Chapter 7 Contract Management
Contract management Objectives Ensure Project Completion • On Time, • Quality, • Minimum cost • Without any Disputes Manage Changes in Scope Major events in contract management • Post bid conference • Work plan & schedule • Progress & quality monitoring • Reporting • Interim payment cont….
Contract management • Variation Order • Cost price adjustment • Time extension • Claim • Conflict management • Contract termination • Liquidated damage (@ 0. 05 % per day but not more than 10 % of contract amount) • Prize (@ 0. 05 % per day but not more than 10 % of contract amount) • Taking over certificate • Defect liability period • Work completion report (As built drawing • Final payment • Work completion certificate
Disputes : Causes and Resolutions Claim • Claims arise when the Contractor believes he has been impeded in some way from executing the works according to the contract. • Common causes of claims, whether justified or not, are : Cause Delay in obtaining possession and access to the site Delay in obtaining work permits, customs clearance Delay in obtaining drawings and instructions Responsibility Employer Consultant
Disputes : Causes and Resolutions Causes of claim cont… Cause Delay of commencement or completion of works by others Delay in payment Disputes over quantities Errors in setting out with data provided by the Consultant Interpretation of specifications Unusual weather conditions Responsibility Employer Consultant None
Disputes : Causes and Resolutions • It is essential that the Employer and the Consultant do not provide the Contractor with any reason for a claim through lateness or negligence in carrying out their responsibilities under the contact. • For claim basic actions which should be followed by the Contractor are: ü Start keeping a detailed record simultaneously with occurrence of an “event” which gives rise to a claim. ü Give notice of intention to claim within specified time limit, usually 28 days of the event. ü Act on the Consultant’s instructions regarding additional records needed to substantiate the claim. ü Submit a claim with supporting information within specified time limit, usually 28 days of notice of intention.
Disputes : Causes and Resolutions ü For an event with continuing effect, submit an interim account of claim on a regular basis. ü Include an application for payment in addition to actions. • If claim is accepted by employer, then no disputes occurs. If claim is not accepted by employer, then dispute occurs between two contracting parties. Causes of disputes • Incomplete and / or unsubstantiated claims • Failure to understand and/ or comply with its contractual obligations by the Employer / Contractor / Subcontractor • Failure to properly administer the contract
Disputes : Causes and Resolutions Causes of disputes cont… • Failure to make interim awards on extensions of time and compensation • Errors and / or omissions in the Contract Document • Employer imposed change • Contract selection was not a ‘best fit’ when compared to the project’s characteristics • Third party or Force Majeure events • Differing site conditions • Conflicting party interests • Unrealistic risk transfer from Employers to Contractors In summary • Poor contract documentation that arise from the organizational system (inadequate or incomplete design information, ambiguities in contract documentation)
Disputes : Causes and Resolutions • Scope changes that arise from uncertainty that exists within the project management system (variations due to client, design errors, site conditions) • Educational and behavioral adaptations of individuals within the system (poor communication, poor management, skill and experience, and personality traits). We could summarize these again as — design, contract administration and personality issues. Dispute Resolutions • Contractual disputes are time-consuming, expensive and unpleasant. • They can destroy client/supplier relationships painstakingly built up over a period of time and can impact on the supply chain.
Dispute Resolution cont… • They can add substantially to the cost of a contract, as well as nullifying some or all of its benefits or advantages. • They can impact on the achievement of value for money. • Identify the needs to resolve disputes and choose the right technique • The desirable features are: – Fast – Inexpensive – Fair – Simple and economical process
Characteristic of a Dispute Resolution process General characteristics should be: – Settlement in short period/ Minimum delay – Fair Decision – Settlement achieved is final – Minimum costs – Control of process – The ability to preserve the relationships between the parties – Confidentiality – Flexibility
Disputes : Causes and Resolutions cont… Dispute resolution techniques (Methods) include: a) Negotiation – The most common form of dispute resolution where the parties themselves attempt to resolve the dispute. • Negotiation is by far the most common form of dispute resolution. • The objective of sensible dispute management should be to negotiate a settlement as soon as possible. • Negotiation can be, and usually is, the most efficient form of dispute resolution in terms of management time, costs and preservation of relationships. • It should be seen as the preferred route in most disputes.
Disputes : Causes and Resolutions a) Negotiation cont. . . Its advantages are: üSpeed üCost saving üConfidentiality üPreservation of relationships üRange of possible solutions üControl of process and outcome • If you are unable to achieve a settlement through negotiation, you will need to consider what other method or methods of dispute resolution would be suitable. • But remember it will still be possible or may be necessary to continue negotiating as part of or alongside other forms of dispute resolution.
Disputes : Causes and Resolutions cont… b) Mediation – A private and structured form of negotiation assisted by a third party that is initially non-binding. If settlement is reached it can become a legally binding contract. • Mediation is negotiation with the assistance of a neutral third party. It is often referred to as ‘structured negotiation’. • It has all the advantages of conventional negotiation as set out above but the involvement of the neutral can make the negotiation more effective. • It should be seen as the preferred dispute resolution route in most disputes where conventional negotiation has failed or is making slow progress.
Disputes : Causes and Resolutions cont… • Format – mediation is essentially a flexible process with no fixed procedures. At an opening joint meeting each party briefly sets out its position. This is followed by a series of private and confidential meetings between the mediator and each of the teams present at the mediation. This may lead to joint meetings between some or all members of each of the teams. If a settlement is reached, its terms should be written down and signed. • The mediator – the mediator’s role is to facilitate negotiations. The mediator will not express views on any party’s position.
Disputes : Causes and Resolutions cont… • Participants – the team attending the mediation should be kept as small as possible but must include a lead negotiator, preferably a senior executive or official within the organisation, with full authority to settle on the day without reverting to others not involved in the mediation. • Preparation – each party usually prepares a brief summary of its position for the mediator and the other party, with the key supporting documents. These are exchanged between the parties, and sent to the mediator, at least a week before the mediation. The parties should enter into a mediation agreement once the details of the mediation (e. g. place, time, name of mediator) have been agreed.
Disputes : Causes and Resolutions cont… c) Conciliation – As per mediation, but a conciliator can propose a solution. d) Neutral evaluation – a private and non-binding technique whereby a third party, usually legally qualified, gives an opinion on the likely outcome at trial as a basis for settlement discussions. • The aim of a neutral evaluation is to test the strength of the legal points in the case. It can be particularly useful where the dispute turns on a point of law. • Each side submits an outline of their case with an indication of what evidence they would be able to produce at trial.
Disputes : Causes and Resolutions cont… • A third-party neutral, usually a retired judge or a lawyer, gives a confidential opinion as to what the outcome of a trial would be. • This procedure can be carried out entirely on paper, saving the parties the time and expense of an oral hearing. • The opinion can then be used as a basis for settlement or further negotiation. e) Expert determination – A private process involving an independent expert with inquisitorial powers who gives a binding decision. • In expert determination, the parties agree to be bound by the decision of an expert in the field of dispute.
Disputes : Causes and Resolutions cont… • This process can be useful where the dispute is about a technical matter. • The expert will commonly be given powers to investigate the background of the dispute himself, rather than just relying on the evidence the parties choose to present. f) Arbitration – A formal, private and binding process where the dispute is resolved by the decision of a nominated third party, the arbitrator or arbitrators.
Disputes : Causes and Resolutions g) Arbitration cont. . . • It is a process for resolving disputes in which both sides agree to be bound by the decision of a third party, the arbitrator. • If court proceedings are begun by one party they will normally be stayed on the application of the other party relying on the arbitration clause. • The agreement to arbitrate should be in writing. • It can take the form of a clause within the original contract or can be made after a dispute has arisen. • It is possible, as long as all parties agree, to amend an arbitration agreement at any stage so that it better serves the needs of the parties.
Disputes : Causes and Resolutions g) Arbitration cont. . . The Arbitration Act gives the widest discretion to the parties to decide between themselves how their dispute is to be resolved but provides a fallback position if agreement cannot be reached. Its advantages are: üSome control of process – parties/arbitrator can tailor procedures üPossible cost saving over litigation üConfidentiality üParties can choose an arbitrator who is an expert in the relevant field üResolution is guaranteed üDecisions are legally binding and enforceable
Disputes : Causes and Resolutions h) Litigation – the formal process whereby claims are taken through the civil courts and conducted in public. The judgments are binding on parties subject to rights of appeal. • If the use of a consensual process is not provided for in the contract and cannot otherwise be agreed, the only alternative is litigation. • Litigation will involve preparation for trial before a judge, and may well be a lengthy, drawn-out and costly process. Its advantages are: üPossible to bring an unwilling party into the procedure üSolution will be enforceable without further agreement Its disadvantages are: üPotentially lengthy and costly üAdversarial process likely to damage business relationships
Disputes : Causes and Resolutions h) Litigation cont. . . üOutcome is in the hands of a third party, the judge • Remember, the court can now refer parties to mediation or another form of alternative dispute resolution, if appropriate. Alternative Dispute Resolution (ADR) Alternative Dispute Resolution is a commonly used term to include a range of processes which involve the use of an external third party and which are regarded as an alternative to litigation, however they do not replace litigation. ADR is defined as, “a collective description of methods for resolving disputes otherwise than through the normal trial process”. Except negotiation and litigation other methods of dispute resolution can be considered as ADR.
PPA/PPR Provision Dispute Settlement Mechanism • Dispute between the Contracting parties (Public Entity and Contractor/ Supplier/ Service Provider/Consultants) to be settled through mutual consent • Contract to provide mechanism for dispute not settled by amicable settlement. • Dispute will be settled by Arbitration in accordance with prevailing laws if no mechanism is stipulated in a contract
Arbitration • Any dispute between the Parties as to matters arising pursuant to this Contract which cannot be settled amicably within thirty (30) days after receipt by one Party of the other Party‘s request for such amicable settlement may be referred to Arbitration within 30 days after the expiration of amicable settlement period. • by Arbitration in accordance with the prevailing laws, if no such provisions are stipulated in the Contract.
Dispute resolution procedure Steps in dispute resolution (Nepalese context) • When a dispute occurs between the contracting parties on the certifications, determinations, instructions or opinion of the Consultant, the dispute should be settled in two steps as follows (All contracts provide for Dispute Resolution in the Conditions of Contract) : 1. Amicable settlement 2. Arbitration • The following guidelines are suggested for the settlement of disputes:
Dispute resolution procedure Steps in dispute resolution (Nepalese context) cont… 1. Amicable Settlement • The contracting parties shall attempt to settle a dispute amicably before referring to arbitator • Amicable settlement period 30 days from the receipt of request by one party of the other for negotiation/amicable settlement • Reference to Arbitator be done within 30 days of expiry of amicable settlement period
Dispute resolution procedure Steps in dispute resolution (Nepalese context) cont… 2. Arbitration Procedure • Arbitration may be done if notice of dissatisfaction and intention to commence arbitration done within 30 days of amicable settlement. • The arbitrators shall have full power to open up, review and revise any certifications, determinations, instructions, opinion or valuation of the Consultant relevant to the dispute. • The arbitral award made by the arbitrator shall be final and binding on both contracting parties. • Arbitration procedure shall be as per Arbitration Act 2055.
Dispute resolution procedure Cost of construction disputes • It has been estimated that across major infrastructure projects, the average value of matters in dispute is 8 -10 % of the contract’s price. • The costs of disputes are not only borne by the client, designer or contractor but through the community through additional taxes and costly delays to the commissioning of vital projects. Direct cost • obtaining legal advice • engaging experts and consultants • the diversion of in-house resources while staff are engaged in activities associated with the pursuit or defense of the claim
Dispute resolution procedure Cost of construction disputes cont… • the preparation for the arbitral or court hearing. Indirect cost • the costs incurred by the parties as a result of delays to the project • adverse performance of the project • distraction and over burdening of staff on the project • reduced morale • erosion of trust and confidence in working relationships • adverse impact on the reputation of the parties • emotional impact on the people involved • lost opportunities for future work
Dispute resolution procedure Indirect cost cont… • destruction of business relationships • loss of people to the industry because of wasted effort. Avoidance of disputes • Prevention is better than cure, so at the beginning of a construction project, identify the potential risks and put in place procurement strategies and contract structures that are most likely to allow the project to progress smoothly. Mitigation • Should a dispute arise, recognizing the problem and dealing with it quickly is key. Having the right expertise available to isolate and manage issues swiftly will mitigate the effects of the dispute, thus avoiding expensive and lengthy difficulties.
Extension of Time: Principles and Practice • Delay analysis • Responsibility Types of Delay Excusable Delay Nonexcusable Delay Compensable Delay Non. Compensable Delay Concurrent Delay
Types of Delay cont… • Excusable delay: delay beyond the fault of either the Contractor or the owner; or not caused by Contractor’s negligence for which Time compensation possible üDelay not caused by either party üDelay caused by Owner üDelay caused by Engineer • Non-excusable delay: delay reasonably foreseeable and within control of the contractor for which no monetary compensation or time extension will be granted. üE. g. Slow progress, faulty workmanship, inadequate labor force, late delivery of materials, failure to coordinate subcontractors • Compensable delay: Excusable delay for which the Contractor may be entitled Monetary compensation and Time extension
Types of Delay cont… • • ü E. g. Unforeseen ground conditions, Delay caused by Owner, Delay caused by Engineer Non-compensable delay: excusable delay for which the contractor may be entitled to an extension of time but no additional monetary compensation. – E. g. Adverse weather Concurrent delay : Concurrent delay is experienced when two or more separate delay events occur during the same time period and each, independently, affects the completion date. Several combinations of delays Resultant delay – Detailed analysis of updated schedule – Dominant cause, etc. – The claimant has the proof of burden
Compensation Events • Delayed possession of sites • Delayed issuance of drawings, specifications, instructions • Employer instructs to uncover or to carry out tests upon work which is then found to have no defect • Employer unreasonably delays to approve subcontract to be let • Unforeseeable ground conditions • Delayed caused by other Contractors and Public authorities • Delayed advance payment • Effect of Employer’s risk • Delayed issue of Taking Over Certificate • Variations etc.
Liquidated Damages for Delay
Extension of Time: Provisions of PPA &PPR • The Contractor to give notice at least 7 days prior to intended completion date • Analysis of situation (reasons of delay) by employer • The employer shall give extension of time (EOT) if a Compensation Event occurs Authority to extend time • Up to six month by tender approving authority • Above six month by head of department Priced acceleration proposal from contractor • Only if there is provision in bidding document & EOT have to be awarded • If accepted, they are incorporated in contract & treated as variation
Variation • All Variations shall be included in updated Programs, and, in the case of a lump sum contract, also in the Activity Schedule, produced by the Contractor. • The Contractor shall provide the Project Manager with a quotation for carrying out the Variation when requested to do so by the Project Manager. The Project Manager shall assess the quotation, which shall be given within seven (7) days of the request or within any longer period stated by the Project Manager and before the Variation is ordered.
Variation • If the Contractor’s quotation is unreasonable, the Project Manager may order the Variation and make a change to the Contract Price, which shall be based on the Project Manager’s own forecast of the effects of the Variation on the Contractor’s costs. • If the Project Manager decides that the urgency of varying the work would prevent a quotation being given and considered without delaying the work, no quotation shall be given and the Variation shall be treated as a Compensation Event.
Variation • The Contractor shall not be entitled to additional payment for costs that could have been avoided by giving early warning. • In the case of an Unit Rate contract, if the work in the Variation corresponds to an item description in the Bill of Quantities and if, in the opinion of the Project Manager, the quantity of work above the limit stated in GCC 37. 1 or the timing of its execution do not cause the cost per unit of quantity to change, the rate in the Bill of Quantities shall be used to calculate the value of the Variation. If the cost per unit of quantity changes, or if thenature or timing of the work in the Variation does not correspond with items in the Bill of Quantities, the quotation by the Contractor shall be in the form of new rates for the relevant items of work.
Approval of Variation
Termination of contract To terminate a contract means to end the contract prior to the parties performing all of their respective obligations required by the contract, their duty to perform these obligations ceases to exist.
Termination of contract cont… • A contract is a legal document that binds at least two parties to one another. A contract requires one or both parties meet obligations detailed in the contract before it is completed. In some instances, contract termination can occur that will make the contract void of legal binding. Only the parties involved in the agreement may terminate a contract. • A Procurement contract shall specify the ground on which it may be terminated. Possible situations of terminating contract a) Impossibility : If one party to a contract is unable to perform his or her obligations due to the impossibility of such performance, he or she may have a legal right to terminate the contract. The reason for the impossibility of performance must not be the fault of the party who finds it impossible to perform; due to either god act or third party.
Termination of contract cont… Possible situations of terminating contract cont… b) Fraud : Fraud occurs when one party intentionally makes a false representation regarding a material matter of fact, upon which the other party relies, and as a result is injured. The representation must be false and made intentionally. It must also be in regard to a material matter. c) Breach of contract by the other party: If one party knowingly fails to comply with the terms of the contract, the other may terminate the contract. A breaching party has no right to complain that the other has ended the contract, which he or she breached.
Termination of contract cont… Possible situations of terminating contract cont… d. Lack of capacity : A contract entered into by a party who lacks capacity, or ability, to contract, such as a minor, or a person with a mental illness, is voidable by the party who lacks capacity. e. Illegality : A contract entered into for an illegal purpose is void. This means that either party may terminate the contract at any time, because legally, there is no contract. f. Mutual mistake: If both of the parties make a mistake concerning a material fact, the party affected by the mistake may terminate the contract, so long as the other party has not yet performed.
Termination of contract cont… Provisions of Public Procurement Act, 2063 cont… a) The grounds in which it may be terminated may include termination of the contract by public entity on the grounds of default of the supplier, consultant, service provider or the construction entrepreneur in the performance of the work in accordance with the procurement contract. b) Termination of the procurement contract by the public entity on the ground of convenience for public interest (“termination by convenience”). c) The ground on which the supplier, consultant, service provider or construction entrepreneur may terminate the procurement contract and d) Termination of procurement contract on the ground of force majeure event.
Termination of contract cont… Fundamental Breach of Contract • Contractor stops work for more than 30 days (not shown on the Current program and no consent from project manager) • The employer or the contractor is made bankrupt or goes into liquidation other than a reconstruction or amalgamation. • Non payment for more than 90 days of date of payment certificate • Contractor fails to correct the defect within a time prescribed by the project manager • Contractor does not maintain security which is required by contract • Contractor delays the work by number of days for which maximum liquidated damages can be paid • Contractor involves in corrupt or fraudulent practices
Termination of contract cont… Consequence of termination • Financial settlement and provision of damages in the event of termination of procurement contract : üPayment of any amount, if any, due and outstanding for any work, delivery or service satisfactorily performed; üLiability on the part of a defaulting supplier, consultant, service provider or construction entrepreneur for increased cost to be incurred by the public entity to do or cause to be done the work set forth in the procurement contract. üActual amount of loss and damage suffered by the supplier, consultant, service provider or construction entrepreneur from the termination of the procurement contract by the public entity without default on the part of contractor.
Termination of contract cont… Consequence of termination • If the contract is terminated by convenience of the public interest public entity shall make additional payment : üWhere there is provision of reimbursement of payment of any expenditure, such actually spent expenditure; üValue of goods prepared specifically for the public entity under the procurement contract; üExpenditure incurred in the termination of procurement contract except profit lost. e. g. for the value of work done, materials ordered, cost of removal of Equipment, repatriation of contractor’s personnel and contractor’s cost of protecting and securing works less advance payment. • If the contract is terminated, the contractor shall stop the work immediately, make the site safe and secure, and leave the site as soon as possible.
Closing of contract • Closing contract means execution of various activities just before ending the contract after the project is completed. Major steps to be followed for closing contract are : ü Preparation of snag list (or punch list) of activities ü Achieving substantial completion ü Issuing taking over certificate (Starts defect liability period) ü Completion of activities in punch list ü Inspect and verify that the outstanding works have been satisfactorily completed ü Remedy detected defects
Closing of contract ü Final taking-over of project at end of defects liability period ü Issuance of defects liability certificate ü Final statement submittal after issuance of defects liability certificate ü Submission of recorded drawings (as built drawing, maintenance manuals & Warranties) ü Final payment ü Work completion report ü Final acceptance of work ü Issuing of work completion certificate ü Final Report
Closing of contract Substantial completion • This term substantial completion, if used on the project, should be defined in the contract specifications. Generally, it represents the recognition that the project is “substantially completed” except for certain minor punch list items which do not hamper the use of the facility. • Substantial Completion is defined as the scope of work that is required by the Contract that has been completed except for work having a Contract price of less than 1 percent of the adjusted total contract price, or substantially all of the work has been completed and opened to public use except for minor incomplete or unsatisfactory work items that do not materially impair the usefulness of the work required by the Contract.
Closing of contract Substantial completion cont… • When the Contractor reaches “substantial completion”, the Contractor will request a semi-final inspection of the work. The PM will inspect the work and inform the Contractor: • If the Project is “substantially complete”, the PM shall immediately prepare a written declaration to that effect and transmit this to the Contractor, along with a Punch List. • If the Project is not “substantially complete”, the PM shall inform the Contractor that the project is not “substantially complete”. The written notification (normally within 21 days after receipt of the Contractor’s certification of “substantial completion”) shall list outstanding or incomplete work items remaining that demonstrates the project is not “substantially complete”.
Closing of contract Substantial completion cont… • If the authority fails to respond by presentation of a written declaration or itemized list within specified time, then the contractor’s certification shall take effect as the authority’s declaration that the work has been “substantially completed”. Taking over certificate • When it is declared that work is substantially completed, a written commitment is taken from contractor to complete any outstanding work in punch list in defect liability period and taking over certificate is issued. • Issuing of taking over certificate implies: ü The work is completed to the satisfaction of authority ü Transfer of insurance and care of work to employer
Closing of contract Issuance of defect liability certificate • Defect liability period (DLP) starts from the date of completion of the works certified. • When defect liability certificate is issued, it should be understood that the contract is effectively completed. • It is issued after completion of defect liability period. Before issuing defect liability certificate, the contractor shall: ü Complete the outstanding work on the date stated in taking over certificate ü Rectify all kind of defects • If the contractor fails to rectify defects and complete the outstanding works, the job is carried out by employer using fund of performance security and retention money.
Closing of contract Final payment • Once work completed is accepted by the public entity, final payment shall be made in accordance with terms of contract. • In making final payment, performance security and 50 % of retention money shall be returned after expiry of defect liability period. The remaining 50 % of retention money shall be returned upon submission of evidence issued by the concerned inland revenue office that income returns have been submitted. Work completion report • No later than 30 days after completion of a construction work the contractor shall submit an as built drawing of the work.
Closing of contract Work completion report cont… • After expiry of DLP, following the completion of construction work, the chief of public entity shall have a technical employee to examine and inspect whether the construction work is in compliance with agreement or not. • The technical employee shall submit a report to chief of public entity. • The concerned public entity shall submit the as build design and the submitted work completion certificate to tender approving authority, and to the one level higher authority if chief and chief of PE is same person. • After examining the work by technical expert if required, such authority shall accept work within 45 days of submission of the report
Closing of contract Environmental checklist for close out • The PM is required to fill out an environmental checklist before the project can be closed out. Lesson learned • The PM is required to record and complete a lessons learned form for both professional services and construction contracts prior to contract close out. • During project closeout, PM is required to fill out the form, and archive the lessons learned with the project records. • Final Contractor Performance Evaluation Rating Sheet - The Project Manager must complete a Final Contractor Performance Evaluation Rating Sheet, which reviews the performance of the Contractor.