© Turner & Townsend plc November 15

making the difference

Contract Management

A world of black, white & grey

Presentation for Engineers Australia Chatswood (Sydney), NSW

16 November 2015

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Your speakers this evening:

Ian Cartwright C. Eng., FICE, FRICS, FCIOB, FCIArb

Director, Contract Services

Caroline Beaumaris DipBus, Post Grad GradCertBus, ACIArb

Associate Director, Contract Services

Contract Management A world of black, white & grey

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Learning objectives

Promote effective professional contract management practices

Recognise a contract for what it is and is not

Understand that good contract management begins early in the project process

Recognise good contract management requires planning

Acknowledge that contract management is a management function – it involves people skills

Soft skills gauge

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We will touch on these and other elements:

Learning objectives

Risk Management and Risk Profiling Objectives and Obligations Standard and bespoke contracts Time, cost, quality Dealing with disputes People, perceptions and power

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Learning objectives

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Contract - An agreement with specific terms between two or more persons or entities in which there is a promise to do something in return for a valuable benefit known as consideration. In short - an exchange of promises

Management - (in businesses and organizations) is the function that coordinates the efforts of people to accomplish goals and objectives by using available resources efficiently and effectively.

Note: Contract do have legal significant and consequences and may involve considerations of legal precedents. This does not mean that lawyers must draft your contracts nor that lawyers must always provide their interpretation.

Contract Management

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A contract creates a legal relationship (select your partner wisely but don’t overlook the contract)

Pursuing legal remedies is expensive, disruptive and seldom advisable

Two important considerations

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A contract is an exercise in risk allocation

■ A contract is an exercise in risk sharing for the project to be delivered - risk assessment recommended

■ Treatment of risk – Avoid, Reduce, Transfer, Retain or Accept (Exploit and Ignore)

■ Risk profile (risk tolerance) – may change with time and leadership

■ Risk should consider and may influence procurement method

■ Commercial principles – make part of your business case

■ Contract must be consistent with procurement method

Remember: The party best positioned to accept the risk is the one best able to manage the risk.

The more risk transferred the greater the cost for the project

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Risk allocation defines obligations

■ The party best positioned to accept the risk is the one best able to manage the risk.

■ If you cannot manage the risk then do not accept the obligation

■ If you transfer the risk include “insurance” in your contract (actions you can perform in the event of non-compliance or breach)

■ Understand your obligations and plan for them

■ Contract management involves the organisation

■ Example 1

■ Example 2

■ Generic examples

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Risk allocation – Practical example with warranties

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Selecting the form of contract – standard or bespoke?

■ Standard form contracts

Advantages: Industry developed with all interested parties

Balance of obligations

Familiar to parties, contract administrators/managers

Certainty of interpretation - precedents have been addressed.

Can be supplemented with special conditions

Disadvantages: May not suit complex/unique projects

Do not address organization specific requirements

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Selecting the form of contract – standard or bespoke?

AS4902-2000 - General conditions of contract for design and construct ■ Association of Consulting Engineers Australia

■ Australian Chamber of Commerce and Industry

■ Australian Procurement and Construction Council

■ AUSTROADS

■ Construction Industry Engineering Services Group

■ Construction Policy Steering Committee

■ Electricity Supply Association of Australia

■ Institution of Engineers, Australia

■ Institution of Professional Engineers, New Zealand

■ Law Council of Australia

■ Master Builders Australia

■ National Construction Council of the Australian Industry Group

■ Process Engineers and Constructors Association

■ Royal Australian Institute of Architects

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Selecting the form of contract – standard or bespoke?

■ Bespoke contracts

Advantages: Can be tailored to specifics of project/procurement

Provide for negotiation of risk allocation

Preferable over heavily edited standard forms

Disadvantages: Can become very complex/cumbersome

May include unreasonable risk allocation (large corporations with strong bargaining power)

Unfamiliar to parties, contract administrators and managers – greater opportunity for ambiguity and disagreement

Take professional advice as necessary – obtain legal advice as necessary Warning! Beware the promise of “bullet-proof” contracts

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Defining the contract documents

■ Define the contract documents

■ Declare the material representations

■ Entire agreement clause

■ Certainty

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Risk allocation defines obligations

■ Most standard contracts contain standard sections: ■ This formal Instrument of Agreement; ■ Australian Standard General Conditions of Contract AS4902-2000

General Conditions of Contract for Design and Construct (as amended);

■ Special Conditions (to be provided separately); ■ Instructions to Tender and all Addendum’s to Tender; ■ Tender Drawings & Preliminaries Specifications and any other

Supplementary Information as listed in the document register; ■ JPW Tender Documents (Annexure B); ■ WSP Tender Documents (Annexure B); ■ Turner & Townsend Tender Documents (Annexure B); and ■ Schedule of provisional sums

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General Conditions of Contract

■ Refer to handout

■ Order to precedence

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Contract management – time and program

■ Set reasonable contract durations

■ Engage contractors who have a track record of timely delivery

■ Where the contract time is short – bring attention to it and request information on how the contractor will achieve timely completion

■ Remember – the program is another tool in the toolbox - do not set unrealistic and onerous programming specifications and requirements

■ Beware of P6 - A simpler program updated regularly is better than a complex program that doesn’t get updated

■ The contractor has the responsibility to deliver the project within the contract time – he owns the contract time

■ Understand your obligations and keep track of them

■ MONITOR the contractor’s program closely – challenge with data

■ Liquidated damages and termination; performance bonds

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Contract management – security of payment

■ BUILDING AND CONSTRUCTION INDUSTRY SECURITY OF PAYMENT ACT (BCIPA) 1999 (updated April 2014)

■ Cannot contract out of statutory provisions. The Act always prevails.

■ Pay when paid provisions are outlawed

■ Section 14 Progress Claims -

(3) If the scheduled amount is less than the claimed amount, the schedule must indicate why the scheduled amount is less and (if it is less because the respondent is withholding payment for any reason) the respondent’s reasons for withholding payment.

(4) If a claimant serves a payment claim on a respondent, and the respondent does not provide a payment schedule to the claimant (within the time required by the relevant construction contract, or within 10 business days after the payment claim is served, whichever time expires earlier) the respondent becomes liable to pay the claimed amount to the claimant on the due date for the progress payment to which the payment claim relates.

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Contract management – cost

■ Most disputes centre directly or indirectly on cost: therefore

■ Think well in advance of the risk of changes and how you will price modifications:

- Bill of quantities - Schedule of rates - Liquidation of preliminaries - Pre-agreed options - Independent expert valuer

■ Fully understand the work methods and programming implications of

change – these influence change costs. Engage appropriate people in the review process.

■ Demand, insist on appropriate substantiation of additional and variation costs (include for in contract)

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Contract management – quality

■ Subcontractor selection – you get what you pay for

■ Quality does not happen in a vacuum

■ Time and cost often overshadow quality – is this important to you? (Plans do not implement themselves) C Q

T

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Contract management – dispute resolution

■ Disputes are a fact of life – they do not need to be adversarial

■ Problems with disputes:

- Lack of process to deal with effectively - Lack of research and understanding - Partisan/arbitrary determinations - Getting personal

■ Have a structured approach to resolving disputes that elevates a dispute and does not supress it

■ Think about what processes to use

■ Utilise independent third parties

■ Avoid the “midnight clause”

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Contract management – People, perceptions and power

■ People are complex

■ Individuals have their own discrete objectives

■ Individuals observe, interpret and perceive the world differently

■ Organisational politics are a fact of life – avoid at your peril

■ Understanding power dynamics is important in any management function

■ Problems occur when expectations and interests do not align

■ The solution to many issues exists in understanding underlying interests

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Contract management – The practical and professional

■ Records

■ Communication

■ Professionalism – acting impartially

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Wrap up and questions

■ Questions

■ What are your take-aways?