The contracts are the most important documents on the project, and the commissioning team needs to pay particular attention to all the contract documents, particularly the technical specifications. There are a few aspects we’re going to look at with regards to commissioning contracts. The contracts, of course are the most important documents on the project. They define how the project is structured, how people interact with each other, and everybody’s roles and responsibilities. The contracts essentially define the rules of the game, and how the project will proceed.

Project Delivery Methods

There are various aspects of the contracts to consider for the overall project structure. Some of them are project delivery method, contract delivery method, the procurement strategy, as well as some of the parts of the contract.

How do the contracts impact commissioning activities?  We’ll go through each of these points.

With regards to the structure of the contracts on the project, there are a few different project delivery methods that can be used.

DBB – Design – Bid – Build

A common delivery method is DBB – design – bid – build. This is a common contracting strategy where the engineering is completed, and the engineering package is put out to tender to award the construction contract.  Largely a lot of the design effort is done up front so that the contractor knows what they’re bidding on. It does involve two different groups to complete the work, the designer and the constructor. The challenge with this method is that those can somewhat be separated in that the design is completed without having a lot of the construction input or constructability reviews which leads to the next type of project delivery method.

Design – Build

Design-build is where one group is responsible for both the design and the construction. The construction contractor would have an in-house engineering group that would perform a lot of the design, so this contract is awarded up front in advance of completion of all the design drawings and awarded strictly based on a technical specification of what the project is to achieve. In this case, you get somewhat more synergy between the construction group and the design group in that they’re the same group. Any input from construction early in the design phase can be taken advantage of to increase constructability in the field or allow optimized inputs to the design to allow easier construction methods later in the project.

CMAR- Construction Management at Risk

Another method is CMAR – Construction Management at Risk. It’s kind of in-between the two that we just discussed, design – bid – build and design – build, where first a contract is awarded for the design of the project, but when the design is complete about 30%, that’s when the contractor is brought in as well, so that the construction contract is awarded part way through the design to allow the contractor to have input to the design, to potentially propose better ways of building the project, have more constructable designs, and to get that synergy between the two groups.

PPP or P3 – Public Private Partnership

The fourth method is a PPP or P3, public private partnership where the contractor takes on even more of the responsibility including financing of the project, where it’s an agreement between a government or private firm and creates a partnership, in that there’s an agreement that the group that’s hired will finance the project, design it, build it, and potentially operate it as well.

Those are some of the common project delivery methods that exist. There are other different types of contract delivery methods as well.

Lump Sum or Fixed Price

For Lump Sum or Fixed Price, the scope of the work is defined up front, and the contractor determines the cost to do the work. The owner awards the defined scope of work for a fixed price amount that will be paid to the contractor. In this case, the contractor bears all the risk. If the level of effort takes more, then it’s a fixed price – that’s what the owner pays. If the level of effort takes less, then the contractor is allowed to benefit from the less work required for that particular scope of work.  Lump sum is cost certanity for the owner, in that they know the price they’re going to pay up front.

Cost Plus

The other method is Cost Plus. This puts the risk on the owner in that whatever the actual costs are, the contractor will submit them and they’ll be paid plus a percentage fee. If the work is estimated to take 10 hours and it ends up taking 20 hours, the risk is with the owner to pay that 20 hours of work, and the contractor doesn’t have any risk. This would be more for situations where the upfront scope is not known at the time that the work needs to take place.

Time and Material

Time and Material is very similar to Cost Plus. The contractor performs the work, submits their actual time and material plus an agreed percentage. There could be a target price in advance of the work taking place, but again, the owner would retain the risk if it takes double the amount of time that is paid to the contractor.

Unit Price

Unit price would be a structure that’s more related to linear infrastructure. If you’re building a transmission line or building a pipeline, you may have a unit price that’s so much per kilometer so if you end up building 10 kilometers of transmission line, then that unit price is paid per kilometer. For those 10 kilometers to the contractor, it’s very flexible towards the end of the project, if you need an additional kilometer of transmission line, and you have to build 11 kilometers of transmission line, no problem. You just pay the unit price for that additional work and the contractor will be reimbursed.

GMP – Guaranteed Maximum Price

GMP is a Guaranteed Maximum Price. In advance of the work, a target price is determined that the contractor must complete the scope of work for. The risk is somewhat shared here that if the work exceeds the guaranteed maximum price, the contractor’s profit margin starts to decrease up to a certain point. The contractor is still motivated to complete the work to that guaranteed maximum price in order to achieve their maximum profit. If they exceed the target price, their profit margin start to decrease.

That can be a helpful contract delivery method as well in regards to those two types of strategies.

Procurement Strategy

You also want to consider your procurement strategy. The procurement strategy will really determine the success of the project. I often see projects awarded strictly on lowest price, and your procurement strategy really needs to consider all aspects of the group’s ability to complete the work, not only price, but their project team structure, their construction plan, material management plan, quality management plan, schedule management plan, all of those aspects. And through their submission of their proposal to do the work, you want to evaluate each of these components to ensure that you’re selecting the right guy to do the job, not just based on price, but based on price and their ability to successfully complete the job.

There are a few contract structures or procurement processes that I’ve gone through.

CCDC or FIDIC

Two of them are CCDC or FIDIC, and these are templated structures that you can use for your contracts as a guide, as a starting point. Modify the templates to be specific to your project to include the terms and conditions that are specific to your project. I strongly encourage you to use these types of contract structures when preparing your contracts, since the contractors will be familiar with these contract structures, owners will be familiar with them, everybody will generally know how the project is to proceed with regards to the structure of the contract. These do form a proper procurement process to build up something like a FIDIC contract. In cases where groups have wanted to use a past contract, take something off the shelf that they may have used a few years ago, and modify it for the next project – this really doesn’t include all the aspects of a proper procurement strategy such as FIDIC where you can follow the structure and build up a proper contract in the end to facilitate the work and to optimize the project.

Contractor’s Submission Evaluation

When you’re going through your procurement strategy, there are a few things that are evaluated in the contractor’s submission that form the contract such as the contractors team structure. Do they have the right people that can complete the job? Do they have the right experience, the right roles that are filled on the project? Do they have construction management processes, such as how are they managing quality, or how are they managing schedule? Everybody will say that they have a schedule, and they manage to a schedule, but what are their actual internal processes for how they manage schedule? Is schedule actually used on a day-to-day basis to manage the work, or is it something that they just submit monthly because the contract says they have to. What are the contractor’s risk management processes? When risks exist on a project, how is the contractor assessing those and evaluating those on a day-to-day basis and managing the risks of the project to ensure the interests of everybody are protected? What is the contractor’s construction plan? How are they sequencing the work? How are they managing material deliveries? How are they managing completion of the work and hand over to the commissioning team? And of course, the contractors commissioning plan? What is the commissioning sequence? What portion of commissioning are they responsible for? Do they have qualified individuals to complete the commissioning tasks? How do they intend to do testing at the end of the project to confirm that the work that they’ve installed has in fact met the contract requirements?

Parts of Contracts

These contract components that I’m going over are related to a FIDIC contract structure. We’ll go through each one of them, and how they relate to the project, as well as how they relate to commissioning.

Articles of Agreement

Once a contractor is selected (once a contract is going to be awarded) the articles of agreement are essentially the last final set of documents where everyone’s agreed to the price, agreed to the schedule, agreed to all the contract terms, and it’s the final signing page saying that the contract now becomes binding on all parties.

General Conditions

These are the general terms and conditions of the contract. They’re not necessarily specific to the project, but they’re the general conditions, terms and conditions, that the owner wants to ensure are encapsulated on the project.

General and Local Conditions

This would be an expansion of the general conditions, but more specific to the project, where terms and conditions that apply maybe to some of the specific site conditions or work locations are included in the contract in this section for general and local conditions.

Technical Requirements

This is probably the portion of the contract that the commissioning team is most interested in. The technical specification essentially defines what the project is to do and the performance parameters that the project is to achieve. Therefore, this is the section of the contract that the commissioning team is going to use as their baseline for verification. This is what they need to verify and show that the project meets all of the technical requirements to confirm sign off at the end of commissioning, that the project has in fact met all the technical requirements on the project.

Payment Milestones

Payment milestones and contract price, these are important for everybody. The commissioning team will certainly want to be aware of this portion of the contract, because the commissioning team may be asked to confirm that portions of the work are complete or some of the testings have in fact passed the technical specification in order to achieve some of these payment milestones. This section will define how the contractor is going to be paid as the project progresses – what milestones do they need to achieve in order to reach those payment milestones. And of course, the final contract price.

Baseline Schedule

The contractors schedule is submitted in their proposal. The initial schedule from the contractor will form a part of the contract, and is essentially the baseline schedule that is agreed to at the beginning of the project.

The baseline schedule is always referenced throughout the project, because as the work is going to change invariably, it will need to change when any changes occur. If there’s a delay or additional tasks that need to be incorporated, you’d like to see that those tasks are being incorporated in order that the baseline schedule can still be achieved. If there’s a two-week delay, then you’d like to see how is that going to be recovered in order that the baseline schedule can still be met. The baseline schedule is an important part up front here to confirm what is agreed to at the beginning, and how some of the milestones are going to take place throughout the project in order to achieve the in-service date.

Contractor’s Organization and Team

There are several roles that are required on the construction team – construction manager, quality manager, all of the superintendent, etc. What is the structure of the contractor’s team, and what are the specific skill sets of the individuals that are going to be filling those roles? Do they have the necessary skill sets to fulfil those roles, and can the contractor put forth an expert team that can manage the construction on time and on budget  What is the contractor’s plans for managing the work? Unfortunately, this can sometimes get overlooked, but it’s an important part of the overall proposal and contract for the project.  How is the work actually going to be managed on a day-to-day basis? What are the contractors internal processes to actually complete the work? Is it as simple as throwing a bunch of drawings out in the field, and say, go build this? Or is there an actual proper work management issuance and tracking process that aligns with a quality management system in order to ensure that the work is completed per contract, and that it’s meeting the quality requirements? This is an important one. It needs to be evaluated up front to ensure that the right groups are involved to complete the work.

Contractor’s Construction Plan

The contractor’s construction plan provides the details of how the contractor is going to complete their construction activities. What is the sequence of the work? How are they managing deliveries on site? How is the work being overseen? And generally, how does the construction plan align with the commissioning plan, which is the next section here. The commissioning plan when submitted this early in the project will be pretty high level, but still at least needs to provide the detail on the sequence of activities, and the general schedule of activities to demonstrate that the plan is at least understood and can be further developed as the work proceeds. This is an important one too, of course, for the commissioning team. They’re going to want to review this section of the contract and ensure that the proper individuals are involved and that the commissioning timelines can be met.

Contractor’s Quality Plan

The contractor’s quality plan is important for the commissioning team, because if the construction that precedes commissioning isn’t being installed correctly or isn’t meeting the proper quality requirements of the contract, it is going to be very difficult for the commissioning team to meet their objectives knowing that the systems that are being received from the construction group aren’t necessarily at the proper quality levels in order for the project to function correctly. The contractor’s quality plan is definitely an important part of the contract.

Contractor’s Work Force and Labour

As well on large projects, or particularly in remote projects, the labour force involved in construction can be quite challenging to recruit the large number of people to remote locations that are required to build some of these large projects.

The contractor’s work force and labour strategy plan are important to understand. What is the workforce that’s involved, and how is the contractor going to engage the labour required, particularly remotely, to have the workforce on-site to complete the work?

Contractor’s Subcontractor and Supplier List

There will of be course many subcontractors involved in the project, and you want to understand and see who those individuals are – local groups or being brought in from further locations. Who are the groups that are involved to complete each aspect of the work?

Performance Guarantees

In some cases, once the project goes into service during the warranty phase, there may be performance guarantees that are required as part of the contract. What performance guarantees are, is the project is monitored for a period of time to confirm that it achieves certain metrics that are measured during the warranty period. An example could be minimum guaranteed losses of a rotating machine, or guaranteed availability. These parameters aret measured over a period of time to determine exactly how the system is performing per the technical specification during that period. If the technical metrics are achieved, then the contractor may achieve their final pay out. But if only a portion of the guaranteed losses are achieved, maybe they only receive a portion of that final pay out based on the contract terms that are defined in the performance guarantees section of the contract.

Performance Securities

Performance securities would be pretty standard in many contracts. These would be the bonds or a letter of credit that would exist – a portion of funds set aside that can be used should the contractor default on any portions of the job. The owner can call on these particular performance guarantees to have security that the work can still be completed.

Variation Procedures

There’s likely going to be aspects that are going to change during the contract, be it additional work or design changes or things like that. The variation procedures section of the contract defines the change management process on how are these changes incorporated into the work, for extra work, determining cost and schedule impacts, and how the contractor is reimbursed for those portions of changes that take place.

Contract Insurance

Contract insurance requirements are typically defined up front so the level of insurance required by the owner is understood, the level of insurance required by the contractor, and any other groups are involved in the project, so that everyone understands what insurance is to be obtained by each party on the project so that everybody’s aware of who’s covered.

Dispute Resolution Procedures

The last section, dispute resolution procedures, invariably someone’s going to have a different opinion on the contract, and there may be a dispute that needs to be resolved. Dispute resolution procedures will define how that process works in the contract, for levels of escalation to senior management, to mediators, to arbitrators, to final claims closeout, and how do these disputes get resolved in a timely manner so that the work can still be completed on the project.

When it comes to commissioning, the commissioning team does need to pay very particular attention to the contracts, particularly the technical specification. The commissioning team will certainly want to be aware of all aspects of the contract so that the activities that they’re conducting, or taking place as part of commissioning are fitting into the overall contract and project structure. Particularly the technical specification, this will be the document probably you’ll have printed out on your desk, and you’ll be accessing on an hourly basis to confirm what’s in the technical specification, and that the equipment being tested is in fact meeting the technical requirements that are defined in that technical specification.

Question and Answer Session

How can you define milestones in commissioning contracts? Is it based on process readiness or priority process? And are shut downs and tie-ins set as milestones from commissioning?

Some of the milestones will be easier to define upfront in the project, such as design or construction milestones.  The commissioning plan may not be fully defined at the time of contract award, and some of these milestones may come at a later date. But when you’re defining commissioning milestones, if it’s a large project, you’ll want to go through the process of systematization of your project where it’s broken down into a few smaller chunks of the project, and these form a system or subsystem.

Likely a milestone that would be defined is mechanical completion.  This would be the point in time when the construction is fully complete installation along with all documentation.  Mechanical completion milestones would be good milestones to mark as a payment milestone through commissioning. You could have an interim milestone where maybe portions of the pre-commissioning are complete, but these milestones can get somewhat difficult because the pre-commissioning and the commissioning can largely blend into each other. If you define that one sub-system is one piece of the project, when it’s complete, that could be a milestone, that when that portion is fully-complete, signed off, and handed over to the owner, that milestone would trigger a payment milestone. Several of these milestones could be structured and tied to payment milestones even in advance when the contract is being awarded.

What happens with the contract if during the construction phase there are some changes in equipment design or need to build additional facilities?

This can always be the case.  Despite everybody’s best efforts, the upfront design of the project may need to change, especially on a multi-year project. If your project spans five years, it’s guaranteed things are going to change over that five-year time frame. We would hope that there’s no major changes where significant designs need to be incorporated, but invariably there’s always going to be lots of changes. If there’s a large change in equipment, then that could be an entirely new contract that needs to be awarded as part of the project.

As an example, if there’s a line-up of 10 transformers, small dry type transformers on the project, and it’s determined that an 11th one is needed, that 11th one wasn’t in the contractor’s original scope of the contract, and they haven’t costed that into their proposal and cost structure. There would need to be a change notice issued to request the contractor’s price to supply and install one additional dry-type transformer. A project change notice is issued to the contractor, they’ll review the scope of work, they’ll price it, determine if there’s any schedule impacts, and reply back to the owner with those two numbers on the response to the PCN.

The owner can then evaluate, and if they’re comfortable with the price, comfortable with any impact to the schedule, then they can determine to award that additional scope to the contractor and make a formal contract change to incorporate the work into the project. If the price comes back as too much, or maybe the owner doesn’t want to incur the delays that that eleventh transformable will impact the schedule, the owner can still evaluate that, and choose not to award that extra work, and perhaps award it to a group after the project is complete to add the 11th transformer. It’s a bit of an evaluation. If there’s new work that needs to be incorporated into the project, the owner and the contractor evaluate that through a formal change management process before deciding if they want to formally incorporate that new scope into the existing contract and into the existing project.

I’ll explain a little bit more about some of the upfront procurement strategies, where if the upfront procurement strategy isn’t done correctly, it can really cause lots of problems throughout the length of the project. If the upfront procurement strategy is strictly based on price, then that doesn’t necessarily mean you’re hiring the right people to form the project team. If the contractor can’t in fact do the work, isn’t qualified to do the work, it doesn’t matter that they were the lowest price, they’re going to charge more and cause schedule delays that end up costing the owner more than the savings that they think they would have gotten from achieving the lowest price.

You definitely want to consider all aspects of the project related to everybody’s competency to complete the work. I’ll also point out on large projects where there’s a contractor and a consultant involved; you certainly want to ensure that the groups that are involved that it’s the right contract structure with regards to the relationship of how the groups can work together. There’s usually an engineer of record or an engineer role defined in a lot of the contracts. In the contracts, you definitely want to ensure that the right people are at the table to ensure that they’re filling their role on the project. If the contractor, of course, has a role to build the project there’s usually an engineering role in the case of design-bid-build where that design is coming from another group, and everybody needs to come to the table to fulfil their portion or their role as defined within the contract.

It’s not strictly just a one-sided relationship where you get somebody to go and do their portion of the work. They’re relying on others, in potentially other contracts to complete their role. And it does need to be thought about up front, and how the project is structured to ensure that the right information is flowing at the right times to the right groups so that the work can be completed on time.

What is the difference between SAT and SIT?

SAT is a Site Acceptance Test, and SIT is a Site Integration Test. In the case of SAT, a site acceptance test is very similar to a factory acceptance test. Whatever was built and assembled was likely tested in the factory with a list of tests to confirm that it meets contract requirements before it even leaves the factory. Now, a portion or maybe even all of these same tests are completed again once the equipment arrives on site as part of the site acceptance test. What this is confirming is that after the equipment has left the factory, there could potentially be shipping damage, or damage during installation, or the equipment could just not be installed correctly. The SAT will confirm that the results that are measured on site align with what was measured in the factory to confirm that nothing’s out of line, nothing got damaged, and that the device is in fact installed correctly.

The vendor may be involved in both of these tests. They would certainly be involved in the FAT. They may also come to site and perform the same or a portion of tests in the site acceptance test to confirm and sign off that their equipment has arrived at site, it is installed correctly, it is functioning per contract, and they sign off, get paid, and they’ve completed their scope of work for supply of that particular piece of equipment. That piece of equipment can then be used in further testing on site once it’s integrated with other portions of the project.

This is where SIT comes into play as the site integration test – this one piece of equipment is integrated with all other pieces of equipment, from a hardware perspective as well as all the software. The PLC logic and the programming, everything is programmed together and the site integration testing is completed. This is not just the vendor’s piece of equipment, but this is also the PLC cubicle rack and communication between the two devices, confirmation that from the HMI screen, you can control that particular piece of equipment, get the status back from that particular piece of equipment, and everything is working now as an integrated system.

I can add that the SIT would be still some of the pre-commissioning testing that is completed. Following that would be more of the integrated system level testing or process testing. The equipment can communicate back and forth from the HMI.

Following the SIT is where you’ll get into some of your process testing. That would potentially be the introduction of chemicals to the system, introduction of wastewater in the case of a wastewater treatment plant, and actually starting up the plant process and executing the intended function of the project.

What is the role of process engineers in pre commissioning and commissioning ?

Process engineers are the subject matter experts on the intended plant process.  For example, process engineers understand how the bilogical processes function in a wastewater treatment plant.  They provide the engineering analysis and oversight to confirm that equipment is operating per specification.

In the case of pre-commissioing and commissioning, it is unlikely that the process engineers are performing the commissioning.  Typically, the process engineers are overseeing commissioning activities of others.  The process engineers review the results or are consulted when there are issues encoutnered.

Please, watch the full video of our live webinar. The presentation and Q&A portion provide lots of helpful information about commissioning contracts.