BN-CO-109 Subcontracts

Table of Content

1. Introduction
2. Subcontracts Procedure
3. Business Considerations
4. Notes on Subcontracts Procedure
5. Subcontracts Administration
6. Subcontracts Close-Out
7. References
8. Attachment Summary

1. Introduction

This section defines the responsibilities of the various functions in a field organization involved with subcontracts.

The Subcontracts Procedure is the basis for all subcontract activity and is written to cover a job which is large enough to warrant a full time Subcontracts/Control Manager in the site organization. Depending on actual job size, organization and Client requirements, the location at which the work is done (Home Office or site) and the people responsible for doing the work may change. This should be reflected in the Project Procedure and Execution Manual respectively the Construction Procedure and Execution Manual.

2. Subcontracts Procedure

See procedure Ref. 7.1.

3. Business Considerations

The primary aspect of all subcontracts which must be kept uppermost in the minds of all who work on them has to do with the fact that subcontracts are instruments of business. There is, of course, a technical part which is important and must be accurate and complete.

This technical part is primarily the responsibility of the Engineering Department. The subcontract provides a commercial framework in which the technical information can be applied to build a part or all of a refinery, chemical plant or other installation.

Construction's aim in developing the various modules of subcontract documentation has been to produce a complete subcontract which provides least cost to accomplish the work with maximum protection for Company and our Clients. At the same time, the subcontractors are given a fair chance with proper information which enables them to make a competitive bid and a reasonable profit.

Moreover, the modular documentation is designed to cost as few man hours as possible in putting it together and in administering it at the site.

Therefore, the role of construction as delineated in the subcontracts procedure is mostly a commercial one, the Procurement Department has its role and acts as a check and balance for construction activity.

Within the overall concern of business, there are other important subjects of a broad nature.

Confidentiality and security go together and are very important. Most subcontract bids are on a competitive basis, the procedure calls for them to be delivered in a sealed condition, the opening of the bids should be done with a protocol and with proper witnesses present (Attachment 4). Depending on our contract with Client, the Client often provides a representative. After the bids are opened, information contained in them is to be distributed only on a strict "need to know" basis. Bidders eliciting information about their own bid or the bids of others are to be rebuffed. All relative information until award of the subcontract is to be kept secure. For instance, it is to be locked up at night.

Business ethics of Company personnel involved with subcontracts must be of the highest type. As a reference for principles of ethics, see the Company booklet, business ethics at Company. Avoid all occasions of conflict of interest. Always provide an auditable trail for all subcontract transactions, ensure that all pertinent approvals are recorded.

Relative to business considerations, we often get so immersed in the business aspects of subcontracts that the requirements of Company's contract with our Client tends to be relegated to second place, if not forgotten. Everyone concerned must always remember that the provisions of Company's contract with our Client always overrides any business considerations between Company and a subcontractor. If we have done a proper job of making the special conditions of the subcontract reflect the Company/Client contract, thus making the two documents fully back-to-back, it makes the administration of the subcontract easier.

4. Notes on Subcontracts Procedure

This section expands on parts of the Subcontracts Procedure.

4.1 Subcontractors List

The list of subcontractors to bid a specific part of the work should either come from the Manager Subcontracts in the Home Office (based on the computerized register) or be checked with him, if only on a verbal basis, before going out for bids.

Attachment 3 of this section is a form which should be used to get approval of the Project Manager and Client.

If it becomes necessary to do a survey of subcontractors to determine capability, Attachment 1 of this section, Company Subcontractor Survey, should be used.

4.2 Technical Input

There is a strong involvement of the Engineering Department in the technical documentation itself (drawings and specifications), in the list of technical documents, in the technical part of the requisition and in quantification if the subcontract is on a unit rate basis.

Our experience has shown that the technical input is almost always on the critical path of any subcontract schedule and requires expediting and follow-up. Although such expediting and follow-up are the responsibility of the Project Engineer, we have found it necessary to expedite the Project Engineer and the applicable Specialist Engineer separately.

Relating to the requisition for a given discipline, the Manager Subcontracts in the home office has standard requisitions for most disciplines which can be used as a guide for a specific subcontract.

4.3 Supply with Erection Purchase Orders

As stated in the Subcontracts Procedure, the erection part of supply with erection purchase orders is considered as a subcontract. We have developed a set of conditions for construction services specifically for use with supply/erection Purchase Orders.

These conditions for construction services supplement the standard conditions on the reverse side of the Company Purchase Order and act as a substitute for General Conditions of Subcontract, special conditions of subcontract and Safety Policy and SiteRegulations. It should be noted that no payment terms are included in these conditions and, for the erection portion, we should ensure that payment terms are covered on the face of the Purchase Order. Also, there is a separate section for special conditions (including those necessary for a back-to-back condition with the Company/Client contract).

The same conditions for construction services can be used for small subcontracts with the approval of the Manager Construction in the Home Office.

4.4 Detailed Commercial Analysis of Bids

The detailed commercial analysis will include a sensitivity study comparing variations in estimated quantities against the Form of Tender in the bid. The analysis will include a comparison of estimated final subcontract quantities and value with the subcontract budget quantities and value.

4.5 Meetings with Selected Bidders

Attachment 6 to this section of the Field Construction Manual is a suggested agenda for these meetings.

4.6 Subcontract Value

The Purchase Order will show as the committed amount the original subcontract value if known. The estimated final subcontract value at the time of letting should include an allowance for normal growth of subcontract (EWA's, growth in quantities) and a contingency. This estimated final shall not be revealed to the subcontractor.

4.7 Kick-off Meeting

Attachment 7 to this section of the Field Construction Manual is a check-list of items to be discussed, if applicable, during the kick-off meeting.

5. Subcontracts Administration

5.1 Responsibility

The overall responsibility for proper subcontract administration is in the Subcontracts/Control Manager. However, almost everyone in the field organization is involved in some way. It is essential that most administration activities are accomplished in a routine manner, well understood by all concerned and without expending too many man hours.

5.2 Revisions to Subcontract Documents

The responsibility for preparation, input, review and approval of revisions to subcontract documents and Purchase Order is the same as for the original ones and as shown in the cross checklist (Attachment to the Subcontracts Procedure).

The Project Manager will arrange for all such documents to be sent to the subcontractor via the Project Construction Manager (if the subcontractor is established on site) to the subcontractors field representative. The Company site offices shall ensure that the subcontractor acknowledges receipt of the documents by signing and returning the transmittal acknowledgement slip.

Drawing issues (both originals and revisions) are accomplished in the same way. Site office is to take care that formal transmittals are used in every case in which drawings/revisions are sent to subcontractor. A complete file of such transmittals is often an important tool in defending against possible claims.

Formal notification and confirmation of revised contractual documents will always be by means of a Purchase Order Amendment initially raised by the Subcontracts/Control Manager.

As with the Purchase Order, no amendment will reveal estimated final values to the subcontractor.

As soon as the Home Office knows about important changes to technical subcontract documents, or large variations in the subcontract quantities are established or meaningful changes to delivery dates of drawings or materials are made, the Project Manager will, pending the revision of the subcontract documents, immediately notify the Project Construction Manager for proper action.

5.3 Final Drawing Quantity Take-Off

Large variations in the subcontractors scope of work only discovered after materials take-offs at site can seriously jeopardize the mechanical completion date of the subject subcontract as well as the completion dates of Company and other (sub)contractors and create a basis for claims.

Therefore, in addition to bulk take-offs by the various disciplines and sampling and trending by the Materials Control Engineer, the Specialist Engineer in the Home Office will normally prepare a final drawing quantity take-off. For unit rate subcontracts the final quantities will be shown in a Form of Tender update, which then reflects the final scope. For lumpsum subcontracts the final quantities can be used for comparison with the subcontractors take-off and for negotiations about the price for variations in scope.

5.4 Variations in Scope

Variations in scope will exclusively be covered in updates of the Form of Tender and comprise variations to quantities shown in the original Form of Tender as well as additions of items not shown in the original Form of Tender.

Examples:

The original Form of Tender for Pipe Erection shows 6 tons of 4" c.s. pipe sched. 40 to be erected. The actual weight is 7 tons. The 6 tons shown in the Form of Tender will be revised into 7 tons.

The original Form of Tender for Pipe Erection shows 4" and 6" pipe. A later requirement for 8" pipe is a variation in scope and will be covered by a Form of Tender update. In such cases a new pay-item, if not already existing, is created for which a price needs to be agreed upon with the subcontractor.

Normally all variations in the scope are generated and handled by the Home Office but can also be generated at site.

As a rule the agreement of new unit rates will be handled at site by the Subcontracts/Control Manager and is subject to approval by the Project Construction Manager and the Project Manager.

5.5 Extra Work Authorizations (EWA'S)

Extra Work Authorizations are issued exclusively to cover modification or alterations to work in progress or work completed and to cover work outside the scope of the subcontractor. Pricing of extra/less work will be done in accordance with the instructions as shown in the Form of Tender.

EWA's will be formally prepared by the Subcontracts/Control Department, approved by the Project Construction Manager.

The procurement representative in the Home Office will regularly issue purchase order amendments to enable payment of EWA - amounts.

5.6 Claims and Backcharges

· All changes to subcontract documents

· All approved Extra Work Authorization Reports (EWAR's)

· All agreed claims

Amendments will be prepared by the Subcontracts/Control Manager and sent to the procurement representative in the Home Office for formal action.

5.7 Issue of Purchase Order Amendment

Purchase Order Amendments will be issued to formally incorporate in the subcontract:

• All changes to subcontract documents
• All approved Extra Work Authorization Reports (EWAR's) "
• All agreed claims

Amendments will be prepared by the Subcontracts/Control Manager and sent to the procurement representative in the Home Office for formal action.

5.8 Progress Payment Certificate (Attachment 9)

Periodical (Progress) Meetings with Subcontractors

At regular intervals (usually weekly but at the discretion of the Project Construction Manager) meetings must be held with the subcontractor(s). During these meetings the subcontract status will be reviewed and problem areas will be addressed. Such meetings will be minuted. A typical agenda for these meetings can be found in attachment 8.

6. Subcontracts Close-Out

6.1 Release of Liens (Attachment 10)

As soon as the subcontractor has fulfilled all his contractual obligations, after acceptance (Attachment 12) of his work has been given by Company and the Client and after settlement of all claims, the subcontractor will be requested to sign a "release of liens" or an equivalent document, established by Company in conformity with any applicable National Laws, Client requirements and approved by Company Legal Department.

The release of liens or equivalent document will be prepared and handled by the Subcontracts/Control Manager.

6.2 Bank Guarantee (Attachment 11)

If the terms of the subcontract so allow, Company will, upon request from the subcontractor and if all above mentioned conditions are met, arrange release of the retention monies in exchange for a Bank Guarantee. Such a Bank Guarantee shall remain in force until the expiry of the guarantee period as defined in the subcontract.

6.3 Subcontractor Performance Report (Attachment 13)

For later reference, the Subcontracts/Control Manager will record the performance of the subcontractor and the final value of the subcontract on a performance report, copies of which will be distributed to Procurement and to the Home Office Manager Subcontracts.

6.4 Subcontracts File

After subcontract close-out, the Subcontracts/Control Manager will submit the complete subcontract file to the Home Office, for future reference and retrieval, in accordance with established project close out procedure.

7. References

8. Attachment Summary