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Lump Sum Turnkey and Reimbursable Project 1
- Thread starter norzul
- Start date
If you can reasonably estimate the amount of work and risks involved then a turnkey or lump sum contract is appropriate. If the risks are unknown and the amount of work is unknown then a time plus disbursement type of contract is appropriate.
Just be careful on a lump sum contract or you may find yourself meeting and justifying every decision to the n th degree to death.
Rick Kitson MBA P.Eng
Construction Project Management
From conception to completion
Just be careful on a lump sum contract or you may find yourself meeting and justifying every decision to the n th degree to death.
Rick Kitson MBA P.Eng
Construction Project Management
From conception to completion
You might want to go for Provisional Lump Sum that include combination of reimbursable and lump sum contract. Due to uncertain quantity at certain stage of engineering phase, you might want to start with unit price with provisional quantity given (the best available estimate in order to give the bidder some indication of quantum of job). Once the quantity could be conveniently decided than the contract could be turned into lump sum contract. Of course there is still other factor to consider in deciding the contracting mode.
Thanks
Thanks
pmkb
Computer
- Oct 4, 2005
- 10
From the owner's perspective, you should also consider whether you have the sufficient, competent supervision on hand to manage a project. If not, then a lump sum contract may make more sense as you will not be able to properly manage the execution otherwise.
Stacy
Project Management Knowledge Base
Stacy
Project Management Knowledge Base
Good point pmkb but competent supervision is required in any case, just more administrative in a cost plus basis.
No matter what sort of contract you have you never get the final result that you expect but the final result that you inspect.
Rick Kitson MBA P.Eng
Construction Project Management
From conception to completion
No matter what sort of contract you have you never get the final result that you expect but the final result that you inspect.
Rick Kitson MBA P.Eng
Construction Project Management
From conception to completion
the project itself will give the answer to the reasonable mind...
laying a household gas distribution network 600km long calls naturally for a unit price type of contract, e.g. price per km of finished pipeline.
maintenance service of a fire protection system for 1 yr, also calls for reimbursement.
both examples above are more related to services rendered than products delivered.
powerplants, refineries, chemical installations are usually contracted turnkey mostly because the owner wants to limit the exposure to delays during commissioning/start-up AND there is a nice round number to look at as the budget.
the owner buys a product, not a service.
e.g. what would you say if you go to the car dealer and instead of buying a car, where you turn the key and she starts, the dealer tells you: - let's do this: we will bill you during the construction of the car... as soon as the frame is ready we call you and you inspect it, then once we finish the body, later when we install the motor, we call you again. by the way, when we do the wiring and the loop checks we need your signature to approve the protocol. start-up and commissioning will not take place unless all the previous activities have been documented... you get the idea...
granted, cars are consumer products and industrial installations are not... firm price, turnkey projects are the means for the owner to give these products a "package" quality.
nevertheless, the turnkey projects usually have milestones for payments so the EPC does not have to finance the whole project.
saludos.
a.
laying a household gas distribution network 600km long calls naturally for a unit price type of contract, e.g. price per km of finished pipeline.
maintenance service of a fire protection system for 1 yr, also calls for reimbursement.
both examples above are more related to services rendered than products delivered.
powerplants, refineries, chemical installations are usually contracted turnkey mostly because the owner wants to limit the exposure to delays during commissioning/start-up AND there is a nice round number to look at as the budget.
the owner buys a product, not a service.
e.g. what would you say if you go to the car dealer and instead of buying a car, where you turn the key and she starts, the dealer tells you: - let's do this: we will bill you during the construction of the car... as soon as the frame is ready we call you and you inspect it, then once we finish the body, later when we install the motor, we call you again. by the way, when we do the wiring and the loop checks we need your signature to approve the protocol. start-up and commissioning will not take place unless all the previous activities have been documented... you get the idea...
granted, cars are consumer products and industrial installations are not... firm price, turnkey projects are the means for the owner to give these products a "package" quality.
nevertheless, the turnkey projects usually have milestones for payments so the EPC does not have to finance the whole project.
saludos.
a.
-
1
- #7
I have done some very large jobs under Lump Sum Turn Key (LSTK). In most cases, it probably wasn't the best way in hindsight. In some cases, it did produce a huge profit.
Lump Sum Turn Key (LSTK) projects are suited in cases where:
- things are well known ahead of time (e.g. a compressor package "just like this one")
- things are well defined and many people understand what the terms mean (e.g. a gas compressor package for "X")
- can be quantified
- can be measured, demonstrated
- usually more commodity type than engineered type (e.g. more compressor package than gas plant)
- no "Change Orders" are anticipated
People tend to concentrate on a LSTK's problem of having to justify changes, additional money etc. People sometimes forget that a bidder may also have the right to refuse a Change Request.
Most owners use LSTK to limit their exposure to cost and schedule overruns. The other side of this is also true for the bidder - they limit their exposure to scope changes, unreasonable delays, etc.
Just one word of caution. I believe that Stone & Webster got into a huge penalty due to a LSTK job. I believe the result was either bankrupcy, and/or a large portion of the company being sold. You need to google this as I am trying to recall from memory somthing that happened a few years ago?
Lump Sum Turn Key (LSTK) projects are suited in cases where:
- things are well known ahead of time (e.g. a compressor package "just like this one")
- things are well defined and many people understand what the terms mean (e.g. a gas compressor package for "X")
- can be quantified
- can be measured, demonstrated
- usually more commodity type than engineered type (e.g. more compressor package than gas plant)
- no "Change Orders" are anticipated
People tend to concentrate on a LSTK's problem of having to justify changes, additional money etc. People sometimes forget that a bidder may also have the right to refuse a Change Request.
Most owners use LSTK to limit their exposure to cost and schedule overruns. The other side of this is also true for the bidder - they limit their exposure to scope changes, unreasonable delays, etc.
Just one word of caution. I believe that Stone & Webster got into a huge penalty due to a LSTK job. I believe the result was either bankrupcy, and/or a large portion of the company being sold. You need to google this as I am trying to recall from memory somthing that happened a few years ago?
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