May,2014

Awareness Session

Contracts Management

descon.com

Contents
1. Introduction To Contracts
2. Role Of Contracts Management
3. Potential Claim Clauses
4. EPC Contracts Administration
5. Effective Contracts Administration- Engineering
Perspective
6. Comparative Analysis

INTRODUCTION TO
CONTRACTS

What is a Contract ?

It is a promise document which is enforceable at law

A document that defines contractual, technical and

execution
obligations of the parties

Why to use a Contract ?

Necessary to carry out business in todays complex

world

defines working interfaces

Effective mechanism to obtain / furnish desired goods

and
services

Describes rules of the game

Essentials of the Contract

Capacity of the parties

Well defined responsibilities & obligations
Valid offer and willful acceptance with free
consent

Considerations
Fair

and

SITUATION

ethical

approach

WIN-WIN

Types of Contract
Contract types vary according to:

The extent of scope of work and time line

responsibility
assumed by the contractor for the execution of
contract; and

The amount and nature of the profit/incentive

offered

to

the

contractor for achieving or exceeding specified

standards
goals

or

Contract Types with respect to Payment

Mechanism

Fixed - Price Contracts: The specific contract types range

from
firmfixed-price, in which the contractor has full responsibility for
the
performance costs and resulting profit(or loss).

Cost - Plus Contracts: The contracts in which the

contractor
has
minimal responsibility for the performance costs and the
negotiated
fee (profit) is fixed.

Incentive Contracts: These contracts include cost and

performance
incentives to the contractor on effectively managing the
cost
and
other uncertainties involved in the project.

Contract Types with respect to Execution

Mechanism
Some of the contracts are;

Engineering Design Contracts

Procurement Support Contracts

Construction Support Contracts

EPC (Turnkey Contracts) / EPCC / EPCM

Factors influencing Contracts

Price competition
Cost analysis & risk assessment
Type and complexity of the requirement
Urgency of the requirement
Period of performance or length of project /
production run

Contractors technical capability and financial

responsibility

Concurrent contracts
Extent and nature of proposed subcontracting

Steps to Award a Contract

Contractor

receives

instruction

to

bidder

(ITB)

documents

Pre - Bid clarifications

Contractor

submits

bid

stating

exceptions

/alternatives

Post Bid clarifications

Negotiations

on

submitted

bid

and

proposed

exceptions

Finalize

contract

documents

to

signatures

Definitive contract is signed at award

be

ready

for

Contract Award Mechanisms

A. Signing a definitive contract (preferred approach)

Good business practice

Establishes rule of the game before starting work
Parties can focus on project execution without any
impact
from
continued
contract
negotiations/finalization

B. Letter of intent (non-preferred approach)

Frequently used
Carries risk exposure for parties
Sometimes justified when owner not in position to
make official award but working on schedule crunch

ROLE OF
CONTRACTS
MANAGEMENT

Focus of Contracts Management

Drafting of project specified terms & conditions of

contract/consortium/joint venture etc.

Contract negotiation with client / vendor

Review and identify contractual obligations and risks

Sub-contract

and/or

procurement

contract

administration

Claims

(cost

&

identification,

time)

management,

substantiation,

including

documentation,

quantification and follow-ups

Support

dispute

resolution

processes,

mediation, arbitration and litigation

including

Contracts Management Role in

Profitability

Thorough understanding of liabilities

Allocation of risks during negotiations

Pricing for contingencies

Awareness on claimable events

Proper record keeping and documentation

Identification and management of change

To work preventively and strategically with contracts

Contracts Management Role at DIPL

The contracts department at DIPL is primarily a support
department.

Spearhead overall contract management of the company

Provide support to business acquisition in preparation of
contracts for various proposals including Engineering & EPC
projects
Negotiate

contractual terms and conditions with clients /

vendors
Provide

assistance

to

Project

Management

in

contracts

administration including claims management during project

execution

Contracts Management Process Flow

Diagram

Functional Outputs of CMD

1

Selection of Contracting Strategies

Advising in selection of appropriate main and secondary options

for new contracts

20 %
Align risk strategy with contract strategy

Provide advice Pre and Post Tendering Phase

Evaluation and risk assessment on contract conditions and

tender documentation during tendering phase
Getting specialist opinion from commercial , legal and
insurance specialists as and when required

20%

Continued.
3

Provide Contract Administration

During life cycles

Monitoring and controlling contractual related activities

40 %
Providing cost advise and implement contract variations and
compensations
Maintaining that contract conditions and specifications are
adhered to

Contract Dispute Resolution

Input and facilitate the implementation of the process related

to dispute resolution
Integrate into the contract and implement resolution

20%

POTENTIAL CLAIM
CLAUSES

Important Clauses of a Contract

General Rights & Obligations

Scope of Work
Design Documents
Review and Approval Cycle
Project Schedule
Payment Terms and Conditions
Performance Bond
Taking Over and Provisional Acceptance

Liquidated Damages
Variation
Insurance
Force Majeure
Suspension and Termination
Warranty & Extended Warranty
Confidentiality and IP rights
Dispute Resolution

Contractual Risks

MITIGATION

Problematic Areas

Disputes / Claims Typically Involve

Owner

ordered

changes

without

agreed

upon

cost/time adjustments

Impact of owners actions / inactions reviews,

approvals, inspections, etc.

Delays

performance,

equipment

materials

delivery

Force majeure events

Actual or perceived differing scope of work / site
conditions

Errors / omissions in contractors bid

Compounded effect of numerous changes
Significant market changes / unusual inflation
Owner vs. Contractor interpretation of contract

Handling Disputes / Claims

Anticipate potential claims early & take

corrective action.
Comprehensive drafting of contracts
Keep good records
Timely notifications
Proper documentation & record keeping
Settlement of matters amicably
Coordinate with appropriate personnel
(legal, technical, project)
Counterclaim, if appropriate, or other
balancing approach
If appropriate, refer to higher levels of
management

The majority of contractual disputes/claims might have been avoided,

or mitigated to a great extent or made easier to resolve, by effective
contracts development and administration.

Loopholes in Contracts

Poorly defined terms

Unclear scope of work / services
Unclear roles and responsibilities
Open-ended definitions / statements (etc, including but not
limited to, )

Poor document management

Open-ended change order coverage
Long delays in reaching agreement on early issues
Long decision lines on either side
Starting project execution before contract is finalized
Tendency to defer resolution of issues
Excessive interfaces

Continued

Assumptions / undocumented promises and / or commitments

Inconclusive project objectives
Ambiguous statements
Win-Lose situations

EPC CONTRACTS
ADMINISTRATION

Why EPC Contracts?

EPC

contract

is

designed

to

requirements for Bankability

A single point of responsibility

A fixed contract price

A fixed completion date

satisfy

the

lenders

When EPC Contracts are not Suitable?

EPC

conditions

of

contract

are

not

suitable

under

following circumstances;

Insufficient

time and information for tenderers to check

the employers requirement

Construction

involves substantial work underground or

work in other areas which tenderers cannot inspect

Inexperience & lack of expertise of contractor for specific

job

Parties involved in EPC Contract

Split EPC Contract

EFFECTIVE
CONTRACTS
ADMINISTRATIONENGINEERING
PERSPECTIVE

Engineering Issues likely to Trigger

Disputes

Engineering errors & omissions

Ambiguous work scope /specifications
Discrepancies in piping & instrumentation diagrams
(P&ID), SLDs etc

Differing interpretations
Excessive change orders as a result of addition ,
deletion or modification of work

Differing site conditions

Risks associated with Engineering Clauses

The Contractor shall be deemed to have obtained all

necessary information as to risks, contingencies and other
circumstances which may influence or affect the Works;

The

Contractor

accepts

total

responsibility

for

having

foreseen all difficulties and costs of successfully completing

the Works; and

The Contract Price shall not be adjusted to take account of

any unforeseen difficulties or costs.

Continued
Scrutiny and Sufficiency of engineering data:

The Contractor shall be deemed to have, scrutinized

Employers requirements (including design criteria and
calculations, if any).

The Contractor shall be responsible for the design of the

works and for the accuracy of such Employers requirements
(including design criteria and calculations).

The Employer shall not be responsible for any error,

inaccuracy or omission of any kind in the Employers
requirements as originally included in the Contract and shall
not be deemed to have given any representation of accuracy
or completeness of any data or information. Any data or
information received by the Contractor, from the Employer or
otherwise, shall not relieve the Contractor from his

Cope with Design Contractual Risks

Proposal Stage:
Few clauses in the general T&C at ITB stage can give significant
impacts.
1.Clarifications and Site Visits:
Undermining importance of site visits and tender clarifications;
technical queries results in ill-defined work scope /specifications.
Stakes are low at ITB stage therefore a sound contractors
practice is to finalize the scope of work at ITB level.
2. Additional Information and Alternative Proposal
It allows you to offer alternate solutions along with a fully
compliant base tender.
Specify technical and commercial advantages of alternatives
and indicate how the base proposal could be adjusted with
increased performance or lower costs.
Understand your competitive advantage.

Continued
3. Adjustment of Errors
It allows you to correct errors and omissions in lump sum
rates and prices contained in a tender and adjustments for
changes or data subsequently revised and provided by the
employer.
4. Fixing Employers Responsibilities
The employer shall be responsible for the correctness of the
following portions of the employers requirements and of the
following data and information provided by (or on behalf of)
the employer:
Portions, data and information which are stated in the
contract as being immutable or the responsibility of the
employer,
Definitions of intended purposes of the works or any parts
thereof,
Criteria for the testing and performance of the completed
works,
Portions, data and information which cannot be verified by

COMPARATIVE
ANALYSIS

Data Accuracy and Sufficiency

Stringent Clause

Balanced Clause

Recommended
Approach

Pre-Bid Data :
CONTRACTOR acknowledges that it has
examined with all due diligence the
PROJECT DOCUMENTS made available to
CONTRACTOR prior to the EFFECTIVE DATE and
confirms that they are sufficient and adequate
for the intended purpose of the PROJECT, and
that they contain no errors, faults,
omissions, or discrepancies that would
result in any VARIATION to the WORKS.
Failure of CONTRACTOR to so notify
COMPANY prior to EFFECTIVE DATE shall not
relieve
CONTRACTOR
of
any
of
its
responsibilities nor shall its liabilities be
diminished under this AGREEMENT.

The Employer shall not be responsible

for any error, inaccuracy or omission of
any
kind
in
the
Employers
Requirements as originally included in
they Contract and shall not be deemed
to have given any representation of
accuracy or completeness of any data
or information, except as stated below.
Any data or information received by the
Contractor, from the Employer or
otherwise,
shall
not
relieve
the
Contractor from his responsibility for the
design and execution of the Works.

Pre-Bid Measures:
1) Thorough understanding of
the scope of work and
prepare
a
list
of
information,
in
coordination
with
the
relevant departments, that
may be required for such
kind of project.

Post-Bid Data:
COMPANY may provide or cause to be provided
to CONTRACTOR after the EFFECTIVE DATE,
supplementary data in addition to the
information that is contained in the EXHIBITS.
COMPANY may also supply further information
as may become reasonably available as
well as information the at CONTRACTOR may
reasonably request. For the avoidance of
doubt,
the
entirety
of
any
such
information provided to CONTRACTOR
under
this
Sub-Article
shall
be
considered as part of normal engineering
development, the incorporation of such
information by CONTRACTOR into its WORKS
for the PROJECT being fully contemplated and
covered within the LUMP SUM PRICE and

However, the Employer shall be

responsible for the correctness of
the following portions of the
Employers Requirements and of
the following data and information
provided by (or on behalf of) the
Employer:
(a) portions, data and information which
are stated in the Contract as being
immutable or the responsibility of the
Employer,
(b) definitions of intended purposes of
the Works or any parts thereof,
(c) criteria for the testing and
performance of the completed Works,
and

2) Inspect all the documents

and promptly notify the
Client for any missing
document or any error,
omission and discrepancy
in the document.
3) Familiarity with the Site
conditions and existing
works.
4) Consideration
of
any
contingent cost for the
missing or inaccurate item
which
an
experienced
Contractor can reasonably
foresee.
Execution Stage;
1) Notify in case of any
change in Scope of Work
that has an cost and
schedule impact.

Design and Drawing Specifications

Stringent Clause

Balanced Clause /Associated

Risks

The design shall be prepared by qualified

The

designers

qualified designers who comply with the

who

expressed

and

requirements,
SCOPE

OF

with

implied
included

CONTRACTOR
responsible

the

design

SPECIFICATIONS

WORK

AGREEMENT.
financially

comply

in
shall

design

shall

be

requirements,

prepared

by

SPECIFICATIONS

and

and SCOPE OF WORK included in the

this

AGREEMENT, or where not specified,

be

comply

with

good

engineering,

1) Try

to

Limit

2) Do

responsibility
data

discrepancies, errors or omissions in the

and proven up to date technologies to

provided

CONTRACTOR

the

COMPANY .

extent

applicable

or

which

take
of
is

basic
to

be

by

the

drawings and other technical documents

implemented

by

whether they have been approved by

CONTRACTOR

for

COMPANY or not.

The CONTRACTORS liability shall

Implied

be limited only to rework/correction

expressed purpose.

of

any

mistake

CONTRACTOR.

an

to

cap

not

construction and management practices

specifications,

or

generalized terms.

any

prepared

for

design

Recommended
Approach

experienced

similar

Works.

attributable

The

3) Replace

intended

or
with

to

CONTRACTOR

4) Fix responsibility of basic

shall be entitled for compensation

data to limit chances of

incase the errors etc occur due to

error.

non provision, error or omissions of

basic data to be
COMPANY

provided by the

Continued
Stringent Clause

Balanced Clause
/Associated Risks

CONTRACTOR
shall
immediately
upon receipt of all drawings and
specifications , verify and check the
correctness
thereof
and
shall
promptly notify COMPANY in
writing of any errors, omissions , or
discrepancies before commencing
any Works to which the drawings
and
specifications
including
improperly described Works where
such Works are clearly necessary to
carryout the intent thereof or
which is customarily performed
shall not relieve CONTRACTOR of
its obligations to perform such
omitted or improperly described
Works and such Works shall be
performed by CONTRACTOR as if
fully & correctly set forth and
described herein.

CONTRACTOR shall immediately upon

receipt of all drawings and specifications
, verify and check the correctness
thereof and shall promptly notify
COMPANY in writing of any errors,
omissions , or discrepancies before
commencing any Works to which the
drawings and specifications including
improperly described Works where such
Works are clearly necessary to carryout
the
intent
thereof
or
which is
customarily performed shall not relieve
CONTRACTOR of its obligations to
perform such omitted or improperly
described Works and such Works shall
be performed by CONTRACTOR as if
fully & correctly set forth and described
herein. Notwithstanding the above , all
cost and risks impacts associated with
execution of improperly described Works
shall remain with the COMPANY. The
COMPANY shall indemnify and hold
harmless the CONTRACTOR for any
loss
or
damage
occurring
howsoever due to such improperly
described Works .Furthermore , the
CONTRACTOR shall be compensated
for all kinds of loss or damage
incurred by it
in relation to
performing
such
improperly

Recommended
Approach
1. Fix responsibility
2. Notify Promptly
3. Take indemnity
4. Keep Option to claim any
damage

Familiarization with Site

Stringent Clause
CONTRACTOR hereby acknowledges that it
has examined and is familiar with the SITE
and EXISTING FACILITIES and the nature
and location of the PROJECT, and has, by
careful investigation, satisfied itself as to
the difficulties in execution of the WORKS,
the general and local labor conditions, SITE
regulations
and
all
other
matters
including
but
not
limited
to
transportation, material handling and
disposal, water and electricity, roads and
site access, climate conditions and the
character of equipment and facilities
needed
preliminary
to
and
during
performance of the WORKS.

Balanced Clause
/Associated Risks
The

Employer

shall

have

Recommended
Approach
made

available to the Contractor for his

information, prior to the Base Date,
all relevant data in the Employers
possession

on

subsurface

hydrological conditions at the Site,

including environmental aspects. The
Employer shall similarly make available
to the Contractor all such data which
come into the Employers possession

The Employer shall be liable for

sufficiency or completeness of such
data.

1) Awareness of the site

conditions and facilities
to avoid any kind of
surprises.

and

after the Base Date.

CONTRACTOR further acknowledges that it
has satisfied itself as to the character,
quality and quantity of surface and subsurface materials or obstacles to be
encountered insofar as this information is
reasonably
ascertainable
from
the
inspection
of
SITE,
including
all
exploratory work as well as from the
drawings and specifications provided under
this
AGREEMENT.
Any
failure
by
CONTRACTOR to take the actions
described in this Article will not
relieve
CONTRACTOR
from

Pre-Bid Measures:

2) Awareness with the SubSoil conditions and make

available the drawings of
underground facilitates
3) Coordinate
with
the
other Contractors (if any)
already working on the
site for aforementioned
information.
4) If required,
boreholes
required to
existing
facilities

random test
would
be
inspect the
underground

Importance of Surveys
Stringent Clause

Balanced Clause / Associated

Risks

Recommended
Approach

In general the CONTRACTOR shall

In general the CONTRACTOR shall

1. Try to Limit liability

deemed to have obtained all

deemed

necessary information as to risk

necessary information as to risk

contingencies

and

all

other

contingencies which may affect

2. Importance of SITE ,

circumstances

which

may

affect

performance under the Contract

topographic and geo-

to

technical surveys.

performance

under

the

Contract,

the

to

have

extent

obtained

all

reasonably

under this clause.

CONTRACTOR shall neither have

foreseeable by an experienced

entitlement for extra payment

CONTRACTOR,

nor it shall be relieved of any of its

shall neither have entitlement for

shared

obligations under the Contract as a

extra payment nor it shall be

COMPANY

result of such lack of knowledge.

relieved of any of its obligations

CONTRACTOR

under the Contract as a result of

such lack of knowledge except
under those circumstances which
could

not

be

reasonable

foreseeable by an experienced
CONTRACTOR.

3. Specifications to be
with

the

Review and Approvals

Stringent Clause
For

all

documents

CONTRACTOR

to

Balanced Clause /Associated

Risks

submitted

COMPANY

for

by
its

review/approval, COMPANY shall use its

best

efforts

reasonable

to
time

respond
unless

within
otherwise

specified in the CONTRACT, provided

that the said documents are complete in
every

respect

and

were

subject

to

CONTRACTOR internal review and check

process..

For all documents submitted by

CONTRACTOR to COMPANY for its
review/approval, COMPANY shall use its
best efforts to respond within fifteen
(15) working days of receipt unless
otherwise specified in the CONTRACT,
provided that the said documents are
complete in every respect and were
subject to CONTRACTOR internal review
and check process. If COMPANY fails
to respond within the response
times stated therein, then said
documents may be deemed to have
been approved or reviewed with no
comments by COMPANY and
CONTRACTOR may, upon notification to
COMPANY of non-receipt of the required
approval, be entitled to proceed
accordingly.
However,
COMPANYs
response times to documents set above
and in EXHIBIT shall not apply to those
documents
which
have
been
disapproved, commented upon, or
rejected by or on behalf of the
COMPANY which were initially submitted
incomplete, or uncoordinated.

Recommended
Approach
1. Fix time lines for
approvals
1. Importance of
deemed approval
necessary.
2. Follow up

Schedules
Stringent Clause

Balanced Clause
/Associated Risks

CONTRACTOR is to comply with Disturbance in Cash Flows.

the SCHEDULE requirements set

Recommended
Approach
1. Resist Acceptance of
such Clause

out in EXHIBIT. COMPANY shall Has impacts on Schedule.

retain

5%

from

CONTRACTORs

invoiced

2. COMPANY already
charging the

amount until CONTRACTOR

CONTRACTOR with

has

Liquidated Damages

complied

with

its

obligations in respect of the

FOR DELAY and

required

Retention Amount.

SCHEDULE

milestone.

Such

amount

be

can

retained

invoiced

by

3. As a last resort

CONTRACTOR upon fulfilling this

negotiate on

obligation.

percentage.

Liability of Scope of Work

Liquidated Damages
Stringent Clause
If

clause

[delay

Balanced Clause
/Associated Risks

Recommended
Approach

liquidated The damages claimed by the

damages] is found for any reason project

company

must

not

Parties should
clearly

and

to be void, invalid or otherwise exceed [the amount specified ]

unambiguously

inoperative so as to disentitle the for any one day of delay and in

agree

project company from claiming aggregate must not exceed the

only remedies are

delay

those

liquidated

damages,

the [defined percentage] of the EPC

project company is entitled to contract price

claim

against

damages

at

the
law

that
within

their
the

EPC contract.

contractor
for

the

UNLIQUIDATED

contractors failure to complete

DAMAGES

or

the works by the date for practical

Common law right

completion.

to sue for breach of

EPC contract is to
be

contractually

removed, It must
be done by very

Importance of Notification & Schedule

Mitigation of rejection of delay claims:

Require early notification of disruptions & delays

Project planning & schedules to be constantly monitored, joint
monitoring

Detailed

work programs with critical path: general & area or

work specific

Identification of float & provision on float ownership (shared or

owned by project Co)

Resource allocations & management

Resource re-scheduling & leveling