Contract Management Training

By Ken Kauffman, PMP Contracts Manager

GOAL
To provide an overview of the contracting process to give you the ability to determine your relationship to the overall project and the contracts.

OVERVIEW
Intent is to provide you with a fundamental understanding as to how engineering and construction companies do business with the client. Because of the complex nature of the work it is necessary to have a means to implement a project with specific goals and objects to be achieved within a specified time frame and for specific compensation.

PURPOSE OF CONTRACTS
A clearly written contract can set out expectations, obligations and save a great deal of confusion. Contracts are essential business tools for professional trading and business relationships. Without clearly defined and agreed contracts, misunderstandings can develop, expectations of owner and contractor fail to match, and all sorts of problems can occur.

ELEMENTS OF A CONTRACT
Date of Agreement, Contracting Parties, Consideration, Time to Complete, Signatures.

CONTRACT TYPES
Lump Sum, contract that is normally used in the construction industry to reduce design and contract administration costs. It is called a Lump Sum because the contractor is required to submit a total and global price instead of bidding on individual items. Cost + Fee, a cost plus contract refers to a contract when the contractor gets paid for all construction related expenses as previously agreed. Some cost-pluscontract can be drafted to set a limit that will be used to restraint the contractor on not to exceed that specified amount. The term plus refers to the profit allowed to be earned by the contractor. A cost-pluscontract provide a win-win situation for the contractor, because all risks are basically covered, and all expenses are likely to be paid.

CONTRACT TYPES
Royal Commission for Jubail and Yanbu. These contracts are professionally written and administered by Royal Commission personnel and their Management Services Contractors. The terms of these contracts are fair and reasonable with standard terms and conditions.

CONTRACT TYPES
FIDIC is the International Federation of Consulting Engineers. FIDIC publishes international standard forms of contracts for works and for clients, consultants, subconsultants, joint ventures and representatives, together with related materials such as standard pre-qualification forms. Typically organizations without their own standard contract formats will use FIDIC because FIDIC is internationally recognized for well balanced contract formats.

CONTRACT TYPES
ARAMCO has their own contract format that was developed based on their long relationship with the oil and gas industry worldwide. ARAMCO contracts tend to be conservatively written.

CONTRACT TYPES
Elements of an ARAMCO Contract: Schedule A General Terms, include definitions, obligations, relationships, warranties, insurance, claims and disputes, suspension, terminations, release of information, notices, finance, securities, guarantees, warranties, superseding effect, and government relations.

Schedule H Special Terms, are more specialized to the type of work to be accomplished and requirements of the contract. Saudization, plant, performance of work, provision of steam, performance guarantees, liability. Contract Scope of Work: Schedule B - Job Specification. That portion of the contract that details what the Owner (ARAMCO) wants the contractor to do. In this case Engineering, Procurement, and Construction (EPC).

CONTRACT TYPES
Large complex projects will include a number of general contracts each with a number of subcontractors. The project will be divided by plant or process to be installed with points of overlapping Work.

Coordination between the contractors will be as agreed with the owner.

CONTRACT TERMS & CONDITIONS

Commitments, a pledge to do or something pledged. For example, a promise to build a building, a promise to pay for the building.

CONTRACT TERMS & CONDITIONS

Payments are based on progress invoices submitted by the Contractor for progress payments. This means the work done in the previous month is calculated as a percentage of the total project.

CONTRACT TERMS & CONDITIONS

Insurance is an important aspect to limiting the contractors risk. In some cases the burden of insurance is shared with the owner. Should an incident causing damage occur on the work site it is important to document and notify the proper authorities so they can contact the insurance company concerned.

CONTRACT TERMS & CONDITIONS

Performance Bond these are bonds or letters of credit issued by the contractors bank to insure contractors performance under the contract will take place as agreed and provide the owner a means to reduce risk.

CONTRACT TERMS & CONDITIONS

Suspension of Work is essentially putting the work or a portion of the work on hold. The reason for a suspension is typically because of a conflict in activities to be accomplished, or because of a change.

CONTRACT TERMS & CONDITIONS

Changes, consist of changes to the contract in the
form of additional work, deletion of work, changes in specifications, additional time, unforeseen site conditions, and so on.
Additional work, or deletion of work. Changes in specifications. Additional time.

Acceleration.
Unforeseen site conditions.

CONTRACT TERMS & CONDITIONS

Claims & Disputes, a Claim as A request, demand, or assertion
of rights by a owner against a contractor, or vice versa, for consideration, compensation, or payment under the terms of a legally binding contract, such as for a disputed change. Claims occur between: owners and contractors (prime), contractors and their subcontractors, contractors and (their) vendors, and at other contractual interfaces. Resolution of the claims and disputes can be a costly, disruptive and aggravating process for all parties. In the engineering and construction industry, claims and disputes take many forms and focus on many topics. For simplicity of discussion, we will use the follow the following categories:
Scope of Work, Changed Work or Variations Delay/Acceleration, Time-Related Disruption/Productivity (usually labor) Terms and Conditions.

CONTRACT TERMS & CONDITIONS

A construction claim consists of two major parts: (1) the entitlement section, which typically includes a detailed description of the actions or inactions of the party from whom relief is sought, entitling the claimant to compensation; and (2) the damages section, which sets forth the calculations and support for the compensation claimed. Important aspects of disputes and claims are: Notification, submitting the claim or dispute as required by the contract. Giving notice to the other party. Governing Law, the law to be used in settling a claim or dispute. In these particular contracts it is the law of England and Wales. The reason is the law of England and Wales is neutral and not in favor of either party.

CONTRACT TERMS & CONDITIONS

Arbitration, is a procedure in which a dispute is submitted, by agreement of the parties, to one or more arbitrators who make a binding decision on the dispute. In choosing arbitration, the parties opt for a private dispute resolution procedure instead of going to court. Its principal characteristics are: Arbitration is consensual Arbitration can only take place if both parties have agreed to it. In the case of future disputes arising under a contract, the parties insert an arbitration clause in the relevant contract. An existing dispute can be referred to arbitration by means of a submission agreement between the parties. In contrast to mediation, a party cannot unilaterally withdraw from arbitration. The parties choose the arbitrator(s) A three-member arbitral tribunal, each party appoints one of the arbitrators; those two persons then agree on the presiding arbitrator.

CONTRACT TERMS & CONDITIONS

Arbitration is neutral In addition to their selection of neutrals of appropriate nationality, parties are able to choose such important elements as the applicable law, language and venue of the arbitration. This allows them to ensure that no party enjoys a home court advantage.

Arbitration is a confidential procedure The arbitration rules specifically protect the confidentiality of the existence of the arbitration, any disclosures made during that procedure, and the award. Rules allow a party to restrict access to trade secrets or other confidential information that is submitted to the arbitral tribunal or to a confidentiality advisor to the tribunal.
The decision of the arbitral tribunal is final and easy to enforce

CONTRACT MANNAGEMENT
Schedule - The project schedule is one of the

most important documents created under the Contract since it determines the rate at work is estimated to be completed. The schedule is complicated in its development and measurement of progress, in simple terms, it is divided into Planed Progress and Actual Progress.

CONTRACT MANAGEMENT
Procurement provides the support for the contractor by ordering the necessary material, equipment, and services to support project activities for cost, delivery, and quality.

CONTRACT MANAGEMENT
Quality Assurance aims to prevent defects with a focus on the process used to make the product. It is a proactive quality process. The goal of Quality Assurance is to improve development and test processes so that defects do not arise when the product is being developed. For example QA will conduct audits to insure compliance with quality procedures.

CONTRACT MANAGEMENT
Quality Control aims to identify defects in the finished product. Quality control, therefore, is a reactive process. The goal of Quality Control is to identify defects after a product is developed and before it's released. For example, pipe is purchased for the project and upon delivery of the pipe Quality Control will inspect it to insure it is free from defects. In most cases Quality Control will inspect the pipe as it is being manufactured to detect defects as early as possible.

CONTRACT MANAGEMENT
Safety, construction is the most
dangerous land-based work sector in Europe, after the fishing industry. In the European Union, the fatal accident rate is nearly 13 workers per 100,000 as against 5 per 100,000 for the all sector average. The problem is not that the hazards and risks are unknown, it is that they are very difficult to control in a constantly changing work environment. Safety is important for numerous reasons and from a contract administration point of view it is important because of lawsuits, insurance claims, work delays, additional costs, site shutdowns, etc.

CONTRACT MANAGEMENT
Punch Lists is a list of tasks which need to completed to
satisfy the terms of a construction contract. Punch lists are generated in the final phases of construction, as people walk around the site and note down any issues deficiencies which need to be resolved. Punch lists are very useful for project management, whether people are dealing with a contractor or doing the work themselves, because it's easy to miss small details which can be problematic later. When a punch list is created, people think about the terms of the contract, and they walk around the job site taking note of anything which is not perfect. Punch lists can include everything from clean up scraps on construction site to finish trim in an office.

CONTRACT MANAGEMENT
Closeout, contracts are physically
complete when contractors have rendered all services and the owner has accepted all documents, materials, data, and other deliverables. Physical completion of the contract indicates the point that ownership is turned over to the owner and the contractor has completed all punch lists.
Contracts are administratively closed when all administrative activities have been accomplished, releases executed, and final payment made. In some contracts administrative closure is only possible after the warranty period.