The development of new pharmaceutical facilities, by their nature, tend to be complex and involve significant cost. Ensuring timely delivery within budget is critical. Our Life Sciences team reviews the main considerations that should be taken into account with a key focus on getting the contract structure right at the outset.
Pharmaceutical projects are often large-scale, technically complex projects and are heavily driven by commercial constraints. New facilities or redevelopment may be required for a variety of reasons. This could involve getting a product first to market, to accommodate new product lines, or to retrofit existing facilities.
The importance of adopting an appropriate procurement strategy and ultimately putting into place a contract structure that reflects the client’s objectives and constraints from the outset is key. We look at some of the different contract structures regularly utilised in the Irish market.
Traditional structure
In this model, the pharmaceutical company, or the ‘client’, directly employs a contractor and a design team itself. The building contract will either be:
- A fixed-price contract, to the extent the contract permits, or
- A remeasurable works contract
Employers naturally prefer a fixed-price contract as it provides more cost certainty. However, a fixed-price procurement solution is not always appropriate, particularly if the work to be completed is complex and cannot be accurately priced due to the level of design available.
In pharmaceutical projects, programme is often the key constraint, especially in a first-to-market scenario. It is necessary in these instances for the tender process to commence before detailed design has been completed.
When using a remeasurable contract, clients must understand the associated cost risks to avoid budgetary surprises later. Similarly, they should be aware that a ‘fixed price’ rarely delivers complete cost certainty in practice – every contract facilitates changes to the price.
Design & Build (D&B) and Engineering, Procurement and Construction (EPC)
In a D&B or EPC structure, the client engages a contractor to design and build the works and the contractor in turn appoints the design team, commonly referred to as taking a novation. The client has a single point of responsibility for the design and construction. The contractor is often paid on the basis of a (i) fixed price, or (ii) a guaranteed maximum price, subject to the cost caveat noted above.
We often see a mix of contract forms used in these scenarios, including heavily amended RIAI and FIDIC forms.
A design-build contract typically includes a basic outline design, and the contractor is responsible for completing the detailed design. An EPC contract usually includes minimal design details and focuses more on performance specifications, requiring the contractor to design and build to a fitness-for-purpose standard. Insurance cover is a key consideration here.
With either of these contracts, more risk is passed to the contractor which means a higher project cost.
Engineering, procurement and construction management (EPCM)
An EPCM contractor coordinates all design, procurement and construction works and procures the package contractors. The client however enters into those package contracts directly. Package contracts in procurement refer to the splitting of a large project into different packages, for example: mechanical works, civil works, and electrical works packages.
The EPCM contractor administers each of the package contracts, including dealing with claims.
This procurement model positively impacts costs and allows the client to issue tenders before the design has been finalised. As a result, the procurement model leads to earlier start and finish times.
Management contracting
In this structure, the client engages a contractor and the contractor appoints the package contractors itself, often on a cost-reimbursable basis, plus a fee.
Comment
It is always worthwhile spending the time at the beginning of the procurement process to think through a procurement strategy that best reflects the client’s objectives and addresses key constraints.
An essential aspect of this process is determining the appropriate contracting structure. Clients should avoid using the previous structure simply by default.
The reality is that no two projects are the same. Objectives and constraints change. Market conditions change. Clients’ resources and internal expertise change.
A stitch in time really does save nine and in a construction context, it can avoid a lot of headaches and surprises down the line.
For more information and expert procurement law advice, contact a member of our Life Sciences team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.
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