Effective Contract Management : A Few Salient Points

Effective Contract Management A Few Salient Points

H.L. Chawla, President, Tecknovate Solutions, New Delhi.

Introduction

The Construction Industry is almost unique where the "Project is sold before it is made." Instead it can be said that each individual contract in the construction industry contains a degree of distinctiveness even though the contracts may be on standardized forms. The reasons are not far to seek.

Contract Management

Construction is the essence of 3 E's (Economical Extraction of Energy from 5 M"s (Men, Money, Materials, Machines, and Methods), now 6th M has also been added and that is: Management. There are engineers who have added 2 more: mafia and muscle power.
  • Construction is field and project oriented.
  • Construction is a service industry.
  • Prime responsibility of this industry is to convert design concepts and specs prepared by architect/engineer into a finished project.
  • Total construction in the world till recently was estimated to be US $4 trillion each year.
  • Construction activity in India is estimated at about Rs. 700,000 crores per annum. In the 11th and 12th plan period, the estimated annual outlay is more than Rs. 290,000 crores only on infrastructure projects.
  • To achieve above, what is required from the construction sector? Possession of Site, Resource planning, Creating systems, training and coordinating procedures, Mobilization of men, materials, equipment and machinery. Completion and handing over.

Project Management

A project can be defined as a sequence of: Unique, Complex, Connected activities

Having a particular role or purpose to be completed within the following: Specific time, Within budget, and According to specifications

Number of activities comprising a project must be completed in some specific order or sequence.

One goal: Large projects may be divided into several subprojects.

Specified time: All projects have a specified completion date.

Within budget: All projects will have a resource limit. These pertain to number of people, money or machines to be deployed on a project.

Specifications: All clients expect a certain level of quality and functionality from the project.

Project Parameters

There are the following constraints which operate on every project: Scope, Quality, Cost, Time, and Resources.

A change in one set can cause a change in another constraint. Therefore, the set of above five parameters form a system that must remain in balance for the project to be in balance. The success or failure of the project depends on the maintaining of the balance between the five constraints.

Almost all projects have inherent risk factors. In fact, somebody who can gamble will be successful in implementing a project.

The contracting firm has also to ensure that it is fully prepared to meet its obligations and is equipped with the latest technology, technicians, engineers and other skilled personnel for the different operations. Timely completion of works to stipulated standards is possible only when a spirit of give and take and mutual trust and confidence exists between the client and contractor and both parties to meet the contractual requirements without trying to take undue advantage of each other.

It is therefore vital that the contracting agencies engaged for a particular project understand the requirements of the project in its entirety including technical features, complexities, if any, the time limits fixed for its completion, and that they mobilize an adequate force of competent technical and managerial staff, labor, equipment and materials to complete the work within the time stipulated. They should take advance measures to ensure availability of the site for construction, materials and construction drawings as per the predetermined schedule, discuss with the project authority an agreed schedule of operations, and draw up PERT/CPM charts.

Proper planning of the entire sequence of activities in advance and adequate and timely interlinkages between different components of the project would go a long way in realizing the benefits of the project as Planned. Contractors have to endeavor to execute the works in a spirit of cooperation and accommodation with the project authority and whenever any problems arise, these may be discussed among the parties and appropriate solutions arrived at.

Construction of different components of the projects is supervised by engineering departments. The existing organizational structure of the concerned engineering department is based on hierarchical structured system and is more prone to delays in the implementation of projects. A personalized service specific to the project is a vital need. The Engineer-in-Charge if armed with adequate powers to give decisions on issues that arise in the field would hasten the progress. In addition, the Engineers-in-Charge of projects should have specialized training in modem methods of construction and management of men, materials and machinery. It is also necessary that senior engineers in charge of project construction remain at the project site for closer supervision.

The following are the major requirements in any construction project:
  • Activities for Contractors prior to actual commencement
  • Management of Contracts–Systems and Controls
  • Schedule Performance
  • Progress Evaluation
  • Activities for Employer during the project cycle after award

Activities for Contractors Prior to Actual Commencement

  • Setting up of the camp offices
  • Setting up of the stores at site
  • Setting up of the quarries, crushing plant for aggregates
  • Setting up of the laboratories
  • Setting up of mechanical workshop (s)
  • Setting up of the accommodation for staff & workers
  • Constructing haul roads
  • Establishing water supply & sanitary facilities
  • Placing orders for plant, equipment & materials
  • Recruitment of staff & workers
  • Arrangement of transport facilities for Project manager & staff
  • Arranging telephone connection, wireless facilities, if required
  • Identifying sources of materials & placing orders

Management of Contracts Systems and Controls

  • Efficient Project management team
  • Programme of implementation
  • Layout of works
  • Recording of levels
  • Working out x-sections and Lsections, particularly for road works
  • Team work
  • GFC (Good for construction drawings)

Schedule Performance

  • SAP Programmes
  • CPM/PERT charts
  • Bar charts
  • Project Management software-Microsoft Project, Primavera
  • S-curve
  • Daily, weekly, monthly, quarterly progress reports
  • Difference between planned vs. actual work done
  • LD vs. Bonus clauses

Progress Evaluation

  • Reasons for difference between planned and actual work done and the analysis thereof
  • Availability of land
  • Availability of designs & drawings
  • Availability of decisions
  • Following up of contractual obligations, both by the Employer and Contractor
  • Issue of Employer supplied materials
  • Grant of exemptions/ licenses/ permissions by the Employer
  • Timely certification of contractor's bills and payments thereof
  • Timely decisions on deviated items- quantities and prices
  • Force- majeure conditions

Activities for Employer During Project Cycle After Award

  • Project management/Contract management team-availability of competent persons
  • Readiness on designs, drawings
  • Mobilization of the Project management team at the site including office, transport and infrastructure facilities
  • Competence in handling jobs of similar nature in the past
  • Land acquisition on time
  • Timely approval of shop drawings
  • Geared up to make timely payment

Contract Provisions for Risk Allocation

Provisions for the allocation of risk among parties to a contract can appear in numerous areas in addition to the total construction price. Typically, these provisions assign responsibility for covering the costs of possible or unforeseen occurrences. A partial list of responsibilities with concomitant (associated with) risk that can be assigned to different parties would include:
  • Force majeure (i.e., this provision absolves an owner or a contractor for payment for costs due to "Acts of God" and other external events such as war or labor strikes)
  • Indemnification (i.e. this provision absolves the indemnified party from any payment for losses and damages incurred by a third party such as adjacent property owners.)
  • Liens (i.e. assurances that third party claims are settled such as "mechanics liens" for worker wages),
  • Labor laws (i.e. payments for any violation of labor laws and regulations on the job site),
  • Differing site conditions (i.e. responsibility for extra costs due to unexpected site conditions),
  • Delays and extensions of time,
  • Liquidated damages (i.e. payments for any facility defects with payment amounts agreed to in advance)
  • Consequential damages (i.e. payments for actual damage costs assessed upon impact of facility defects),
  • Occupational safety and health of workers,
  • Permits, licenses, laws, and regulations,
  • Equal employment opportunity regulations,
  • Termination for default by contractor,
  • Suspension of work,
  • Warranties and guarantees.

Contractual Problems

Sound feasibility studies, efficient designs, timely supply of construction drawings and equitable administration of contracts are important for developing an efficient construction industry. These services are provided more effectively by consulting firms than by government departments. Moreover, consulting firms spearhead the initiatives on adoption of modern technology, improvement in design practices and effective use of local materials. Consulting firms help in ensuring a fair contract administration and are more effective in discharging the responsibilities of "Engineer' than a Government Department operating both as the "Employer and the Engineer". A well developed consulting profession is, therefore, essential for promoting the construction industry. In India, we have a well developed domestic construction industry and emerging competent consulting firms. For large and more complex projects, foreign consultants can be utilised, if considered necessary.

Contract Requirements

The overall experience so far with the preparation and management of contracts is that the contract documents do not provide full information and data required for a proper appreciation of the job requirements. Added to this is the fact that a number of such uncertainties are left to the sole discretion of the Engineer-in-Charge. Under such circumstances, the bids of contractors are likely to be either high as they will naturally try to cover up the cost for lack of information or unreasonably low which could later on lead to claims, disputes and even abandonment of the work. The client may also end up by paying a higher cost or getting involved in avoidable arbitration proceedings or litigation.

Contract Document

Some of the other special aspects are:
  • Many of the projects are located in remote areas often with poor communication and civic facilities like housing, drinking water, medical, schooling, law and order etc.
  • People have to work under difficult and hazardous conditions quite often away from their families. Most of the jobs during construction are of temporary nature. These factors adversely affect the psychology of the people.
  • Availability of limited information on physical aspects of the project, the foundations and soil characteristics etc. at the time of signing of contract. This information is updated and upgraded as the work proceeds. Sometimes new information calls for major changes in scope and extent of the contract. The contractors are thus required to be prepared to face and provide for such unknown factors.
  • The scope of the work is usually not very well defined; large deviations take place, involving change in methodology and induction of additional resources.
  • In river works and in hilly terrain; floods, landslides and unfavorable weather conditions impose severe limitations on the working season. Unprecedented natural phenomenon beyond the control of the contractors can result in severe damage to life and property and to partially completed works.
  • The contract period is long, usually 2-10 years. Constant physical change in the project and financial atmosphere of rising costs affect the contract prices as the work proceeds.
  • The time allowed for completion of contracts is based on the wishes of the client and not necessarily on a scientific evaluation of the scope of work. This does not take into account the unknown factors which are required to be faced;
  • Lately, a number of projects are coming up with foreign collaboration with agencies mostly from western nations and time bound programmes are framed for completion of the projects. While making out the time bound programme and the methodology of the project, the collaborators mostly keep in mind the facilities available in their countries, with improved transportation, communication etc. and are not at all aware of the handicaps which a developing country faces. Therefore, it is necessary that the time allowed for completion of contracts on such projects should be realistic keeping in mind the conditions/ facilities for transportation, availability of materials etc. in our country.

    For example, if chilled water or ice has to be used in concrete it is essential first to locate the quantity of ice required for chilling and to ensure that this facility is available nearby. If not, the tendering authority should make a provision of developing an ice factory in the area to meet the ice requirements for continuous supply during the required period. It is also observed that foreign collaborators provide material specifications in accordance with practices in their countries for which the equivalent in our country have to be identified. It should be mandatory on the part of the project authorities that they should provide the Indian equivalent of specifications to the foreign agencies during the tender stages, to avoid delays in the procurement of the material, because of non-matching of specifications.

    The needed input of resources both in terms of machinery, manpower, and finance is large as compared to the manufacturing industry for the same output, over a period of time.

    The machines deployed on a project cannot be depreciated on the same project. At the same time there is no guarantee for continuity of job for machines and men.

    While all the above factors affecting large civil engineering projects are well known and recognized, they are hardly reflected in the tender documents or the contract documents. Also the conditions of the contract attached with the tender documents in vogue tend to ignore these factors.

    The first step in this direction would be to exercise care in the preparation of tender documents and to modify some of the conditions of contract to achieve the above objectives.

Completing of Projects on Schedule

Completion of the projects on schedule will be the culmination of a number of activities taken up prior to and after the award of the contract for construction. The project planning has to be done in a thorough manner so that all problems likely to arise during design and construction are identified. Both the client and contractor have to work in a spirit of give and take and try to accommodate each other to the extent possible.

Detailed information should be recorded on each print to serve as defence photographs in the event of claims.

The following documentation should be properly indexed and recorded at site/office of the Contractor:
  • True copies of the Contract documents incorporating all amendments.
  • Drawings and dimensions for which the Bills of Quantities were prepared.
  • Copies of the original as well as the subsequently revised construction programme in assessing the value of delay in construction operations.
  • Copies of agreed minutes of site meetings with Project Authorities.
  • Contract diary including a journal of general activities, recording problems that arise and information required etc.
  • Record of Labour and Staff inputs.
  • Preparing valuation of variations and notifying the Client within the specified time, delays and other factors which have a bearing on cost and date of completion.

Site Information

All information regarding the infrastructure and other facilities should be given in detail. The following particulars are considered necessary but some more information specific to the type of works for which tenders are invited would be necessary.
  • Location of the works
  • Access to the works mentioning nearest Railway Station, Sea Port and Airport.
  • Wharfage and port charges.
  • Communication facilities including Railways, Post and Telegraph.
  • Roads in the area.
  • Availability of labour.
  • Water supply.
  • Contractor’s working areas for
  • Construction
  • Camps, workshops, stores, offices
  • Dumping/ Disposal areas
  • Medical facilities
  • Climatic conditions.
  • Geological data including complete details of logging and cored/ bored holes.
  • Hydrological data: Rainfall, flood and fair weather discharges, high flood level etc.
  • Parameters of permeability coefficients and other data relevant to dewatering for selecting the type and quantum of dewatering equipment.

Contract Management

  • Preparation of Contract Document
  • Preparatory Activities Detailed investigations affecting design, technological alternatives
  • Detailed designs
  • Drawings
  • Specifications
  • In short Contract Management is synonymous with Competent Construction Management.

Contracting Sector

  • Government Departments—Public Sector Undertakings—Major Contracting Companies.
  • Contracting Agencies must appreciate & understand all aspects including:
  • Technical features
  • Complexities
  • Time for completion
  • Required mobilization of resources incl. equipments, manpower, materials, managerial staff and finance

    Project Authority: There are 3 important players:
  • Employer
  • Engineer
  • Contractor

Contractual Problems

  • Contracts not equitable or fair
  • Problems in management of contracts
  • Disputes:
  • DRB
  • Arbitration
  • Court cases
  • Consulting firms in a better position to administer contracts

Pre-contract Requirements

  • Information and data must be complete
  • Uncertainties should be minimum
  • Contract document should be equitable
  • Specifications and Drawings must be clear
  • Social amenities are also a major issue. This includes rehabilitation and re-settlement

Consultancy in Management

Engineers’ Role
  • PCC (Project Construction Consultant)
  • Project Formulation
  • Detailed Engineering.
  • Transfer of Technical know-how
  • Finalisation of Contracts
  • CSC (Construction Supervision Consultant)
  • Monitoring
  • Quality Control
  • Preparation of regular progress reports. Preparation of Completion reports

Main Issues

  • Possession of site free of all encumbrances
  • Information and Data
  • Discrepancies in the contract documents
  • Quality control
  • Payments-Interim and Final payments
  • Advance for mobilization of machinery and equipment
  • Additions, omissions and variations
  • Excess/deficit over tendered quantity
  • Extra items Extension of time
  • Escalation
  • Time for completion
  • Delays and Liquidated damages
  • Measurements
  • Price adjustments
  • “As Built Drawings”
  • Operation and maintenance manuals

NBMCW July 2009

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