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5. TERMS AND CONDITIONS OF CONTRACT
5.1 Time, Cost, and Quality
Any project incorporates a degree of risk, which once initiated, may be countered by insurances, payment bonds, advance payments and retentions as described in Section 4. The type of contract employed to complete the project works is also important in order to match risks against either the client or contractor who is best able to carry them. It is totally immature to expect a project to be other than a compromise between time, cost and quality (see Fig. 11). For example the priorities for different projects may be different and therefore demand different contractual treatment.
1. Construction of a nuclear power station will require the highest degree of quality at the expense of cost.
2. Repair of a damaged primary substation transformer might demand priority to be given to the time of the repair.
3. A Third World aid power distribution project on the other hand may involve very tight cost constraints leading to well-tried and proven design of sufficient quality to give lasting service under a minimum of maintenance.
Different types of contract allow for better management of these different priorities and risks.
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FIG. 11 Relative risk to contractor and client for different types
of construction.
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FIG. 12 Relative risk to contractor and client for different types
of construction contract.
Risk to contractor; Risk to client; (a) Cost reimbursable with % fee (b) Cost reimbursable with fixed fee (c) Target price (d) Measured contract (e) Guaranteed minimum price (f) Lump sum, fixed price
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5.2 Basic Types of Contract
FIG. 12 indicates the different relative levels of risk to client and con tractor when using different forms of contract for the completion of the project works. Of absolute and key importance is the adequate definition of the works. A good guide to the preparation of specifications is given in BS 7373. The differences between these different forms of contract and typical uses are described below:
1. Cost reimbursable with % fee -- The contractor agrees to carry out the work for whatever it actually costs him to complete it (as substantiated by receipts, time sheets, etc.) and then charges this amount plus a percent age fee based upon these costs. The disadvantage or risk to the client is that the contractor may not keep his costs under tight control. There may be no particular incentive for the contractor to keep his costs down since he will get a larger fee the longer and more expensive he makes the job.
Such conditions of contract may be necessary for research work where only a few contractors have the capability and the outcome may not be known for certain. Client and contractor must be in complete harmony, working for the same goal, for this type of contract to be considered.
2. Cost reimbursable with fixed fee -- This form of contract puts a limit on the costs by imposing a fixed fee upon the contractor. Often this form of contract is used by engineering design consultants. Normally the reputation of the consultant is at stake, and abuse of such conditions is unlikely; it still puts the client at risk if increased costs due to poor budgetary control by the contractor, but this may be acceptable if it enables small specialist firms to be employed.
3. Target price-- The contractor agrees to perform the works within a given cost ceiling and/or time frame. If the contractor manages to complete the works within budget or time frame then a bonus is paid. This type of con tract has been very successful for such projects as motorway road repairs where rapid completion is required by the client and the incentive of a large bonus has driven such works to a successful conclusion by the contractor.
4. Measured contract -- A Bill of Quantities is prepared to describe the works in great detail. Rates are attached to each item of work and the contractor is paid according to the amount of work performed. For example, a rate is applied to the supply and laying of cable in a trench per linear meter of cable laid.
Description Unit Rate/unit Quantity Total 185 mm^2 11 kV PILC cable laid in trench Linear meter d100.00/m 1,500 m d150,000 There is a risk to the contractor if the bill of quantities does not define in sufficient detail the work involved. He may underprice the work at the tender stage and have no recourse if he did not fully understand the full scope of the work involved. It would be necessary to check, in the example above, if the rate should also include for the cutting of an asphalt surface, digging of the trench, the sand surround to the cables, inclusion of cable tiles, back filling the trench and possible reinstatement of the asphalt surface.
Interim payments may be made to the contractor on a regular basis based upon a measurement of the work completed. This type of contract is particularly common for building services work, cable laying and overhead line construction.
Variations to the estimated quantities in the original bill of quantities invariably occur in practice. As long as these increases or decreases do not materially affect the overall intent of the contract works (often judged by whether the overall contract value has changed by more than 615%) then the rates detailed in the contract remain valid. The risk to both the contractor and the client is therefore kept within manageable bounds.
5. Guaranteed minimum price-- The client and contractor agree a guaranteed minimum price for the completion of the works. This may then be varied should the scope of the works change during the contract period. A guaranteed minimum price reduces the risk to the client but increases it for the contractor. This type of contract requires good definition and a minimum of interference and change requests by the client during the contract period.
6. Lump sum, fixed Price-- The client and contractor agree a fixed price for carrying out the work. The risk here is greatest to the contractor since unforeseen circumstances may alter the cost of the works considerably.
The client has effectively placed the risks involved with unforeseen circumstances onto the contractor with this type of contract. Of course the contractor will price the works accordingly with a larger than normal contingency to cover any lack of definition. It is important with this type of contract that the client does not impose significant changes to the scope or definition of the work during the contract period. If the client does this then the contractor will be able to correctly claim for extra costs. A form of contract such as this is useful where the design, supply, and installation of transmission and distribution equipment is required to be placed totally in the hands of a competent contractor.
5.3 Standard Terms and Conditions of Contract
5.3.1 Forms of Contract
A contract is an agreement between two or more parties such that if one party fails to do what he has promised another party will have legal remedy.
The contract therefore embraces both statute and common law.
A variety of standard conditions of contract are available for transmission and distribution construction works. These may be broadly classified into whether the works consist of:
_ supply only of materials;
_ supply of materials and supervision of erection/installation; or
_ supply and installation.
In addition a degree of design work may also be required from the con tractor in all these variants.
Model forms of conditions of contract have been written for application within the engineering industry. Considerable thought has gone into these documents and many of the contract clauses are inter related. Therefore, any modification of one clause may have 'knock on' effects throughout the conditions of contract. Only after very careful consideration and certainly only after expert advice should any attempt be made to amend the standard model form conditions of contract.
IMechE/IEE Model Form 'A' and the more recent MF/1 Conditions are suitable for detailed design, supply and installation transmission and distribution plant construction contracts. Similar IMechE/IEE Model Forms are available for Supply Only (Model B2) and Supply and Supervision of Erection (Model B3) types of work. The ICE and FIDIC Model Forms are useful where a large element of civil engineering works are involved.
IChemE forms of contract are especially suitable for large 'design and construct' projects. RIBA Model Forms are very different in concept and intended for building works contracts and not normally suitable for substation or overhead line construction.
Less adversarial terms and conditions are now gaining acceptance. The NEC, published by the Institution of Civil Engineers, is now well tried and tested and attempts to resolve 'claims' as they arise. Such contracts may also include associated client/contractor partnering arrangements.
Note:
IMechE _ Institution of Mechanical Engineers IEE _ Institution of Electrical Engineers 1 ICE _ Institution of Civil Engineers FIDIC _ Federation International Des Ingeniurs _ Conseils RIBA _ Royal Institute of British Architects IChemE _ Institution of Chemical Engineers NEC/ECC _ New Engineering Contract/Engineering Construction Contract
The diagram below (FIG. 12a) helps to frame thoughts as to where client and contractor will inevitably have to work together in a collaborative manner for the benefit of the project. When the work is of a high complexity and where client involvement _ such as being necessary for gaining wayleave approvals and planning permissions _ is necessary, such joint working is essential if delays and cost escalations are to be avoided. Further, a client cannot, under most modern health and safety regulation (see Section 5.4.5), completely absolve themselves of responsibility for the welfare of all those working on their projects, including contractor personnel.
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FIG. 12a Characterization matrix relating project complexity with client involvement.
High project complexity / Low need for Client involvement
Applicable contract strategy:-
Consortium
• Incentive for Contractor innovation
• Maximize appropriate risk transfer
• Early Contractor involvement High project complexity / High need for Client involvement
Applicable contract strategy:
Alliances
• Complex contract strategy
• Risk share appropriately Low project complexity / Low need for Client involvement
Applicable contract strategy:-
Prime contractor
• Simple contract strategy
• High risk transfer (to Contractor) possible Low project complexity / High need for Client nvolvement
Applicable contract strategy:-
Traditional
• Later Contractor involvement
• Fixed pricing possible (within strictly defined limits)
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FIG. 13 Privity of contract -- typical client/contractor arrangement
using a Consulting Engineer for transmission and distribution construction
contracts.
Client Engineer Contractor Contract 1 Contract 2 Powers and duties only as defined in Contract 1 between client and contractor
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5.3.2 Role of the Consulting Engineer
It is quite normal for the client to employ an 'engineer' to act as an impartial and technically competent adjudicator between client and contractor for the administration and perhaps the design of the contract works. The client sets up a contract between client and contractor and a separate contract between client and engineer. There is no privity of contract between con tractor and engineer. However, the consulting engineer has specific duties and powers under the terms and conditions of the client/contractor contract and is able to instruct the contractor to perform during the course of the works. The arrangement is shown in Fig. 13.
The consulting engineer is often brought in by the client at an early stage in the project life cycle to carry out the technical system studies. The engineer may advise the client on the best form of contract for the particular work to be performed. The engineer may also assist or complete the financial and economic project evaluation and prepare the project's outline design.
This work is then converted into a tender document. The engineer will then supervise the issue of tenders and produce an independent tender adjudication from which the most appropriate contractor is selected to carry out the works. Typically, the engineer will check the contractor's detailed designs during the contract period and also supervise the installation on site.
Often the client has considerable technical resource and may well have a contracts group which is capable of fulfilling all the roles of the consulting engineer listed above. In this case, the client takes on the dual role of both client and engineer.
5.3.3 The Design and Construct Contract
Recently there has been a trend away from the use of the consulting engineer in large mechanical and electrical (M&E) multidiscipline contracts. The client appoints a single 'management contractor' or 'main contractor' to complete the whole works on his behalf. This requires a mature approach to client/contractor relationships. The method is particularly suitable where the client does not have a large technical resource, is prepared to put faith into a contracting organization and will not interfere with the design process without understanding that this is likely to cause changes, and will result in cost escalation. The advantage to the client is that the responsibility for inter faces between the different engineering disciplines or sub-contracts is all in the hands of a single main contractor.
If the work is well defined such an arrangement does not place undue risk on the contractor and, all things being equal, prices for the work will be competitive. However, more often than not the work will not be clearly defined (since at the time of tender it has not been fully designed) and the work will be described more in terms of a performance requirement. Such contracts may run into difficulties if risks have not been placed with those best able to handle them. For example, it is difficult for a contractor to handle all aspects of planning permissions or to match the design of the plant to the client's particular operating procedures if these are not clearly specified at the time of tender. Since a contract should involve co-operation between client and contractor with the goals of getting the work completed on time, to a given cost and to a given standard such an equitable split of risks should be possible given a mature approach by both parties from the outset.
To try to reduce the antagonistic relationship between client and contractor, much thought is currently being given to new engineering conditions of contract. Further, partnering arrangements have been introduced whereby client and contractor meet on a regular basis at all levels within the organizations to resolve issues.
Regardless of the form of contract, it will not be possible to adequately monitor and control progress without the construction of a rigorous program of work involving a clear work breakdown structure (WBS), organizational break down structure (OBS), resource assignment matrix, and clearly estimated and costed activities, coupled to a logically linked activity network. Given such a good program, the work may then be subjected to modern 'earned value' cost and schedule analysis. On larger scale programs, fund providers are now insisting upon the construction and independent review of such programs before sanctioning funds.
5.3.4 Private Finance Contracts
There is no standard form of private finance contract, although with experience some governments and public bodies are developing 'standards' to meet their particular requirements. The consequence of the lack of standardization, together with the large sums of money involved, the correspondingly significant risks, and the special aspects of each major project, is that private finance projects usually involve a long period of contractual negotiation.
Typically, the client body will solicit interest by public notice, will invite tenders from four pre-qualified bidders, and on receipt of tenders will select one as 'preferred bidder'. Negotiations are then started with the preferred bidder, during which time technical and financial options may be considered, risks re-apportioned, and contract terms finalized, before the bidder puts in a 'best and final offer'. If this is unacceptable to the client, he may chose to re-start negotiations with one of the other bidders, but depending on the original terms of the bid will probably have to compensate the originally selected preferred bidder for the costs incurred during the negotiating period. The total period from bid invitation to award of the contract has been known to take more than 2 years, and legal and technical costs can be high.
The format of the contractual arrangements will vary according to the nature of the project and the finally agreed allocation of risks, but typically the successful firm or consortium of firms will establish a company for the purpose of holding and operating the concession. This is called a 'Special Purpose Vehicle' (SPV). The capital provided for the SPV will probably come only partly from risk capital put in by the owners; they will employ a financial consultant to advise on the optimum financial structure and to assemble a consortium of banks to lend the rest of the money needed for the project. This may involve a separate bidding process, to obtain the best offer.
In order to get the project built, the concession company will then let a contract to a construction company, or consortium of companies, specialized in the sector concerned. If one of the concessionaire partners is a con tractor or a manufacturer they will be in receipt of at least a part of the work. The form of this construction contract, which is in effect a sub contract to the concession contract, will be more conventional _ probably, a design and construct contract with an element of partnership or risk sharing (see Section 5.3.3). Often a further separate contract will be let for the operation of the asset. This enables the best specialists to be used in each area, and again one of the member companies, such as an electricity utility, may be the obvious choice. However if the operating contractor is different from the construction contractor it does leave a difficult contractual inter face between the two when it comes to project handover, operational start-up problems, etc. One way of minimizing this is for the SPV to be more than a financial framework, and instead to take on staff seconded from partner companies and/or the client and to operate the concession itself.
It should be apparent from the foregoing that the costs of bidding and of establishing the SPV mean that this form of financing is only appropriate for large projects, and indeed it is only on large and expensive projects that public bodies will be concerned at the effect on their debt ratios.
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FIG. 14 Construction contract event network.
Contract period starts Extensions of time Extensions of time Liquidated damages start Delayed completion Defects liability period ends Defects liability period starts Test on completion Extensio Subcontractor delayed Site tests Availability of site Provision of data Tender Start work Approve drawings Variations Delivery to site Sitework starts Variations Complete erection Take over Final certificate Second retention First retention Interim payments Adjust CP Progress payments Letter of acceptance Loss and damage to plant begins Accident and damage to third party starts Reduction in cover; Cover ends Works tests
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5.4 Key Clauses
5.4.1 Introduction
This section gives an explanation of the key clauses contained in model forms of contract applicable to transmission and distribution construction works. FIG. 14 is a network showing the interrelationship of these different clauses and their relevance during the construction phase of the project life cycle.
5.4.2 Program
The client may issue a letter of intent to the chosen contractor following the tender adjudication process. There is no assurance that this will result in a contract and such letters should be treated with caution.
The contract commencement and overall contract period is defined in the letter of acceptance unless stated elsewhere.
Where time is of the essence (a wording which introduces much risk to the contractor) the client has the right to terminate the contract (and payments to the contractor) if the contractor fails to complete the work on time. An extension of time may be granted if the delay has been caused by client, con tractor or circumstances beyond the control of either party (e.g. an industrial dispute in one of the equipment manufacturer's factories). It is in the client's interests to deal with extensions of time as they arise or on a regular basis. Extension of time claims should not be left until the end of a con tract or the contractor may well decide to be late by a certain period and be the only party to have all the necessary paperwork to justify this.
Variation orders may be issued by the engineer to the contractor. Time related costs may be involved together with program implications. The scope of the variations must not alter the original intent of the contract and are limited to perhaps 610% of the contract value. As long as this limit is not exceeded, the prices for the varied works must be based upon those prices included by the con tractor in his original tender. It is in the contractor's interests if the client substantially alters the scope of the works since this will allow the contractor to fix prices for the excessive changes without recourse to open tender.
If the contractor fails to complete the work on time, then he will be in breach of contract. In practice, things are not so clear-cut on multi-discipline contracts. It is clear that if the work is delayed, the client will probably suffer some loss of revenue which was originally intended to arise from the completion of the project. A liquidated damages clause is therefore placed in the contract as a genuine pre-estimate of the damage likely to flow from the breach. The damages, whether actually suffered or not by the client, are not a penalty. The liquidated damages clause tends to set down in advance a limitation on the contractor's liability. An example of the preparation of a liquidated damages claim is given in the case study included in Section 7.
During the course of the contract the engineer will witness or check tests carried out at the manufacturer's works, on site and upon completion of the works to show that all is in order.
Upon completion of the works the contractor receives a Taking Over Certificate (often tied to release of monies to the contractor). The contractor is then responsible for a maintenance or defect liability period when defects caused by bad workmanship or materials have to be rectified. At the end of the maintenance period the contractor receives a Final Certificate representing the end of the contractor's obligations under the contract. The contractor will, however, still remain liable under tort. If the contractor's conduct constitutes negligence, then they should still have a liability in tort for a period of several years (6 years in the UK) from the time the action was known or reasonably thought to be known.
5.4.3 Payments
FIG. 10 shows the build-up of monies flowing to the contractor during the course of the contract. The different payments, retentions, and bonds are explained in Section 4. Contract Price Adjustment (CPA) clauses are often included in contracts involving the supply and installation of cables where the raw material and manufacturing labor costs are likely to fluctuate on the open market. The contractor should ensure that Progress Payments should include for variation orders and CPA if applicable. Plant for which progress payments have been made should be marked as the client's property. The client should also make sure that the contract allows temporary possession of dies, templates, etc. such that the work may be completed should the contractor become bankrupt during the course of the project.
5.4.4 Insurances
Civil engineering contracts usually have to include contractors all risks (CAR) insurance. Reasonable precautions must be taken to ensure that damages to both the works and plant are rectified. The insurance policies must be adequate since an indemnity does not alter the legal position and is only as good as the insurance cover or the financial status of the parties involved. Both client and contractor must therefore be aware of the financial standing of the other party before a contract agreement is signed. Indemnity clauses may be included in the contract to limit the contractor's liabilities under tort. In such circumstances, the contractor remains legally liable but may have the client underwriting his liabilities.
5.4.5 Health and Safety
Different countries have different approaches on legislation, regulation, and enforcement. A good contract will make reference to the need to comply with the rules on health and safety applicable in the territory concerned.
Many transmission and distribution clients have their own specific safety rules and these too must be referenced and adhered to. In locations where local requirements are minimal, it is wise to specify adherence to a recognized set of rules (such as European, Japanese or US safety standards). This will demonstrate that reasonable consideration has been given to health and safety and will minimize the risks of later legal actions.
Member states of the European Union have all incorporated into their national legislation, the content of a series of European Directives that establish minimum standards on occupational health and safety. In the United Kingdom, the relevant legislation is the Health and Safety at Work Act 1974; the regulatory trend here is away from prescriptive rules and towards risk assessment. In the United States, the Occupational Safety and Health Act of 1970 created the Occupational Safety and Health Administration in the Department of Labor, which is responsible for workplace safety and health regulations.
As a specific example, in the United Kingdom, all organizations with five or more employees (and that will include special purpose or joint venture organizations created for a specific contract) are required by law to have:
_ A documented health and safety policy.
_ Documented risk assessments for all significant hazards.
_ Access to competent health and safety advice.
_ Documented arrangements for the planning, organization, control, monitoring, and review of health and safety arrangements (normally in the form of a H&S manual).
_ Adequate health and safety training for managers.
An important aspect of safety is the clear allocation of responsibility between the contract parties at all stages of the work from conceptual design through to commissioning, acceptance, and ongoing operations and maintenance. In the United Kingdom, this is given legal force through the Construction (Design and Management) Regulations 1994, which are the United Kingdom's implementation of the EC Directive 92/57/EEC on health and safety requirements at temporary or mobile construction sites.