L&T CASE STUDIES IN

PROJECT MANAGEMENT

©L&T INSTITUTE OF PROJECT MANAGEMENT, VADODARA, GUJARAT (INDIA) - 390019

 MALACCA CONUNDRUM
A Case Study on Supply Chain Management

Disclaimer

This case was written by K. Lakshmanan, Chittaranjan Sahoo, Chakradhar Iyyunni under the supervision of
Prof. Homayoun Khamooshi and Prof. Sanjay Jain, School of Business, The George Washington University,
Washington, D.C., USA towards partial fulfillment of the requirements of the Level-3 program in Strategic
Project Management conducted by Larsen & Toubro Institute of Project Management (L&T I’PM,
http://www.LNTipm.org/), Vadodara, India. The authors do not intend to illustrate either effective or
ineffective handling of managerial situations and the case has been created to facilitate class-room
discussion for practicing project managers in L&T. The authors may have disguised certain names and
other identifying information to protect confidentiality. The data presented shall be treated as
confidential and shall not be used for teaching outside L&T.

© L&T Institute of Project Management, September 2011

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or
transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise,
without prior written permission of L&T I’PM. For communication, please contact ipminfo@LNTipm.org.
Introduction

It is 8 months into the project and the site team is under tremendous pressure
as the early works planned are delayed to a great extent. Entangled with the
stringent QHSE (Quality, Health, Safety and Environment) Policies and
Specifications in the Contract, and, accommodating the local contents as per
the Bumiputera (Son of the Soil) philosophy - a unique concept as per the laws
of the Republic of Malaysia, the project team is unable to cope with the
pressure as the local Subcontractors deployed are unable to perform.

Though the team landed early at the site, they were yet to establish the
Project office and associated infrastructure. Even the local subcontractors
recommended by the customer, who are supposed to have been more
experienced in the locality / demography, could not yield any desirable result.
Added the woes, of a key subcontractor deployed to carry out certain critical
early activities had abrupt demobilization without any prior notice.

The Project Team reeling under tremendous pressure from all corners – the
owner, PMC (Project Management Consultant), and the Consortium Partners,
was highly demoralized as in spite of their hard effort they are unable to catch
up with the schedule. It was clear that the delay if not mitigated, is likely to
lead to heavy penalties in terms of money and credibility. The Project
Management Team has been summoned for an emergency meeting at the
Project Manager’s office to brainstorm and plan the path forward.

Overview

PETRONAS, a Fortune 500 Company, is the biggest national company in Malaysia

with a turnover of more than US$ 51 billion in 2005 and operations in 35
countries. In its pursuit to upgrade the selective by-products from their Melaka
refinery to produce the highest quality Group 3 lube base oil, PETRONAS

Malacca Conundrum Page 1

decided to expand its existing refinery at Melaka with MG-3 (Melaka Group-3)
project. Being first of its kind of project executed in the region and to get
leadership position in Lube Oil market, timely completion of this project is very
important to PETRONAS. The basic engineering for the plants was carried by
Foster Wheeler,UK and OGP Technical Services Sdn Ltd (A Petronas owned
Subsidiary company), Malaysia were later retained as the project management
consultant (PMC) for the project. The pre-qualification bid was out in
September 2003.

The Hydrocarbon Division of Larsen & Toubro Limited (L&T), the largest
construction company of India has been executing several EPC Projects
(Engineering, Procurement and Construction) in the field of oil & gas terminals,
petrochemical refineries, cross country pipelines, fertilizers, power plant etc.
With a clear focus to expand business, L&T is trying to expand its wings beyond
the Indian subcontinent mainly to the Middle East and South East Asia. In
recent past, it has tied up with various international engineering companies for
technology transfer and obtained approval of many renowned licensers. The
PETRONAS MG#3 Project came at the right moment and L&T grabbed the
opportunity with a focused effort.

Though L&T had executed several critical units in oil refineries viz. fluid
catalytic cracker, vacuum distillation, diesel hydro-desulphurization,
hydrocracker etc. it did not have any proven track record of executing a lube
oil plant. Hence it decided to look for partners in order to satisfy stringent pre-
qualification criteria.

After a lot of deliberations with various parties, L&T forged alliance with Lurgi
AG (Germany) and a local construction company named KQKS Sdn Bhd
(Malaysia) on scope and liabilities sharing basis. Lurgi was elected the leader of
the consortium, as they had executed a similar lube base oil plant in Poland.
However L&T had the major stake in monetary terms (approximately 68%) and
was responsible for major engineering (except for the Diesel Hydro-treater &

Malacca Conundrum Page 2

Motor Spirit Diesel Process Units where the engineering and procurement is in
Lurgi’s scope), procurement and the entire Construction activities including
project management.

In order to beat the stiff competition from established global EPC players like
Samsung, Technip, Hyundai, Toyo and Daelim, the strategy for formulating a
cost-competitive bid was formulated by the consortium in the early stages.

Satisfied with the capabilities of the consortium partners, the price and overall
project schedule, the job was finally awarded by the client to the consortium
in December 2005 to achieve the PAC (Performance Acceptance Certificate –
issued after the Test run of the Plant) within 29 months of the job being
awarded. The approximate order value was US $ 350 Mn with L&T’s share at
about 68%. Majority of construction work was to be executed by L&T with no
prior experience in executing EPC projects in Malaysia. L&T hence had to
depend on Malaysian sub-contractors and vendors for mobilization of resources.

Early Phase of Project

The execution of MG-3 project was quite a challenge right from the beginning
due to stringent QHSE, and technical requirements, work volume spread over
22 units through the entire length and breadth of the refinery, tight schedule,
multi-lingual/multi-cultural location, consortium working for the first time on
such a huge project and above all, an extremely demanding customer& Project
Management Consultant.

The first task after receipt of the LOA (Letter of Award) was to revisit the
composition of the team and ensure the availability of key task members’ right
from the beginning. The other immediate task was to identify sub-contractors
to execute temporary facilities such as the owner’s and contractor’s site
office, warehouse and development of laydown yards. The job was awarded to
one of the local sub-contractors for construction of site office in line with
contractual requirement of encouraging “Bumiputera” agencies based on local

Malacca Conundrum Page 3

references. Though the entire project was to be executed by the Consortium of
L&T, Lurgi and KQKS, each party was solely responsible for executing
respective scope of work. As per the consortium agreement construction of site
offices to accommodate all consortium partners, the owner and PMC were in
L&T scope of work.

During the execution of works, it was realized that the sub-contractors engaged
for site office and other facilities did not have capabilities and resources to
execute the works on fast track basis and the site offices could not be handed
over till 8 months after award of contract.

During this period, L&T had to make-shift arrangement of porta-cabin offices

inside the refinery premises for supervisory and managerial personnel of
consortium partners. The owner and PMC personnel operated from the existing
O&M (operation& Maintenance) offices inside the refinery.

During this period, L&T’s site team had allocated certain temporary
infrastructure work to few local subcontractors referred by various entities
they came across viz. the local JV Partner ( who has a larger interest in
financial management than project execution), The owner, Indian Consulate,
etc. Due to the uncomfortable feeling in managing these subcontractors, the
administrative team was asked to evaluate whether the law of the Republic is
flexible to accommodate more resources from elsewhere(India in
particular);however, it was not allowed under Bumiputera law. This has put
L&T in a difficult position as there was no other option but to get the work
done through the existing sub-contractor for construction of project site office.
L&T had been struggling with the permutation and combinations of the
subcontracted works amongst the existing ones so as to draw a balance but
unfortunately the allocation/assignments did not deliver the desired result.

The starting troubles created misconception in minds of the owner and the PMC
with respect to contractor’s capabilities in mobilizing the right sub-contractors
for the project. As a result, the sub-contractors proposed by the contractor for

Malacca Conundrum Page 4

main plant works were rejected by the owner / PMC which further delayed
commencement of major critical activities of the project (under the guise of
subcontracting stipulation spelt out in the Contract – Refer Exhibit–1). In order
to gain confidence of the owner / PMC and to complete this project within the
contract schedule, L&T realizes that it is important to have a sound sub-
contracting strategy and processes in place for identification and finalization of
sub-contractors that will enable them to have the best sub-contractors for the
project.

Status Report

Schedule Actual
Activity Description Completion / Completion/ Remarks
planned to date status
(32nd week)
Subcontracted to Vendor –
Establishment of Project Office 24th Week On-going, 90%
A
completed

Establishment of HSE Induction

16th Week, Subcontracted to Vendor –
Room, Training Room & QAQC Completed.
B
Laboratory 24th Week

Readiness of Rebar Yard, Cement Subcontracted to Vendor

12th week. Completed. 18th
Go-down A and then to Vendor –C
week

Strengthening of Roads and drains

Refer Plot plan for area
in locations where disinvestment
40% demarcation,
works are involved (Area 72, 79, On-going , 5%
subcontracted to Vendor-
49, 52, and LSWR – Low sulphur
C
waxy residue)

Preparatory work Load test completed,

Piling works ( Unit 18,19, 75 ,
started Subcontracted to Vendor -
LSWR and off site Pipe Rack) 250 numbers out of 2900
Progress: NIL D

Shortfall -3.5%, catch up

plan to be prepared for
Overall Construction Progress in % 11% 7.5%
balance period.

The site team was clueless as to what’s wrong with the subcontractors – the
rates are reasonable and in some cases even much better than the prevailing
market rates. Also the payments are done in time. It was also not clear if any
action should be taken since a group of L&T’s construction team members state

Malacca Conundrum Page 5

that this happens in all projects, once the main work starts, the contractors
will fall in line!

Status of Major Works

Note: There has been a negative trend since 10th weeks onwards and the
cumulative shortage in progress is compounded now to 3.5% in 32 weeks. This is
equivalent to a delay of 6 weeks in 32 weeks of the Project. With the pressure
mounting, L&T thought it would be prudent to commence the early work on
disinvestment and piling scope, mostly related with civil foundations, piling,
and excavation etc. as enumerated below and is in the process of receiving
drawings for same. This has become essential as further activities were
dependent on the civil foundations – delay in these activities shall have a direct
impact on the critical path and may lead to crashing on a later date.

Disinvestment Work Scope

The scope of disinvestment in this context refers to dismantling / demolishing

of the existing structures in order to accommodate the revised requirements.
Existing facility in following areas were to be removed / relocated as part of
disinvestment scope of work.

 Unit 75,
 Fire water pedestals,
 Unit 51,
 Unit 72 drains,
 Near unit 49, and
 Existing drains.

Such works need a definite skill set of workmen and supervisors having
adequate experience on safety aspects as well as making make shift
arrangements so that the ongoing operation is not affected. Further socialized

Malacca Conundrum Page 6

equipment viz. jack hammers, rock breakers, pavement breakers etc. needed
to execute the work at a desired speed with safety.

Piling Scope

After SI (Site Investigation), commenced during 8th week and completed by

12th week, piling was next important field activity to be taken up. Piling work
has to be executed in three packages as given below:

 Process units 18, 19 ,31 and adjoining off-site pipe-rack and sleepers
 Piling in unit 75 and pipe rack and sleeper in that area
 LSWR

With the frontage available in terms of Engineering and clear site, L&T
awarded a part of the civil works to sub-contractor- Dafter going through the
documents produced by him. The subject work being part of the Main Plant was
important and the owner/ consortium partners and PMC had great hopes that
with its sound track record in India, L&T will catch up with the schedule on this
part of the project. The site team was excited and put in hard work, but one
fine morning, the subcontractor demobilized all his resources overnight,
without any prior notice. The site team was absolutely puzzled and quite
apprehensive of the customer’s reaction. In any case, this news was
communicated to all the stakeholders.

The civil supervisor, the focal point to deliver the field activities appears to be
lost in the woods, unable to understand as how to proceed, says “ It is difficult
to work here – we have to find a way out to get people from other countries as
these subcontractors are not trustworthy, neither I can rely on them. Should
we try out by direct recruit of workmen and buy new construction equipment?”

The Project Cost Controller jumps on to argue “We do not have such provision;
It shall be too costly and not viable. It will be a huge problem as we are likely
to reinvent the wheel! We have not planned facilities for such a huge
workforce (to build on our own) and if we start now, the temporary facilities

Malacca Conundrum Page 7

will take at least 8 to 10 months down the line –And, who shall construct these
facilities, the same old subcontractors? “

One of the owners’ superintendent points out “It does not look like that this
subcontractor can execute this job, they may be great guns in their soil, but
cannot become an International / Global EPC player.”

There have been few meetings on motivating the subcontractor, with offers
such as an incentive scheme for timely completion, award on safety
compliances etc. The Project team had been trying different ways to retain the
subcontractor including higher rates than prevailing market rate and making
the billing schedule more attractive. In a few cases, mobilization advances
were paid to sub-contractors by going beyond accepted practice. In spite of all
such motivating factors, the subcontractors were miserably failing. One of the
L&T supervisors commented that it looks like that the subcontractors had taken
L&T for granted since it was totally dependent on them.

L&T had executed a project in northern part of Malaysia ~4 years back, there
was no history of any delayed payment. The Sub-contractors in Melaka refinery
were not aware of L&T or its track record on payment.

Typically, in Indian context, L&T deploys subcontractors who have been

working with them for more than 10 years and as such there is no laid down
Sub-contracting procedure for carrying out regular construction works viz.
earth work, concrete works, steelworks fabrication and installation etc. due to
repetitive nature of the works in almost all Projects across India. L&T usually
adopts a rate analysis concept for various works and prequalification criteria
are not in practice as capability and capacity of the subcontractors are known.
The number of subcontractors for various activities is decided on the basis of
their spare capacity to mobilize needed resources. The RFQ (Request for
quote) / Subcontractor evaluation system is not strictly followed in finalization
of sub-contractor.

Malacca Conundrum Page 8

Case Problem

The project manager is concerned that something has to be done in so as to

eliminate the backlog and streamline the progress in the future. He is aware
that if corrective and preventive actions are not taken now, the project failure
in terms of schedule (and therefore cost) is inevitable. From previous
experience , he understands that certain amount of slippage do occur during
the initial phase to overcome the learning curve depending on uniqueness of
Projects and such slippages are possible to catch up during the peak periods.
However, the current scenario raises an alarming signal due to continued
attrition of resources / focus of the sub-contractors who are not aligned with
the project schedule. To summarize, the project manager realized that
something has to be done in order to address the existing contract/ sub-
contract management and also to have a long term strategy for the future.

In the upcoming monthly review meeting the project manager has to present
the progress and come out with an achievable catch-up plan. It is a crucial
meeting and everyone is aware that plan should be demonstrable as practical.
The works are spread over many areas consisting of process units, utilities,
offsite, associated facilities and ancillary systems for the production of MG-3.
These elements in the Plant lay-out are divided in following areas:

1. Green field area – Hassle free from hydrocarbon / operating area

2. Brown field area- Works involved adjacent to live hydrocarbon operating
process area
3. Shutdown and tie-in works – Works involved in running plants

It is understood that the action plan has to be portrayed as manageable,

demonstrable and measurable. Unless a concrete actionable plan is laid out, it
will be very difficult to convince all the stakeholders to support the plan. The
stereotypical presentation of previous review meetings may invite huge
criticism and the owner may invoke draconian measure. To induce confidence

Malacca Conundrum Page 9

amongst all, the project manager was brain storming (what has gone wrong,
what is going wrong, how to rectify the situation etc.) with his blue–ribbon
team leaders to prepare the presentation and get ready with the answers for
the likely scathing attack with questions such as those given below.

 What should be the short term strategy to manage the ongoing works, do
we have to offload some works from the existing subcontractor – engage
additional contractors?
 What are the checks, balances and measures for subcontractor
management on a long term basis – should we follow our proven process
of Indian context ?
 How do you assure the other subcontractors will not run away?
 From where and how will you get capable contractors adhering to the
contractual stipulations?
 What should be the right strategy to have right number of sub-contractor
for better management of projects of this scale and nature?

Malacca Conundrum Page 10

Exhibit-1

Article: 21 – Sub Contracting

21.1 CONTRACTOR may upon written approval by the OWNER, enter into
SUBCONTRACT for the performance of parts of the WORK.
CONTRACTOR shall ensure that the terms and conditions as well as the
remuneration paid to any SUBCONTRACTOR shall be fair and
reasonable. CONTRACTOR shall provide OWNER with copies of unpriced
SUBCONTRACT documents which OWNER desires to receive, identifying
therein the mandatory clauses CONTRACTOR is required to insert into
said SUBCONTRACTS pursuant to this CONTRACT. CONTRACTOR shall
engage. Wherever possible, Malaysian SUBCONTRACTORS approved by
OWNER and shall in the case of such SUBCONTRACTORS provide priced
copies in accordance with the requirements of Article 28.
21.2 CONTRACTOR shall not subcontract any of its obligations related to the
WORK to any party not specifically named in CONTRACTOR's PROPOSAL.
In the event the SUBCONTRACTOR named in the CONTRACTOR's
PROPOSAL is unable, for whatever reason, to undertake that portion of
the WORK to be subcontracted, CONTRACTOR shall inform OWNER of
the reasons and seek approval from OWNER as regards CONTRACTOR's
intention to appoint a replacement SUBCONTRACTOR.
21.3 CONTRACTOR shall not be relieved from any obligation under this
CONTRACT by entering into a SUBCONTRACT and CONTRACTOR shall be
responsible for the acts, defaults and neglects of any SUBCONTRACTOR,
its employees, agents, representatives, servants, or workmen as fully
as if they were the acts, defaults or neglects of CONTRACTOR, its
employees, agents, representatives, servants or workmen.
21.4 No SUBCONTRACT shall bind or purport to bind OWNER and each
SUBCONTRACT shall provide for the possibility of its immediate
termination at any time. Without prejudice to the provisions herein
contained CONTRACTOR shall hold harmless and indemnify OWNER
and/or PMT from and against any action, damage, claim and/or
demand whatsoever by any SUBCONTRACTOR.
21.5 CONTRACTOR and SUBCONTRACTOR shall not without OWNER's prior
written consent, engage any personnel who are already employed by
any other contractor in privity of contract with OWNER or directly
employed by OWNER unless such personnel obtain clearance in writing

Malacca Conundrum Page 11

 from their employers, if so required by OWNER. For the purpose of this
Article 21.5 only, the term "OWNER" shall also include PETRONAS
and/or any of its subsidiaries.
End of Article – 21

Article – 20 – Construction Equipment

20.1 CONTRACTOR shall cause SUBCONTRACTOR to maximize the sourcing of
all CONSTRUCTION EQUIPMENT in Malaysia. CONSTRUCTION EQUIPMENT
shall not be imported by CONTRACTOR without prior written approval
of OWNER.
20.2 In the event of approval by OWNER for importation of CONSTRUCTION
EQUIPMENT. CONTRACTOR shall obtain all import licenses and other
permits required for the importation into and use in Malaysia of all
items of CONSTRUCTION EQUIPMENT to be supplied/made available
from sources outside Malaysia. All such items shall be imported by
CONTRACTOR in the name of CONTRACTOR.
20.3 CONTRACTOR shall use such CONSTRUCTION EQUIPMENT as will be
available in time, in quality and in quantity, to carry out the WORK in
accordance with the CONTRACT and shall be solely for the use of the
PROJECT.
20.4 If, in the opinion of OWNER, the quantity of any item of CONSTRUCTION
EQUIPMENT is inadequate or any item of CONSTRUCTION EQUIPMENT is
not or is no longer suitable for the purpose intended- then OWNER shall
have the right at its sole discretion to require CONTRACTOR to provide
the necessary additional CONSTRUCTION EQUIPMENT at WORK SITE or
make adequate repairs or arrange for immediate replacement at no
additional cost to OWNER.
20.5 CONSTRUCTION EQUIPMENT may not be removed from the WORK SITE
by CONTRACTOR except in accordance with a demobilization schedule
to be mutually agreed upon between OWNER and CONTRACTOR and
subject to OWNER's right of first refusal to purchase.
20.6 Upon the issuance of the CERTIFICATE OF PROVISIONAL ACCEPTANCE of
PROJECT all other items of CONSTRUCTION EQUIPMENT shall be held at
the disposal of CONTRACTOR, with the exception only of those items
which OWNER wishes to purchase from CONTRACTOR pursuant to
Article 3.31.

Malacca Conundrum Page 12

20.7 CONTRACTOR shall ensure that any CONSTRUCTION EQUIPMENT that
OWNER wishes to purchase from CONTRACTOR shall be reconditioned
and handed over to OWNER in good working condition with all
documentation necessary to affect such sate free from all
encumbrances.
20.8 CONTRACTOR shall hold harmless and indemnify OWNER from and
against any ownership claim which might be made against OWNER with
respect to CONSTRUCTION EQUIPMENT that CONTRACTOR sells to
OWNER.
End of Article - 20
Article – 28 – MALAYSIAN PARTICIPATION
28.1 CONTRACTOR shall provide for its Malaysian management and non
management staff such training programmes as described in
CONTRACTOR’s PROPOSAL.
28.2 CONTRACTOR shall maximize the utilization of Bumiputera and
Malaysian resources, particularly local resources in the State of
Melaka in which the WORK will be performed. This involves:
a) OWNER's approved VENDOR List and SUBCONTRACTOR List:
b) PETRONAS Registered Vendor List which includes:
 List of Bumiputera Companies participating in the PETRONAS
Vendor Development Programme.
 List of companies registered with PETRONAS
c) Maximizing SUBCONTRACTS assigned to Bumiputera and Malaysian
entities and maximizing use of Bumiputera and Malaysian personnel in
the performance of the work.
d) Maximizing use of materials, construction equipment and supplies
sources from Malaysia.
e) Maximizing use of Malaysian services and facilities of all description
28.3 CONTRACTOR shall source the goods and services and shall appoint
SUBCONTRACTORS for the supply of goods and services in the following
order of priority. In addition, in each of the categories below, the
companies based or operating in the state of Melaka shall be given
priority over the other companies.
a) Bumiputera owned companies and Bumiputera controlled public listed
companies and
b) Malaysian owned companies

Malacca Conundrum Page 13

28.4 The above are further described as follows,
a) Bumiputera owned companies for the purpose of this CONTRACT are
companies which are currently registered to be at least owned by
Bumiputera individuals and have at least 51% Bumiputera individuals
and have at least 51% Bumiputera participation at Board
Management and staff levels.
b) Bumiputera controlled public listed companies for the purpose of
this CONTRACT are public listed companies or their subsidiaries that
have been given the status of Bumiputera Controlled Plc by the
Foreign Investment Committee (FIC) / Ministry of international
Trade and industry (MITI) through the Ministry of Finance or Pusat
Khidmat Kontractor (PKK). Bumiputera controlled public listed
companies are not allowed to participate in tender works valued at
Ringgit Malaysian 10 million or less.

c) Malaysian owned companies for the purpose of this CONTRACT are

companies which are currently registered to be at least 51% owned
by Malaysian nationals and have at least 51% Malaysian participation
at Board, Management and staff levels.

d) CONTRACTOR shall maintain throughout the duration of this

CONTRACT the minimum of thirty percent (30%) by value of
Malaysian Content.

e) CONTRACTOR shall report to OWNER its achievement against the

contractual requirement for local participation every month in
accordance with Article 10.
28.5 All fuels, lubricants and skid tanks required by the CONTRACTOR or any
SUBCONTRACTOR in the performance of WORK shall be sourced from
PETRONAS or its subsidiaries and affiliates. OWNER shall have the right
to deduct, from any monies due and payable to CONTRACTOR, any
unpaid balance for the fuel and lubricants so purchased.
28.6 All ocean and inland transportation including the services of forwarding
agents shall be contracted by CONTRACTOR with Malaysian shipping
agencies as specified in the PROJECT SPECIFICATION. Priority should be
given to Malaysia International Shipping Corporation Berhad (MISC)
group of companies that offer ocean or inland transportation services.

Malacca Conundrum Page 14

28.7 For all air transportation, Malaysian Airlines (MAS) shall be used for
routes served by MAS and for flights where MAS services are not
available, booking of tickets shall be made through MAS offices

End of Article – 28
MALAYSIAN PARTICIPATION

OWNER is seeking the maximum involvement of Bumiputera and other

Malaysian personnel in the management and execution of the WORK. This can
be achieved either by the direct employment of preferably Bumiputera and
other Malaysian personnel by BIDDER. or by the establishment of a Joint
Venture /Consortium with a preferably Bumiputera or other Malaysian owned
company. Accordingly,
1) The utilization of Bumiputera and Malaysian resources, particularly
local resources in the state in which the work will be performed, shall
be maximized. This will involve:-
a) Maximizing use of Suppliers in the PETRONAS Vendor
Development Programme
b) Maximizing sub-contracts assigned to Bumiputera and Malaysian
entities and maximizing use of Bumiputera and Malaysian
personnel in the performance of the WORK.
c) Maximizing use of materials, construction equipment and
supplies sourced from Malaysia.
d) Maximizing use of Malaysian services and facilities of all
description.
2) Any SUBCONTRACTORS to be used for the supply of goods and services
shall be appointed in the following order of priority. In addition, in
each of the categories below, the companies based or operating in
Melaka shall be given priority over the other companies.
a) Bumiputera owned companies and Bumiputera controlled public
listed companies.
b) Malaysian owned companies.
c) Non-Malaysian owned companies.
3) The following definitions apply:

Malacca Conundrum Page 15

 a) Bumiputera owned companies are companies which are
registered to be at least 51% owned by Bumiputera individuals
and have at least 51% Bumiputera participation at Board,
Management and staff levels.
b) Bumiputera controlled public listed companies are public listed
companies or their subsidiaries that have been given the status
of "Bumiputera ControlledPLC" by the Foreign Investment
Committee (FIC) 1 Ministry of InternationalTrade and Industry
(MITI) through the "Ministry of Finance or Pusat Khidmat
Kontractor".
c) Bumiputera controlled public listed companies are not allowed
to participate in tender works valued at Ringgit Malaysia: Ten
Million (RM10, 000, 000) or less.
d) Malaysian-owned companies are companies which are registered
to be at least 51% owned by Malaysian nationals and have at
least 51% Malaysian participation at Board, Management and
staff levels.
4) The value of that portion of the WORK to be performed by Malaysian
companies, particularly Bumiputera companies, using their own forces
and not subcontracting to non-Malaysian companies, shall be clearly
identified and shall be not less than 30% of CONTRACT PRICE. Within
this percentage the WORK awarded to Bumiputera companies shall be
maximized.

Construction Contracts:
Reference PROJECT SPECIFICATION Part IV, Section 5, Construction
Procedures and Requirements. BIDDER shall identify the basis of its proposed
SUBCONTRACT Strategy in regard to the extent of its proposed
subcontracting. Engineering disciplines to be SUBCONTRACTED are to be
identified. BIDDER to provide a list of potential SUBCONTRACTORS
containing a list of not more than 3 nominations for each SUBCONTRACT.
Selection of potential Sub-Contractors shall be made from the Project Sub-
Contractor List in PROJECT SPECIFICATION Pad IV, Appendix 7.
BIDDER shall include in its PROPOSAL full details of the procedures and
criteria by which it proposes to evaluate SUBCONTRACTORS, with reference
to Procedure S-1651-00-PR-0305, Evaluation and selection of

Malacca Conundrum Page 16

SUBCONTRACTORS and Suppliers (PROJECT SPECIFICATION Part IV, Appendix
3.5).
For proposed SUBCONTRACTORS, BIDDER shall provide a typical
`SUBCONTRACTOR Evaluation Report'. Typical SUBCONTRACTOR Evaluation
Reports shall be provided for all SUBCONTRACTS, to show that their size,
experience and past performance qualify them to carry out the work.
Subcontractor Evaluation Report
The SUBCONTRACTOR Evaluation Report shall include, but not be
limited to the following details.
 Proposed SUBCONTRACTOR Name(s)
 Proposed SUBCONTRACTOR location
 Proposed parts of the WORK relevant to each
SUBCONTRACTOR Tender proposals/invitation details
 Proposed form of SUBCONTRACT
 Organogram indicating the relationship between BIDDER and
SUBCONTRACTOR. Methods of controlling the work
 Methods of planning the work
 Methods describing how quality is to be maintained
including the Quality Management System
 SUBCONTRACTOR's existing manpower level
 Reference of past experience for similar work and project
size
 Highlight proposed Malaysian SUBCONTRACTOR
 Methods describing how safety is to be maintained including
the Safety Management System.

Malacca Conundrum Page 17

Exhibit-2: Organogram of the Project

Malacca Conundrum Page 18

Teaching Notes

Consequent to failure of the sub-contractors engaged for temporary facilities

and piling works, L&T carried out market research and formulated a sound
subcontracting strategy and procedures for selection and award the Sub-
Contractor. A flow chart of the sub-contracting method adopted is given below.

Malacca Conundrum Page 19

The project was finally successfully completed with entire satisfaction of the
customer and meeting all project requirements.

Market research undertaken on the subject:

L&T carried out an extensive market survey within Malaysia to understand

capabilities and capacities of sub-contractors available to carry out similar kind
of works. Detailed discussions have been with the sub contractors on scope of
work, HSE, Quality and schedule of project requirements. Past experience of
the sub contractors in executing similar jobs, details of resources managed,
track record of sub contractors, present commitments and their financial and
technical status were obtained for analysis. The contractor also visited the sub
contractors work shop and their ongoing projects to ascertain sub contractor’s
facilities and their performance with respect to HSE, Quality and project
schedule.

Sub-Contract Strategy:

Subcontracting strategy was prepared to provide the basis of subcontracting

covering all required Sub-contract works and services at work site during the
constructions stage of the Project to ensure timely completion.

The Sub-Contracting strategy outlines the division of the Scope of Work into
various packages according to plant area or specialization specific criteria.

Subsequent to study of available Sub-Contractors and their capabilities, the

number of Sub-Contractors to be engaged for the project was decided. The
following points were considered while finalizing the work distribution plan:

1) Pre-Qualifications of Sub-Contractors:

Detailed Technical Evaluation of each Sub-contractor based on above criteria

was carried out for each sub-contractor

2) Sub-Contract bid document preparation / Invitation of Quotations:

Based on the pre-bid Sub-Contract strategy keeping the Type of Contract, Site
team prepared the Bid document with scope of work, technical and commercial
terms and conditions with all complete relevant details as required for the
bidder for execution of work. The tender document was reviewed by in-charges

Malacca Conundrum Page 20

of HSE, Quality, and Admin & Accounts dept. for inclusion / exclusion of terms
and conditions.

3) Technical Evaluation and Selection of Sub-Contractors:

A tender committee team consisting of Project Manager and other key

personnel was formed at site for the purpose of Sub-Contracting.

Sub-Contracting Bids were opened at the specified date and time in presence of
at least 3 members of the tender committee and the top sheets shall be signed
off by all attendees.

Technical Bid documents were issued to the concerned dept. in-charges

including HSE, Quality, Accounts / Administration for review and the comments
were incorporated.

Detailed Technical evaluations based on the bidders technical documents

against acceptance criteria / requirement was carried out.

Commercial bids were reviewed by the concerned tender team with respect to
deviations and assumptions from the bid document requirements.

Comparative statement for all the items for all bidders with the in-house
estimates based on the productivity norms were prepared for discussions with
the bidders.

Based on the Technical evaluations the All / Selected bidders were called for
Techno-Commercial discussions. The following points were discussed.

 Understanding of the package as a whole by the bidder

 Execution methodology
 Sub-Contractors mobilization plan against our in-house estimate
 Bidders Qualifications and assumptions if any mentioned.
 Unit Rates “abnormally high or abnormally low” with respect to in-house
estimates.
 Key persons like project Manager, planning manager etc., are to be
available during the meeting.
 Bumiputera compliance

Based on above, the final Techno-commercial evaluation was prepared and the
Sub-Contractor offering the best technical services with competitive price were
selected.

Malacca Conundrum Page 21

4) Sub-Contractor Administration & Performance:

Kick-off meeting were conducted with a week’s time of issue of LOI wherein
Sub-Contractor’s Project Manager with their key personnel consisting of HSE
Manager, QA/QC Manger, Planning Manager, Construction Manager, etc.,
presented their plan to successfully execute the sub-contract package.

5) Sub-Contractor’s Progress Review:

On mobilization and complete through execution of work by Sub-Contractor,

the administration performance monitoring through regular structured meetings
was carried out. Sub-contractors were appraised at regular intervals about the
short comings and action plans for retrieval of productivity observations.
Minutes of all the meetings shall be recorded and circulated to all concerned
for actions.

Day to day meetings were conducted at supervisory level on day’s plan and
progress issues etc.

Weekly meetings were conducted in presence of Project Manager of L&T,

Project Manager of Sub-Contractor and Project in-charge from Sub-Contractor’s
head office and discussions were recorded.

Monthly review meeting with higher management of Sub-Contractor was held.

Project Manager and Site engineers strived hard to ensure that work front and
materials are issued to the Sub-Contractors as per the agreed plan. Status of
availability and future release of work front was reviewed in detail during
weekly review meetings and appropriate corrective actions were taken if there
be any deviation from the original plan.

6) Billing and Payments to Sub-Contractors:

A schedule for the billing and payments cycle for the Sub-Contractors was
prepared and mutually agreed by Execution, Planning and Accounts
departments and the same was communicated to the Sub-Contractors for timely
submission of running invoices by the Sub-Contractors.

All concerned ensured that Sub-Contractor running invoices are processed and
payment was released as per the planned date.

Malacca Conundrum Page 22

Upon completion of the job, Performance of the Sub-Contractor was evaluated
and the lessons learnt, areas of improvement and good work practices adopted
were documented for future use.

Malacca Conundrum Page 23

 Specimen - Sub-vendor Evaluation Table

Malacca Conundrum Page24