A Practical Guide to Engineering, Procurement and Construction Contracts

Eric Eggink

• Publisher: Informa Law from Routledge
• Year: 2020
• ISBN:
  9781000029727
• Edition: 1
• Topic: Law
• Subtopic: Construction Law
• Index: Law

This book is a step-by-step practical guide on how to achieve successful projects in EPC/turnkey contracting and construction.

Mapping out the shape of a project, the book spells out where things often go wrong, where and why disputes arise, and how to avoid conflicts.

It is a key reference point for all involved in the contract, making it attractive to legal practitioners, construction industry professionals, and government officials involved with these projects.

CHAPTER 1

Main causes of disputes in construction projects

1.1 Introduction

This chapter lists the various problematic issues that often arise in construction and explains why they develop into disputes and what can be done to avoid them.

Can one identify common categories of causes for disputes in projects, whether the project is the formulation of a feasibility study, a Basic Design and Engineering Package or an EPC/Lump Sum Turn Key (LSTK) Project, and if so what are these categories?

The answer to the question “Can one identify . . .?” is: “Yes one can!” There are categories of causes identifiable and most of these categories apply to any type of project, whether it is a study or an LSTK project.

Problems, possibly developing into disputes, often originate in relation to:

• (Supply of) information;
• Scope of work;
• (Lack of) access to the site;
• Clash of personalities in Project Management on the Contractor’s and on the Owner’s sides;
• Price;
• Payment;
• Risks originating outside of the parties’ control; e.g. unforeseeable physical conditions, Force Majeure, etc.;
• Delay;
• Quality (Performance);
• Damage and/or loss; injury or death;
• Flexibility in dispute resolution.

The vast majority of problems (if not all) between the Owner and the Contractor in a project can be related to these categories and when drafting or negotiating a contract or managing a contract during the course of a project, one should always be aware of this and seek a solution to a problem that in the early stages is perceived as a potential problem during the drafting and negotiation phase, or when it has arisen during the course of a project.

The reader should invest time in reading Professor Bent Flyvbjerg’s¹ works on why cost-overruns and delays keep on happening in projects, particularly in the early phase of a project. Many think it is because of inaccuracy: unreliable data and outdated data, an unsatisfactory explanation as numerous projects have been executed, yet no improvement has been made over time where one would reasonably expect improvement.

1 Bent Flyvbjerg: Mega Projects and Risks (Cambridge University Press, Cambridge, 2003.

Flyvbjerg sees “bias” as the culprit:

1. Psychological bias; optimism which is in fact self-deception: believing facts are in reality better than seen in investigations;
2. Political bias; strategic misrepresentation by overstating/overestimating benefits and understating/underestimating costs.

As an example: the author was present as Contract Manager and legal advisor in a Steering Committee meeting when the Joint Ventures of Dutch Contractors had handed in their bids for phase one, the civil works, of the High-Speed Rail Link from Amsterdam to Brussels. Total of the lowest bids was 5.2 billion NLG (or today: €2.36 billion). During that meeting the news broke that the minister of transport had just addressed the Dutch parliament stating that she thought the whole line could be built for 3.8 billion NLG (or today: €1.7 billion). The predominant question was: “Why would she say that when the bids had just come in?” That became clear soon thereafter, when the minister announced that the government would procure the “Betuwe Route”, a freight rail line from Rotterdam to the German border: she needed parliament to allow her a budget for that project. Even until today on the German side of the border the line has not yet been connected further into Germany. But the minister very much wanted to portray a “green image”.

1.2 Supply of information

Particularly in the early stages of a project the Contractor is depending on information given to him by the Owner either during the bidding phase or during the early phases of the project. How far can the Contractor rely on the correctness and completeness of the information received from the Owner?

A lot of information may prove to be crucial for the success of the project, and the Contractor must be able to rely on the facts in the information and the completeness of the information, or, if that is not the case, he must be allowed to investigate the reliability of the information. E.g. correctness of subsoil information will be vital for the design of the foundations and the stability of the foundations is crucial to the safe erection and operation of the rest of the project.

In the event of a “revamp”, a restauration and improvement of an existing facility, it will be the “as-built drawings” of the facility as it was built, if any. If the Owner indicates that information can be relied upon – generally this is done by marking the information as being “rely-upon”, the Contractor will treat it as “rely-upon information” and not conduct any further investigation as to its reliability.

It is prudent contract management to list all the information that is indicated as being “rely-upon” in a separate document, and it is even better to attach such a document as an attachment, signed by both parties, to the contract. If the rely-upon information turns out to be wrong the consequences thereof will be for the risk and account of the Owner as the issuer of the (rely-upon) information. Information that is wrong or flawed will cause change orders, resulting in increased cost and delays in the schedule for performing the project, all at the risk of the Owner, as the Owner issued the incorrect information.

One might ask: “Then why would an Owner ever issue rely-upon information and set himself up?”

But one needs to realize that not issuing such information increases the risk to the Contractor significantly and as a consequence the price will increase significantly as well as the time for completion the Contractor will think he needs. The project will suffer substantially. Thus, it is of paramount importance that the Owner prepares the information with due diligence; it will form the very foundation of the project.

Perhaps another answer would be to give the bidding Contractor sufficient budget to do the necessary investigations, but to give all bidding Contractors a budget to do so (in case of a bidding competition) could become very costly. To allow tenderers to share in the execution of one investigation increases the risk of collusion as they might talk to one another about other things than just the resulting information.

There is the same risk of having negative cost and negative time effects if such “rely-upon” information is given later, during the course of the project, as such information may require changes in the engineering and changes in the equipment and/or materials to be delivered, or in completed sections and thus have an impact on the schedule as well as the cost of the project. If the Owner is not sure of the correctness of the information he should say so and the Contractor should then say that further information and thus investigation is necessary, reasonably to be paid for by the Owner. Information may also come without any warranty from the Owner, and in that case, the Contractor may not be able to rely upon such information other than at his own risk.

Therefore, a contractual arrangement for “rely-upon information” is strictly necessary. A provision in the contract may be worded along the following lines:

Owner shall indicate on information provided to Contractor when such information may be relied upon by Contractor. Contractor may then rely upon such information and where any incorrectness in such information causes the need for a change order the Contractor shall then be entitled to compensation of reasonable cost and profit as well as to additional time for completion.

In such event, the Contractor must act in accordance with the “variation” provision of the Contract.

The Contractor logically is always responsible for the interpretation of, and conclusions he draws from, the information provided to him.

Often the Owner knows exactly what he wants and provides the Contractor with specifications (“specs”) of exactly what it is he wants. Based on those specifications the Contractor does the pricing of and the bidding for the project, the process design/Basic Design, etc. Sometimes Owners do not specify in detail what they want other than the desired performance of the Works and leave it to the Contractor and the Contractor acts on his own technical specifications which will lead to the desired result, expressed in the Owners functional specifications. This happens regularly with regard to oil and gas installations.

As the Contractor’s own specifications often tend to end up in lower overall cost, the Contractor sometimes bids on his own specifications rather than on the Owner’s specifications in order to be able to present a lower price and be invited to negotiate for the contract. This can be a very risky strategy for such bid may (actually: should) be ignored as it does not comply with the Owner’s specified preferences. If the Owner is tempted to accept the bid purely on the basis of the low price, he runs the risk of not getting what he wants but “getting what he paid for”. It is not uncommon and actually might be sensible for the Owner to reject an abnormally low bid, a bid that is substantially lower that the other bids received. Accepting such a bid may mean that the Owner will be hiring either the dumbest or the most desperate Contractor, which obviously will not lead to a successful project. Some Contractors follow that risky bidding strategy because they need work and cash flow to be able to pay wages, debts, etc.

It is of paramount importance that the supply of information happens when it is needed as to not hamper the design process or cause the need for design changes because the information was provided too late in the progress of the design. What will cost €10 to change on the drawing board may cost millions to change during construction. Information has a direct effect on the following issue: the scope of work.

1.3 Scope of work

A project starts with a Design Brief, a document generated by or on behalf of the Owner which formulates the Basis of Design. The Design Brief in itself is generally a multi-paged (easily 40+ pages) document that specifies in detail (functional and otherwise, e.g. technical) what the Owner requires and what the purpose of the Works will be after completion: what the Owner intends to use it for and how he intends to use it and thus what the Contractor must produce. From this flows the extent of what exactly the Contractor is to do and to produce, that extent is the scope of work usually laid down in an appendix to the contract. The scope of work and the functional specifications therein comprise what the Contractor must produce; the technical specifications comprise how the Contractor must produce, and in a Turnkey project the Owner should avoid technical specifications and rely on the Contractor’s know-how and not subject himself to the risks and liabilities of defects in the technical specifications.

The trouble with formulating the scope of work is that it is rather difficult to formulate exactly what the Owner wants and what the Contractor is to produce. Words are often open to interpretation and therefore much less descriptive than diagrams and numbers.

For each of the project phases, from the Basic Design and Engineering Package (BDEP) through start-up, there is a scope of work, which includes the specifications, which define what the Contractor is contractually bound to perform and produce. In practice, all too often scope of work items may be scattered over several appendices.

It is a primary task of the Contractor’s proposal team to know what the full scope of work is that is to be priced. For the Contractor’s management, it never hurts to ask if the proposal team has perused all the appendices of the Owner-supplied documents for scope items: “Better safe than sorry!”

Where there are unclear issues, the Contractor must ask for clarifications in the bidding phase and he must resist the urge not to ask these questions fearing that all his bidding competitors will hear the answers as well. That may be so, but by asking for clarifications the chances (read: risks) of making mistakes that may have significant budget and time consequences will be greatly reduced. Also, what would the Dispute Review Board or the arbitrators decide if such obviously necessary questions were not asked?

Based on the specifications, the Contractor quotes his price and the Owner eventually, after negotiations, comes to an agreement with the Contractor on the contract price. Therefore, if there is any substantial change to the scope of work, such change will most likely have an impact on the cost (and the schedule) and in that case must have an impact on the contract price and the time for completion.

One can already imagine that under a fixed price contract, any changes to the scope of work are a source of debate between the Owner and the Contractor, whether or not such a change is already within the scope of work or a within a variation to the scope of work and therefore if the Contractor is entitled to additional payment (and/or time for completion, as the case may be) – or that it is not achievable.

The more detailed the technical and functional specifications are formulated the more the Owner is responsible for the choices he has made. It is the Contractor’s duty to check such specifications against the functional specifications of the end product expected by the Owner and to see if the end product is achievable with the technical and functional specifications as given by the Owner, and to notify the Owner if he is of the opinion that it is not.

For the Owner, there is an eternal tension between his available budget and the total cost of the facility he is procuring (see earlier: Flyvbjerg’s opinion on “bias”). Often Owners mistakenly believe that “the more you specify, the higher the cost will be” and this belief will lead to condensed, general and thus less descriptive specifications and thus a diffuse scope of work.

For the Contractor, certainly when he is expected to quote a lump sum price and accept the full price risk, unclear specifications form a high-risk factor: he quotes a fixed price while he is not sure what exactly he is to deliver. His room for including contingencies in his price is very limited; he is bidding in competition with others and adding contingencies may mean his price will be too high to be selected as the preferred bidder. For the Owner the result will be that he most likely will award the contract to either the dumbest or the most reckless and desperate-for-work bidder.

One can easily understand that this can lead to severe conflicts during the execution of the project: while the Owner will be of the opinion that an item is included in the price the Contractor will be of the opinion, if it is not expressly specified, that it is not included in the price. See further under Section 1.5.

Scope of work may also be fluid in the sense that it will be impossible to establish the exact scope of work because an existing facility is to be restored, refurbished or revamped without there being accurate “as built” drawings available. Let’s take a 600-year-old cathedral as an example. With every section of a wall, the question will be: “What will we find behind it?” In such a case it will be impossible for the Contractor to quote a fixed price other than for the known scope of work and he will have to exclude issues that are uncertain.

A non-limitative list of such exclusions in general:

• Discrepancies between information and data provided by the Owner and “as-built” status (e.g. errors, omissions or inaccuracy, deterioration of equipment, materials and current performance) occurring between contract award and start of the Works;
• Hidden defects and/or hidden conditions of existing equipment ...