Why do disputes occur and how can they be avoided? At the outset two parties willingly enter into a contract, with genuine good intentions with regard to its outcome. The owner wants to have its facilities built, safely, to the desired standard and delivered on time. The contractor wants to do a good job, have a happy client they can work with again, and of course, make their budgeted margin (or better). So why do these good intentions so regularly deteriorate into conflict and dispute.

There are many reasons contracts deteriorate into conflict, however the following factors are in our experience major contributors to disputes on projects and they are reasonably easy to avoid or at least mitigate if the correct focus is applied.

Time pressure pre-contract

Both parties are typically under pressure to conclude contract negotiations and get the project started. The owner want their facilities completed on time and the contractor wants to lock the project into their order book. The effect of these positive intentions is that closing by a given date becomes the focus and this often leads to shortcuts being taken with respect to negotiations and both parties ensuring they have a full understanding of their responsibilities and obligations.

Mack Energy focus: Get the deal done, but not at the expense of considering all issues, including correct contract terms, an accurate specification and a realistic schedule. This can be done efficiently, using experienced professionals, and the value added far exceeds the cost.

Contract terms

The terms we see on many major projects are poorly structured and lack key clauses. This often reflects the evolution of contracts, where the contract from a previous project is amended for the next. These progressive changes to the contract lead to an accumulation of errors and inaccuracies, with the end result often being a poorly structured document, with ambiguous terms, that is likely to lead to disagreement and dispute later in the project.

Mack Energy focus: Spend the necessary time and commit the right resources and expertise to ensuring the contract is fit for purpose and properly understood by both parties.

Incomplete design information/specification

Linked to the issue of time, is pressing forward with the finalisation of a contract based on incomplete design information and or poor specifications. In these instances subsequent change is inevitable, leading to discussion and potentially dispute as to what was and was not anticipated in the contractors price.

Mack Energy focus: Complete the design, properly review the specification and use an appropriate form of contract that reflects the status of the design, the allocation of design risk, and sets the structure for the adjustment of the contract price as the design matures.

Unrealistic schedule

As noted above, owners want the their facilities to be delivered by a certain time and they often will not accept a later delivery even if the contract start date drifts due to events that are the owner’s risk. On one project we recall extensive negotiation over the schedule period, and whether the project should be delivered in 28 or 24 months. The contractor knew the critical path demanded 28 months as a minimum, but the client would not agree. It then took the client a further 6 months to place the order, demonstrating that a realistic construction schedule could have been accommodated to the benefit of the project. Needless to say, the project was not delivered within the 24 month period and a dispute ensued.

Mack Energy focus: It is in the interest of all parties to ensure the schedule is realistic. If it is not then deliverables in the schedule will be missed and delay and dispute is inevitable.

Inexperienced teams

Finding the right people to manage a complex project is not easy, but having the right skills and experience is essential to deliver a  successful project. We regularly see both clients and contractors assign inexperienced personnel to key project positions and the outcome is predictable.

Mack Energy focus: Take the time to find the right people for key project positions and if they are not available internally look outside your own resources and recruit or contract people with the right skills and experience, and consider using an advisor who will also provide an oversight service to support contract personnel.

Hoping for the best and not managing the contract

Linked to all the above issues is simply not starting the project correctly from a contract management perspective. This may happen because teams are under time pressure, or perhaps they simply do not have the right skills, but if the contract management process is not followed, you will be in a weaker position should disputes arise.

Mack Energy focus: Review the contract, identify all management and administration requirements, including notices, deliverables and records, and follow these requirements from the first day of the project. Getting on the ‘front foot’ with respect to change order and claims management is invaluable and will result in an improved financial outcome for the project.

In future articles we will expand on the subjects of contract review and negotiation, contract management and claims and dispute resolution.

About Mack Energy

Mack Energy provides professional results focused Commercial, Contract, Claims and Dispute solutions for Energy Sector EPC Projects.

Services are managed and delivered by our managing partners located in Dubai, Johannesburg and London – each having more than 25-years commercial experience on complex multidiscipline engineering & construction projects across the Energy sector, including O&G, petrochemical, power and renewables.

Mack Energy Solutions include:

1. Commercial & Contract – Services through complete project life cycle from tender to delivery, including contract drafting, review & negotiation, contract administration and final account process
2. Claims & Dispute Resolution – Services for claimant or respondent including claim preparation, review and the management of the resolution process whether through negotiation or a formal dispute process
3. Commercial Management – Services provide clients with expertise to develop or support the corporate commercial management function
4. Independent Project Review – Offers stakeholders including executive management and board of directors an independent audit and qualified appraisal of a project’s commercial status
5. Project Development – Services provide project management and commercial support to develop your energy project
6. Project Resourcing – For clients and contractors includes the provision of personnel including project managers, construction managers and superintendents

Mack Energy ensures that the most appropriate resources are used for each assignment, including sourcing additional resources and expertise from an established network as needed.

Our contact details can be found at www.mack.energy