CEM 204 International Construction

Question 2: 

“Consideration is being given to negotiating a lump-sum fixed-price for the construction work with China State Construction Engineering Company (CSCEC). One of their conditions is that they should be allowed to use Chinese materials, equipment and plant on the project, where appropriate. CSCEC has said they can deliver the project within the budget price. As project manager how would you advise upon such a proposal, describing the important factors that will influence Aldar’s decision to award the project to CSCEC.”

In order to successfully complete this project and to maintain high project standards, Aldar Construction must identify the risks of awarding the project to China State Construction Company (CSCEC) and its impact on management processes.  An engineered strategy must be established / adopted to ensure that the objectives of the project are prioritized to fulfill the requirements of the project management, which includes quality assurance, project completion within the proposes time and budget, along with various other project requirements. Any possibility of failing to achieve such objectives can adversely affect the purpose of business of Aldar group, and thus must be considered as potential risks.  

A well defined procurement strategy can effectively manage and balance such risks against the primary objectives of the project. Therefore, details related to procurement strategy and its management must be carefully reviewed, and the associated parameters must be thoroughly investigated before coming to the final decision (Mortledge et al., 2006).

Although the China State Construction Company (CSCEC) have confirmed that they can complete / deliver the project within the budgeted price, the lump-sum fixed price contract must be critically reviewed before deciding to award the tender to the subject company. This is because fixed price lump-sum strategy can influence the productivity of this resident facility development project by Aldar.

It important to realize that through adaptation of the proposed strategy, an agreed fixed amount would have to be paid to CSCEC, which may not be subject to any form of recalculations or revisions. The requirement of any construction variance can arise in any project due to possible lack of communication between the client’s design/consultant/management teams and the contractor, which can lead to uncertainties of cost and subsequent disputes (Atkinson, 2002)

It is also important to note that the CSCEC constructor has not been a part of the design of the project, and this procurement strategy utilizes a sequential approach for all activity completions of the project.    This can potentially impact the project in the later stages, as this will result in limited provision of fluctuations/revisions in the design and construction.  Therefore, if the negotiations with the CSCEC are matured, it is recommended that provision for any possible revisions are included in the form of  a ‘contract clause’; to be able to ensure that project is completed with optimum design specifications and in accordance with the project requirements.

Another important factor that can influence the productivity of the project is the ‘quality of construction’. Sine, the CSCEC contractor has proposed a condition that they should be allowed to use Chinese materials, equipment as well as plant for this project. This is an extremely important aspect, as the performance of any project can be defined through the quality of materials and the plants used during the construction. The subject constructor may simply provide the specifications of the materials and plants in a descriptive form, which can result in the risk of ‘low quality of construction’ and ‘higher levels of contingencies’ as well as ‘cost cuttings by the contractor’. If these issues are not resolved at the time of negotiations, this may also lead to significant disputes with the contractor.  

Theoretical analyses of this form of procurement strategy may suggest that considerable risk is placed with the contractor (Wrong et al., 2000); however the fact is that the risk assumptions have just been merely changed for this project; as the contractor has reserved a relatively strong condition on the Aldar Properties. Although the client has hired world class design teams, consultants, architects, structural engineers and quantity surveyors, who can ensure that the scope of works are defined in detail with expectation of limited variations, it is still important to keep higher level of involvement in the project management.

Since Aldar has hired extensive teams for project management services, it is advised that Aldar Properties must assume higher level responsibility of project management. Not only would this ensure that Al Rahaya project is completed with high quality construction, it would also ensure that all the influential parameters associated with the project are managed in accordance with the expectation of high project standards of Altar group. Therefore it is recommended that a strategy which can ensure better integration of information between the teams, and which enhances the collaboration across all teams must be utilized for this complex project.  An alternate strategy must therefore be considered in light of these important factors OR specific quality, management and performance related concerns must be addressed before awarding the project to CSCEC.  

Question 4: 

“Aldar want to provide jobs and training for local UAE companies on the project, they want a clause inserted in the contract relating to local content. Their aim is to have 20% local content by value. They are seeking your advice about the implementation of such a contract clause involving local content. Discuss the challenges of having local content clauses in the UAE and the way it may influence the project.”

The UAE government has specified their local content preferences to expand and extend the benefits for local/national companies. Since, Aldar is a business partner of UAE government; they have aimed to include 20% local content by value for this project. This has been proposed to ensure that the economic opportunities are made available in abundance to local stakeholders. The economic opportunities which may arise from this development can benefit the local supply chain, management, consultancy, and in other forms of support based services (Mortledge et al., 2006).

UAE companies and the local community can also have plenty of employment opportunities for them with this strategy.  The local government aims to achieve a greater share of local content in comparison to what could be achieved from procurement of services and goods in an open market. In order to allow local businesses and workforces to attain benefits from some of the most influential construction companies in the world as well as their large sized contractors, the Aldar can impose preferential measures. For instance, when evaluating tenders, Aldar can allow for a price premium for local companies/suppliers who benefit from technology transfer and human resource training.

The local content clause can be added in the contract FIDIC “Conditions of Contract for Construction for Building and Engineering Works Designed by the Employer”, which is being used for this project. Narration of this contract clause shall be provided to all the parties involved, to understand the effect of this particular clause. This process shall allow the contractor to evaluate/analyze the risks properly, enabling them to consider this clause at the time they submit their bids for the tender.

The quantifiable method that may be outlined in the tender document (such as bills of quantities and specific conditions such as local content value) shall determine the value and success of the bid. Depending on the project requirements, the indicated criteria may include use of certain amounts of local equipment and material for the purpose of construction, skills improvement programme, and employment for local skilled individuals. It is important to note that the bidding process is complex process and usually involves an independent third party assessment of the benefits expected for the local community. Where local content provision is substantial, such as 20 percent of the total project value, and where the fair market share cannot be easily identified, the independent third party evaluator comes into play. It should be also noted that the appraisal process is considered to be an integral part of the project cost for construction projects in the UAE.

Therefore, inclusion of the local content can potentially increase the complexity of the bidding process, and it may also consequently increase the cost of the tenders; as it may require services of expert third party evaluators. The assessment of the ability of the local market to cope with the requirements of the major construction projects must also be evaluated before coming to a final decision.  There might be cases where there is a lack of technical or even traditional labour resources, lack of production in supply chains, and lack of quality in locally available resources.  

Since there are various ways through which the local content clause can influence this project, the inclusion of local content in the tender submission must not be considered as the only preference. For example, awarding the contract when/if their bid price included local content and it fell between specific ranges of percentage of the lowest valid bid must be avoided (Wong at al., 2000), rather a detailed analyses shall be carried to investigate how successfully the contractor might be able to utilize the local resources. Although there are a large number of opportunities available to the local firms through inclusion of such local content, however, it is important for Aldar to clearly specify the quantities and amounts of materials to be purchased from the local suppliers, indicate the number of direct and indirect employment opportunities that would be created for the local community and provide skill enhancement trainings in accordance with the requirements of the project. In order to make sure that the local content conditions are properly and sufficiently included and addressed within the bid price to satisfy the value for money rule of economic, bids shall be thoroughly investigated and then evaluated against a certain criteria.

Some additional and undesirable content costs can be occasionally associated to the local content conditions outlined in the tender and this may cause hassles for the interested companies. However, these additional costs are balanced against various long term economic and social advantages to the local companies in the form of savings in skills improvements and social support expenses. In such cases, a suitable study needs to be carried out to establish the value of benefits by duration, type and category to support the premium paid and the socio economic benefits provided to the local companies. It is vitally important to clearly state the assumption made in relation to each benefit and they should be consistent with the supporting justification (Graham, 2010). Eventually, it is important to demonstrate benefits to local community; as such benefits are considerably greater than the social economic benefits generated and the premium paid on the project. This approach helps to make sure that all stakeholders including the local community and companies benefit from this development project of Aldar.