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Reimbursable vs Lump Sum Turnkey Project

11 replies [Last post]
Sun, 2006-01-15 06:07
Norzul Ibrahim
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Hi Guys,

What are the criteria for selecting reimbursable or lump sum turnkey project?

Thanks

norzul
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Replies

Wed, 2006-02-01 02:22
#1
Clive Randall
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Andy
Agree with what you say about the thrust of the NEC contract
Hope to see it widely used by some luddites prefer the entrenched method of construction similar to the 1914 1918 method of warfare.
Time will tell as will educated clients.
Clive
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Wed, 2006-02-01 01:42
#2
Norzul Ibrahim
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Andy,

Looks like the contract that yu are doing now is inline with the "7 Habits of Highly Effective People" by Dr Stephen Covey i.e. Think Win-Win and Creative Cooperation.

Is this type of contract commonly practised in the oil & gas industry?

What are the disadvantages?

norzul
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Tue, 2006-01-17 04:13
#3
Andy McLean-Reid
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Norzul

I’m working on section 2 of the Channel Tunnel Rail Link providing comms systems for the new build which comes from Kent in Southern England, tunnel under the river Thames, up agin north of the river, another tunnel under East London, up again in Stratford where the Olympic village is going to be, on to St Pancras station which opens the way north.

The target price is agreed up front between my company and the Project Manager company operating on behalf of the client (essentially Bechtel at each stage). Actual costs are then monitored (and reported) against the target price which is adjusted as scope changes are agreed.

At the end of the project the actual costs are deducted from the target price and any savings are shared out, likewise any overspend is equally shared out.

It’s a good contract, the New Engineering Contract (NEC) seems to be designed far more for project achievement rather than as a way to win battles against client/contractor.

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Tue, 2006-01-17 04:06
#4
Norzul Ibrahim
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Andy,

It’s quite interesting....can yu elaborate a bit about the projects i.e. construction of building, refinery, power plant, engineering, etc.

Who determine the cost estimate? How detailed is the cost estimate? The 2 parties (contractor & client) must agree with the cost estimate?

Thanks

norzul
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Tue, 2006-01-17 03:51
#5
Andy McLean-Reid
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Yeah Scott

That’s the kind of contract I am working with currently.

We get 50% of any saving made against an agreed target price.

The motivaton being to achieve savings through the course of the project.
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Mon, 2006-01-16 17:32
#6
Scott E
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Time is also associated with risk. As is scope, quality (whether it be the construction, or the success of the operating plant), and the largest unknown relating to latent conditions.

Alliance Contracts are risk (or cost sharing) also known as pain share/gain share type contracts.

These contracts are based on a target cost estimate (similar to other contract types). The the actual costs are compared to the estimate (adjusted throughout the project for scope changes). If there is a cost overrun then both the contractor and the owner (princpal) share this cost overrun (the pain). If there is an underrun then they both share the gain.

There could be 50/50 split, or it could be based on non-cost modifiers such as quality, management reports, safety, etc.

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Mon, 2006-01-16 04:54
#7
Norzul Ibrahim
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.....EPCM type project ( less than USD 1.0 million), and reimbursable type project-for small detailed engineering (less than USD 0.5 million)...
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Mon, 2006-01-16 04:54
#8
Norzul Ibrahim
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.....EPCM type project (
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Mon, 2006-01-16 04:51
#9
Norzul Ibrahim
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Dear Scot,

Can yu share with us, your experience pertaining to the alliance kind of project. I’ve heard about this but never have any experience.

Most of my experiences related to lump sum turnkey project (LSTK)-for large project (>USD 200million), EPCM type project-for small project (
For the LSTK project we normally split the project into 3 phases i.e.
1) Feasibility Study Phase
2) Basic Engineering Design (BED) or FEED Phase
3) EPCC (Engr, Procurement, Construction, & Commissioning) Phase

Normally the consultant who do the BED will become the Project Management Consultant (PMC) during the EPCC Phase. In terms of cost, item (1) and (2) range from 5%-10% of the total project cost.

My personal opinion, after involved in those kind of projects for 15 yrs, I would prefer the LSTK for a large, high risk, high cost, and critical project. The most important thing is to ensure that yu have a very good and clear project specifications/contractual requirements.

Thanks

norzul
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Mon, 2006-01-16 04:33
#10
Andy McLean-Reid
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I have always thought that the criteria relied upon the timescale versus cost matrix.

If you have a fixed project end date, for instance building the rail infrastructure to support the Olympic games, and you must achieve that target, you would go reimburable.

If time is not really an issue, but cost is, you would go lump sum.

Currently I am working under an NEC contract on the target price module. So we have an agreed sum for the work and a pain/gain share mechanism against that target. Quite a lot of UK rail projects operate under similar guises.
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Mon, 2006-01-16 01:54
#11
Scott E
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This is usually dependant on the risk associated with the project.
The higher the risk, the more likely the project is going to be Cost Plus (reimbursable) or some sort of risk sharing type arrangement (alliance type project).

For Example:
A shutdown in a process plant would typically be reimbursable. (If the principal wanted to go lumpsum the contractor would allow for the risk within the Tender and the initial price would be greater).

However, a new plant is more likely be lumpsum.

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