It is a very common practice among construction contractors to joint venture when it comes to delivering mega-sized projects. Further, in many countries, international contractors are required to joint venture with local contractors when it comes to delivering public sector-funded projects. Joint ventures help contractors to share risks, increase their buying capacity, share technical and local knowledge and skills, among others.
The joint venture partners may elect to enter into a purely contractual relationship or they may choose to set up a joint venture company in which each joint venture partner will be a shareholder. Regardless of the selected joint venture relationship, the JV company will be signing a single construction contract agreement for which they will be jointly bound by the obligations and entitlements of the executed contract and its potential liabilities.
The successful delivery of joint venture contracts requires a shared vision and commitment to manage and administer the many business processes required for delivering capital construction projects. These include the processes for planning and scheduling, site administration, quality control, and quality assurance, health, safety and environment (HSE), budget management, contract management, commitment management, risk management, procurement management among others. To enable achieving this shared vision and commitment, there is a requirement to use a Project Management Information System (PMIS) like PMWeb to manage those processes.
One of the critical business processes that need to be managed on the IV contract is those processes that relate to cost management required for achieving the 100% Buyout objective to reduce the project’s risk exposure. The first process that needs to be documented is the cost estimate on which the awarded contract was based. Regardless of the cost estimating application used to prepare the bid proposal, the final approved cost estimate needs to become the basis for all subsequent financial processes to be managed and decisions to be made.
PMWeb cost estimate module will be used to capture this cost estimate by importing the contract cost estimate MS Excel output file. In addition to PMWeb default fields, PMWeb allows defining additional 10 user fields when needed. This will ensure that the same cost estimate details and data are captured and stored in PMWeb.
The next step is to decide on how the project cost will be monitored, controlled, and reported. This will be achieved by establishing the cost breakdown structure (CBS) levels which should be also aligned with the procurement buyout strategy set for the project. PMWeb allows defining a cost breakdown structure (CBS) of up to 16 levels with 10 digits per level. The same CBS levels will be also used for the resource and cost-loaded integrated project schedule control accounts. Those CBS levels will be assigned to the imported cost estimate line items.
The next step is to capture the awarded contract agreement, also known as the revenue or income contract. This contract reflects the price that the JV Contractor has bid for and for which they got awarded the contract. The revenue contract might be front-loaded and unbalanced to incorporate the JV Contractor strategy to win the bid. PMWeb will be used to capture the income contract summarized at the CBS level to ensure alignment with the cost estimate, cost-loaded schedule, and commitment contracts. Similar to all other PMWeb cost records, the income contract could be of multi-currency at each line-item level.
Now the JV Contractor needs to reconfirm the budget approved for delivering the project. This includes establishing the value for the buyouts’ scope of work including subcontracts, material and services purchase orders, and all products, plant-hire, and services provided by an entity of the joint venture. In addition, it includes establishing the project contingency, management reserve, profit margin among others. This budget needs to be signed off by the two parties of the Joint Venture.
The project budget in PMWeb will be generated from the approved cost estimate for which it will create the budget value for each defined cost breakdown structure (CBS) level. This will ensure that the project is fully aligned with the approved cost estimate. In addition, PMWeb allows defining the projected budget spending plan for each period for each line item. This can be done either by linking each budget line item with the relevant project schedule activity or using PMWeb budget projection to identify the exact spending amount to be assigned to each period. It should be noted that PMWeb allows creating budget versions although only one budget can have the status as “Approved” budget while all other versions need to have their status as “Withdrawn”. Similar to all other PMWeb cost records, the budget could be of multi-currency at each line-item level.
In the case there is a need to modify the values assigned to each budget line, the PMWeb budget request module provides the JV Contractor with a traceable and auditable process to track all those adjustments and transfers along with those who have initiated, reviewed, and approved them. Those adjustments and transfers can be reported as Original Budget or Revised Budget values depending on how they need to be reported on. Similar to all other PMWeb cost records, budget requests could be of multi-currency at each line-item level.
To ensure that the sources of funding for the project are formally captured and aligned with the approved baseline budget, PMWeb allows capturing the details of all authorized funding sources. Those could include banks’ lines of credit, bonds, guarantees, and overdraft facilities, funds provided by the contractors of the JV, and others. PMWeb allows assigning the sources of funding and amounts associated with each funding source to the budget line items.
Now the JV Contractor will be ready to commence the processes needed to achieve the 100% Buyout objective. This objective will ensure that the complete project budget, excluding contingencies and management reserve, is sold to other entities including the contractors who are part of the joint venture. This will also include the contract for managing the project including site management, procurement management, commercial management, quality management, HSE management among others. This will enable transferring the project’s risks that the JV Contractor also known as the seller entity to the other buyer entities.
To ensure that the buyout process is successful and will achieve its objective, the first requirement is to ensure that the entities who will be considered as buyers for the project scope of work are qualified to do so. Otherwise, the JV Contractor will be increasing their project’s risk rather than mitigating it. Therefore, the PMWeb vendor prequalification module will be used to create the prequalification documents as well as enforce a formal process for assessing and scoring the prequalification submissions of those entities.
The next step is to formalize the process for procuring the buyout’s scope of work. PMWeb procurement module will be used to define the work packages to be procured. Those will be automatically generated from the approved cost estimate module using the bid package identification provided in the field for “Work Package” for each line in the cost estimate. The bidders for each bid package will be selected from the PMWeb Vendors module which will have the details of all registered and qualified bidders. For each bid package, PMWeb will allow defining when the bids will be due for submission.
An invitation to bid will be issued from the PMWeb procurement module using the Notification option to all qualified bidders. Each invited bidder will receive an email with the link to PMWeb online bid module. This will be the module where each bidder will complete and submit technical and commercial requirements set for the bid package. Those bidders will attach all supportive documents requested by the JV Contractor.
When bids are submitted, the JV Contractor will be able to immediately analyze the received bids and compare them with the approved cost estimate. This will enable the JV Contractor to have a transparent process when it comes to the outsourced bid packages award.
The awarded commitment contracts will now become readily in the PMWeb commitment module where all change management, interim payment certificates, and actual payments made will be made and managed. The JV Contractor can define the payment milestones and terms and conditions for each commitment contract including provisions for advance payment, advance payment recovery, retention, retention release, VAT, withheld taxes, and another type of taxes and adjustments that need to be part of each awarded commitment contract.
For each awarded commitment contract, all line items will be assigned their relevant cost breakdown structure (CBS) level. It should be noted that PMWeb allows adding lump sum as well as unit price commitment contracts. Similar to all other PMWeb cost records, commitment contracts could be of multi-currency at each line-item level.
The trustworthy data captured in the different PMWeb modules by their accountable team member which are detailed above will become the basis for generating a real-time single version of the truth report on the project’s buyout. The report will include a cost table that is structured by the Cost Breakdown Structure (CBS) levels. For each level, the values for the approved cost estimate, income contract which is the contract between the JV Contractor and Project Owner, budget, funding, awarded commitment contract, low and high bids value, bid package number or contract number, and awarded subcontractor, supplier or any buyer name.
The report will also include a histogram visual to summarize the estimated, awarded, low, and high bid values for each bid package as well as two donut visuals to summarize the breakdown of project budget and income contract by the first level of the cost breakdown structure (CBS). In addition, the report includes filters to select specific bid package or packages as well as any cost breakdown structure (CBS) value at any CBS level.
About the Author
Bassam Samman, PMP, PSP, EVP, GPM is a Senior Project Management Consultant with 40-year service record providing project management, project controls services, and project management information systems to over 200 projects with a total value over the US $100 Billion. Those projects included Commercial, Residential, Education and Healthcare Buildings and Infrastructure, Entertainment, Hospitality, and Shopping Malls, Oil and Gas Plants and Refineries, Telecommunication, and Information Technology projects. He is thoroughly experienced in complete project management including project management control systems, computerized project control software, claims analysis/prevention, risk analysis/management (contingency planning), design, supervision, training, and business development.
Bassam is a frequent speaker on topics relating to Project Management, Strategic Project Management, and Project Management Personal Skills. Over the past 40 years, he has lectured at more than 350 events and courses at different locations in the Middle East, North Africa, Europe, and South America. He has written more than 300 articles on project management and project management information systems that were featured in international and regional magazines and newspapers. He is a co-founder of the Project Management Institute- Arabian Gulf Chapter (PMI-AGC) and has served on its board of directors for more than 6 years. He is a certified Project Management Professional (PMP) from the Project Management Institute (PMI), a certified Planning and Scheduling Professional (PSP), and Earned Value Professional (EVP) from the American Association of Cost Engineers (AACE) and Green Project Management (GPM).
Bassam holds a Masters in Engineering Administration (Construction Management) with Faculty Commendation, George Washington University, Washington, D.C., USA, Bachelor in Civil Engineering – Kuwait University, Kuwait and has attended many executive management programs at Harvard Business School, Boston, USA, and London Business School, London, UK.