Contracting & Procurement Strategy
Select right structure, partners, number & type of contracts
Project Contracting & Procurement Strategy Development Process
The contracting & procurement (C&P) strategy development process consists of a number of facilitated workshops in which all elements are discussed between the various stakeholders, subject matter experts and decision makers. The preferred C&P strategy shall be tested with key suppliers & contractors.
During project front end development most contracts are services type contracts related to studies, surveys technology and Front End Engineering Design (FEED). These can be competitively tendered or single sourced.
For the implementation phase various contracting options are available and selection depends on objectives, timing, project size and complexity, market conditions, financing, local content, FEED definition, site, interfaces & other relevant factors.
The first thing that the project development team has to do is to determine what the project objectives are. The project objective normally contain HSE, Quality, Cost & Time in relation to CAPEX and operability reliability, availability and maintainability in relation to OPEX. Furthermore elements such as sustainability and local content are part of objectives discussion.
The key challenge with establishment of the project objectives is the determination of the relative importance (weight factor) in relation to the others, with other words which of the objective is most importance. The result of the objective discussion should be an objective list with their weighting percentages.
The second thing to do is describe the project environment elements and factors such as the business environment for which the asset is developed, the markets in which the products will be sold, stakeholders and shareholders. In this section also all the assumptions, givens, constraints, boundaries and challenges should be clearly described as background information.
In this section the project team has to describe all the scope elements of the project in such a way that it provides a clear overview in a structured manner, preferably in line with the desired Work Break Down (WBS) structure. Furthermore it is very important to describe all key interfaces and dependancies including the permit requirements (Authority Engineering). The project scope description should include a listing of key scope blocks/units. Furthermore the scope section shall describe the outline project schedule, cost estimate and CAPEX distribution of the key elements as well as listing of key project (process) equipment.
The type of project financing will influence the Project Contracting & Procurement Strategy so it is important to understand how the project financing will be organised. For example Lender requirements need to be incorporated into the EPC contract(s) and Export Credit Agencies may impose restrictions on project procurement strategy. Also tendering timelines may be longer due to alignement with and due diligence of Lenders.
In order to establish which contract options are feasible the project team needs to determine which scope elements are best combined into a contract and how these contracts need to be split in vertical sense E-P-C or E-P-C-I. This is not an easy task since it requires in depth knowledge of supplier and contractor markets as well as what kind of contract (size & complexity) these markets can take. Furthermore considerations should be made in view of possible consortia which will form in the market in oder to effectively bid on the contract. This may lead to limited number of bidders and competitiveness however on the other hand too many contracts increases the interface risk significantly.
Based on the available contract options the project team needs to determine how many and what kind of contracts are the best solution for the project realisation taken into consideration all parameters such as contract types, long lead equipment, pricing types, terms & conditions. During this activity an option scoring and ranking methodology has to be applied to the feasible contract options in which the options are evaluated against the strategy section criteria which are derived from the project objectives.
Front End Loading
Depending on the number of contract packages the front end loading requirements need to be established which support the C&P strategy. This means that level and number of Front End Engineering Development (FEED) packages is determined. This includes the selection of technology providers and licensors for critical processes. The FEED phase or FEL phase can consist of 3 or 4 phases.
Once the preferred C&P Strategy has been selected the team needs to determine the contracting tactics, tendering timelines, tendering methods and required resources required to perform the various tendering processes for the identified purchase orders and contracts. The FEED/FEL contracts are the first set to be tendered followed by the EPC/EPCI contracts once the FEED package is ready.
One of the last steps in the strategy development process is market testing in which the selected proffered strategy is tested with key suppliers and contractors in order to verify that there will be sufficient interest and that bidders for the identified will submit competitive bids. Depending on the market feedback certain elements of the strategy may have to be adjusted.