Contract Administration

Head Office Overhead & Profit Claims – Why Hudson’s Formulae Failed Most of the Time?

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If you are a contractor and having a delayed project (presumably not solely caused by you!), Head Office Overheads Contributions may be in your list for Loss and Expense claims. It is common for contractor to adopt the simplest and so called ‘accepted’ method of calculating such expenses hoping the other side will accept it too. …

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Construction Law, Contract Administration

WHEN DOES A VARIATION IN CONSTRUCTION BECOME A SEPARATE CONTRACT?

Variations Clause
Most standard forms of contract include a clause under which the employer or his representative is able to issue an instruction to the contractor to vary the works which are described in the contract. A change in shape of the scheme, the introduction of different materials, revised timing and sequence are all usually provided for by the variations clause. It will also usually include a mechanism for evaluating the financial effect of the variation and there is normally provision for adjusting the completion date. In the absence of such a clause the employer could be in a difficulty should a variation to the works be required. The contractor could either refuse to carry out the work or undertake the work and insist upon payment on a quantum meruit or fair valuation basis. Calculation of the price for the extra work applying this method could involve payment well in excess of the contract rates. …

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Project Management

Estimating Techniques

Estimate in Phases

One of the most difficult aspects of estimating projects is that you do not know exactly what work will be needed in the distant future. It can be difficult to define and estimate work that will be done three months from now. It’s harder to estimate six months in the future. Nine months is even harder. The reason is that decisions made and deliverables produced earlier in the project have an impact on what the work looks like further along. Therefore, there is more and more estimating uncertainty associated with work that is farther and farther out in the future. …

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Construction Law, Contract Administration, Project Management, Statutory Adjudication

Importance of contractor progress payment terms

It has been said that an army marches on its stomach. Contractors and subcontractors in the construction industry run on cash. Lord Denning many years ago made the oft repeated phrase that cash flow is the lifeblood of the construction industry and this sentiment is still relevant today. Estimators when preparing tenders usually concentrate on building profits into the price. Of equal importance is the amount of working capital required to fund the contract and the need to keep the amount to a minimum. The payment terms are therefore crucial to every contractor and subcontractor. Certification and payment should be the subject of careful strategy and planning. …

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Contract Administration

CMGUIDE is the MEDIA PARTNER of the second FIDIC Contract Users’ conference

Get to grips with the ins and outs of using FIDIC contracts at an event designed by FIDIC and featuring FIDIC speakers.

The 2nd annual FIDIC Middle East Contract Users’ conference is taking place on Wednesday 23rd & Thursday 24th February 2011 in at the InterContinental Abu Dhabi.

Cmguide readers get a 10% discount to attend! Quote VIP Code: KW8116CMGP or visit:
http://www.informaglobalevents.com/KW8116CMGP …

CMGUIDE is the MEDIA PARTNER of the second FIDIC Contract Users’ conferenceRead More »

Construction Law, Contract Administration

Security of payment

By Dr Jay Palmos

To date, both the public and private sector’s attempts to resolve this problem have failed. Security of Payment (SOP) style legislation has successfully solved this issue in other jurisdictions, and should be considered in Dubai before we lose the best sub-contractors and suppliers to other more reliably paying regions. Just last month, Laing O’Rourke closed its Middle East division of 20 000. The loss of this and other superior-grade contractors signifies that the presently available source of high-quality contractors has diminished. …

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Construction Law, Contract Administration

What is Conciliation?

By Dennis Brand

Conciliation is a form of alternative dispute resolution (ADR) process whereby the parties to a dispute agree to utilize the services of a conciliator, who then meets with each of the parties separately in an attempt to resolve their differences. Conciliation differs from arbitration in that the conciliation process, of itself, has no legal standing, and differs from mediation in that the parties seldom, if ever, actually face each other across the table in the presence of a conciliator.

A conciliator usually has no authority to require the presentation of evidence or call witnesses; indeed, the conciliator usually writes no decision and makes no award. However, if the conciliator is successful in negotiating an understanding between the parties, then that understanding is almost always recorded in writing, often with the assistance of the respective parties’ legal advisors, and signed by the parties, at which time it becomes legally binding.

Conciliation can be carried out by a conciliator appointed by the parties, being someone that both parties respect and consider able to bring about a resolution of the dispute. Often the parties will prefer to use a professional conciliator, being someone trained in the conciliation process, and best able to assist the parties towards a resolution. A common method is ‘shuttle diplomacy’ or ‘caucusing’, whereby the parties to the dispute are placed in separate rooms and the conciliator goes from one room to the other trying to find common ground in order to bring about a resolution of the dispute.

A variation of that method is where the conciliator asks the parties to independently list their objectives and the outcomes they desire from the conciliation. The conciliator then discusses with the parties their respective lists, requiring them to priorities the items. Thereafter he encourages them to ‘give’ on the objectives one at a time from the least important upwards, thus reducing the number of issues in dispute.

Although conciliation can be carried out by a conciliator appointed by the parties, being someone that both parties respect and consider able to bring about a resolution of the dispute, often the parties will prefer to use a professional conciliator, that is someone who has been trained in the conciliation process and is best able to assist the parties towards a resolution.

There are several organisations that provide dispute resolution services. The International Chamber of Commerce (ICC) launched its ADR Rules in 2001 to replace the former 1988 Rules of Conciliation. Under the ICC ADR Rules, the parties can choose the settlement technique they consider most appropriate.

Conciliation in the UAE

The Rules of Commercial Conciliation and Arbitration of the Dubai Chamber of Commerce and Industry provide for conciliation on the basis of the secretariat to the committee of the DCCI appointing a conciliation panel. The form of the conciliation proceeding is contained in Chapter 5: Articles 21 and 22:

Article 21

1. A party desiring Conciliation shall submit a written application to the Secretariat.

2. The application shall include a presentation of the facts of the dispute and the views of the applicant together with supporting documents.

3. The Secretariat shall notify the other party with the application of Conciliation within a period not exceeding seven days from the date of the receipt thereof. The other party shall present his views with respect to the dispute within 15 days of the date he was informed of the application for Conciliation.

4. The Conciliation Panel shall be appointed by the Committee in accordance with the provisions of Article 17 of these Rules. The parties may object to the conciliator/s within two weeks of receiving notification of his/their name/s. The Conciliation proceeding shall commence immediately after expiration of this period.

5. The Committee may request an advance payment against the costs of the Conciliation in accordance with the provisions of Part Seven of these Rules.

6. The Conciliation Panel shall study the dispute and summon the parties before it to hear their statements and each party shall attend personally or through a representative.

7. The Conciliation Panel shall bring together the views of the parties, and upon their agreement on a final formula for the settlement it shall be recorded and authenticated by the Panel.

8. The Conciliation Panel must accomplish its duties within two months of the commencement of the Conciliation proceedings, but by a decision of the Committee this period may be extended for another similar period.’’

Article 22

If the attempt of Conciliation fails, the dispute shall be considered not more pending before the Chamber and the rights of the parties shall not be affected in any manner by what was presented or written during the course of the Conciliation proceedings.

At the request of any of the parties, the Chamber shall issue a certificate stating that the dispute had been referred to it but that attempts for Conciliation failed without giving any comment or opinion regarding the subject of the dispute.

It is worth noting that, while it is said by some, that conciliation is of little benefit because of its limitations, FIDIC, when it published its 1999 ‘Rainbow Suite’ of contracts, maintained the same provision for amicable settlement in Clause 20.5 as was included in Clause 67.2 of the 1987 4th Edition Conditions of Contract for Works of Civil Engineering Construction.

Conciliation remains one of the several available forms of alternative dispute resolution; and, if the parties involved in a dispute process consider conciliation to be the most effective way of resolving that dispute, then it is a method that should be retained.

CW

Contract Administration

Contractors will have to be patient if they want to benefit from Qatar’s World Cup

By Stuart Matthews
 FIFA has made the people of Qatar very happy and that happiness is spreading quickly. Judging by the regional response to the country’s winning World Cup bid, the population of the GCC can barely wait the twelve years until the first kick-off of the 2022 FIFA World Cup. …

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Contract Administration, Project Management

Project finance: how to secure it

By Martin Preston
THE majority of the features of a project finance loan agreement are the same as a corporate loan agreement. However, because the basis on which the lenders are advancing the loan is the forecast revenues of the project, rather than the assets or creditworthiness of the sponsors, the risks taken by the lenders and, therefore, the controls that they require under the loan agreement, are greater than would be required under a corporate loan agreement. Inevitably, some of these additional controls impact on the construction contract.

Conditions precedent

Conditions precedent are those that must be met by the project company for financial close to occur, which is when the loan becomes effective. Additional conditions precedent may also need to be satisfied before first drawdown under the loan can occur.

Typical conditions precedent to financial close that affect the construction contractor are that the construction contract and all ancillary documents (including the direct agreement to the lenders) have been executed and become effective. Since the construction contract will often itself contain a condition precedent stating that it does not become effective until financial close (to prevent the project company being committed to construction of the project before it has funds available to pay for it), it is important to avoid circularity between these two requirements. The usual way that this is dealt with is for the condition precedent in the construction contract to state that all conditions precedent to financial close under the loan agreement have been satisfied other than the effectiveness of the construction contract.

Representations & warranties

The representations and warranties made by the project company are the facts upon which the risk is allocated between the parties and form the basis of the lenders’ decision to commit funds to the project. These will normally be made at the date of the loan agreement and deemed to be repeated at financial close. Alternatively, one of the conditions precedent to financial close will be that no changes have occurred that render any of the representations and warranties previously made inaccurate.

Where the project company is required to make representations and warranties relating to the construction of the project, these will be passed down to the construction contractor, who will be required to make the same representations and warranties to the project company.

The representations and warranties commonly required to be given by the construction contractor in a project-financed construction contract include the following:

• The construction contract is legally binding;

• No defaults have occurred under the construction contract;

• No force majeure event has occurred under the construction contract;

• All necessary licences and consents required for the construction of the works have been obtained;

• Completion will occur by an agreed date;

• No variations will be made to the works; and

• No amendments will be made to the terms of the contract.

Undertakings & discretions

Undertakings and/or reserved discretions are the means by which the lenders control the project company and its implementation of the project. They may be positive or negative and prevent the project company from exercising any discretion it has under the construction contract without the lender’s consent. Thus, the project company will not be able to vary the terms of the contract or the scope of the works, issue certificates or terminate the construction contract without obtaining the lender’s consent.

Payment

Payment will be due to the construction contractor when it has met the payment conditions under the construction contract (which will usually be based on the achievement of milestones). However, the project company will only have funds to make payment to the construction contractor if it is able to draw down funds under the loan agreement. This will usually require demonstration by the project company that not only are the amounts due to the construction contractor under the construction contract, but also that:

• When aggregated with all amounts paid to date, the amount sought is within the agreed construction budget;

• The sum of the amounts paid to date and the remainder of the loan allocated to the construction costs is sufficient to complete the works;

• The representations and warranties remain accurate in all respects;

• No event of default has occurred under the loan agreement; and

• There has been no material adverse change affecting the project.

Insurance

Where the works suffer a total loss (or a loss in excess of a pre-agreed amount) and this is covered by insurance, the usual position would be that the insurance proceeds would be paid to the contractor who would then undertake the rebuilding of the works.

However, in a project finance transaction, the insurance proceeds will be paid into an account controlled by the lenders who will decide how they are to be used. If they decide that the insurance proceeds and the outstanding amount of the loan are insufficient to complete the works, then rather than the works being rebuilt, the insurance proceeds will be used to repay the debt. This is known as a “head for the hills” clause and will need to be replicated in the construction contract.

Gulf Construction

Construction Law, Contract Administration

Front end advice

Despite the harsh lessons learnt over the latter part of 2009 and first quarter of 2010 it is still patently obvious that parties to contracts are falling into a number of age old pitfalls, many of whom are convinced that they have no other viable choice but to accept top-down back-to-back arrangements and in some cases a scramble of documents that barely resemble a contract at all.

There is still an overwhelming market tendency to order mobilisation and commence work on the back of a very brief Letter of Intent (LOI), particularly if the commissioned works are minor works or low value. This is a particularly high risk practice. …

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