Management of Construction Contracts

Management of Construction Contracts

Malini Ganesh, Advocate and Legal Consultant for Construction and Infrastructure Projects

Construction Disputes

Construction disputes are becoming more complex with the influx of global participation, ever growing forms of contracts etc creating an acute need for efficient management of contracts. Problems and disputes often become multijurisdictional in nature. Increased litigation, long pendency of disputes and enormous cost of litigation and conflict of laws pose a real threat to the people involved in such construction activities. This has created an awareness amongst people to work out the means of reducing the level of disputes and if possible to avoid disputes totally. The focus is now shifting from the dispute resolution to dispute avoidance.

The thrust that is developing on the avoidance of litigation, thus, requires special attention not only to the working of the project but also to certain basic factors underlying the very formation of the contract.

Contract Documents

The most fundamental of any commercial venture is the terms and conditions of the contract upon which such commercial ventures are built. It cannot be disputed that contracts are the foundation upon which any business or commercial venture is structured. Hence, all the more it is necessary and important to study and understand the efficacies of the various contract documents concerned with any venture. Efficient execution and successful completion of any project depends to a larger extent on the effective management and administration of the various stages of the process of execution. In a nutshell, we may call this contract management.

The party who wants to get any project executed and the party who is offering to execute the said project come together and their relationship is determined by the agreement they sign. Only when two competent parties meet, deliberate the terms and conditions, fix the consideration and give their respective acceptance, an agreement in the real sense comes into being. Under the law of contract, it is generally said that all contracts are agreements, but not all agreements are contracts. This is because just by specifying the terms and conditions the contract is not formed. Without the consensus and the consideration a contract does not become complete. From this we can realise how important is the contract document signed by the parties. The term contract does not mean only the short agreement to which the signature of the parties are affixed, but, includes all other documents and correspondence which are mentioned to form an integral part of the agreement. That is why it is customary to refer to them as contract documents.

All the more, the term contract management has to be understood as management of all contract documents which means nothing but understanding the entire contract documents and strictly adhering to the same. It is, hence, fundamental to become familiar with the contract documents before the commencement of any project execution. It is quite common that during the execution of any work ,differences and issues will arise between the parties. The parties invariably try to resolve them there and then especially in the wake of Dispute Resolution Boards. More often than not, reaching consensus on the differences become elusive and the parties are compelled to resort to the process of Arbitration.

Starting from the pre-tendering stage up to the successful completion and commercial operation of any project, parties, be it, employers/owner or the contractor, is burdened with several contractual obligations. Sometimes the contractual obligations fall under the category of reciprocal obligations. We all know that any failure to meet the contractual obligations leads to serious consequences. Parties remain unmindful of the resultant effect and keep blaming the other. This leads to differences and disputes taken to the stage of resolution through arbitration and beyond.

Risk Management

Can any construction be undertaken without the basic plans and drawings? In a similar way, preparing a legal plan for the efficient and effective management of the contract is necessary. We have learnt from experience that construction litigations besides being expensive and timeconsuming, also tends to erode corporate ethics and morale. The management as well as the site people, be it the employer or the contractor must together hold themselves responsible for upholding the corporate ethics and morale by adopting proper and efficient administration techniques of the contract.

The work of project formation starts from negotiating and documenting the contracts and hence it is necessary to understand the legal nuances involved from that stage onwards. While having an eye on the profitability of the project, it is fundamental and essential to consider the other aspects as well such as ones’ experience to handle the project, the wherewithal, resourcefulness, core competency and strength and above all the managerial strength. This is what we call risk management. When a party is armed with these, automatically, their strength to negotiate becomes stronger placing themselves in an equal bargaining power with the other party. It is better to sort out the loopholes at the negotiations stage rather than litigating upon it at a later stage. For making a correct appraisal of the capabilities to execute the project, one should have an efficient and well-informed team of people with experience in tendering process. In one of the projects involving supply of certain sophisticated equipment by a JV of a leading Indian construction company and a foreign design consultant until the design drawings were submitted for the approval of the proof consultant, both the parties were ignorant about a particular requirement inbuilt in the contract documents about ‘Standardization’ of some of the specified supplies. This resulted in rejection of the entire drawings and redoing the same resulting in delay and additional cost. These kind of situations could be avoided if an efficient team is involved in study and thorough appraisal of the contract documents.

The work of contract administration starts from the time the tender documents are obtained. Proper study and understanding of the basic terms and conditions, the required specifications, market conditions, availability of resources, soil conditions, environmental bottlenecks etc must be undertaken before deciding to participate in the tender. This takes us to the next stage of submission of offer, further negotiations and acceptance of the letter of award. Many a time the bidder succumbs to all demands made by the other party during negotiations in order to somehow bag the contract. The owner/ employer also takes advantage of the unequal bargaining power of the tenderer to get the work awarded in the hope of being executed to their requirements, at the same time pegging down the price. Needless to say, problems crop up one after the other for both the parties which have direct impact on the final completion of the project. Who is to take the blame for this state of affairs!

Knowing Legal Aspects

A clear transparency and knowing the legal implications at the right stage can to a large extent bring down the rigors of the situation. Then starts the actual execution stage wherein the site people come in for the first time. Mostly the site in charge & other people are brought in for the first time only at the start of execution They will be ignorant about what transpired before at the tendering and award stage. Mostly the contract department just passes on the contract documents and other records to the site in charge and seldom efforts are taken to educate them on the risk areas involved in the contract. Neither the site incharge takes time to study the papers nor is it expected of them by the management. In most of the cases, the project manager is appointed only just at the time of commencement, with the result, he will hardly have any time to devote to the study of the contract documents. His main focus will be on preparation of the programme charts and giving a start to the project abiding to the commencement date. We do come across disputes in assessing even the commencement date! This is totally due to lack of understanding of the contract documents and failure to assess ones’ capabilities and strength.

Role of Management in Contract Administration

The seat of management has a greater role in the administration of contract as the very contract emanates from them. In the first instance, the management has to adopt a plan of action to achieve best results by formulating a work strategy. This should include the following:-
  • Forming a core team
  • Firm decision on the roles and responsibilities
  • Study and analysis of risk factors involved and the means and measures to tackle them
  • Process of evaluation by incorporating effective monitoring, aggregation and review procedures
  • Setting out clear policies for contract managent and facilitating the monitoring, measurement and management of implementation policies
  • Regular reviews and updates
  • Checking up legal compliances
  • Attending to procurement issues
  • resource planning and allocation
  • Building up proper correspondence
  • Knowing the legal consequences of any slippages/deviations
Not stopping with this, the management also should build a strong bridge between itself and the executing team to enable constant monitoring of execution process and averting unwarranted delays and other issues. It is also essential to appraise the executing team of the basis upon which the offer was made and the anticipated areas of risks and the proposed means to tackle them.

Contract Administration-The Role of Site People

Once the contract is placed in the hands of the executing team, their responsibility commences. It is imperative to study the contract documents and become knowledgeable on the important provisions so that they become well equipped to meet any situation and over come bottlenecks. Many projects suffer in the very beginning of the execution itself attributable to many reasons like:
  • Improper planning
  • Inadequate resources
  • Diversion of mobilisation advance to other purposes
  • Failure to prepare an accurate programme of execution
  • Failure to assess the soil conditions
  • Failure to adhere to the technical specifications
  • Inadequate supervision
  • Insubordination
  • Unscrupulous correspondence
  • Lack of transparency in reporting to the management
All these could be averted if alone the management exercises due diligence in selecting the correct project team and appraising the project team with anticipated contract issues. The failure to provide basic drawings, work site, bill of material and other inputs on the part of the owner also leads to delayed execution by the contractor. Unfortunately, the resources of the contractor would remain unutilised or underutilised and the contractor would suffer loss of turnover on account of all this. Differences and disputes start accumulating from the commencement of the project. Both the parties not being aware of the legal consequences of such unfortunate situation hurl accusations against each other. Instead, an attempt to understand the legal implications would help them resolve the issues in a most reasonable and amicable manner averting unwarranted consequences and aggressive legal battle.

Building up Proper Correspondence

Yet another thing to be considered in the administration of contract by the site people is the correspondence they build. The site people have the advantage of discussing across the table at the work site the day-to-day issues that crop up during the execution. Either in their anxiety to proceed with the work or due to lack of legal knowledge, offhand commitments are made by them which leads to problems at a later stage. It is very essential to keep the correspondence in order, so that, whenever differences and issues arise, the parties will be supported by proper evidence. In most of the arbitration cases, we come across either lack of correspondence or improperly written correspondence which does not support the client. On most occasions, the correspondence may not reveal what was intended and understood by the parties.

Delay and Extention of Time

Similarly, another area which always gives room for continuing battle is the delay that happens and the extension of time for completing the work. Unaware of the legal position and consequences, parties keep corresponding on the issue. Many a time such correspondence remains one-sided, mostly emanating from the contractor and the owner keeping silence. The owner fails to realise that such an attitude will not help them and they will face difficulties while exercising their right to levy liquidated damages. Besides, the issues relating to extras, variations, interpretation of contract provisions and specifications, prolonged stay of the contractor on project and its consequences and so on also end up in disputes. It would be in the best interest of the parties to put the issues on record as and when they arise taking care of the legal implications.

Timely Legal Advice

Mostly, issues are not taken to the knowledge of the management there and then and the situation is sought to be managed by the site in charge. This deprives them of timely legal advice and guidance. Invariably, many issues are disputed by the owner as not tenable, not maintainable, time barred etc. and at the stage of dispute resolution it becomes difficult to over come such defenses either due to lack of strong foundation or absence of clear evidence.

Most of the contracts, especially following the FIDIC provide for a particular procedure for making the claims. To cite an illustration, the contract provides that a contractor who intends to claim any additional payment shall have to give notice of his intention to the engineer within 28 days from the date of the event giving raise to the claim. It is mandatory for the contractor to follow the procedure prescribed. Any failure to give such notice would naturally be construed by the owner as a waiver.

Yet another difficult area is where the contract provides that whenever the contractor is not satisfied with the decision of the engineer, the same shall be referred to the Adjudicator within the specified time. Normally a time limit of 14 days is specified for referring the decision of the engineer to the adjudicator who is given 28 days to give his decision. Party dissatisfied with the decision of the adjudicator is given the right to refer the dispute to arbitration again within 28 days. This type of contract provisions do always leads to complexity. From the day of commencement of execution, many issues will arise on day-to-day basis and if the issues are of such nature as to compel the contractor to claim additional payment, each of such issues will result in a decision of the engineer leading to decision of an adjudicator and finally to arbitration. Does this mean that there should be series of arbitration proceedings in respect of each of the issues as and when they arise? It has become a debatable question!

An overview of these problems are listed only to focus our thoughts on the topic "contract administration" which literally means running or managing the contract for execution of the project undertaken and taking it towards successful completion. When the goals are fixed on execution of the work and achieving completion, is it not necessary to know the terms and conditions upon which the work has to be taken through? As mentioned already, both the management and the people in charge of execution carry the responsibility of administering the contract in its true sense. Any failure to adhere to the terms and conditions will result in breach of contract exposing the parties to the consequences arising out of such breach.

The Law of Contract

The law of contract governs the relationship of the parties to the contract and also provides for the consequences arising out of breach of the contract terms and conditions. Ultimately when the differences between the parties become disputed issues and subjected to resolution process, legal aspects assume greater relevance. More than what was really intended between the parties, facts made out by the various documents pertaining to the matter will take precedence. In certain circumstances, the parties are driven to let in oral evidence before the tribunal. All these, needless to say, result in protracted proceedings and increased cost of arbitration. Transparency, clarity, accuracy, clear understanding, strict adherence to the contract provisions, proper and timely correspondence and above all a frame of mind not to litigate will help parties to avoid difficult situation arising at a later stage. A total coordination between the employer and the contractor vis-àvis respective management and the site people cannot be lightly brushed aside. This alone will enhance the work culture and infuse moral and ethical standards in handling any project execution.

Contracts are brought about by the consensus of the parties. But, only an efficient contract management will take it to a successful completion.

The paper is concluded with the following quotation of Chief Justice Warren E. Burger, Supreme Court of the United States of America:

"We tend to forget that we ought to be the healers of conflicts. As healers of human conflicts, the obligation of the legal profession is to provide mechanisms that can produce an acceptable result in the shortest possible time, with the shortest possible expense and with a minimum of stress on the participants. This is what justice is all about."

NBMCW July 2009

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