Flexibility in contracts

In the "1? and "2? modes, the single entity is the Lump Sum Turnkey Contract (LSTK), EPC contractor and the D-B contractor respectively. In both these modes, the contractor acts as a single point responsibility for the implementation of the project i.e. the contractor accepts financial liability for failure to meet any of the salient project deliverables of schedule, cost and performance. The drawback in this model is that you cannot change design or introduce new scope.

Mode "3? allows a good deal of flexibility to you, i.e. you will be able to maintain both executive control and open options for as long as possible, to respond to external conditions in this mode.

Theoretically, in mode "3?, the single entity model can be achieved if you can designate a project manager for in house project planning and project engineering personnel can report for the duration of the project.

In such a case, this team should have certain features which set it apart from the traditional function of a project company. For example:

• A centralised clearing system should be established for timely project decisions involving diverse interests.
• The team should get directly involved in managing participation by parties normally outside its direct control. The team should handle diverse activities such as feasibility studies, changing requirements, regulatory requirements, so on all of which are time-phased, and which require coordinated planning, scheduling, and control.
• Organisational conflicts are bound to occur which need to be dealt with by top management.
• The project staff hired will have to get back to their original function as you may not hire them in near future.

Construction projects are one-time undertakings and they do not justify for you to set up an in house staff, both from the viewpoint of efficient utilisation of staff and lack of project management skills. Hence, for medium size and big size projects, the project manager and the project team should be an outside agency and you can nominate a representative to whom the outside agency?s project manager reports. The benefits provided by the outside agency are that the agency?s services are more flexible; the agency usually has access to varied resources, and costs little in comparison to the total project commitment throughout its life.

This outside agency is popularly known as Project Management Company (PMC). You award the contracts for supplies and construction while the entire coordination and interfacing of the project works are carried out by the PMC.

In summary, you have understood that the degree of flexibility owned by you is greater in the D-B-B mode of contracting compared with the LSTK EPC mode of contracting. Some flexibility for changes can also be incorporated in the LSTK EPC mode, for example, escalation formula for providing financial compensation to contractor, mutually agreed basis for computing compensation for  marginal  extra  works  i.e.  works  not  envisaged  in  the original contract. Generally, a LSTK contractor will be inclined to demand a higher compensation and grant of longer time extensions for project completion when faced with major extra works.

The degree of flexibility in the D-B mode would fall between that of D-B-B mode and LSTK mode.