A Program Management Approach: Procurement Strategy & Project Delivery (Part 2)

Investors & Funding Sources?(Part 2)

Projects of this magnitude are frequently funded from various sources including funding institutions, banks, and the owner’s own equity.?Regardless of the source of funding, the cost of the project needs to be accurately estimated at the early stage of the project and regularly updated throughout the design to establish the development’s feasibility parameters and secure funding.?

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Budget Development & Management.?Close management of the budget during the design phase is critical to managing potential cost increases. Depending on the size and complexity of the development, the budget may be broken down into separate project cost centers (i.e. tower, car park, retail, infrastructure) to allow each cost center to be tracked and managed independently.?Subsequent cost management through the construction phase of the project is of equal importance to ensure that the return on investment initially projected is realized.

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Budget Updates.?The preliminary estimate is established following analysis of the concept design information. This estimate is consequently developed and refined throughout the subsequent design phases allowing the client the opportunity to address any budget overruns through Value Engineering or other design intervention. Estimates are typically updated at several intervals in each design phase to ensure the robustness of the estimated final cost of the development.?

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For example on the Merdeka 118 Development, estimates are generally revised at 25%, 50%, 80%, and 100% at each design phase. The budget for the development should be approved by the owner as early as practicable with realistic allowances for design and construction contingencies included. The approved budget sets the baseline from which any divergence are monitored during subsequent design phase estimates and managed via value engineering, design intervention and/or contingency adjustments. Pre-Tender estimates are produced prior to the tender close of construction packages which are then compared to the approved budget on a cost center basis to ensure compliance.

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Financial Reporting.?Budget updates are made available to the funding institutions. Presentations and workshops with funding institutions are generally required and attended by the owner, cost consultant, and Project Manager. Cash flow projections detailing the expenditure of funds at their respective stages of the project are of high importance and regularly updated to determine the optimum manner in which the funding for the project should be drawn down by the owner and consequently allow appropriate management of finance costs.

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There is a high volume of information generated from the large number of design and cost consultants involved in super tall projects. This high information volume requires frequent updating of the cost models and it is highly advantageous to implement a web based project management control system at an early stage to provide the platform to manage the budget, commitment, and change control aspects of the development on a ‘real-time’ basis.

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Contracting Practices

In addition to the Main Contract, other agreements must be prepared and negotiated. These include all or some of the following depending on the procurement strategy:

? Agreement with a Project Management Consultant ("PMC")

? Agreement with a local Architect of Record ("AOR") and local Engineer of Record (“EOR”) Agreements with a “Design Architect, Design Engineers and Specialty Consultants

? Contracts for Early Work Packages

? Agreements with nominated subcontractors

?The below illustrates the common super tall contracting structure

Legal Team Assembly.?Just as an owner will bring world class designers, contractors and PM/CM's to a super tall project, it is important to incorporate world class contracting practices. It is recommended that the various tender and contracting documents be prepared by a legal team consisting of an owner's local or regional advisors augmented by internationally experienced advisors.?Local knowledge of customs and practices coupled with broad knowledge of international practices is common on super tall projects and offers an owner the best of both worlds. Experience shows that such a diverse legal team can work seamlessly together while pushing each other to excel and achieve solutions for the benefit of the project.?For example, if a local code would render a contract provision, such as an indemnification or a limitation of liability, unenforceable, there may be workaround solutions available.????

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Form of Contract.?As mentioned earlier, the FIDIC Red Book 1999 is often used as the starting point for a Design-Bid-Build (DBB) project's construction contracts because it is familiar to most international construction contractors and provides a good framework to ensure necessary provisions are included.??However, a custom form of contract may be preferred by an owner.?Other forms of construction contracts are more appropriate for different delivery methods, such as Design-Build.?The FIDIC Red Book clauses are typically modified by Particular Conditions.?The reasons for the modifications are local customs, preferences, and conditions (site and otherwise), as well as the owner's and/or lenders' risk tolerance.?A common practice is to assign a risk to the party best able to control it.

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Project Governance Rules.?Allocating risks and clauses establishing rules of project governance are crucial to successfully executing a complex multi-party super tall project. Risk allocation will address such matters as delays, differing site conditions (i.e. unforeseeable physical conditions), damages, limitation of liability, indemnification, right or lack of right to stop the Works, suspension, default and termination.?Increasingly important on large international projects are managing the risks of corruption.?Not only can corruption have a detrimental cancerous effect on a project and lead to increased costs, but many international companies must comply with such laws as the United Kingdom Bribery Act and the United States Foreign Corrupt Practices Act, as well as in-country laws where a project is located.?Project governance requires clauses in the?appropriate agreements to address such matters as variations, authority of the PM/CM, claims and dispute resolution, schedule requirements, building information modeling, requests for information and quality. Such clauses can promote cooperation and project harmony and provide a clear path for early administrative resolution of matters affecting costs and schedule.

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Risk Allocation.?Risk allocation is not always as simple as shifting risk to one party or another.?The parties involved in super tall projects are generally large sophisticated international firms who are experienced in super tall projects and carefully negotiate risks.?In preparing tender documents and contracts, early consideration should be given to the extent that risk can be transferred to an insurance product, for example, an indemnification.?Other issues, and not an exhaustive list, include what clauses in a FIDIC contract may be problematic under local law and how they may be modified, how will the risk of site conditions be handled, what investigations will be done prior to tender and fixing a price to minimize the contingency that a contractor may carry in its bid, to what extent will delays be compensable, will a lump sum fixed price be best or will a type of contract known as a cost-plus guaranteed maximum price better balance risks and contain project costs.???

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Best Practices

Super tall buildings present unique risks and challenges because of their high profile (no pun intended), prestige, technical complexity, and expense.?Examples include logistics, limited pool of talent and experience, politics, financial and ethics.?The procurement strategy should consider such factors at the initial planning stage and key project players involved and integrated early in the project.?While super tall projects may not use integrated project delivery as a delivery method, there is no reason not to take advantage of the principles of lean design and construction to maximize efficiency and eliminate waste.