Guidelines for activity based contracts: Miscellaneous engineering and building activities

An activity based contract facilitates the inclusion of multiple activities (various engineering disciplines) within the boundaries of a structured cost management system. This approach can be taken irrespective of the number of activities, where the value per activity does not exceed R500 000 (R7=$1).

The inclusion of 80% of preliminary and general costs into measured rates forces the contractor to actively participate in a contract where no complete scope definition exist (shared risk principle). This also prevents the cumbersome process of re-negotiating indirect costs associated with the contract at each extension of time and/or inclusion of additional scope.

Effort must however be made to timeously identify works of mechanical, electrical or specialist nature to allow for alternative procurement arrangements or re-negotiation of costs. A minimum of two weeks is required to procure and agree complex installations that falls beyond the expertise of the civil contractor. Civil contractors tend to place premiums on work outside their field of expertise as it forces them to employ a suitable subcontractor (without maintaining effective cost control).

Also to be noted is that cost effective alternatives are not always beneficial to the client (time constraints, site or procurement conditions) and differ from contract to contract, but the following guidelines could be considered when compiling future contract documentation for contracts of fragmented nature (activity driven):

  • Preparation of bills of quantities (not schedule of rates). Where no quantities have been measured an allowable quantity must be inserted to restrict speculative and/or opportunistic pricing, especially where contractors have a sound knowledge of local site conditions. A structured tender document creates the impression that all anticipated activities have been thoroughly documented on a uniform basis.

The disadvantages of a schedule of rates are:

  • Cumbersome process of comparing rates (and tenders) submitted: Tenders where provision for Rate Only has been made create the opportunity for speculative pricing as no uniform pricing basis exist (each tenderer assumes probable quantities to calculate a rate, where the rate is proportional to the quantity)
  • Hidden risks: High rates disregarded at tender stage could influence future costing should a contractual rate be used for bulk work, which was initially priced on a small quantity. The balancing of rates must be prioritized and high rates must be carefully scrutinized and discussed with the contractor prior to official award of contact.
  • Currency exchange rates (international contracts) must be agreed as a fixed factor for short duration contracts or a fixed factor at the commencement of every month on long duration contracts.
  • Works of similar nature (mechanical, electrical, control or instrumentation) must preferably be grouped together and allocated to appropriate contracts.
  • Focus on the inclusion of billed items that will presumably be responsible for 80% of the Final Estimated Cost (principle: 20% of measured items are responsible for 80% of costs).

Activity driven contracts could lead to fragmentation and disruptive execution, thus adding a premium on construction costs, although the benefits obtained outweighs regrets if viewed against the cost savings of procuring multiple contracts and/or orders. From a project managerial perspective, future cost planning for fast-track projects could incorporate a 5% allowance (on the main civil or other activities) as part of the pre-contract estimates to allow for miscellaneous plant commissioning requirements.

Contract administration can be done with desktop database applications without additional programming requirements. Its is also helpful if assisted by a pro-active contractor with the capability to organize and prioritize according to project and client requirements. Activity driven contracts could serve as an effective vehicle to execute miscellaneous works within a structured, uniform cost environment.

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