Awareness SessionContracts Managementdescon.comMay,2014

ContentsIntroduction To ContractsRole Of Contracts Management Potential Claim ClausesEPC Contracts AdministrationEffective Contracts Administration- Engineering PerspectiveComparative Analysis

1INTRODUCTION TO CONTRACTS

What is a Contract ? It is a promise document which is enforceable at law

A document that defines contractual, technical and execution obligations of the parties

Why to use a Contract ? Necessary to carry out business in todays complex world defines working interfaces

Effective mechanism to obtain / furnish desired goods and services

Describes rules of the game

Essentials of the Contract

Capacity of the partiesWell defined responsibilities & obligationsValid offer and willful acceptance with free consentConsiderationsFair and ethical approach - WIN-WIN SITUATION

Types of ContractContract types vary according to:

The extent of scope of work and time line responsibility assumed by the contractor for the execution of contract; and

The amount and nature of the profit/incentive offered to the contractor for achieving or exceeding specified standards or goals

Contract Types with respect to Payment Mechanism Fixed - Price Contracts: The specific contract types range from firm- fixed-price, in which the contractor has full responsibility for the

performance costs and resulting profit(or loss).

Cost - Plus Contracts: The contracts in which the contractor has minimal responsibility for the performance costs and the negotiated fee (profit) is fixed.

Incentive Contracts: These contracts include cost and performance incentives to the contractor on effectively managing the cost and other uncertainties involved in the project.

Contract Types with respect to Execution MechanismSome of the contracts are;

Engineering Design Contracts

Procurement Support Contracts

Construction Support Contracts

EPC (Turnkey Contracts) / EPCC / EPCM

Factors influencing Contracts

Price competitionCost analysis & risk assessmentType and complexity of the requirementUrgency of the requirementPeriod of performance or length of project / production runContractors technical capability and financial responsibilityConcurrent contractsExtent and nature of proposed subcontracting

Steps to Award a ContractContractor receives instruction to bidder (ITB) documentsPre - Bid clarificationsContractor submits bid stating exceptions /alternativesPost Bid clarificationsNegotiations on submitted bid and proposed exceptionsFinalize contract documents to be ready for signaturesDefinitive contract is signed at award

Contract Award MechanismsA. Signing a definitive contract (preferred approach)Good business practiceEstablishes rule of the game before starting workParties can focus on project execution without any impact from continued contract negotiations/finalization

B. Letter of intent (non-preferred approach)Frequently usedCarries risk exposure for parties Sometimes justified when owner not in position to make official award but working on schedule crunch

2ROLE OF CONTRACTS MANAGEMENT

Focus of Contracts ManagementDrafting of project specified terms & conditions of contract/consortium/joint venture etc.Contract negotiation with client / vendor Review and identify contractual obligations and risksSub-contract and/or procurement contract administrationClaims (cost & time) management, including identification, substantiation, documentation, quantification and follow-upsSupport dispute resolution processes, including mediation, arbitration and litigation

Contracts Management Role in ProfitabilityThorough understanding of liabilitiesAllocation of risks during negotiationsPricing for contingenciesAwareness on claimable eventsProper record keeping and documentationIdentification and management of changeTo work preventively and strategically with contracts

Contracts Management Role at DIPLProvide assistance to Project Management in contracts administration including claims management during project executionThe contracts department at DIPL is primarily a support department.Provide support to business acquisition in preparation of contracts for various proposals including Engineering & EPC projectsNegotiate contractual terms and conditions with clients / vendorsSpearhead overall contract management of the company

Contracts Management Process Flow Diagram

Functional Outputs of CMD

1Selection of Contracting StrategiesAdvising in selection of appropriate main and secondary options for new contracts

20 %Align risk strategy with contract strategy2Provide advice Pre and Post Tendering PhaseEvaluation and risk assessment on contract conditions and tender documentation during tendering phase20%Getting specialist opinion from commercial , legal and insurance specialists as and when required

Continued.

3Provide Contract Administration During life cycles

40 %Monitoring and controlling contractual related activitiesProviding cost advise and implement contract variations and compensations

Maintaining that contract conditions and specifications are adhered to4Contract Dispute ResolutionInput and facilitate the implementation of the process related to dispute resolution20%Integrate into the contract and implement resolution

3POTENTIAL CLAIM CLAUSES

Important Clauses of a ContractGeneral Rights & ObligationsScope of WorkDesign DocumentsReview and Approval CycleProject SchedulePayment Terms and ConditionsPerformance BondTaking Over and Provisional Acceptance

Liquidated DamagesVariationInsuranceForce MajeureSuspension and TerminationWarranty & Extended WarrantyConfidentiality and IP rightsDispute Resolution

Contractual RisksMITIGATION

Problematic Areas

Disputes / Claims Typically InvolveOwner ordered changes without agreed upon cost/time adjustmentsImpact of owners actions / inactions reviews, approvals, inspections, etc.Delays performance, equipment / materials deliveryForce majeure eventsActual or perceived differing scope of work / site conditionsErrors / omissions in contractors bidCompounded effect of numerous changesSignificant market changes / unusual inflationOwner vs. Contractor interpretation of contract

Handling Disputes / ClaimsAnticipate potential claims early & take corrective action.Comprehensive drafting of contractsKeep good records

Timely notificationsProper documentation & record keepingSettlement of matters amicablyCoordinate with appropriate personnel (legal, technical, project)Counterclaim, if appropriate, or other balancing approachIf appropriate, refer to higher levels of management

The majority of contractual disputes/claims might have been avoided, or mitigated to a great extent or made easier to resolve, by effective contracts development and administration.

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Loopholes in ContractsPoorly defined termsUnclear scope of work / servicesUnclear roles and responsibilitiesOpen-ended definitions / statements (etc, including but not limited to, )Poor document managementOpen-ended change order coverageLong delays in reaching agreement on early issuesLong decision lines on either sideStarting project execution before contract is finalizedTendency to defer resolution of issuesExcessive interfaces

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ContinuedAssumptions / undocumented promises and / or commitmentsInconclusive project objectivesAmbiguous statementsWin-Lose situations

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4EPC CONTRACTS ADMINISTRATION

Why EPC Contracts?EPC contract is designed to satisfy the lenders requirements for Bankability A single point of responsibility A fixed contract price A fixed completion date

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When EPC Contracts are not Suitable?EPC conditions of contract are not suitable under following circumstances; Insufficient time and information for tenderers to check the employers requirementConstruction involves substantial work underground or work in other areas which tenderers cannot inspectInexperience & lack of expertise of contractor for specific job

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Parties involved in EPC Contract

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Split EPC Contract

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5EFFECTIVE CONTRACTS ADMINISTRATION-ENGINEERING PERSPECTIVE

Engineering Issues likely to Trigger Disputes Engineering errors & omissionsAmbiguous work scope /specificationsDiscrepancies in piping & instrumentation diagrams (P&ID), SLDs etcDiffering interpretationsExcessive change orders as a result of addition , deletion or modification of workDiffering site conditions

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Risks associated with Engineering ClausesThe Contractor shall be deemed to have obtained all necessary information as to risks, contingencies and other circumstances which may influence or affect the Works;

The Contractor accepts total responsibility for having foreseen all difficulties and costs of successfully completing the Works; and

The Contract Price shall not be adjusted to take account of any unforeseen difficulties or costs.

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ContinuedScrutiny and Sufficiency of engineering data:

The Contractor shall be deemed to have, scrutinized Employers requirements (including design criteria and calculations, if any).

The Contractor shall be responsible for the design of the works and for the accuracy of such Employers requirements (including design criteria and calculations).

The Employer shall not be responsible for any error, inaccuracy or omission of any kind in the Employers requirements as originally included in the Contract and shall not be deemed to have given any representation of accuracy or completeness of any data or information. Any data or information received by the Contractor, from the Employer or otherwise, shall not relieve the Contractor from his responsibility for the correct design and execution of the Works.

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Cope with Design Contractual RisksProposal Stage:Few clauses in the general T&C at ITB stage can give significant impacts.

Clarifications and Site Visits:Undermining importance of site visits and tender clarifications; technical queries results in ill-defined work scope /specifications.Stakes are low at ITB stage therefore a sound contractors practice is to finalize the scope of work at ITB level.

2. Additional Information and Alternative ProposalIt allows you to offer alternate solutions along with a fully compliant base tender.Specify technical and commercial advantages of alternatives and indicate how the base proposal could be adjusted with increased performance or lower costs.Understand your competitive advantage.

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Continued3. Adjustment of Errors It allows you to correct errors and omissions in lump sum rates and prices contained in a tender and adjustments for changes or data subsequently revised and provided by the employer.

4.Fixing Employers ResponsibilitiesThe employer shall be responsible for the correctness of the following portions of the employers requirements and of the following data and information provided by (or on behalf of) the employer:Portions, data and information which are stated in the contract as being immutable or the responsibility of the employer,Definitions of intended purposes of the works or any parts thereof,Criteria for the testing and performance of the completed works, Portions, data and information which cannot be verified by the contractor, except as otherwise stated in the contract.

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6COMPARATIVE ANALYSIS

Data Accuracy and Sufficiency

Stringent ClauseBalanced ClauseRecommended ApproachPre-Bid Data :CONTRACTOR acknowledges that it has examined with all due diligence the PROJECT DOCUMENTS made available to CONTRACTOR prior to the EFFECTIVE DATE and confirms that they are sufficient and adequate for the intended purpose of the PROJECT, and that they contain no errors, faults, omissions, or discrepancies that would result in any VARIATION to the WORKS. Failure of CONTRACTOR to so notify COMPANY prior to EFFECTIVE DATE shall not relieve CONTRACTOR of any of its responsibilities nor shall its liabilities be diminished under this AGREEMENT.

Post-Bid Data:COMPANY may provide or cause to be provided to CONTRACTOR after the EFFECTIVE DATE, supplementary data in addition to the information that is contained in the EXHIBITS. COMPANY may also supply further information as may become reasonably available as well as information the at CONTRACTOR may reasonably request. For the avoidance of doubt, the entirety of any such information provided to CONTRACTOR under this Sub-Article shall be considered as part of normal engineering development, the incorporation of such information by CONTRACTOR into its WORKS for the PROJECT being fully contemplated and covered within the LUMP SUM PRICE and SCHEDULE.The Employer shall not be responsible for any error, inaccuracy or omission of any kind in the Employers Requirements as originally included in they Contract and shall not be deemed to have given any representation of accuracy or completeness of any data or information, except as stated below. Any data or information received by the Contractor, from the Employer or otherwise, shall not relieve the Contractor from his responsibility for the design and execution of the Works.

However, the Employer shall be responsible for the correctness of the following portions of the Employers Requirements and of the following data and information provided by (or on behalf of) the Employer:

(a) portions, data and information which are stated in the Contract as being immutable or the responsibility of the Employer,(b) definitions of intended purposes of the Works or any parts thereof,(c) criteria for the testing and performance of the completed Works, and(d) portions, data and information which cannot be verified by the Contractor, except as otherwise stated in the Contract. (FIDIC 1999)Pre-Bid Measures:Thorough understanding of the scope of work and prepare a list of information, in coordination with the relevant departments, that may be required for such kind of project.

Inspect all the documents and promptly notify the Client for any missing document or any error, omission and discrepancy in the document.

Familiarity with the Site conditions and existing works.

Consideration of any contingent cost for the missing or inaccurate item which an experienced Contractor can reasonably foresee.

Execution Stage;Notify in case of any change in Scope of Work that has an cost and schedule impact.

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Design and Drawing Specifications

Stringent ClauseBalanced Clause /Associated RisksRecommended ApproachThe design shall be prepared by qualified designers who comply with the expressed and implied design requirements, SPECIFICATIONS and SCOPE OF WORK included in this AGREEMENT. CONTRACTOR shall be financially responsible for any discrepancies, errors or omissions in the CONTRACTOR prepared specifications, drawings and other technical documents whether they have been approved by COMPANY or not.

The design shall be prepared by qualified designers who comply with the design requirements, SPECIFICATIONS and SCOPE OF WORK included in the AGREEMENT, or where not specified, comply with good engineering, construction and management practices and proven up to date technologies to the extent applicable to or implemented by an experienced CONTRACTOR for similar Works. The CONTRACTORS liability shall be limited only to rework/correction of any mistake attributable to CONTRACTOR. The CONTRACTOR shall be entitled for compensation incase the errors etc occur due to non provision, error or omissions of basic data to be provided by the COMPANYTry to Limit or cap generalized terms.

Do not take responsibility of basic data which is to be provided by the COMPANY .

Replace intended or Implied with expressed purpose.

Fix responsibility of basic data to limit chances of error.

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Continued

Stringent ClauseBalanced Clause /Associated RisksRecommended ApproachCONTRACTOR shall immediately upon receipt of all drawings and specifications , verify and check the correctness thereof and shall promptly notify COMPANY in writing of any errors, omissions , or discrepancies before commencing any Works to which the drawings and specifications including improperly described Works where such Works are clearly necessary to carryout the intent thereof or which is customarily performed shall not relieve CONTRACTOR of its obligations to perform such omitted or improperly described Works and such Works shall be performed by CONTRACTOR as if fully & correctly set forth and described herein.CONTRACTOR shall immediately upon receipt of all drawings and specifications , verify and check the correctness thereof and shall promptly notify COMPANY in writing of any errors, omissions , or discrepancies before commencing any Works to which the drawings and specifications including improperly described Works where such Works are clearly necessary to carryout the intent thereof or which is customarily performed shall not relieve CONTRACTOR of its obligations to perform such omitted or improperly described Works and such Works shall be performed by CONTRACTOR as if fully & correctly set forth and described herein. Notwithstanding the above , all cost and risks impacts associated with execution of improperly described Works shall remain with the COMPANY. The COMPANY shall indemnify and hold harmless the CONTRACTOR for any loss or damage occurring howsoever due to such improperly described Works .Furthermore , the CONTRACTOR shall be compensated for all kinds of loss or damage incurred by it in relation to performing such improperly described WorksFix responsibility

Notify Promptly

Take indemnity

Keep Option to claim any damage

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Familiarization with Site

Stringent ClauseBalanced Clause /Associated RisksRecommended ApproachCONTRACTOR hereby acknowledges that it has examined and is familiar with the SITE and EXISTING FACILITIES and the nature and location of the PROJECT, and has, by careful investigation, satisfied itself as to the difficulties in execution of the WORKS, the general and local labor conditions, SITE regulations and all other matters including but not limited to transportation, material handling and disposal, water and electricity, roads and site access, climate conditions and the character of equipment and facilities needed preliminary to and during performance of the WORKS.

CONTRACTOR further acknowledges that it has satisfied itself as to the character, quality and quantity of surface and sub-surface materials or obstacles to be encountered insofar as this information is reasonably ascertainable from the inspection of SITE, including all exploratory work as well as from the drawings and specifications provided under this AGREEMENT. Any failure by CONTRACTOR to take the actions described in this Article will not relieve CONTRACTOR from successfully performing the WORKS without any additional delay or expense to COMPANY.The Employer shall have made available to the Contractor for his information, prior to the Base Date, all relevant data in the Employers possession on subsurface and hydrological conditions at the Site, including environmental aspects. The Employer shall similarly make available to the Contractor all such data which come into the Employers possession after the Base Date.

The Employer shall be liable for sufficiency or completeness of such data.Pre-Bid Measures:

Awareness of the site conditions and facilities to avoid any kind of surprises.

Awareness with the Sub-Soil conditions and make available the drawings of underground facilitates

Coordinate with the other Contractors (if any) already working on the site for aforementioned information.

If required, random test boreholes would be required to inspect the existing underground facilities

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Importance of Surveys

Stringent ClauseBalanced Clause / Associated RisksRecommended ApproachIn general the CONTRACTOR shall deemed to have obtained all necessary information as to risk contingencies and all other circumstances which may affect performance under the Contract, CONTRACTOR shall neither have entitlement for extra payment nor it shall be relieved of any of its obligations under the Contract as a result of such lack of knowledge. In general the CONTRACTOR shall deemed to have obtained all necessary information as to risk contingencies which may affect performance under the Contract to the extent reasonably foreseeable by an experienced CONTRACTOR, CONTRACTOR shall neither have entitlement for extra payment nor it shall be relieved of any of its obligations under the Contract as a result of such lack of knowledge except under those circumstances which could not be reasonable foreseeable by an experienced CONTRACTOR. Try to Limit liability under this clause.

Importance of SITE , topographic and geo-technical surveys.

Specifications to be shared with the COMPANY

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Review and Approvals

Stringent ClauseBalanced Clause /Associated RisksRecommended ApproachFor all documents submitted by CONTRACTOR to COMPANY for its review/approval, COMPANY shall use its best efforts to respond within reasonable time unless otherwise specified in the CONTRACT, provided that the said documents are complete in every respect and were subject to CONTRACTOR internal review and check process..For all documents submitted by CONTRACTOR to COMPANY for its review/approval, COMPANY shall use its best efforts to respond within fifteen (15) working days of receipt unless otherwise specified in the CONTRACT, provided that the said documents are complete in every respect and were subject to CONTRACTOR internal review and check process. If COMPANY fails to respond within the response times stated therein, then said documents may be deemed to have been approved or reviewed with no comments by COMPANY and

CONTRACTOR may, upon notification to COMPANY of non-receipt of the required approval, be entitled to proceed accordingly. However, COMPANYs response times to documents set above and in EXHIBIT shall not apply to those documents which have been disapproved, commented upon, or rejected by or on behalf of the COMPANY which were initially submitted incomplete, or uncoordinated.Fix time lines for approvals

Importance of deemed approval necessary.

Follow up

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Schedules

Stringent ClauseBalanced Clause /Associated RisksRecommended ApproachCONTRACTOR is to comply with the SCHEDULE requirements set out in EXHIBIT. COMPANY shall retain 5% from CONTRACTORs invoiced amount until CONTRACTOR has complied with its obligations in respect of the required SCHEDULE milestone. Such retained amount can be invoiced by CONTRACTOR upon fulfilling this obligation.Disturbance in Cash Flows.

Has impacts on Schedule.

Resist Acceptance of such Clause

COMPANY already charging the CONTRACTOR with Liquidated Damages FOR DELAY and Retention Amount.

As a last resort negotiate on percentage.

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Liability of Scope of Work

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Liquidated Damages

Stringent ClauseBalanced Clause /Associated RisksRecommended ApproachIf clause [delay liquidated damages] is found for any reason to be void, invalid or otherwise inoperative so as to disentitle the project company from claiming delay liquidated damages, the project company is entitled to claim against the contractor damages at law for the contractors failure to complete the works by the date for practical completion. The damages claimed by the project company must not exceed [the amount specified ] for any one day of delay and in aggregate must not exceed the [defined percentage] of the EPC contract price Parties should clearly and unambiguously agree that their only remedies are those within the EPC contract.

UNLIQUIDATED DAMAGES or Common law right to sue for breach of EPC contract is to be contractually removed, It must be done by very clear words.

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Importance of Notification & ScheduleMitigation of rejection of delay claims:Require early notification of disruptions & delaysProject planning & schedules to be constantly monitored, joint monitoringDetailed work programs with critical path: general & area or work specificIdentification of float & provision on float ownership (shared or owned by project Co)Resource allocations & managementResource re-scheduling & leveling

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