A white paper: Exploring contract models

Choosing the right contracting model is critical to the successful delivery of a project. Senior Consultant Melanie Purcell explores the various models and takes a deep dive into the pros and cons of Early Contract Involvement (ECI).

By Critical Input Senior Consultant Melanie Purcell

Early Contractor Involvement (ECI)

CI is a collaborative or relational procurement method that seeks to obtain the benefit of the contractor’s specialist knowledge in the early planning and design phases of the project. Under an ECI arrangement, the contractor is engaged for a fee as a contribution towards its tendering costs. At this point, the project cost isn’t known because design is typically not yet finalised. In effect, an ECI is considered a process that leads to another form of contract, rather than a contract itself.

How ECIs intersect with other contracts

Besides ECIs, other common contracting models used in infrastructure projects – each with its own pros and cons – include:

Construct only
Design and Construct (D&C)
Early Contractor Involvement (ECI) then Construct or partial D&C
Engineering, Procurement and Construction (EPC)
Engineering, Procurement and Construction Management (EPCM)
Design Build Finance Operate (DBFO) / Build Own Operate (BOO) / Public Private Partnerships (PPP) (and other variations)
Managing Contractor
Alliance.

While ECI is the common “umbrella” term used, there are several ECI models. The key differences relate to the number of tenderers and whether it will culminate in a “Construct only” or a detailed “Design and Construct” (D&C) contract. Early Tender Involvement (ETI) generally leads to Construct only contracts. Typically, two or three competing contractors are invited to review the principal’s preliminary design, provide constructability inputs, and undertake value engineering. The principal and its designer amend the detailed design after considering market input. Competing contractors then offer a schedule of rates or lump sum prices based on the refined tender documentation.

Generally, a Construct only (ETI) model is preferable when the principal wants to retain control of the design and/or the design is substantially complete. The contractor appoints their own design consultants to validate certain aspects of the design, participate in value engineering and potentially provide alternative design solutions, however, the contractor does not take on design responsibility.

Early Contractor Involvement (ECI) generally leads to a detailed D&C contract. Typically, an ECI involves two competing contractors and is commonly known as dual or double ECI (dECI). The contractors each align to a designer and the two competing groups develop concept designs and undertake pricing in parallel. By contrast to the ETI model, under ECI the principal may have only reached 10%-30% design maturity and doesn’t want to control the design. The principal provides a clear brief to the contractors (e.g., principal’s project requirements) and actively seeks alternative designs within those parameters. The competitive tension during the concept design phase helps drive innovation to deliver best value for money. After the tender process, one of the competing groups is selected to undertake detailed D&C. ECI is best suited to large, complex projects where a relationship-focused model is preferred, sophisticated risk management and allocation is required, and the contractor’s knowledge and innovation is a key driver for success.

Pros and cons

While the ECI model provides greater value than traditional procurement models, it’s not without pitfalls.

ECI advantages include:

Better design and improved constructability, through innovation and technology solutions
Improved risk identification, management, and allocation
Fewer variations during construction
Improved schedule (faster and more certain delivery)
Improved understanding and management of community and other stakeholders
Interactive process builds the foundation for future project relationships and a less adversarial structure
Increased transparency (including in relation to costs and trade/subcontractor pricing)
Improved contract documentation and improved understanding of each party’s position and risk profile, therefore reducing the risk of disputes.

ECI disadvantages include:

Could be a lack of market appetite due to additional time and costs involved by contractors and a reluctance to tie up key personnel for an extended period
Potential schedule risk if negotiations with the ECI participants fail
Contractors transfer significant intellectual property and the losing contractor’s IP may be shared with the successful contractor (thus eroding the losing contractor’s commercial advantage on future projects).

Process

An ECI is typically delivered over multiple stages, such as:

Stage One – Expression of Interest (EOI)
Stage Two – ECI Phase (design development and bid formulation)
Stage Three – Award of a fixed price Construct only or detailed Design and Construct contract.

During Stage Two, the contractor, or commonly two to three contractors, are engaged to provide advice on the design under an agreement such as a consultancy agreement or a bespoke ECI Agreement. The agreement will set out information such as the roles and responsibilities of the principal and contractor, the workshop schedule, communication protocols (including how to deal with commercial in confidence information), and document submissions/design reviews. Separate structured meetings and workshops with each contractor are recommended to ensure ideas are shared freely. Each contractor is required to be treated fairly and probity must be maintained. The contractors provide detailed pricing, schedule, and construction options at the end of the ECI phase which can be incorporated into the contract with the successful contractor. Before awarding the Construct only or detailed D&C contract, the principal can stop the project if the project’s business case isn’t feasible, without facing a claim for losses from a contractor that was anticipating taking the project through to construction. Additionally, in the unlikely event that relationships have broken down between the principal and the contractor(s), the principal can continue with the project but competitively tender to include another contractor, with the benefit of ownership of the concept and preliminary design works.

Avoiding pitfalls

While the ECI models are growing in popularity, they don’t suit all projects and should only be selected after a thorough procurement options analysis, including an assessment of the market and the principal’s capability and capacity.

Selecting a contractor early, based largely on non‐price criteria, can at times reduce competition and value for money, but this can be mitigated through evaluating (and locking in) financial parameters, such as margin and unit rates as part of the selection process and by validating open book estimates throughout the process. If an ECI process is adopted, it’s important to begin early enough in the project lifecycle to maximise opportunities for innovation and constructability improvements. Waiting until the design has progressed too far or not being open to innovative ideas limits the value that principals and their designers can derive from the contractor’s knowledge and experience.