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ECI in Sweden - A. Kadefors, KTH Royal Institute of Technology, Stockholm (SE)

This document discusses different construction project delivery and payment models. It begins by outlining common delivery models like design-bid-build and design-build. It then explains different payment methods that can be used like fixed price, unit prices, and cost-reimbursable. The document also discusses pricing strategies and how they relate to risk transfer between parties. It provides details on collaborative models like early contractor involvement and discusses selecting the optimal contract based on a client's project risks, desired influence, and market conditions.

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What are we talking about?
Anna Kadefors
Professor of Real Estate Management at KTH Royal Institute of Technology, Stockholm
Guest Professor at Chalmers University of Technology, Göteborg
Presentation outline
• Delivery models: Design-Bid-
Build, Design Build,
• Payment methods: fixed price,
unit prices, cost-reimbursable
• Pricing strategies and risk
• Early Contractor Involvement
• Other collaborative/relational
contracting models
• Selecting the contract
Delivery models
• Design-Bid-Build: the client hires
consultants to develop a
detailed design before the
contractor is procured.
• Design-Build: the client procures
the contractor based on
performance/functional
requirements and the contractor
hires consultants to develop the
design
• Design-Bid-Build: the client hires
consultants to develop a
detailed design before the
contractor is procured.
• Design-Build: the client procures
the contractor based on
performance/functional
requirements and the contractor
hires consultants to develop the
design
3
Payment/pricing methods
4
Two principles:
• Price-based
The price is set in competition by the market
• Cost-based
Payment is based on actual costs
• In practice often combined
Payment
principles 1:
price-based
• Lump sum/fixed price: the client pays a fixed
price for the whole contract. Cost risk with
contractor.
• Schedules of rates, unit prices,
remeasurement: contractors tender fixed
prices per unit of work or activity. Cost risk is
shared.
5
Payment
principles 2:
cost-based
• Cost reimbursable (for construction): the contractor
is reimbursed for actual costs. Cost risk with client
(Also called prime cost principle)
• Guaranteed maximum price (GMP): the contractor
is reimbursed for actual costs up to an agreed
maximum price
• Incentive contracts with gainshare/painshare
formula (target cost contracts): A cost reimbursable
contract where cost overruns and underruns
relative to an agreed target cost are shared. Cost
risk is shared.
6

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ECI in Sweden - A. Kadefors, KTH Royal Institute of Technology, Stockholm (SE)

  • 1. What are we talking about? Anna Kadefors Professor of Real Estate Management at KTH Royal Institute of Technology, Stockholm Guest Professor at Chalmers University of Technology, Göteborg
  • 2. Presentation outline • Delivery models: Design-Bid- Build, Design Build, • Payment methods: fixed price, unit prices, cost-reimbursable • Pricing strategies and risk • Early Contractor Involvement • Other collaborative/relational contracting models • Selecting the contract
  • 3. Delivery models • Design-Bid-Build: the client hires consultants to develop a detailed design before the contractor is procured. • Design-Build: the client procures the contractor based on performance/functional requirements and the contractor hires consultants to develop the design • Design-Bid-Build: the client hires consultants to develop a detailed design before the contractor is procured. • Design-Build: the client procures the contractor based on performance/functional requirements and the contractor hires consultants to develop the design 3
  • 4. Payment/pricing methods 4 Two principles: • Price-based The price is set in competition by the market • Cost-based Payment is based on actual costs • In practice often combined
  • 5. Payment principles 1: price-based • Lump sum/fixed price: the client pays a fixed price for the whole contract. Cost risk with contractor. • Schedules of rates, unit prices, remeasurement: contractors tender fixed prices per unit of work or activity. Cost risk is shared. 5
  • 6. Payment principles 2: cost-based • Cost reimbursable (for construction): the contractor is reimbursed for actual costs. Cost risk with client (Also called prime cost principle) • Guaranteed maximum price (GMP): the contractor is reimbursed for actual costs up to an agreed maximum price • Incentive contracts with gainshare/painshare formula (target cost contracts): A cost reimbursable contract where cost overruns and underruns relative to an agreed target cost are shared. Cost risk is shared. 6
  • 7. Gain shared to be shared 7 Payment model: target cost contracts
  • 8. 8
  • 9. Pricing strategies and risk • Lump sum contracts: competitive tendering for basic contract – risk for winner's curse • Changes/variations priced in monopoly (claims) ➢Contractor strategy: bid low – claim high ➢Client strategy: monitoring, suspicion ➢Costs and conflicts increase when uncertainty is high (many changes = many conflicts) • Contractors will price risk – can be expensive • So if there is uncertainty all contracts will be either high risk or very costly for clients
  • 10. ▪ Relationship-building activities – workshops etc ▪ Partnering charter with joint goals ▪ Communication to support creative interaction ▪ Joint risk management ▪ Systems for following up goals and collaboration ▪ A conflict management system ▪ Often: Monetary incentives (”carrots” for collaboration and innovation), open books Collaboration models - activities and systems 10
  • 11. ECI – Early Contractor Involvement • Most common interpretation (?): bilateral two-stage open book contracts with collaborative measures and contractor selection on soft parameters • But also refers to alliances with multiparty contracts and collaborative measures (f ex PPC2000 in UK) • Or just to involving contractors early without collaborative measures 11
  • 12. Early Contractor Involvement (bilateral) Two-stage process Phase 1: - Often cost plus payment - Develop budget/target cost - Go/NoGo Phase 2: - Target cost contract with gainshare/painshare - Or cost reimbursable with fixed part - Or fixed price 12
  • 13. International trend: inspiration, imitation and translation between contexts
  • 14. Other collaborative models and labels • Partnering – US, UK, DK, SW… • Can refer to any collaborative relation • Or to collaboration within traditional contracts • Or to two-stage open book tendering plus collaborative measures • And more… • Alliances – Australia, UK, Finland • Multiparty contracts • Can also siginify any collaborative relation (cf strategic alliances) • Integrated Project Delivery (IPD) – US and other countries • Originally multiparty contract, but now wider term • Related to lean and VDC • Framework contracts involving multiple projects (UK: FAC1) • Various local models: Bouwteam, etc. • (Relational contracting, collaborative contracting, supply chain management) • Labels change meaning between context and over time in the same context
  • 15. Reasons for using early contractor involvement • There is uncertainty in the project (geology, existing structures, external actors, user demands, complexity in requirements, re-use of material…) • The client wants to influence detailed design beyond traditional contracts (architecture, labs, etc.) • Benefits of including construction competence in design (constructability, optimizing for carbon reduction, etc.) • To get tenders – contractors prefer low-risk contracts • Industry attractiveness and recruitment (less stressful, more learning) • Lean client functions • Everybody does it, test something new
  • 16. Trust and control • Calculus-based trust • Contracts • Reputation effects in small markets • Relational trust • Based on actual interaction • Selecting contractors with high collaborative competence • Collaborative measures to build trust at project level – social control • Institutional trust • Informal shared understandings at industry level • Certifications of companies, standard contracts, certified training
  • 17. Some takeaways • You can’t have your cake and eat it • Don’t assume that others use label/terminology in the same way as you • It’s not only about selecting a contract for a project, it’s an industry learning process
  • 18. Client’s choice of procurement strategy • Which risks are there and which party can control them? • How much influence does the client wish to have over detailed design? • Client competence and resources for procurement and contract management • Time pressure • Market aspects (competition): how many contractors have the necessary competence and how many will be interested in submitting a tender? 18