foremen / Supervisor

L/S

 

2

N/A

N/A

 

Tradesmen

L/S

 

20

N/A

N/A

 

Total Yearly Estimated Contract Price (Add 1 to 4)

 

Notes:

  • Total Standard work Hours are calculated as 48 Hrs./Week x 52 Weeks/Year.
  • Over Time Hours could be estimated on a basis such as:  3 Hrs/Week x 52 Weeks/Year.
  • The hourly rates for Tradesmen should include cost of all necessary tools and equipment
    normal for providing services as per Scope of Works/Services

 

 

 

 

 

 

 

 

 

 

 

 

Payments for:

Services carried out are normally on a monthly basis against approved timesheets

Mobilisation amounts are paid upon achieving defined obligations such as:

Physical arrival of personnel to site (along with any medical’s required).
Submission of Insurance policies and any Bonds/Guarantees required under the Contract

De-Mobilisation amounts are paid upon physical demobilisation of personnel and equipment and site clearing/cleaning.

b) Services under Contractor’s supervision and control - used where the Services are of specialized nature and risk and responsibility for Works/Services is with the Contractor.

Pricing under this type of a Contract is on a cost per month for the defined Services with unit rates for overtimes, material, if any and, any ad-hoc services required.

No

Description

Unit

Rate

Total

1

All inclusive mobilisation cost (including trade tools) of personnel as required per scope of work

Lump Sum

 

 

2

All inclusive cost of Services as per scope of work (Manpower, supervision, equipment, tools)

Monthly

 

 

3

All inclusive de-mobilisation cost (including trade tools) of personnel and site clearing

Lump Sum

 

 

 

Total Yearly Estimated Contract Price (Add 1 to 3)

 

Term Contracts come with appropriate termination provisions at Clients sole discretion.

Longer duration Contracts could come with escalation provisions and agreed provisions should be separately and clearly highlighted.

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