Gaining more control to ensure project success

In the first of two articles, Mukund Karnick, senior contracts advisor at Nakheel’s Palm Jebel Ali, discusses when the time is right for clients to take more control over building material selection and use.

In any construction project, the client requires that when the completed project is delivered, they get the exact quality in material and workmanship that was specified when finalising the design of the project.

This is the reason why the client, in most contracts, specifies a list of approved materials or manufacturers/suppliers in the tender documents.

They are generally called ‘approved suppliers/subcontractors’. Bidders are expected to have contacted them for prices and considered those prices in their tenders. But there are two more options that the client considers in ensuring that they get what they wants, namely:

1. Procuring the material of his choice and supplying to the contractor for installing in the project as ‘Client Procured Items’ (CPI), and

2. Instructing the contractor to sign contracts with the subcontractors of his (client’s) choice, naming them as ‘Nominated Subcontractors’ (NSC).

In this article, we will consider the first option.

Client Procured Items (CPI)

This concept was not supported in the earlier versions of FIDIC. However, the 1999 version supports these as ‘free issue material’. Normally, all material that goes into the permanent works in a construction contract is deemed to be the responsibility of the contractor.

But sometimes it is necessary to deviate from this practise for various reasons, such as:

1. It is difficult for the contractor to source certain material specified by the client in the tender documents;

2. The supplier is overbooked and does not want to oblige the contractor in sticking to the contractor’s required delivery schedule; or,

3. It is likely that the supplier may quote a high price to the contractor, prompting him to increase his price for the work item, but is likely to be coaxed by the client into supplying the item at a sizably discounted price.

However, there are some disadvantages to this which I’d like to suggest steps to mitigate problems arising out of them:

1. By undertaking to procure the items, the client faces all risks regarding quality, timely procurement, defects, etc., of the items thus procured. The contractor is required to only carry out the visual inspection at the time the materials are delivered. This inspection does not relieve the client of liability for shortage, defect or default not apparent from such inspection.

2. It is very likely that the contractor’s personnel may tend to be less careful about wastage, loss, misuse of the CPI, and so the cost of the work involving such items shall increase.

3. The warranty period of such items is hard to be linked to the defects liability period of the contractor since the supplier of such items is liable for the warranty period counted from the delivery of the item only. This is more so when the CPI is procured far in advance of when it is actually required for installation.

4. Delay in procuring these items may give rise to a time and cost claim by the contractor.

5. Favouritism or vested interests in the selection of suppliers may result in receiving substandard quality goods.

The likely mitigation measures are

1. Minimise the number of items to be procured directly by the client.

2. Include requirement of pricing for ‘installation only’ of the CPI in the BOQ of the main contract.

3. At the tender stage, establish that the contractor shall be deemed to have provided for all charges on account of taking delivery, handling, storage, maintaining inventory, shifting and installation of such CPI in his price; the contractor shall also be made fully responsible for these items during the period starting from when they are received on site, and ending with the date of when the contractor’s defects liability period under the main contract is over.

4. Allow a reasonable percentage for wastage so the contractor shall be made responsible to bear the cost if the wastage exceeds the pre-established percentage.

5. Ensure the supplier interacts and coordinates with the contractor for timely and ‘as-scheduled’ delivery of items. A provision should be included in the supply contract for not only the delay penalty but also for recovering all other damages (including the contractor’s claims, if any) arising out of the supplier’s failure to deliver, or late delivery.

6. Do not remove any items that are already in the contractor’s scope to provide, such as supplying a CPI after the main contract is awarded only because somebody approached you to supply the items at a cheaper price than what the contractor considered. This could be treated as an act of bad faith or breach of contract.

As far as possible, CPIs should not be included in tenders. But if unavoidable, then precautions must be taken.

• Avoid favouritism in selectingsuppliers. Avoid middlemen and as far as possible purchase straight from the manufacturers or authorised dealers of the goods.

• Ensure that the contractor has quoted his rate/price for ‘installation only’ of the CPI in his tender.

• Ensure that the tenderers of the main contract were advised to include charges on account of taking delivery, handling, storage, maintaining inventory, shifting and installation of CPI in the price.

• Prevail upon the contractor to limit wastage of the CPI to the pre-established reasonable percentage.

• Ensure proper coordination between the supplier of the CPI and the contractor regarding selection of the design, finishes, delivery schedule, delivery point, etc.

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