Mega Projects: Avoiding Contractual Disputes
By their nature, mega projects are funded by well-resourced organisations. Typically, funding security has allowed some elasticity for overruns and the associated cost, which recent experience has illustrated can be 15 per cent of project cost.
Yet tightening budgets and the need for project operators to better manage their reputational risk has put greater focus on management of the contracts that are driving these projects – which range from anything from laying foundations to supplying mobile devices to field engineers.
Traditionally, companies have attempted to mitigate against the risk of project cost overruns by engaging engineering, procurement and construction (EPC) firms in lump sum contracts. Under an EPC contract, the contractor usually has responsibility to produce a detailed design and meet the performance output requirements of the specification. However, when latent errors are found in the pre-tender front-end engineering and design studies during the course of detailed design, claims are invariably made by contractors as a result.
Where the EPC lump sum contract is silent on how this risk should be dealt with, arbitrations, disputes, controversies and cost overruns inevitably ensue. As these capital projects evolve, the likelihood of additional grey areas that give rise to change orders and possible claims increases. The owner contract management team is faced with a flurry of change order requests that need rigorous review, internal consultation, expert opinion and management attention.
Project operators have traditionally relied on a combination of enterprise resource planning (ERP) systems, spreadsheets and paper trails to manage mega project contracts. ERP systems are by design good at handling transaction management such as invoice and purchase order processing. These systems are designed for predictable, repetitive processes. However, in reality mega projects operate in dynamic environments where new projects can throw up new contractual challenges.
So, increasingly project operators are adopting “fit-for-purpose” contract management software that integrates with ERP and other systems. This usually incorporates a common contract communications platform that connects the parties, such as engineers, legal and finance teams, as well as contractor teams, on a contract. This allows teams to work collaboratively in a predetermined space. Such systems preserve the proverbial red thread as to where responsibility lies as the contract is executed, allowing for a single, referential point of truth. In essence, they synchronise the evolving contractual position with the evolving built environment so that the contract is always a true, real-time reflection of the latter. In turn this helps contract managers move from adversarial relationships to partnerships with contractors.
While the key is prevention, disputes remain inevitable on mega projects. During dispute resolution, accessing the true audit trail of decision-making and evidence is essential in negotiating a case and minimising the associated cost. Companies should ensure their contract management processes and systems are providing them with the “story” and the context at the time a decision was made, rather than providing them access to disparate documents, emails and invoices with no clarity on how these all tie together.
Discover if your current technology is fit for purpose when managing the contractual project risk by reading the whitepaper ‘Contract Management for capital expenditure’.
This article was orginally published here