Contract Management; Causes and Handling of Claims, a practical approach.
1.- INTRODUCTION
The EPC firm knows if what it is doing is well written or where is stipulated ?
In the EPC business, claims fall into two categories:
Note:
a) Claims against EPC Firm or brought by EPC Firm where EPC Firm has an EPC role, will directly affect your bottom line.
b) The outcome of complaints handled by EPC Firm on behalf of clients may directly affect EPC Firm's reputation as a Project Manager.
2.- CAUSES OF CLAIMS (WHY?)
It is strictly necessary that EPC Firms have a clear and well definied Contract Baseline.
EPC Firms almost always have very tight budgets and are forced to try to recoup any “over budget” they incur. They may have only one practical way of doing this, and that would be through claims against their clients during the execution of the work or immediately after it has been completed.
Astute EPC Firms, with solid arguments to make a claim, will file claims about whether or not they are overspending, but will push them when they find themselves at a loss.
The main causes of complaints are:
2.1.- An poorly defined scope of work, the scope of services, or the scope of facilities (WHAT?).
It is necessary a clear vision of what the client wants or even what really needs by EPC firm, after the contract was signed, will be no room for grey areas, misinterpretation and execution holes for the contract (set rules of engagement).
What it covers:
2.1.1.- A known scope that is poorly defined or not defined at all, meaning that the client's expectations are greater than what the contractor has contemplated.
2.1.2.- Additional work that has been added through contract variations.
2.1.3.- The foregoing causes discussions about what is included in the contract and what includes the extraordinary work, also affecting the terms of the contract, the above is not normally an issue for contractors as contracts are usually determined to handle them. It may, however, be the cause of a problem with clients, as they might also have expected such work to have been included in the base contract and therefore in the base contract price.
2.2.- An schedule with a lack of precision, detail, or reality (WHEN?)
For Christ's sake! someone knows why those expensive cranes are doing nothing!
The following are the main causes:
2.2.1.- Establishment of Unattainable Programs as of Day One.
2.2.2.- Programs that Change
2.2.3.- Delay Within the Contract finish
2.3.- Money and financial issues with unclear flows and control (WHO PAYS ?)
Where my money goes, anybody knows the flow exactly?, if there is no backup i do not pay anything (the owner)
Allowances in most contracts are eventually replaced by actual net costs incurred by the contractor.
Unless prevented by the wording of the contract (which is rarely the case), the cost of design changes (by the contractor) to a lump sum item (including repairs of defective workmanship) may be claimed as reimbursable while the contract is in force. This applies even to changes made by the contractor after delivery of the item to the field.
Provided that a change is an "add-on", under most contracts the Principal may be forced to accept all costs of changes in supplies under a provisional sum.
The overarching principle is that the Principal must pay the full cost of doing everything once.
If disposals occur (by the supplying contractor) the Principal would generally not have to pay for the disposal as, again, the Principal would be obligated to pay the properly incurred cost of the final item.
This concept exposes the Principal when he wants the contractor to make changes.
2.4.- Re-execution of the scope at Cost Plus Fees (HOW)
Early in the morning, I saw that those guys installing red overthere, then they take it out, then they reinstall blue again ?
This is most applicable to re-work, or field defect rectification, to equipment or materials, brought to the field under a supply contract of some kind, and given to a field contractor for installation.
In this circumstance, the field construction contractor is often ordered to make repairs to achieve erection or is forced to make repairs to allow construction to proceed.
In this case, the repairs become cost plus fees, and the Principal pays the contractor's costs, regardless of the work performed.
This will mean that every effort and precaution must be taken if the cost of such re-performance of work is to be sought from the at-fault party.
This is especially true if the ground contractor happens to have any cost-plus-fee arrangements (in association in one form or another) with the Principal, in which case the contractor will have little or no incentive to help recover re-enforcement costs, as you are being paid for all hours, regardless of whether you are doing scope work or re-performing work.
Whether in the partnership or not, if recovery of costs is to be attempted on behalf of the Principal, this will require the filing of an effective claim against the at-fault party (usually a third-party provider), and first-class records must be maintained for this to be successful. of the defect in the first place and the cost of its repair.
It is never too much to stress the need to have good records with sufficient detail and this will mean that the project manager will have to allocate sufficient resources to obtain and process these records.
Without sufficient solid records to base it on, it is difficult to make a collected claim, it is much more difficult to prove it, and the risks are rendered substantially or entirely ineffective.
2.5.- Changes by an EPC´s subcontractor (HOW)
It is strictly necessary that EPC subcontractors have loyalty, fine-tune and share the vision (please be my work-buddy, wing-man, first-mate but not a bruttus!).
The principle regarding keeping detailed first-class records also applies when we seek to recover from a subcontractor cost incurred by late changes to this contractor's design, where the changes mean that the construction contractor you have to re-perform the work or when they have an impact on the construction schedule due to the delay with which they were carried out.
To recover construction costs (which have been properly paid to the builder to implement the changes), we need to be able to prove that the cause of the rework is attributable to the design contractor. The resulting delay for the construction contractor can become another complicating factor.
In addition, a strong culture must be established that design changes may only be implemented following written instructions from the design contractor before any changes are implemented.
Any circumstance that softens this requirement can result in considerable costs that are sunk, with delay costs on top of them.
The answer lies in records, records and more records, and high-quality records if cost recovery is desired.
2.6.- Delay in Items, pieces of equipment, services, or even subcontracts Supplied by the Owner.
A delay in supplies by the owner is a breach of contract, for which an EPC firm has the right to request compensation.
This remains valid whether or not the delayed supplied item can be installed immediately.
2.7.- EPC Firm starts its fieldwork too early
Owner typically want to see "dust and bulldozers" in the field.
Pushing a contractor to start too early (before there is enough design and enough materials available) is a classic way to burn money, leading to claims that are usually filed under some other name, for example, acceleration and inefficiency.
This is especially the case if the contractor has a lump sum contract.
2.8.- Intelligent Claims
These are usually large claims, often exceptional, but they are the most difficult to make, and when they push they are the most difficult to defeat, they include:
These claims are based on a selection of the facts listed in (a) through (g) above. When they are not resolved by negotiation between the parties, they can go to either Arbitration or Litigation and will often be re-badged as intelligent claims, particularly as negligence and misrepresentation in one form or another.
Defending these claims is expensive and time-consuming and will almost always involve expensive legal counsel.
3.- PREVENTION OF CLAIMS (HOW)
To prevent and minimize claims, we need to ensure that the causes mentioned above are eliminated, to the greatest extent possible, from our projects.
That means the following “rules” should be adhered to and implemented in both project design and project management.
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3.1.- Project management.
It should meet the following:
3.1.1.- Be complete and describe the total work, defining each task with at least one line. The scope should focus on what needs to be done. The specifications describe how to do it and the standards it must follow.
3.1.2.- be unambiguous
3.1.3.- not contain options, unless they are priced before work begins and the specific impact on the program is known and contemplated in the contract.
3.2.- Schedule management
Don't set deadlines too tight, the consequence tends to be:
3.2.1.- The owner requires a project completion date that is not feasible.
3.2.2.- EPC Firm complies because the client pushes us and inserts excessively tight deadlines in the bidding documents.
3.2.3.- EPC Firm can also set very tight deadlines without customer influence.
3.2.4.- EPC Firm complies at the time of bidding because EPC Firm requires it.
3.2.5.- The established contract term is too short.
3.2.6.- Pressure to start working in the field too soon.
3.2.7.- Request for money for overtime or for not considering the hours
3.2.8.- Longer times and higher than anticipated costs follow
3.2.9.-The Contractor tries to recover them by attributing the blame to the Principal
3.2.10.- For early warning of possible higher-than-anticipated times or costs, set objective progress measures and stick to them.
3.2.11.- Also, pay close attention to changes in the contractor's access or any other aspect regarding deadlines.
3.3.- Purchasing management
3.3.1.- Verify that the supplies provided by the owner are delivered promptly.
3.3.2.- This is easier said than done, as any supply contract that is delayed translates into a backlog of supply on the ground. This is a breach of the owner's obligations, whether or not the Contractor is ready to use the material.
The sequence is as follows:
• delay in the supply to be provided by the owner
• breach of contract by the owner,
• allows the EPC firm to initiate a claim for delay.
• EPC Firm design delay
• delay in detailed drawings
• Delay in equipment
• Late work
• Costs above those expected
The same scenario applies to the availability of “approved” drawings from suppliers.
Where possible, avoid writing delivery dates for items to be supplied in writing in contracts. This is not always possible; however, written proof of such dates on contracts should be kept to a minimum.
When dates are given, ensure they are feasible and can be met.
It is rarely possible to recover on-site construction delay costs from an equipment supplier, but it is not difficult for a site contractor to recover delay costs from the Principal.
Novation of major supply contracts to the construction contractor will prevent delay claims due to equipment backlogs but may open the door to lesser quality equipment. In addition, it will not be possible for the team to be on the ground before.
Novation is most effective where a strong prime contractor has a contract for design, supply, and construction, but the Principal orders and provides long-term equipment items early, free of charge, to shorten the project schedule.
EPC Firm's design cycle and supplier drawings must also be kept within the confines of contractual deadlines, otherwise, claims by informed contractors are likely to be initiated.
3.4.- Quality management
Verify that the quality meets specifications and don't forget about dimensional integrity.
Owner-supplied materials, especially structural steel and piping, may be properly welded and look good, but if they are not within dimensional tolerances, they can lead to a lot of rework on site, which will initiate repair claims. and also for the delay, if it is a contract in hard currency.
3.5.- Change management
Design changes should be kept to a reasonable minimum and, if possible, eliminated.
This applies particularly to design changes that have an impact on construction and can cause rework and delays on site.
The design changes are closely related to the comments above under “interim additions”.
Projects with no design changes tend to stay on schedule with little cause for complaint.
Accelerated Execution Projects (Fast Track)
Expedited execution in our world largely means starting construction before the design is complete, and as such tends to be the root cause of many of the claims discussed above.
On the other hand, it helps keep lawyers well-fed and well-paid.
The inherent risks that jeopardize project start-up dates due to delays should be understood and managed to the greatest extent possible.
Recovering rework costs will require excellent records, as mentioned in (c) and (d) above.
4.- CONCLUSIONS (Claim in a Nutshell)
To reduce claims:
• Develop sufficient initial engineering before awarding contracts.
• Do not delay the contractor in any way.
• If “allowances” are used in contracts, make sure they have a cut-off date on the cost of the item shipped from the factory or the cost of the item delivered to the field.
• Make sure the contractor/supplier remains responsible for repairing any defects, regardless of who supplied the equipment/materials.
• Do not vary the terms of the contract unless the scope formally changes. In the event of scope changes, agree on any timeline changes before the job is executed.
• To maintain the term of a contract, consider hiring a different contractor to implement major changes.
• Keep contract administration up to date and in order, especially concerning small nut and bolt claim responses.
• Respond promptly to claims for extensions of time and, if possible, reach an agreement on the response to avoid further claims of the acceleration type.
• Verify that contracts have appropriate variance provisions for normal quantity variances.
• Verify that excellent records are kept of the cause and cost of any rework, on an item-by-item basis. These records must be impregnable and signed as a sign of acceptance by the "performing party" at the time of performing the work.
• Make sure similar records are kept of any design changes.
• Ensure that contract packaging allows for the proper interface of contractors so that they do not fall behind each other.
• Verify that the equipment and materials supplied by the Principal are following the specifications and are delivered on time.
• A lump sum performance contract means a Lump Sum Performance Contract. Keep this in front of the contractor at all times.