Application of P&G Cost to the Calculations for an Extension of Time

Where P & G cost are incorporated in any contract or order by schedule or list, there must be a clear distinction between time related costs, value related cost, and fixed cost.

  • Time Related Costs

Time related cost are those cost which increase with the extension of the duration of the contract typically are time related costs:

  1. All people related cost such as project manager, site manager, planner, QA, QC, supervision, security in the form of site guarding
  2. Tools and equipment costs
  3. Craneage cost
  4. Site building cost
  5. Site vehicle cost

With reference to any time related item: where an extension of time is required it is generally for a smaller quantity of work to be carried out than during the peak phases of the erection work on a contract. The extended duration therefore does not generally require the existing for site establishment to be maintained for the duration of the extension of time.

It is consequently incumbent the procurement and management function of the project team to define precisely the extent of time related P & G personnel and equipment that would be required for the extended duration and to insist that all other personnel and equipment be demobilised and removed from site.

  • Value related costs

Value related P&G costs are those costs which change in relation to the increase or decrease in the Value of the contract. These are costs such as finance charges, surety charges, (where the requirement is for an increase in sureties given by way of increase in the value of bank guarantees or retention deducted), insurance costs, and head office overhead costs.

The calculation of the value of increase in value related items is arrived at by using the original order ratio of value related P & G cost to total contract value before such P & G cost and applying it to the revised contract value before value related P & G costs.

  • Fixed cost

For obvious reasons most tenderers and contractors are inclined to either ignore or minimise the value of fixed cost that are included in their P & G value.

It is therefore important to examine and define very clearly the reasonable value and detail of fixed cost, as in a construction or erection order or contract these may be significant.

Fixed costs include the following items:

  1. Cost of mobilisation (including induction of labour force, medical examination and relocation)
  2. Site establishment (including the transport and erection of all site building and the transport of cranes and equipment to site). In this regard should be noted that generally the cost of mobilisation of a crane to site is the equivalent of 2 days of crane hire charges at day work rates. This should be used as a verification at least in part of the contractor’s understanding of what constitute a fixed cost.
  3. Concrete hard standing for the site offices and buildings
  4. Electrical connection and hook ups for the site
  5. Transport of personnel to the local place of accommodation where the site is not in close proximity of an existing large town
  6. Site disestablishment (uplift and transport of site equipment and tools to the hirer or to the contractor’s permanent establishment, cleaning of site, removal of fencing, removal concrete hard standing, removal of ablution, exit medical for site manpower, etc.). From the above it should be clear that both establishment and disestablishment are a significant portion of the value of most quotations for erection/construction orders or contracts. As such it is important to insure that a portion of these costs does not form part of the calculation by any subcontractor of the value of cost associated with any extension of time.
  7. Mark-up. The profit percentage is generally not less than 5% of the contract price. We do not expect the Contractor to increase his profits by the extension of the contract duration.

We also do not expect the contractor to increase his profitability by the carrying out of Site Instructions or extras. So this value falls to be included under fixed cost.

It is clear then that the fixed cost component of P&G costs is a large, if not the largest by value component of P&G costs. This must always be checked and verified in all contractor tenders and should be reflected in all orders or contracts for erection of the Works.

3. Optimum and recommended treatment of P & G cost where the contract is a lump sum construction order.

3.1 Fixed rate per Day [or week or month or all three]

The need for a schedule of P & G cost can be eliminated from incorporation into any order or contract where a clause is inserted into the contract that stipulates that there is a daily rate, and defines such daily rate associated with any extension of time. The clause should ideally be worded as follows:

“The P & G cost, including but not limited to supervision, craneage and all site establishment and head office overhead, associated with any extension of time for which the Contractor is not responsible, shall be R. ……per day.”

Obviously the rate noted should be very carefully adjudicated and the management of the project should be satisfied that such rate is warranted and appropriate to any extension, bearing in mind that the total site establishment should be able to be reduced during any extended construction duration.

The insertion of such a provision eliminates an enormous amount of time consuming negotiation, and even disputes, during critical phases of the project.

Note, however, that this approach should not be used unless the Project Manager is personally convinced that the rate negotiated is reasonable and appropriate to an extension of time with a reduced total site establishment.

3.2 Schedule of P&G Costs included in the lump sum price.

If such a value cannot be negotiated it is preferable for a schedule of P&G costs and cost components to be included in and integrated with the contract price to enable the Project Manager to have redundant P&G items removed from site and to manage the cost of any extension of time on a “hands on” basis.

Note carefully that wherever a P&G value is incorporated into a price [that is with every single erection contract without exception], the make-up of that price and the definition of the components of that price into “Fixed”, “Time related” and “Value-related” sections must be included in the schedule as tendered by the contractor.

When including such schedules, care should be taken to clearly identify whether such costs are already included in the lump sum erection price or not.

If the erection price is broken down into components, then the P&G cost schedule should be summarised as a total on the lump sum price break-down [as in the case of Activity Schedule contracts].

NOTE: The inclusion of P&G items on the basis of item x duration x rate [as a BOQ contract] should be avoided at all times if at all possible. EPCM and LSTK Project Managers are not geared up to manage this level of P&G cost and neither is main contractor or EPCM contractor cost control on site. The administration overhead in controlling these costs does not form part of most main contractor or EPCM contractor budgets.

Manage your construction site to your people budget.

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