Owners Face Challenges in Selecting Directional Drilling Systems for Pipeline Installation: Part II

By Steven R. Kramer and Daniel J. Nichols

This installment concludes a two-part series, which began on March 8 with the article Owners Face Challenges in Selecting Directional Drilling Systems for Pipeline Installation: Part I.

Several contract formats have been used for horizontal directional drilling (HDD) projects. Lump sum or fixed price, daily rate, footage rate, mixed price, and partnering contracts are examples of agreements that have been use.

The lump sum version perhaps has been the most common. However, there are situations where an alternative contract may be advantageous for both owner and contractor. According to one of the largest directional drilling contractors, numerous directionally drilled crossings let on a lump sum basis have been unsuccessful. Our past experience supports this statement that traditional contract forms have not always been appropriate as contractors have expanded the envelope for HDD projects. The trend is to utilize alternative contract forms for the more challenging directional drilling jobs.

The Construction Industry Institute (CII) sets an important consideration and approach for all types of construction contracts. CII states, "The ideal contract—the one that will be most cost-effective—is the one that assigns each risk to the party that is best equipped to manage and minimize that risk, recognizing the unique circumstances of the project (Construction Industry Institute, 1986)."

It must be pointed out that legal items should be prepared by an attorney and fall outside the scope of this presentation.

Lump Sum or Fixed Price Contract Good When Events are Predictable
In this type of contract, the contractor is paid a fixed amount for delivering a drilled hole and installed pipe in accordance with the plans and specifications. A lump sum contract is usually suitable when most events are certain or predictable. Payment to the contractor is based on performance and does not change with the time to complete or amount of effort applied. It is inevitable that a contractor will include large contingencies for unknowns in a lump sum contract.

The key advantages to the owner of this type of contract are that it removes some of the questions of final project costs, and the contractor takes on risk for completing the project

However, this arrangement also has disadvantages. Typically, a lump sum contract will provide a provision for unforeseen ground conditions. This applies for significant deviations from the conditions identified in the geotechnical investigation. This may include a sharing of the risks and potential liabilities between contractor and owner. For this reason, it is advisable that an engineer prepare a Geotechnical Baseline Report (GBR) or similar document as part of the construction specifications (Essex, 1997). The GBR establishes a geotechnical baseline and contains a description of the subsurface conditions and ground behavior. If the construction conditions are materially different from those stated in the report, this change in condition should be more recognizable by all involved parties.

There are several contract forms that have good mechanisms for changes in the contract resulting from unforeseen ground conditions. These include standard contract forms from the National Society of Professional Engineers, the International Association of Drilling Contractors, and the Institute of Civil Engineering Surveyors. It is very difficult for any contractor to make guarantees for items that can not be reasonably predicted.

A Target Contract is a modification to the lump sum contract. In this type of contract, the contractor states his lump sum price and time for completing the work. If the contractor completes the work before his target date, then the contractor and client share the cost savings. On the other hand if the contractor misses his target, then the contractor and client share the additional costs. In this type of contract, it is important to set the client's percentage so that the contractor has appropriate incentives to improve his job performance and lack of incentive to overrun the target price. There are also other variations to target contracts. For example such contracts have been utilized for many tunneling and pipe jacking projects.

Day Work Contract Payment is Based on Time Elapsed
In a day work contract, the contractor is paid a fixed amount per day or some other unit of time for providing a spread of equipment and appropriate personnel in accordance with the contract documents. Payment is based on the passage of time regardless of progress made in the installation process.

Fixed Price Items Separated from Unknowns in Mixed Price Contract
In a mixed price contract, the contractor is paid a fixed amount for certain items required for completing the contract and then paid a daily rate for other contractual items. In this type of contract, the items that can be estimated with a high degree of accuracy (fixed price items) are separated from the unknown quantities (daily rate items). Examples of components considered in a mixed price contract are:

Fixed price items

Daily rate items

Several difficult HDD projects have been undertaken using a form of the mixed price contract. This form of contract is fairly common for a state-of-the-art HDD project. Our experience indicates that contractors are unwilling to submit lump sum bids on difficult jobs or they will submit lump sum bids with very large contingencies built into their price. In addition, drillers may require a wide-open escape clause on their lump sum bid should problems develop while drilling.

The mixed form of contract results in a shifting of risk from the contractor to owner. Often this permits the owner to avoid large contingencies that may be added to lump sum contracts on projects near or outside the traditional drilling envelope. The owner obtains the financial savings if the project goes well since the contractor's contingency is minimized. The owner only pays for work completed or items delivered. In a mixed form of contract, the owner is more of a partner in the project. Strong owner representation is required in both contractual and technical matters when using a mixed price contract.

Many types of performance incentives are often used with mixed contracts. These include:

• Progress payments based upon completion of key milestones (e.g., completion of pilot hole, completion of reaming operations, installation of product pipe).
• Incentives for early completion of key events.
• Bonus for contract completion by or before a defined date.

In one state-of-the art project in rock conditions, the contractor was provided an incentive clause (using a mixed price contract) for early completion of the project. Problems occurred on the project and the contract passed the proposed completion date. At this point the bonus was gone, and the contractor was assuming no risk for slow progress or failure to complete the project as designed and bid. The contractor in theory was not earning a profit or incurring a loss. His actual costs were reimbursed without his normal profit margin. At this point, it was critical for the owner to take greater control of the project in order to assess the financial risks.

Contractor Submittals that Improve Owner Control
Submittals during the bid and construction process permit the owner to have greater job oversight and confidence in the work completed. The owner or his representative now takes on the responsibility to review and approve the submittals as appropriate. There may also be submittals presented for information purposes only.

Our experience suggests three types of contractor submittals are appropriate and useful.

• Submittals during the bid process – contractor experience, personnel experience, company information, financial information, proposed methods and work plan, equipment to be utilized.
• Submittals prior to construction – pipe and coating certifications, downhole drilling component certifications, verification of equipment calibration, construction sequence, construction schedule.
• Submittals during and after construction – daily construction logs, as built drawings/record drawings, test pressure verification.

Contract Monitoring can be Accomplished in Several Ways
Prior to the start of construction, a decision needs to be made on the type of interface between the contractor and owner during the construction process. The owner may elect to oversee the process using his own personnel, hiring an owner's representative, or having the contractor provide reports directly to the owner. The size (dollar value) and complexity of the project frequently dictate the type and amount of monitoring. For simple projects, continuous monitoring may not be necessary. A complex or state-of-the-art project will require more frequent or continuous monitoring by the owner or his representative. The form of contract may also influence the type of monitoring to be utilized. As noted earlier, a mixed price contract will likely require more monitoring by the engineer firm on the project.

The Technology Has Passed Out of the Early Development Phase
Directional drilling is no longer in its infancy. It has become a major and regularly used method for installing pipes and cables. However, utility owners, their engineering consultants, and their contractors are still learning how to maximize the benefits of this technology. As noted a number of key factors have to be investigated and understood in the planning stages of a directional drilling project. By taking advantage of these lessons learned, owners can avoid potential problems, finish up with projects that are less technically difficult, and minimize costly claims and overruns.

About the Authors: Steven R. Kramer, P.E., is principal of trenchless technology for Sverdrup Civil, Inc., 7600 Leesburg Pike, Falls Church, VA 22043. Daniel J. Nichols, P.E., is a project manager at Sverdrup Civil, Inc., 13723 Riverport Dr., St. Louis, MO 63043.

References
Kramer, Steven R., "Directional Drilling – Good Times Continue in North America," No-Dig International, September 1998.

Construction Industry Institute, "Impact of Various Contract Types and Clauses on Project Performance," University of Texas, 1986.

Essex, Randall J., Editor, Geotechnical Baseline Reports for Underground Construction, American Society of Civil Engineers, New York, NY, 1997.

Editor's Note: This article is based on a presentation made by the authors during the American Public Works Association's Congress and Exposition held last September in Denver, Colorado. It was prepared for a series of sessions on pipeline technology offered at the APWA event that was sponsored by the American Society of Civil Engineers.