Effective Contract Management: Some Important Issues and Suggestions

H.L. Chawla, President, Tecknovate Solutions and World Bank Consultant, New Delhi.

Construction Contracts

Introduction

Compared to the manufacturing sector, the construction industry is almost unique where the "Project is sold before it is made." Instead it can be said that each individual contract is different from the other & contains a degree of distinctiveness even though the contracts may be on standardized forms. The reasons are not far to seek. This is because:
  • Construction is field & project oriented.
  • Construction is a Service industry.
  • Prime responsibility of this industry is to convert design concepts & specs prepared by Architect/Engineer into a finished project.
  • Total construction in the world till recently was estimated to be $4 trillion each year.
  • Construction activity in India is estimated at about Rs.700,000 crores per annum. In the 11th plan period (2007-12), the estimated annual outlay is around Rs.290,000 crores only on infrastructure projects. In the 12th plan period (2012-17), this is estimated to be $1 trillion (about Rs.45,00,000 crores). This works out to approx. Rs.900,000 crores to be spent every year. If we add to this the construction in the real estate & other private projects, the figures become mind boggling. The construction industry is required to meet the challenging task of unprecedented growth in the sector. The main question is: Is the construction sector geared up to perform to the expected levels?
  • To achieve above, what is required from the construction sector?
  • Proper resource planning
  • Creating proper, workable systems, training and coordinating procedures
  • Mobilization of men, materials, equipment and machinery.
  • Completion & 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
  • 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

The following constraints 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.

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.

The client has to rise to the occasion and provide the contractor with the site free of all encumbrances, provide the timely designs, drawings and decisions, payments and redress the genuine grievances of the contractor.

The contracting firm has 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.

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, labour, 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 inter-linkages 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 co-operation 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 departments 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 & 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, equipments & 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 & Controls

  • Efficient Project management team
  • Programme of implementation
  • Layout of works
  • Recording of levels
  • Working out x-sections & L-sections, 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 & actual work done & the analysis thereof
  • Availability of land
  • Availability of designs & drawings
  • Availability of decisions
  • Following up of contractual obligations, both by the Employer & Contractor
  • Issue of Employer supplied materials
  • Grant of exemptions/ licenses/permissions by the Employer
  • Timely certification of contractor’s bills & payments thereof
  • Timely decisions on deviated items- quantities & 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 & 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 labour 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),
  • Labour laws (i.e., payments for any violation of labour 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. However, a word of caution: It has been observed that on many projects, where Construction Supervision Consultants have been employed, they have not been able to measure up to the expectations as there is no continuity of the key staff & nil or hardly any accountability. In most of the projects where foreign consultants have been engaged, they generally bring in one or two expatriate persons and recruit local engineers & other key personnel on the project resulting in hardly any transfer of technology or management system. In other words, there is hardly any value addition.

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.

The colonial legacy is still being followed in finding a solution to the disputes and consequent claims by the clients & supervision consultants.

Value of Disputes:
As per a presentation made by the CIDC to the Deputy Chairman of the Planning Commission, the value of the disputes pending settlement was stated to be of the order of some Rs.85,000 crores, a couple of years ago. Out of these, the disputes in the Road sector accounted for about Rs.54,000 crores.

Study by the World Bank:
As per a study conducted by the World Bank, New Delhi office, on Indian Road Construction Industry "Demand & Supply Issues, Constraints on Capacity Enhancement & Recommendations":

Quote:
As per experience of some Asian contractors in India, apart from other constraints, the following constraints find a place:
  • Problems in India have no resolution
  • There is no effective dispute resolution process in India and contractors can be hurt badly financially
  • The Indian Employers refuse to reasonably negotiate a settlement
  • In India top level management may make a decision, but even this is unlikely. Lower down the chain every Employer Represen- tative is scared to make a decision because of the risks of accusation or corruption, or of inappropriate decisions
As per perception of the sample of the European contractors and consultants, the ones from Italy & UK mentioned "Dispute resolution system as one of the significant entry barriers possibly due to their earlier bad experience in India". However, the French Construction Industry did not seem to consider dispute resolution mechanism as one of the significant entry barriers.

As per Summary on the Study of the Operation of Dispute Resolution mechanism in Civil Works in India (The World Bank), the following are the key findings:
  • DRBs are often not established until a contract dispute arises. When they are established they are dominated by elderly members who often serve on multiple boards
  • DRBs take too long to reach decisions when disputes are addressed to them. The time taken to reach a decision is far in excess of the mandated 8 weeks
  • DRB recommendations often have little effect since the vast majority is rejected
  • The recommendations of the DRBs have been validated by arbitration panels as well as by the courts.
  • The rejection of a DRB recommendation almost always results in extensive delays in project completion, sometimes over 100% while acceptance of a DRB recommendation is associated with on-time project delivery
  • Contract dispute resolution processes that happen after the rejection of a DRB recommendation are very lengthy and costly

Overseas Scenario

According to the Indian Road Construction Industry Study conducted by the World Bank, the following were the inputs received on settlement of disputes from China & Malaysia as a part of the lessons learnt:

China

China does not believe in confrontational management and understands the need to resolve disputes quickly due to the negative impact that it has on the progress of the project and its acceptance into the national asset base. They do, however, recognize that it is vital to have reliable and respected dispute resolution mechanisms within the contract. It is generally considered that site personnel have failed in their administrative duties if disputes cannot be resolved at project level. The recommendations of the adjudicators/DRB are normally respected. Adjudication provisions are included in the conditions of contract but on highway construction there is seldom cause for their use due to the overwhelming desire by all parties to negotiate an agreement to avoid delays.

Malaysia

In Malaysia there has been a belief that dispute resolution mechanisms are really not needed due to the culture of the people where they openly discuss issues and resolve them as the project proceeds.

Project level staff is accountable for successful completion of the projects and they should have the authority to make decisions.

Recommendation in the World Bank Study relating to the Dispute Resolution
Recommendation Area Recommended Action Responsibility Envisaged Timeframe
Contract Enforcement and Dispute Resolution

Key issues addressed:
  • Improved business environment
  • Strengthen dispute resolution mechanism
  • Setting up Roads Appellate Tribunal (RAT), as a permanent body, at central and state levels for arbitration if the DRB mechanism provided in the contract fails during contract/concession execution;
  • As one moves up the ladder of legal recourse it should be ensured that the final decision of the previous process be honoured till it is changed or reversed
  • Inserting Prompt Payment clauses in contracts especially in states in poor financial conditions with clear penalties
  • Law ministry and state departments
  • MoSRTH
  • State Road agencies
  • Discussions and decision to establish RAT: Short Term
  • If acceptable, then actual implementation at Central and State levels: Medium Term
  • Decision to honour the previous decision of the dispute resolution process till the next step reverses or changes it; immediate
  • Prompt payment facilitation: immediate to short term

Some of the other special aspects are:
  1. 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
  2. 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.
  3. 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.
  4. The scope of the work is usually not very well defined; large deviations take place, involving change in methodology and induction of additional resources.
  5. 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.
  6. 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.
    1. 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;
    2. 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/near the place where the project is required to be done.
  7. 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.
  8. 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. The mind-set has to undergo a complete change. The contractor should be seen as and respected as a partner in progress. It is often forgotten that the success/failure of the supervising engineer is directly linked with the success/failure of the contractor.

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 & data must be complete
  • Uncertainties should be minimum
  • Contract document should be equitable
  • Specifications & Drawings must be clear
  • Social amenities are also a major issue. This includes rehabilitation & 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 & Data
  • Discrepancies in the contract documents
  • Quality control
  • Payments-Interim & Final payments
  • Advance for mobilization of machinery & equipment
  • Additions, omissions & variations
  • Excess/deficit over tendered quantity
  • Extra items Extension of time
  • Escalation
  • Time for completion
  • Delays & Liquidated damages
  • Measurements
  • Price adjustments
  • "As Built Drawings"
  • Operation & maintenance manuals

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