Contracting Formulas for Large Engineering Projects. The Case of Desalination Plants
Abstract
:1. Introduction
2. Background and Theoretical Framework
- Immediate availability of all information.
- Project targets (timeframe–price–quality).
- Technical capacity and the means available at the moment.
- Economic and financial conditions of the project.
- Market situation at the moment and its foreseeable evolution.
- Objectives of the contract.
- An EPC project usually results in a turnkey installation. Upon completion, the EPC contractor delivers a ready-to-run installation. A D&B contract is similar to DBB contracts, with an active role of the owner upon receipt of the installation. There is also no EPC equivalent of the D&B processes “design assistance” or “accelerated process”. This reflects the customer’s minimal involvement in the EPC design process.
- EPC contractors often have performance requirements (output levels, uptime levels, maximum maintenance costs, etc.), while most D&B contracts provide design details in customer communications during execution.
- The role of the client, who is more active in the D&B than in the TC, both during the development of the work and in the reception and commissioning. The customer’s participation is minimal in the process of designing the turnkey contract and usually receives the finished project after commissioning.
- In most D&B projects, the contractor provides design details during execution that must be approved by the client. The contractor of a TC often has performance and result requirements.
- The risk to indefinite contractual elements in D&B contracts is shared between the client and the contractor, thus adopting a traditional approach to DBB. In contrast, it is not uncommon for TC contracts to assign these risks to the contractor.
- At the international level, the D&B contract has served as the basis for the configuration of the international construction TCs. So, while a D&B contract cannot be equated to a TC, it always includes the obligations found in D&B contracts.
- The TC has emerged from the business practice to respond to the needs of customers and is linked to the transaction of the project.
- Turnkey procurement gives confidence to financial institutions and international and multilateral agencies in the international construction market.
- In a TC, the engineering is carried out in parallel with the execution of the works, while, in Spain, in a D&B, the design of the project must be completed and approved by the public sector before construction begins, thus complying with the Public Sector Contracts Act.
- Concentrates on a single contractor design and work.
- It offers faster development in parallel engineering and construction.
- Reduces communication needs between owner–contractor.
- Change or changed orders that generate time and budget variances are removed or reduced.
- The contractor exclusively assumes the risk of the technological developments.
- The contractor is responsible for compliance with the quality requirements established by contract.
- Client. Client quality was assessed to define precisely the scope and objectives of the project; contractual manageability; whether they have adequate personnel or a team of consultants; whether they can properly coordinate contractors; and their expertise in developing similar projects.
- Contractor. Contractors are assessed for their financial solvency; technical experience from similar works and their availability to be part of temporary joint ventures and consortia; check their suitability to respond appropriately to the needs of the project.
- Contract. It is necessary to qualify whether a type of contract is appropriate for the proposed project and the particular circumstances of all the parties affected by it; identify the responsibility assumed by each of the parties and the distribution of risks amongst them.
- Budget. The form of payment; the fulfillment of the established milestones; the possible claims; the treatment of costs not covered by the budget; the guarantees and the evaluation of the work carried out in the event of a halt or termination of the contract.
- Financing. Financial availability is considered prior to the signing of the contract; information on public funds and the necessary requirements to apply for them; the availability of independent companies to audit the progress of the project; and how it affects the total or partial external financing in the work certification.
- Risks. Client risk, contract risk, contractor risk, financial risk, country risk, and governance risk are also assessed.
- Technological Developments. Evaluation of the offers considering the parties that improve the project during the construction phase and during the life of the project; the competition improvement aspects by assessing the life cycle of the infrastructure; and efficiency of the processes, consumption, maintenance, and quality.
3. Case Study
3.1. Oropesa-Cabanes Desalination Plant (OCDP)
- Modularity to adapt to seasonal demand, because Alicante is a province with a large tourist population during the summer.
- Contribution to the improvement of water supply and quality.
- Contribution to tourism promotion and the development of the area.
- Careful environmental and architectural integration.
3.2. Southern Seawater Desalination Plant (SSDP)
- Security in construction and operation.
- Use tanks between different process areas. These areas are insulated so that no transients are transmitted from one to the other, while commissioning is done more easily.
- Design a safe plant and easy to start and operate.
- Employ a level of redundancy for flexibility and operational assurance.
- Achieve the lowest specific energy consumption possible.
- Design a plant capable of updating with the new membrane developments that the future will bring with the minimum cost, both in reverse osmosis and ultrafiltration.
- The distinctive features of the plant include:
- High quality civil works, equipment and architectural design.
- One of the world’s largest pretreatments with ultrafiltration membranes (UF) (720,000 m3/day filtration capacity).
- High availability factor (95%, 345 days/year).
- High quality of water produced; partial double step for reducing the concentration of bromide below the limits of Australian drinking water quality standards.
- Membranes in hybrid configuration (different types of membrane inside the pressure tubes) and with split water extraction on both sides of the tube, enabling reduced energy consumption and the size of the second step.
- Very low energy consumption design: 3.72 Kwh/m3 in total including the two steps of osmosis and pumping water product representing 0.58 Kwh/m3.
- Environment friendly.
4. Analysis of the Case of Study
- Client. Acuamed, the owner of the OCDP, had experience in the development of similar projects, but with breaches of term and budget in each of them. In the project under study, they showed a lack of management capacity. Water Corporation, the SSDP client, had experience and procedures to develop a large infrastructure contract.
- Contractor. The winning consortium of OCDP had problems because one of its companies was affected by problems arising from the 2008 economic crisis. The winning consortium of SSDP, with experience in similar projects, had to function properly in the project.
- Contract. The OCDP was developed with a D&B contract in accordance with the Spanish Public Sector Contract Law [23], since it does not allow turnkey contracting. The SSDP was developed as a TC project.
- Budget. The OCDP budget, in accordance with Spanish Law, was set by bidders in their offer, and must always be lower than that provided by the administration. In the SSDP, the competition preparation phase between the finalist consortiums and the possible negotiation of contingencies and risks, favored a tight budget without deviations.
- Financing. In the Oropesa Cabanes desalination plant, unforeseen and deviations in terms of time negatively influenced the financing of the project. In SSDP, the planned financing was met in parallel with the fulfillment of deadlines and budget.
- Risks. In the OCDP, certain risks were underestimated as the client is a public company dependent on central government. The risk analysis carried out for the SSDP project, which is located in a different country, was much more thorough and complete.
- Technological Developments. In both contracts, the companies offered adequate technological developments consistent with the uniqueness of these infrastructures.
- Client: Scored a 2 in the OCDP project for the lack of capacity to manage the project; lack of coordination with other public administrations affected and the non-compliance with deadlines on their part. While in the SSDP, all criteria were met, so the maximum score was assigned.
- Contractor: Scored a 3 for OCDP because one of the partners had serious economic problems that led to changes that affected the awarding consortium; the local partner failed to meet the objectives based on their specifications and did not take steps to avoid the prolonged and successive construction stops. In the SSDP, all requirements were met, so it was evaluated with a 5.
- Contract: A 2 was assigned to the OCDP project because the condition of completion and prior approval of the project did not work due to non-compliance with the deadlines set out in the contract by the customer, the responsibilities set, and the complaint mechanisms were breached. Quite the opposite of SSDP, rated 5.
- Budget: The 2 score indicates the clear budgetary inadequacy for the project and work of the OCDP, under the conditions it was actually carried out. While 5 indicates the success of the SSDP.
- Financing: The OCDP project was allocated a 2 for the negative condition in the unforeseen stop periods of construction and its impact on demobilizations and mobilizations not considered during the supply period. The 5 awarded to the SSDP indicates strict compliance with the commitments.
- Risks: The 2 score indicates a clear deficiency in assessing the risks of the OCDP, undoubtedly due to false assumptions of risks by working within the country itself with institutions dependent on central government. The 4 assigned to SSDP notes that despite having carried out a thorough analysis up to the last phase of bidding, during the development of the project unexpected problems arose with local subcontractors that had to be managed at a late stage.
- Technological Developments: For the OCDP, the 3 score assesses the perfect response of the solution developed to correct the environmental impact of a desalination plant; it also reflects the demand characterized by strong season cycle and energy efficiency in the desalination process. The highest score given to the SSDP reflects the above number of extraordinarily demanding requirements in terms of environmental impact correction, energy consumption, and other characteristic ratios that led to the award of the best desalinating plant in 2012.
- Lack of adequate legislation.
- Following the customs and habits of traditional procurement.
- The absence of the concept of global responsibility placed on the contractor, who took advantage of the management of work exercised by the administration and the failure of deadlines to make important economical claims.
- The risks assumed by the contractor are limited due to the status of the limited liability company.
- The contractor selection process.
- Contractual documents with clear identification of responsibilities in accordance with a turnkey contract.
- The high risks demanded of the consortium, as a result of global responsibility and the high budget.
5. Conclusions
- Risks: determination of the risks of the project and assignment in the contract of the responsibility of these risks to the parties.
- Negotiation: The type of contract should not be imposed but negotiated between the two parties and decided by common agreement.
- Customer Requirements: A turnkey project requires the customer to have an adequate and experienced technical structure to define their parameters, monitor their development, and approve and receive the works. If the client does not have their own technical and experienced staff, they should hire companies to provide such expertise.
- Contractor Requirements: The turnkey contract requires the successful bidder to have sufficient technical expertise and economic solvency in line with the size of the project. Companies should demonstrate that they have personnel, materials, and procedures with experience in similar contracts. It is common practice to train consortia between companies that are complementary in the distribution of jobs and the assumption of risks and responsibilities.
- OBE phase: Introduce into the procurement processes an estimation open book phase that allows for adjustments and agreed designs and prices, which will reduce the risks of the project, contingencies and construction phase deviations that result in costs and claims; this practice will have a better end result with a more transparent and fair treatment of the actual costs of the project.
Author Contributions
Funding
Conflicts of Interest
References
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D&B | TC |
---|---|
A single contractor develops the design and construction | |
Promoter (owner) has to approve the engineering (design) before construction begins. | It allows the parallel development of design (engineering) and construction. |
Approval of engineering limits contractor responsibility. | Overall contractor responsibility. |
Approval of engineering does not prevent modified work and claims during construction phase. | There is usually no modified work during the construction phase and the contractor’s claims are very limited or do not exist. |
Open bidding process. | Restricted bidding process. |
All aspects of the contract are provided by Public Sector Contract Law (public law). | Litigation is resolved by arbitration or civil law. |
- | Most developed countries allow the use of the TC for the administration. This option is not possible in the European Union and Spain. |
It reduces the number of bidders considerably, focusing on companies with the capacity to develop the project. | |
It requires the client to have teams (own or contracted) with experience and knowledge to supervise the execution of these types of contracts. |
Oropesa-Cabanes Desalination Plant (OCDP), Spain | Southern Seawater Desalination Plant (SSDP), Australia | |
---|---|---|
| Public Company of the Government of Spain. Experience in construction of more than 20 desalination plants, but with breaches of term and budget in each of them. | Western Australia Government. Responsible for supplying drinking water and treatment for more than 2 M. inhabitants. Successful experience in construction of 1 desalination plant. |
| Consortium made up of 3 companies, 1 with experience in the construction of desalination plants | Consortium formed by 4 companies, 2 Spanish companies with experience in turnkey construction and desalination plants + Australian engineering company and construction company. |
| Project and Work according to Spanish legislation on Public Sector Contracts. Requires Project approval before starting work. No negotiation. Accession to the Contest Base Fold. Contractual term: 3 months (Project) + 18 months (Work). Delays, stops, deferrals: delivery in 2015 (award in 2007). | Turnkey responsibility of the Contractor. Negotiation in the bidding phase between the Client and the two finalist consortia. Includes proposals for technological developments. Term 1st Phase: Contractual, 28 months. Completed in 26 months. Term 2nd Phase: Contractual, 22 months. Completed in 24 months. Deadline compliance |
| Award: 52 M€ Final (included modified): 55.5 M€. Deviation of 6.73% With partial funding of European funds. | 1st Phase: 475 M€. 2nd Phase: 350 M€. Compliance within budgets. No deviation. Funded by the Government of Western Australia. |
| Work certification with milestones. No billing during periods of waiting for project approval and obtaining permits | Initial payment (“Dawn payment”) + payment milestones. Monthly certifications of work carried out. Monthly margin invoicing in the award percentage. |
| In addition to those inherent in a Project and Work contract, the requirement of prior approval of the Project before the start of the Work entails added uncertainty, which may result in losses for the Contractor claims to the Client. | The ones of an international turnkey contract, to highlight country risk (legal security, currency, industrial fabric); contract management risk (planning and control, cash flow and costs). |
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|
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Projects Determinants | OCDP | SSDP |
---|---|---|
| 2 | 5 |
| 3 | 5 |
| 2 | 5 |
| 2 | 5 |
| 2 | 5 |
| 2 | 4 |
| 3 | 5 |
TOTAL | 16 | 34 |
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Berenguel-Felices, F.; Lara-Galera, A.; Guirao-Abad, B.; Galindo-Aires, R. Contracting Formulas for Large Engineering Projects. The Case of Desalination Plants. Sustainability 2020, 12, 219. https://doi.org/10.3390/su12010219
Berenguel-Felices F, Lara-Galera A, Guirao-Abad B, Galindo-Aires R. Contracting Formulas for Large Engineering Projects. The Case of Desalination Plants. Sustainability. 2020; 12(1):219. https://doi.org/10.3390/su12010219
Chicago/Turabian StyleBerenguel-Felices, Francisco, Antonio Lara-Galera, Begoña Guirao-Abad, and Rubén Galindo-Aires. 2020. "Contracting Formulas for Large Engineering Projects. The Case of Desalination Plants" Sustainability 12, no. 1: 219. https://doi.org/10.3390/su12010219