The lump sum construction contract is the most basic form of agreement between a supplier of construction services and an owner. The lump sum bid strategy obligates the constructor to provide the required services for a specific price and the owner to pay the price of the work upon completion or according to a negotiated payment schedule.
In developing a lump sum bid, the constructor will estimate the costs of labor and materials and add to it a standard amount for overhead and the desired amount of profit. In addition to the standard overhead and profit, the constructor will add a contingency based on the constructor’s assessment of the risk associated with pro-viding a lump sum price for the materials and labor required to complete the work. If the actual costs of labor and materials are higher than the constructor’s estimate, the profit will be reduced. If the actual costs are lower, the constructor will experience an increase in profits. Either way, the cost to the owner is the same.
Bid strategy
The owner’s objective in seeking lump sum bids is to limit the liability associated with construction budget overruns by assigning that risk to the constructor. To protect profits the constructor must add additional monies to his bid to cover unforeseen events and unknown project conditions.
For the constructor, reducing the uncertainty associated with the cost of installation is essentially the same as reducing the risk. Improved definition of installation cost, in this case, will provide an advantage over competitors who must think in terms of worst case scenarios or risk not covering cost.
By utilizing TGC Engineers’ (TGCE) dimensional control methods, the constructor can achieve a competitive advantage by removing the dimensional risk associated with the cost of installation at the outset of the project. This capability allows the constructor to more accurately predict the cost of installation by eliminating the cost of rework from the project scope of work. This “dimensional certainty” afforded by TGCE methods provides the constructor a distinct advantage over competitors who must include a more substantial contingency for rework or risk not covering cost.
TGCE has a long history of working with heavy industrial constructors on large, complex component installations such as large bore piping, heavy welding and rigging boilermaker projects. FCCU revamps, coke drum replacements, installation of coke drum de-heading valves and distillation tower resections/replacements are typical of the projects under-taken. The collaboration is a marriage of construction know-how and state-of-the-art dimensional technology. This combined expertise results in the successful completion of heavy industrial projects without rework or leave-long field fits while providing the obvious advantages to the budget and schedule.
The bid strategy centers on the substitution of the known cost of TGCE services to dimensionally define the construction activities required to complete the project for the unknown/higher cost of the rework.
Experience indicates the cost of rework is several times the cost of TGCE services. When lost product costs are included in the evaluation, TGCE services are extremely low when considered as a percent of total avoided cost (lost product and rework costs). This ratio of avoided costs to TGCE costs provides the opportunity for a competitive advantage and increased profits in a lump sum project execution scenario.
Execution strategy
With lump sum projects, the constructor is free to choose the lowest cost, means, methods and materials consistent with the specifications. Nontraditional methods are expected and welcomed in this environment provided quality is not diminished. The constructor is responsible for proper work performance but is free to use any means and methods to complete the work. The constructor owns the construction documents at this point and does not have to consult the engineering contractor to make any required changes to complete the work in a cost-effective manner. Engineering services can be obtained through a third party (such as TGCE) and reviewed by the owner’s engineering contractor if the owner deems it necessary. TGCE can provide the engineering manpower resources and the dimensional support required to install project components with the minimum man-hours possible. TGCE understands the importance of schedule in a turnaround environment and remains mobilized and prepared to generate the most cost-effective engineering solutions possible.
Documenting dimensional change orders
When dimensional errors occur that are not part of the lump sum contract, such as errors in equipment and piping sup-plied by others, TGCE has the means to capture and report the true dimensions of the component exposing the error. TGCE can also document the source of the error, engineering or fabrication, and the most efficient approach to correct the error. This can be extremely important in the recovery of cost associated with dimensional problems when the contract permits. Disputes over the scope of work associated with dimensional control are not in the best interest of the constructor or owner and often discourages both parties (owner and contractor) from selecting the lump sum contract option. Providing TGCE documentation of all dimensional problems eliminates this concern.
Business case
• Owners seeking lump sum construction contracts are in many cases open to incentives to be paid to the constructor for cost savings associated with early completion, improved safety, reduced construction equipment cost, etc. Opportunities to exploit these benefits should be investigated and realized whenever possible.
• Competitors not using state-of-the-art dimensional control methods must include a contingency to cover rework making them less competitive on lump sum contracts.
• Often unplanned work is discovered when a project is underway, owners typically place that work with the constructor mobilized on the project. A constructor executing lump sum contracts can benefit from this work stream by providing lump sum pricing for this additional work.
• Replacing rework activities with dimensional control activities dramatically reduces project installation cost resulting in a decrease in project cost. This savings goes directly to the bottom line on lump sum contracts.
• By eliminating rework, outage duration is decreased resulting in a decrease in lost product. Lost product is the primary cost in many turnaround projects.
• Safety is improved by eliminating unplanned rework tasks. These tasks are unknown at the outset of the project and quickly become urgent in the execution and start-up of the project.
Good scope of work documentation is primary to any project’s success and profitability. Defining the steps, the work processes and level of effort required to execute is essential to the successful execution of every project. When the uncertainty associated with project execution is decreased, there is an associated increase in management’s ability to predict and control project activities and outcomes. An increase in control when fully utilized will result in an increase in profits for the operating company and the contractors providing the services to complete the project.
Finding alternative contracting strategies and work processes that bring value to our industry is the best way to control project cost and project duration. Careful examination of project execution methods and objectives will reveal when and how to apply these techniques.
For more information about TGC Engineers, email jcrawford@tgcengineers.com, visit www.tgcengineers.com or call (713) 477-8682.
