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Management of Medium-Size /

Revamping Projects
Oil & Gas Downstream Projects
4. Contracting for EPC phase

RC - PR GES - 08171_A_A - Rev.1 - 18/07/2013


Management of Medium-Size /
Revamping Projects: course content
I. Introduction
II. Preliminary Studies
III. Basic Engineering (or FEED)
IV. EPC Contracting
V. Organization and Engineering
VI. Procurement
VII. HSE, Quality and Risk Management
VIII. Project Control (cost/schedule)

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IX. Construction and Fabrication Management
X. Completion / Commissioning / Start-up / Closure
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Contracting Objectives /
Strategy

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Objectives

 Once the FEED is complete and the project approved:


• Confirm the expected contract scope
− Engineering Services
− Equipment supplies
− Fabrication, Construction, Installation
• Confirm Engineering contract type (Lump Sum or Reimbursable)
• Select the Engineering Contractor(s)
• Select LLI suppliers and place early orders if any

 Process should comply with Owner requirements


• Tendering policy, standard contractual terms, legal reviews
• Authority approval levels, exception/waiver rules

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• Project cost/schedule constraints

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Owner level

 What does that mean for Owner ?


• How many contracts ?
• How to separate the Project into sub-projects ?
• Where to place interfaces ? how to minimize them?
• What type of contracts to be used ?

 Owner has to take into account:


• His own contracting rules and Project Management standards
• His internal resources available (or not)
• The overall project size: Revamping projects may not need splitting
• Availability, qualification, experience and management of
contractors

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 Contract Strategy is critical for project cost and schedule
performance
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Contracting Objectives / Strategy

 Contract: agreement between two or more parties, by which they


commit themselves to fulfil pre-defined obligations

 EPC contract for a Medium-Size / Revamping project:


• Typical agreement between Owner and one Engineering Contractor
• Typical Scope: Engineering, Procurement, Construction, till handover

 EPC Contract: the tool by which, under certain conditions:


• Contractor agrees to carry out the execution of the approved project
• Owner agrees to compensate Contractor, according to contract terms

 There are many subtle differences between a contract and a PO

 Pay attention to: placing an order for a contract is fundamentally

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different to place an order for materials or equipments ... see next page

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Contracting Objectives / Strategy

CONTRACT PURCHASE ORDER

In general will include several disciplines: For an equipment or materials issued from “standard”
engineering … fabrication, construction fabrication

May be performed at several sites including the final Fabrication will take place at supplier’s and /or sub-
project site supplier’s premises

The contract documents are based on Company’s The purchase order is based on supplier’s definition as
detailed requirement agreed by buyer

The result of the work will be checked at the Owner The result of the supply will be agreed at delivery (with
Site a warranty period)

Overall responsibility of the Work, liability could be Responsibility limited to the supply and the compliance
very large. i.e 100% with the specification.

Payment can be by unit rates, time rates, progress, Payment through milestones is the normal procedure
milestones

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May endorse several orders from the Company May be used for “packages”, several equipment for a
specific process

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New LPG tank + compressor

LPG Rundown storage & loading


Battery
limits

LPG Loading &


circulation pump
Boil off gas
compressor

LPG Storage tank

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How many contracts would you go for? What scope? Which type?
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Interfaces
Examples of Interfaces Management,…
Interconnecting Piping, Electricals, Controls…

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A few key questions

 Are there any preferred Vendors for specific equipment ? Why ?

 Do you have any black-listed suppliers ? How should Contractors


manage this ?

 How is Cost important vs Schedule ? Is there a schedule window ?

 What qualified resources does Owner have now ? And in the future ?

 What can be the impact of the project construction on Facility


performance ?

 What is the level of knowledge of the plant by each Contractor ?

 Have Contractors good relationship with local authorities ? Is it

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important ?

 Which Contractors do you really trust ? Why ?


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EPC Contract scopes and types

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Possible scopes

 Separate contracts
• Not too common in Revamping projects (too many interfaces)
• Owner keeps better control of activities, but needs resources

 Combined contracts
• EP: Engineering, Procurement (transportation may be included or
not), and usually construction & commissioning assistance
• EPC: Engineering, Procurement, Construction/Installation
(Operations taking care of Commissioning/Startup). Common for
Revamp projects
• EPCC: E.P.C. + Commissioning
• EPCCS: E.P.C. + Commissioning and Startup (very seldom for
Revamps, but possible for Medium-Size grassroots projects, with
Owner-loaned team)

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 Although Procurement is always included in the scope, the EPC
contractor may have limited decision authority (sometimes
none…)
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Possible scopes
SEPARATE CONTRACTS Pre-FEED, FEED, EPCI Pre-FEED, FEED, EPCC TURN-KEY
PRE-FEED PRE-FEED PRE-FEED PRE-FEED

BASIC or FEED DESIGN


PROCUREMENT SERVICES FOR BASIC or FEED
BASIC or FEED BASIC or FEED DESIGN LONG LEAD ITEMS DESIGN

PROCUREMENT PROCUREMENT SERVICES FOR


LONG LEAD ITEMS LONG LEAD ITEMS DETAIL ENGINEERING

DETAIL ENGINEERING
DETAIL ENGINEERING DETAIL ENGINEERING PROCUREMENT PROCUREMENT
PROCUREMENT PROCUREMENT ASSIGNMENT
LONG LEAD ITEMS
SUPPLY
OTHER EQUIPMENT SUPPLY SUPPLY LONG LEAD ITEMS
BULK MATERIALS ASSIGNED L.L. ITEMS

OTHER EQUIPMENT OTHER EQUIPMENT OTHER EQUIPMENT

BULK MATERIALS
CONSTRUCTION
CONSTRUCTION INSTALLATION BULK MATERIALS BULK MATERIALS
CONSTRUCTION CONSTRUCTION

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COMMISSIONING COMMISSIONING COMMISSIONING COMMISSIONING AND START UP

OPERATING TESTS OPERATING TESTS OPERATING TESTS OPERATING TESTS

PERFORMANCE TESTS PERFORMANCE TESTS PERFORMANCE TESTS PERFORMANCE TESTS

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Most common types

 Lump Sum
• Pros: clear definition of work, final price fixed, Contractor responsibility
• Cons: long tendering period before contract award, rigidity, schedule
• Common for Grassroots (even medium-size), difficult for Revamps

 Reimbursable
• Pros: quick contract award, global project schedule shortened, flexibility
• Cons: final price not firm, large Owner supervision team
• Owner may be assisted by a PMC (Project Management Consultant)

 Payment on behalf: similar to Reimbursable


• Orders and Subcontracts placed by Contractor and paid by Owner
• Pros: quick contract award, global project schedule shortened, flexibility

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• Cons: Owner directly exposed to Sub-Contractors and Vendors

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Variants

 Lump Sum Turn Key: includes S/U (infrequent for revamp)

 Reimbursable + Incentives: improves Contractor motivation


• Target Price + bonus/malus
• Incentive based on performance indices
• Schedule incentive
• Cost + Fixed Fee (common for Umbrella contracts)

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Risk for owner

Remaining risks for the Owner:


 Owner prepares the Plant base description (wrong description  extra costs)

 Owner is responsible of the Plant performance once the project is started

 Plant incidents during project construction are typically not compensated

 Owner has to manage early interface risks (FEED, early contracts, LLI)

 An endorsement process is organised and put in place to reduce above risks

 Owner has limited flexibility to make late scope changes (even if justified)

 Schedule overruns may not be easy to recover and compensate

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 Too few Contractors able to perform the scope restrict Owner options

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Risk for owner

Mechanical completion Punch lists

Construction and Start-up and warranty period


pre-commissioning Commissioning performance 18 months
tests or 24 m

Ready for
Commissioning Ready for Provisional Final
(mechanical start-up acceptance acceptance
completion)

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Direct EPC Contracting option

Idea
Contracting

Proceed to Concept or CFT Approval and Contract Award

Detailed Engineering
Concept and/ or
Direct CFT
Procurement
(Simple Projects)
Proceed to Basic

(Fabrication),Construction,
Basic (or FEED) Commissioning, Start-Up, Perf.Tests
Engineering
Mechanical Completion
Provisional Acceptance

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• Direct preparation of Project definition & requirements for CFT
• FID after potential Contractors Tenders evaluation & selection Guarantee
• Depends on Contractors willingness to quote on this basis Period
• May allow alternate designs comparison(e.g debottlenecking)
Final Acceptance
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Long Lead Items management

 Long Lead Items / Critical Equipment should be limited to:


• Equipment that cannot be delivered on time at site if selected and
purchased at EPC Contract time (possible examples: LNG Tanks, large
rotating equipment, MCHE, extra heavy vessels, pipelines materials…)
• Equipment requesting rapid specific design finalization to fit the
requirement of the project (possible examples: air coolers for air cooled
modularized LNG Plant)
• Equipment that Owner desires to select before EPC Contract Award for
“standardisation” purpose (example: control systems)

 For an EPC contract, all tasks regarding the procurement and the initial
steps of the LLI supply remain under the responsibility of the Owner
 The endorsement by EPC Contractor of the LLI supply has to be
implemented as early as possible during the tendering phase

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 If applicable, Licensor packages may be considered as LLI (EPC
Contractors are very reluctant to accept the Licensors guarantees)

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EPC Contract bidding process

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EPC Contract bidding process

CONTRACT STRATEGY
PLAN
Contracts Scope / Split

COORDINATION
Award type / Schedule
MEETING

Identification of PRE QUALIFICATION Tenderers complete CFT,


suitable Tenderers TENDER ISSUE PERIOD clarification notices issued

Tenderers Selection BIDDERS LIST

Unpriced / Priced TENDER EVALUATION


Evaluation
Exact Terms & PREPARE
Conditions + Scope CALL FOR TENDER (CFT)
RECOMMENDATION TO
Ranking & Selection AWARD

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Contract Initialling APPROVAL

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Call for Tender documents

INSTRUCTIONS TO TENDERERS
ITT (Introduction & Instructions)

AGR. AGREEMENT & ANNEXES


(Terms & Conditions)

EXHIBITS & Attachments


(Scope & Requirements)
FEED dossier
Company
A Scope E I Items

Schedule Particular Subcontractors&


B of Prices F Conditions J Vendors

Work Time Coordination Contractors


C Schedule G Procedure K Organisation

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Performance
D Guarantees H Quality L HSE

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Typical tendering procedure (medium-size project)

Five Main Steps


Prequalification of potential Tenderers
3 months Preparation of the call for tenders (by Company)
 Conditions for tender preparation & issue
 Contract conditions (clauses, prices, etc.)
 Scope of work and specifications
4 months
Tenders preparation (by Tenderer)
 Price preparation (critical path)
Technical and unpriced commercial
 Priced Commercial
3 months Tenders analysis (by Company)
 Receipt and formal opening
 Comparison
 Clarification meetings

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 Additional submissions
 Evaluation and recommendation
??
Decision

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Prequalification of Contractors

 Verification that Contractors have sufficient


• Experience
• Organization and resources
• Financial solidity

 Process managed by knowledgeable Owner team, not a single person

 Qualification questionnaires are launched, received and analyzed

 Contractor facility surveys are performed for each good-looking one

 Finding enough contractors to assure competition may be a problem

 Tenderers with complementary skills may form a Joint Venture

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 Prequalification may be performed through public advertisement

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“Call for tender” procedure

 Objectives
• Ensure a fair and equitable treatment of all tenderers
• Select the best contractor after an open competition
• Assure the best acceptable conditions for Owner

 At the end of the selection process:


• The successful tenderer should have full knowledge of the dossier
• He shall not later be able not plead ignorance and dispute contract
validity

 A satisfactory tendering process has expected benefits for both

Clarifications will always be required during the process

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 Be ethical (any Owner has his own ethics rules)

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Opening the bids

Two philosophies exist for Tenders opening

Same opening date for technical and commercial tenders


Technical and Updated tenders
contractual
Analysis, clarifications, confirmations Recommendation
Commercial

Two different opening dates for Technical commercial tenders


Commercial
Short list
Updated tenders
Technical and Analysis, clarifications, technical
Lowest bid
contractual confirmations

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selected

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Tender period

 Tender Period: A reasonable tendering period shall to be allowed


taking into account the project schedule, and the amount of work
of tenderers are required to perform to complete the CFT.

 Any request for extension of the tendering period shall be subject


to approval. If such extensions are granted, all tenderers shall be
informed by means of a Tender bulletin.

 Tendering costs incurred by tenderers in connection with the


bidding process shall normally be borne by the tenderers and this
principle made clear in the CFT documents. However, the project
may consider compensating unsuccessful Tenderers for the cost
of tendering in certain circumstances (e.g. in the case of major
EPC Contracts).

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Tender evaluation

 Tender Evaluation Procedure: the responses to the CFT shall be


assessed technically and commercially against previously
established criteria by a team of representatives of the technical,
contractual and commercial functions, co-ordinated by the Owner
or PMC.

 It may be appropriate to include Partner/Shareholder personnel


within the Tender Evaluation Team.

 Organisation and criteria of the Tender evaluation must be


recorded and approved in a contract specific Tender Evaluation
Procedure which shall contain details on the evaluation.

 Project should give careful consideration to opening only the

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technical packages first. This will allow a technical evaluation to
be performed to decide whether or not Tenders are technically
acceptable.
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Clarification meetings

 Objective for Owner is to review and clarify with each Tenderer:


• The Contract “execution plan” submitted, including the work
schedule
• The qualifications and alternatives submitted by the Tenderer
• His reaction to the qualifications or suggestions made by other
Tenderers
• His position re. endorsement of the FEED and of the Long Lead
Items

 The clarification meetings will allow:


• Owner to appreciate the understanding and motivation of
Tenderers
• Tenderers to improve their understanding of the Owner’s position

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• Owner to improve the dossier quality by taking into account
comments

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Final selection

Opening of final tenders and selection of the Contractor

 After having checked that each tenderer has accepted (through


his initialling) the Contract conditions, the Owner opens the
commercial proposals.

 The selection is made in principle on the lowest price basis.

 If it is not the case, the Owner is usually requested to document


his decision (detailed scored evaluations).

 Accept at the last minute an uncontrolled price reduction from


one contractor outside the normal procedure would be:

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• Unfair to other Tenderers
• Counter-productive for future projects
• Risky (Contractor will try to recover during the Contract execution)
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Design competition strategy (applicable to some medium-
size Projects)
 An EPC Contract can be negotiated on LSTK basis after a Design Competition
(paid FEED and offer based on a limited Project Definition).
 Allows to bring innovation and competition of designs
 Basis of Design and minimum SOR requirements, Project objectives, areas
open to new or novel « Design », evaluation criteria should be specified by Cy
 FEED scope should be defined to avoid « short » FEED, although the FEED
content may be lighter than required to be the basis for a later LSTK bidding
 Areas of innovation should be followed-up by Company team in order that
they fall under Company expectations
 Company teams are needed at each Competitor’s office to follow the process
 Equal treatment should be applied to both Competitors for fair competition

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 Company should ensure that key participants to the design competition can
participate for each Bid (e.g. Process Licensors, Critical Equipment suppliers…)

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Project EPC contracting

Key points to keep in mind

 Good Project execution relies on “solid” contract, based on:


• Clear scope of work (clear for both)
• Confidence in each party performance capability
• Good definition and management of interfaces
• Review and Agreement, for each party, of all contracting aspects
• Openness to change, but risk management
 Placing the EPC contract is a major Owner responsibility
 Some EPC contracts need less Owner management resources than
others, but any EPC contract has to be managed
 A good contract is based on a win-win situation

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ATTACHMENTS

I. Examples of Medium-Size projects

II. Detailed tendering elements

III. EPC contract structure/contents

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ATTACHMENT I
Examples of Medium-Size projects

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EPC LSTK: Gas plant accro project Santa Barbara 2nd Train extension

EPCC LSTK PROJECT (Compl. 1994): GRASS ROOTS PLANT (Compl. 1994) 2x400 MMSCFD
Trains; 2nd Train to be completed rapidly

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Discuss Contracting Plan & contract type for Train 2 (Duplicate Train)

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Small project example

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ATTACHMENT II
Detailed tendering elements

STEPS

EVALUATION TABLE

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Tendering detailed steps

When an ITT includes a FEED, and if the construction execution plan is based on unit-rates
contracts (x) per trade, the proposal critical path usually goes thru:
 Preparation of MTOs and BOQs for construction contracts
 Issue of inquiry package to the potential construction contractors (unit rates contractors
& others)
 Preparation of bids by construction contractors
 Receipt and review of these bids, Preparation of comparative construction estimates,
finalization of construction estimate
 Estimate of related « contingencies » (MTO allowances, provision for changes...)
 Input to Project estimate
 Finalisation of construction execution plan; Management Price reviews
 Preparation of commercial proposal with corresponding required price break-downs
and unit prices
 Dispatching of the proposal (generally in sealed envelopes hand delivered at Owner

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designated office)
(x) Unit-rates contracts are contracts with a unit price for « direct cost » of each item shown in
Bill Of Quantities and a lump sum price for « indirect costs ». The lump sum price does not
change as long as the contract estimated price (based on the estimated quantities) remains
within +- x %
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Tendering detailed steps

When the CFT is structured per common international practice for


major projects, other main tasks include:
 FEED review / endorsement; CFT review
 Preparation of clarification requests (follow format and watch
dead line)
 H.O manhours estimates
 Bulks MTOs and estimate of MTO allowances
 Preparation of requisitions and inquiries to Vendors, technical &
commercial evaluation

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 Proposal Executive Summary

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Tendering detailed steps

 Technical Offer preparation with, in general:


• FEED endorsement report
• Project Execution Plan (Engineering, Procurement, Construction, Commissioning,
Project Controls, Materials Controls, Systems etc.), EPCC Schedule
• Technical qualifications
• Proposal Forms
• A mandatory principle is to strictly answer Owner requirements and required
proposal formats in the ITT
 Commercial Offer preparation with, in general:
• Prices and Price breakdowns
• Unit prices and rates
• Payment Conditions
• Commercial qualifications

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• Bid Bond
 CFT Agreement review and Legal qualifications
 And, if required, financing proposal
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Example of tender evaluation table
No CATEGORY Weight CONTRACTOR A CONTRACTOR B
Un-weighted Score Weighted Score Un-weighted Score Weighted Score
(A) (B) (A * B) (B) (A * B)
1.0 MANAGEMENT
1.1 PROJECT MANAGEMENT 3.0% 0.00 0.00 0.00 0.00
1.2 CONTRACTUAL COMMERCIAL COMPLIANCE 2.0% 0.00 0.00 0.00 0.00
1.3 SUB-CONTRACTING 2.0% 0.00 0.00 0.00 0.00
1.4 QUALITY ASSURANCE & QUALITY CONTROL 2.0% 0.00 0.00 0.00 0.00
1.5 HEALTH, SAFETY & ENVIRONMENTAL PROCEDURES 2.0% 0.00 0.00 0.00 0.00
1.6 SCHEDULE COMPLIANCE 2.0% 0.00 0.00 0.00 0.00
Sub Total: 13% 0.00 0.00 0.00 0.00
2.0 CAPABILITIES AND PLANS
2.1 DETAIL ENGINEERING 4.0% 0.00 0.00 0.00 0.00
2.2 PROCUREMENT 3.0% 0.00 0.00 0.00 0.00
2.3 FABRICATION, CONSTRUCTION & TESTING 8.0% 0.00 0.00 0.00 0.00
2.4 TRANSPORTATION, HOOK-UP, INSTALLATION & SURVEY 6.0% 0.00 0.00 0.00 0.00
2.5 PRE-COMMISSIONING & COMMISSIONING 6.0% 0.00 0.00 0.00 0.00
Sub Total: 27% 0.00 0.00 0.00 0.00
3.0 PROJECT EXECUTION PLAN FOR DETAIL DESIGN
3.1a RISERS – FLEXIBLE RISER SYSTEM See Note
3.1b RISERS – ORGANISED RISER SYSTEM 8.0% 0.00 0.00 0.00 0.00
3.2 FLOWLINES (PIPE-IN-PIPE or BUNDLE) 8.0% 0.00 0.00 0.00 0.00
3.3 SPOOLS & JUMPERS 8.0% 0.00 0.00 0.00 0.00
3.4 UMBILICALS 8.0% 0.00 0.00 0.00 0.00
3.5 OIL LOADING TERMINAL SPM BUOY 8.0% 0.00 0.00 0.00 0.00
3.6 OIL LOADING TERMINAL OIL OFFLOADING LINES 7.0% 0.00 0.00 0.00 0.00

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3.7 FPSO MOORING SYSTEM INSTALLATION 7.0% 0.00 0.00 0.00 0.00
3.8 ANCHORS 6.0% 0.00 0.00 0.00 0.00
Sub Total: 60% 0.00 0.00 0.00 0.00

OVERALL TOTAL: 100% 0.00 0.00 0.00 0.00

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Example of tender evaluation table
Example of tender evaluation table
Scoring Criteria (1/2 point possible)
1 : unsatisfactory Average Weight Weighted
Safety Quality Specialists Contracts Responsible
2 : satisfactory score coefficient score

3 : good
Engineering quality 2
Procurement quality management 3
Capability adapted to scope 3
Job conformance to tender 3
Conformance to contract terms 2
Conformance to schedule 3
Quality control performance 2
Safety control performance 3
Quality of studies & technical documents 1
Management administration of project 3
Adaptability to changes 1
Subcontractors selection quality 3
Relations with client

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1
Social climate 1
Bank confidence 2
Comments : compulsory if score under 2 Total 33
Evaluation /33
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ATTACHMENT III
EPC contract structure / contents

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Work scope typical contents

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Work scope typical contents

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