TECHNICAL PAPER

CONTRACTS ADMINSTRATION ON LUMP SUM CONTRACT IN EPC CONSTRUCTION FIELD

(PROJECTS)

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I N D E X

Introduction………………………………………………….. …………..Page 3

About my Technical Paper………………………………………………..Page 4

Roles and Responsibilities of Contracts Administrator (Projects)………..Page 5

About my Project………………………………………………………….Page 6

Contract Plan……………………………………………………………....Page 7

Reference Contractual Documents………………………………………..Page 7

Variations and Claim……………………………………………………...Page 8

Schedule Delay……………………………………………………………Page 11

Progress Measurement and paymensystem………………………………Page 12

Conclusion………………………………………………………………..Page 13

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INTRODUCTIONThe construction field is a very extensive and unique in each project. In this world nearly

80% of projects are managed by contracts. To manage the projects effectively, the

projects are executed under contracts. In this instant you may ask what is the meaning

of contract?. The Contract is simply an agreement between two or more personal and

/organization which is enforceable at Law. This is an agreement, whereby one party

agrees to perform work or services for the other party within the contractual agreement.

To manage the contracts ,organizations have their own department to manage the various

contracts effectively. The department will play the major role on execution of any kind

of projects from initiation to closure. The main functionality of Contracts Management

department is to initiate the contracts, Planning, Exection, Control and closure upon

satisfactory completion of projects. As you know the phase will interact each other or in

some projects all the phases will not exist due to the nature of projects. The projects may

be subdivided into many phases in accordance with the nature of project and each phase

will be managed through the contracts department throughout the project cycle . There

are several types of contracts which will be applied to the projects based on the inherent

in nature of Statement of Works ( SOW). It is very useful in the construction industry,

especially in Engineering ,procurement and construction (EPC)project ;since these

projects will have many phases each will be managed thro sub contractor while it

requires to have a very close monitoring in scope verification and control. Meanwhile, it

creates a record system that will be useful as templates to other upcoming projects in the

same organization for similar projects .This will help the organization to eliminate the

Inaccuracies which had occurred in the previous projects. Contracts administration

ensures that both parties meet their contractual obligation and protect the legal rights

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ABOUT MY TECHNICAL PAPER

I am qualified degree holder in Engineering with the elective subject in contracts

management. I have been working with various companies as Contract Administrator the

last 17 years. I have selected to submit my Technical Paper on Contract Management

and I hope the input shall justify my selection.

Presently I am working with EPC Contractor M/s. SNC Lavalin International Inc., as

Contracts Administrator for their BeAAT Project (Central Environment Protection

Facilities) our Company is one of the third largest EPC CONTRACTOR in the world in

the field of Oil and Gas, Power and Aluminum smelters. The organization has a system to

manage the different contracts regardless of type of projects. The objective is to achieve

the project completion within the budget and time schedule. In my projects, we are highly

involved in all the areas such as initiation to project closure due to the nature of

projects .The project has been subdivided into many phases to manage and control

effectively. I have experienced in this project the effectiveness of the contract

management in fulfilling the obligation of Main contractor and sub contractor

successfully. As we are aware that, EPC contracts will have several changes on project

life cycle. Due to the nature of project, we have stumble upon changes in design which

creates the several impacts in scope and schedule. In this instant, I would like to brief

how we managed the Lump sum contract in EPC construction in this particular project

especially handling variations ,claim and payment systems.

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ROLES AND RESPONSIBILTIES OF CONTRACTS ADMINISTRATOR

(PROJECTS)

Formulate contract plan

Contractor Pre qualification

Prepare Tenderers lists

Prepare tender Packages

Receive tenders

Prepare Evaluation and recommendation

Award contracts

Execute contracts

Process progress payments

Negotiate and issue contract change notices and amendments to contacts

Evaluate and negotiate claims from the contractors

Maintain contract files

Close –out all contracts and

Maintain performance records

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ABOUT MY PROJECT:

The project had been initiated by the UN environmental department to facilitate the

treatment of waste generated from the oil sectors to protect the environment. This is a

UNIQUE project in the world which contains all the treatment facilities are

interconnected to neutralizing the contaminated waste. The client has awarded the Lump

Sum EPC Contract (Engineering, Procurement and Construction) to my company. The

EPC contract is most valuable for the complex design and procurement and where the

buyer desires to contract with a single party. In this scenario, I would like to brief about

my project and what are the major complex units are designed and under

procurement/construction which are as follows;

Incinerator

Solidification

Thermal descorption

Centrifugation

Chemical treatment

Mercury distillation

Tank farms

Landfills

To manage the Lump sum EPC contract effectively, we have considered the following

phases and each phase had been awarded as sub contract.

Site preparation ,earthwork and civil works

Mechanical and piping works

Electrical and instrumentation

Land Fills

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CONTRACT PLAN:

Since we decided the phases and execute the project by sub contracting, we are now in

the process to select that type of contract for different packages. The contract selection is

basically affected by how extensive we have the project Scope of work (SOW). Since the

customer had transferred the risk to EPC contractor vide Lump sum Contract, we also

determined to manage the phases through the Lump sum contract for better execution,

monitoring and control.

REFERENCE CONTRACTUAL DOCUMENTS:

As an EPC contractor and decided to execute the contract through sub contracts, we have

prepared the set of contractual documents which will make a legal agreement between the

parties to fulfill the obligation that has been given to sub contractors thro Request for Bid.

Since, my paper is based on contracts administration for the particular project, I would

like to highlight what are contractual documents which we are referring to manage the

Lump sum contract .The documents are listed as per the order of precedence. Incase of

any discrepancies in any of the documents which is not resolved between the parties, the

documents shall be referred as in order to solve the issues

SIGNATURE AGREEMENT

ARTICLE OF AGREEMENT

PARTICULAR SPECIFICATION

SCOPE OF WORK

BILL OF QUANITIES

Upon review of contract awarded and evaluations of various requirements as per section,

due to changes during execution in the areas as listed below could occur which leads to

variation, claim and schedule delays that are affecting the cost and completion date of the

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project. I wish to elaborate all functions in the variation, claim and schedule delay areas

in detail.

VARIATIONS AND CLAIM:

Eventhough, the design criteria is well defined, EPC contracts allows client changes or

variation during the project life cycle. In principle this is not a problem, rather the

problem rises when there is a question who is responsible for the cost and time impact

associated with change. For illustration, a change in process may have little cost and time

impact if it is made during the basic design. But if any changes occur during the

construction, the impact shall be significant.

In this project life cycle the changes occurred in both the phases of design and

construction. Since the design changes pertinent to client and Prime EPC contractor , I

would like to share how we have managed the critical changes in Scope of work occurred

while construction in progress.

In my project, I have managed the changes through design change authorization (DCA)

and contract trend notice (CTN). Since we are discussing the subject between the EPC

contractor and sub contractor perspective the DCA procedure is not applicable, because

we are designing and instruct the sub contractor to construct as per drawings and

applicable specifications. How ever, I would like to brief about DCA. While we are in

detail design or construction if we decided to change the specification or equipment

which should be addressed to customers through DCA that shall contain the reasons why

to have the specific change to process or any form and shall mention that this will have

an impact in schedule and /or cost with all relevant back ups to review and comments. If

there is any impact in cost or schedule, the EPC contractor shall be advised accordingly

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to submit the CTN .The DCA shall be applicable if there is no potential change in cost

and schedule.

Only those potential changes that falls outside the Contract and could be construed to

impact cost, quality and /or schedule should be considered for a Contract Trend

notice(CTN) .CTN should accompany with the detailed supporting documentation such

as reference letters, vendor confirmation and cost and time estimation. All CTN’s are

documented & monitored for its status.

According to contract, both the parties can able to initiate the changes when and

wherever require to fulfill the requirement of customers. In EPC contracts, the EPC

contractor is designing the project and or phases and will be issuing to sub contractor to

execute in accordance to the applicable specification and issued for construction

drawings. After receiving the drawings, sub contracts may verify with the scope of work

which is stipulated in contract and if find that any changes, the contractor will be

notifying the EPC contractor accordingly. On the other hand, EPC contractor itself will

generate the changes which occurred in my project most of the project life cycle.

The changes are formulized vide formal letters stating the items to be considered while

contraction that shall be implemented unilaterally since my contractual clause states

that” Not withstanding any dispute and or any changes either in drawing or

specification ,upon request contractor shall be perform the same without affecting the

progress”.

In this project, we have set sub clause in Article of Agreement stating that how to process

the variations and implement the same. To conclude the lump sum price of the changes

either positive or negative variation to Scope of Work, the sub contactors were instructed

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to include the various unit rates in the form of appendix to BOQ which will be utilizing

to compute the Lump sum value of the requested changes.

Now, the changes have occurred and the contractor is advised to execute the changes in

accordance with contract. The contractor has informed the EPC contractor that due to

these changes there will be cost and time impact in the contract. Subsequently, contractor

has been advised to submit the back ups for the variations so that the request will be

evaluated and revert to contractor all in terms and conditions of contract. Upon receipt of

the requested documents, EPC contractor will be reviewing the request with the Scope of

Work and if requires, will be organizing a meeting to discuss the varies items incurred in

the changes, and accordingly the contractor to be informed either the requested changes

are within the contract or not.

If the changes are legitimate and not in scope of work, the contractor will be advised to

proceed further and subsequently the cost and time impact shall be estimated. In case the

stipulated unit rates are not covered the items involved in the changes, new rate will be

established and agreed to utilize to compute the lump sum price.

When the cost is finalized, contractor will be informed that the changes are approved and

advise them to proceed to implement the changes. Consequently to include the approved

changes, the amendment to contract will be issued and that to be signed by both the

parties and thereafter the approved changes are becoming the integral part of scope of

work. We were maintaining the register to track the approved and unapproved variations

in which we can able to monitor the scope changes and what impact we had due to this.

Besides, we have come across several variations are not mutually agreed due to inherent

nature of variations. Those are called claim against the contract. The disputed claims will

be resolved amicably with terms and conditions of contract. If not the claim shall be

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reference to third party, that is called arbitration. In this, common personals those who

are not connected to either parties will be reviewing the request from both the parties as

the international law and given the verdict to abide on. If the verdict is not fulfilling any

one party, then that party can refer to court and the settlement will be as per the court

decision which is firm and final.

SCHEDULE DELAY:

Construction contracts frequently require schedule or program for tracking the progress

and delay. To determine the delay, the submitted Base line schedule can be monitored

and updated regularly to find the schedule variations. We have used the Primavera for

tracking the same. In deed, any party claiming against the time should demonstrate that

the other party actually delayed work on the CRITICAL PATH of the project. As you

know, if any changes and /or delay occurred on critical activities, this will affect the

project duration which will have an impact.

In my project, the schedule had a high impact since the changes occurred in detailed

design and also in construction phase. For example, for incinerator facility, we have

signed the contract with vendor to design and supply the kiln with in the agreed duration.

During the design phase, the vendor advised that the requirement which had been given

to consider for detail design is not sufficient to fulfill the project requirement. Due to this

the delivery of the kiln is delayed substantially which is in critical path of the project. So

the project duration has been extended for several months. Since the delay is not incurred

by the contractor, they issued a delay notice to main EPC contractor and further requested

EOT (extension of time) and cost related to maintain the construction teams in project.

Another major case of delay noted on this project was due to failure in meeting

hydrostatic testing requirement of under ground GRE Pipe upon installation. Although

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these pipes were inspected at vendors works at random (10%) prior to delivery to site.

Due to this failure, we had to remove all installed underground GRE pipes and replace

with new pipes supplied by another vendor. A substantial delay occurred due to this

incidence.

As Contract Manager I had put in all my effort to expedite the early placement of order

and prioritized an early delivery from vendor and negotiated with sub-contractor to

increase manpower to reinstall these pipes on war footing plan.

As a contract administrator, I have evaluated the request and estimated how many days

this delay will affect the contraction period which will be executed by others. On the

other hand, if we increase the recourses upon receiving the equipments what will be the

impact of schedule? In this particular example, I have taken a decision to crash the

duration which will allow us to complete the installation of all related activities .To

conclude that I have compared the time versus cost and selected the lowest cost impact to

project and time as well ,so that the delay could be reduced substantially. Since the delay

is not occurred by sub contractor, I have recommended compensating the cost incurring

to execute the work beyond the contractual period.

PROGRESS MEASUREMENT and PAYMENT SYSTEM:

Due to the nature of the project, we have decided to measure the process by incremental

mile stone method. What is the meaning of Mile stone? Milestone is an important activity

that must occur when scheduled in the project in order to achieve the project objective.

Incremental milestone means that the particular milestone activity has been broken into

manageable intermediate milestones. Each and every sub divided milestone will have the

weightage which will be using to compute the total progress in terms of cost incurred in

that particular period. In every cut of dates, the physical progress is computed as the

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actual work executed at site and that to be compared with the mile stones. The completed

milestone shall be considered for progress and payment.

Since it is an incremental milestone measurement system which is comparatively simply

than other methods to achieve this, a milestone lists were prepared for which suitable

percentages were allotted. Accordingly, we have entered the completed activities and

obtain the cumulative value of work done until the cut-off date. To submit the invoice

for that particular period we should have to take into account the retention amount as per

contract and previously invoiced amounts to obtain from payment retrieve system. In my

project, the approved invoice shall be payable to sub contractor within 60 days from the

approved date or 7 days from receiving the payment from the customers which is coming

earlier. Once I completed this process, I am updating the PM+ System which is computer

aided record system that is implemented to track the entire document in this project.

CONCLUSION:

In my personal opinion for my project although the intent of programming, planning and

scheduling is to ensure completion of the project within the budgeted cost and contractual

time and fulfilling the requirements as per contract. But in practice due to so many

unforeseen facts related to change in detailed design, could creep in thereby cost and time

could be affected. I personally recommend all the organization should have to follow in

this kind of system which is highly effective. So as a contract administrator, it is of high

importance that from day one the project process is monitored, evaluated and corrective

action and reactions shall be the ultimate responsibility of contracts administrator.

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