Construction Contracts

Edward Whitticks

• Publisher: Gulf Publishing Company
• Year: 2013
• ISBN:
  9780127999739
• Topic: Technologie et ingénierie
• Subtopic: Ingénierie de la construction et de l'architecture

In this superb new volume, Edward Whitticks has charted the course for anyone working with contracts and dispute control in oil and gas, one of the most volatile industries in the world. His practical, straightforward approach will move you step by step through the process of contractual negotiations, bids and closeouts. For anyone working in the oil and gas industry today, finding your way through the maze of contract management seems more cutthroat and challenging than ever before. In Construction Contracts, Edward Whitticks dispels the myth that "there has to be a winner and a loser" in contractual management and dispute control. As a desktop companion for project managers and engineers, contract administrators, cost scheduling engineers and others engaged in the field of refinery, pipeline and petrochemical construction, this book covers the entire contract process.

CHAPTER ONE

Client Policy and Practice

1.1 Introduction

The oil, gas, petrochemical, and the energy industry in general instructs and imposes a duty upon its employees to observe certain policies regarding the contracting process and to maintain a high standard of ethics and fairness. All contracts are issued in writing and are intended to be executed prior to committing work to a contractor or a contractor starting work. Adequate safeguards and controls in terms of procedures, documentation, files, reviews, and approvals are expected to be established and maintained for all contracting activities.

Certain contracts, which are governed by institutional terms and conditions, may introduce a third party into the executed agreement, namely, the engineer. This title usually refers to a consulting company who acts, among other functions, as an intermediary between the client and the contractor. In these contracts, the client may be described as the owner or employer or company but in this work we will usually refer to one party as the client and the other party as the contractor. When the latter is obliged to engage another to carry out work, the contract will be made between the contractor and a subcontractor.

1.2 The Fundamental Contract Document

The construction contract is an agreement between the parties for the performance of work through the supply of labor and materials.

First, a valid contract must be sufficiently certain to have a practical meaning and before execution the parties must have agreed on all terms and conditions. Second, there must also be an agreement on the consideration and on the payment terms. Third, the contract must be in writing. A contract is not easily enforceable if it remains entirely as an oral agreement and without written evidence.

It is worth bearing in mind that the contract of magnitude in size and value—succinct, crystal clear with guaranteed protection against future construction disputes, and capable of being understood by all parties to the agreement—has probably yet to be written!

1.2.1 Letters of Intent

Letters of intent should only be used in special circumstances and should only be issued after all contractual matters are settled or specifically delineated in the letter of intent as being unresolved.

The letter of intent will be valid only if it contains, at the very least:

(a) Confirmation of the client’s intent to award a contract to a named contractor.

(b) Reference to the scope of work in the invitation to bid.

(c) The consideration (i.e., pricing for the work) or an invitation to submit monthly invoices based on percentages of work completed against the price quoted in the contractor’s bid proposal.

(d) The effective date of the contract (being the date when the client receives the contractor’s confirmation by letter).

(e) Reference to the receipt of the contractor’s agreement to the preceding (see d).

A letter of intent is defined as a contract designed for interim use only that sets forth certain agreed terms and conditions remaining to be negotiated (see the following example).

CRUDE OIL COMPANY INCORPORATED

Subject: Letter of Intent

Contract No. _______

Contract Title ____________________________

Effective Date: On receipt of your confirmation and agreement

(Contractor’s Name)

(Contractor’s Address)

Gentlemen,

This is to express our intent to enter into a contract with you for (description of Work) in accordance with your proposal dated (date), your subsequent letters dated (dates), and your meetings with our representatives held on (dates).

[Note to Contract Engineer/Administrator: Add here a clause specifying what was agreed and what was not.]

It is understood and agreed that this expression of intent is subject to the execution of a final contract in writing between us and that of this date and until a final agreement is reached, neither of us is bound to the other or to any third party by any legal or equitable commitment whatsoever except as set forth in the following text.

You may submit monthly invoices for payment based upon percentages of work completed against the price(s) set forth in your bid proposal dated (date). However, in the event we decide not to enter into a final contract with you for this work, we will reimburse you only for all costs and expenses incurred by you up to the date of our notification to you that we will not enter into a contract with you, plus _______ percent of such costs and expenses to cover profit. In such event, all your said costs and expenses shall be subject to audit.

Very truly yours,

W. H. Smith

Vice President, Procurement

CRUDE OIL COMPANY INCORPORATED

1.3 Invitations to Bid

Open bidding, that is, an open invitation to contractors to tender for work, is not a usual feature of oil company practice. Advertising in technical magazines and other media is more properly confined to the building construction industry and to work for government departments. However, in certain areas, there are regulations in force that oblige organizations proposing to embark on construction ventures to publicly announce their intentions. Work in refineries, gas plants, and on pipelines is, for the most part, highly specialized and only a limited number of contractors have the resources and the workforces to undertake such ventures. In an open tender situation, however, this consideration would not discourage a large number of contractors from having a shot at it. Invitations, therefore, are normally restricted to those organizations regarded by the client as capable of handling the work.

1.4 Lump Sum Contracting Preferred

Lump sum contracting is normally the preferred contract format when it can be properly used. Competitive bidding is used to select a technically and financially qualified contractor whose bid represents the least overall cost to the client. Negotiated contracting is only used in exceptional circumstances involving exceptional skills or equipment that would otherwise be unobtainable.

Lump sum, unit prices, day rates, and reimbursable cost fixed fees that are quoted under competitive conditions for defined work are not normally negotiated. There may be exceptions to this policy where:

(a) The contractor selected is the only one capable of performing the work within the project schedule.

(b) The selection of any other contractor would result in substantial additional costs to the client.

(c) The contractor selected possesses special expertise or other experience that would cause its work performance to be superior to that of other potential bidders.

The essence of a lump sum contract is that, in return for a lump sum payment, the contractor supplies such goods and services as it finds necessary to ensure that the end product is in accordance with its specification and meets the delivery and performance guarantees. Once the contract is in force, the lump sum price is fixed regardless of costs incurred by the contractor wh...