construction contracts - new outlook

7/29/2019 Construction Contracts - New Outlook

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/INSTRUCT/JNB INSTRUCT Program at Chennai 1

Contracts & Indian SituationRelationship Contracts, Risk, Performance,Technical Developments, Disputes & Avoidance

of Disputes

Can we not frame & managecontracts to avoid or

minimize disputes &ensure performance?


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Contents

Contracts join two parties for a commonspecific performance result orientedobjective.

Projects over the years have become complexTechnological developments at a fast pace.

Projects require multi disciplinary inputs. Influence of Energy & Environment. Perceived needs of different users

Lighting, Ventilation & comfort, Tools, Transport, Entertainment.

Integrated Approach Influence of Computers & Communication.

We are not making the best use of the available facilities!


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Overview Even simple Contracts require inputs from more than one

party. Contract is like a marriage; Supposed to bring both partners

to a common objective. Common objective vanishes just after contract is signed. Parties are linked by Notional Primary Objective

The Project Completion

Each party has its secondary objective, which overrules. The simplest of the project requires inputs from about 22

different entities of different categories. The purpose of the contract conditions is to make the

objective of all partners common. Demands on construction activityfast completion, quality

construction, lower cost. For the success of the project the cooperation from all the

parties in essential;Anyone party can cause the project to fail!


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At least 22 differentorganizations

Directly involved parties. Regulatory agencies. Affected, disgrunted parties Parties are linked by Notional Primary Objective

But could be competitors Service organization Electricity, Water &

Sewage, Friendly neighbors; May not really be friendly!!! Unaffected partiesWell wishers??? Public interest custodians

PIL, Environmentalists Direct involved, but not having contract

(suppliers). Anyone party can cause the project to fail!


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What do we EXPECT from

Contracts?TrustCo-operation

DependencySharing of KnowledgeShared Values Innovation


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Desired Contract Outcome

Project Duration Project Cost Project Quality

Client Satisfaction

Have the latest technology

Reliability, Redundancy, Maintainability

Energy Efficiency, Low operating cost

Environment friendly & Sustainability


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Contract Conditions framed to cover

Any contract involves transfer of risk. Contracting parties come up prepared for certain risk limits.When the actual risk exceeds what is

expected then problems arise. Contract is between two parties.

But there are a number of parties for anyproject.

Some of those parties may not be beneficiaries.

Some may be interested in interference.

Some are service or regulatory organizations. Transparency & Equitability have been the

aims for all contract form updation. FIDIC & WB contracts Progress in this

context.


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What is required?

Usual Contracts Desirable Change Transfer of Risk Risk remains with owner Profit at risk Profit levels pre-arranged Price in advance Pay actual costs

Penalties Success sharing Individual contract Integrated contract Best practice Latest practice

Has it been tried? Channel tunnel & Heathrow T5 System in force from 1996 recommended as NEC Considered by committee for CPWD in 2002.


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New Engineering Contracts

We had simple cost plus contracts. Not adoptable due to lack of trust Now effectively enforceable by integrated network

accounting

Successful implementation Channel tunnel. Heathrow Terminal T5.

Risk remains with owner

Each partners accounts are open to all thepartners.Any midstream change does not affect contract

progress or affect partners profit.


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Concepts & Attitude towardsproject

Parties or partners to a CONTRACT OR

Parties or partners to a PROJECT

Contract success benefits one party

From the angle of that party the benefit tothe party takes precedence over the benefit

to the project.

Project benefits only a few parties

Many parties are outside the ring!


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INSTRUCT Program at Chennai

Key characteristics

Actions

Act as stated in this contract and in a spirit of mutual trust andco-operation

It covers obligations and attitude

Communications

In a form that can be read, copied & recorded

Replies within the period for reply


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n Project Manager

n Is the key management person on behalf oftheEmployer

n PM decisions should reflect theEmployersbusiness decisions

n Acceptance does not change theContractors responsibility to Provide theWorks of his liability for his design

n Essential that the Project Managerissufficiently close to the work and has thetime and authority to carry out his duties

effectivelyn Contractorhas recourse toAdjudicator

where he believes theProject Managersactions or decisions do not accord with theECC

ProjectManager

Early

Warning

AcceptedProgram

Key charateristics


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n Early Warning

n Contractorand Project Managerhave aduty to notify each other if aware of amatter which could

increase the total of the Prices

delay Completion or

impair the performance of the works in use

n Instruction to attend meeting, thoseattending:

consider proposals, seek solutions anddecide actions

n Benefits prevention better than cure

proactive rather than reactive

n Encourages collaboration, innovation andability to adjust to circumstances during the

contract

ProjectManager

Early

Warning

Accepted

Program

Key charateristics


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n Programmen Accepted Programme is latest

accepted by Project Managerand

includes

key dates

method statement for each operation

order and timing of operations

n Likely to be a collection of

documents which may include

method statements, histograms,

network diagrams, bar charts and

the like

n Stated reasons for not accepting

ProjectManager

Early

Warning

Accepted

Program

Key charateristics


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Key characteristics

n Compensation events are

n events which, if they occur, and do not arise from theContractors fault, entitle the Contractorto be compensated for

any effect the event has on the Prices and the Completion Daten Process is

n Notification

n Quotation

n Assessmentn Implementation


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Key characteristics

n Risk

n NEC contains typical risk allocation provisions in compensation

events andEmployers risk

n Provision made to alter risk allocation pre-contract according toproject risk register and any negotiation

n Provision made post-contract to re-appraise risk allocation when

quoting for effects of compensation events


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Key characteristics

n Value engineering

n Provision made in target cost contracts

n Payment

n Variety of payment options

n Focus on out-turn cost

n Disputes

n Use adjudication before arbitration or litigation


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NEC in use

n Who are the users?

n Building

National Health Service ProCure21, 5 years 1.4bn/year

BAA Heathrow Terminal 5 (4bn)

Circle33 Housing Trust, Oxford University, Bristol Airport, Barclays Bank,Cardiff Millennium Stadium, Sainsburys Supermarkets

n Civil engineering

Channel Tunnel Rail Link (4.5bn), London Underground

Environment Agency, Highways Agency & British Waterways

Extensive local authority usage Eden project


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NEC in use

n Who are the users?

n Utilities

Most UK water companies

National Grid Transco

Vodophone

n Power

UKAEA

ESKOM (South Africa)


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NEC in use

n Thus far..

n Used in more than 20 countries

n Over 20,000 projects of 15bn+ (?)

n No substantive case law

n Probably responsible for generating a new breed of modern

day forms of contract

n Rarely is it not used subsequently by clients

n The UK Govt believe NEC to be reasonable Achieving

Excellencecompliant


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Examples in IndiaProposal was seriously considered for

implementation for contracts of value more than10 Cr in CPWD by the committee in 2002; But

could not be adopted as there wasnopast experience.

n Inherent problems of cost plus contracts can beovercome by using computer network basedaccounting

n Reliance has adopted such a systemn GMR has operated for the DIA T3


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Protection from being taken for a ride

Transparency in accounting by allpartners

Frequent (weekly) review of

progress, plan for next week &accounts of past week.

Changes discussed & posted forinformation of all partners


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Review Codes, Standard Formats

Present codes & contract formats were draftedwhen professionals were not contractors.

Now most contracts are dealt with byprofessionals.

Collect feedback on Visibility & Safety aspects . Problems in the event of design change.

Technological developments are fast.So is obsolescence.

Review & feedback should be regular and

systematic. Remedial measures should be dynamic. Develop trust & common objective in contracts. Safety & morale of personnel is most important.

Make contracts your friend & achieve success

with high productivity, good quality.

1. Educate & reorient key professionals.

2. Educate stake holders on long term &hidden benefits.

3. Get the standards & codes identifypublic good and make mandatoryprovisions instead of looserecommendations.

4. A good EQUITABLE & TRANSPARENT

contract will help progress of work andcreate healthy working atmospherewith common objective.


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BUILD GOOD

RELATIONSHIPCONTRACTS WITH LESS

DISPUTES &LEAST IMPACT ONPERFORMANCE

Thank You

construction contracts - new outlook

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