Author name: mackenergy

ANATOMY OF DISPUTE – PART II Mack Energy: 06 September 2023 Many years ago there was an Independent Power Plant (IPP) developer who struck a deal with a industrial entrepreneur in Nigeria to build, own and operate a gas fired power plant and sell electricity over a 20 year term. After the celebrations it was time to build the power plant so that revenues from electricity sales could start. The developer needed to get going quickly, they already had a firm quote for the prime equipment, all they needed to do was to find someone to build the plant and put it together, how difficult can that be? No need to waste money on finding a capable EPC contractor, they just needed to find a good project manager that could put it all together for them. Finding a project manager took a bit longer than the developer thought, they found one in the end. Even though he had limited experience and had not worked on a power plant before, he was willing to live in Nigeria for a year or two, as long as he could take his family. Through contacts the project manager was introduced to a local contractor who was ready to get going immediately. No need to go through any pre-qualification and tendering process as time needed to be gained. A short form contract prepared by the contractor was accepted. The contractor turned out to be very helpful in getting the project manager settled, finding an apartment and school. They even helped getting him settled in a new country and shared various social events. The contractor had no capability to undertake any of the detailed engineering work so he outsourced it. The project manager did not implement any quality controls for this but he trusted the contractor fully. The contractor started building the power plant to its own design. The construction works did have some quality controls but it was all handled by contractor. The time came that the industrial entrepreneur was expecting its electricity. The contractor was not yet ready but it would not be too much longer. The equipment was in place, most of the piping and electrical work had been done, they just needed a little bit more money from the IPP developer to finish off. The project manager decided the best way was to give the money to the contractor, after all it seemed fair to him and there was no need to get ‘contractual’. The IPP developer fell of its chair when it heard it needed more money as it had not been warned and there seemed to be no justification. They quickly sent someone with experience to see what had happened. The project had serious engineering and construction deficiencies, could not be commissioned and was not safe. Significant rectification works were required which the contractor was prepared to do but at a significant price, after all the project manager had been there throughout and had never raised any issues. The project manager was sent home, the contractor and IPP developer entered into a dispute on who was going to pay for the rectification work. The contractor occupied the site and would not let the developer back on until they had their money. The industrial entrepreneur was also very unhappy and was applying damages on the developer because he was not delivering the electricity he had promised. The dispute went to the local courts who were less than efficient in resolving the matter and there it stayed for the next year. Eventually the industrial entrepreneur and the developer got together and found a way to resolve the dispute and get the contractor off the site. The developer rectified the power plant with other contractors, commissioned it and supplied electricity to the industrial entrepreneur. There were no winners in the above story and the overall financial effect of this in both time and money was considerable for everyone involved. Whilst the above story may seem extreme, it is a fair bet that there are quite a few readers out there who will find some or all of it familiar to their own experiences. One of the Mack partners happened to be the engineer that the developer sent out to find out what was going wrong. In summary, just a few basic technical, commercial, and contractual disciplines would have avoided most if not all of the pain: Pre-Contract • Understand the risks and make sure that you adopt a construction strategy that is aligned with your risk appetite. • Make sure the stakeholders are competent (engineers, project manager, contractor etc). Spend time on ensuring that any contracts properly capture the agreement between the parties and include the usual boiler plate provisions with respect to responsibilities, liabilities management of change, including all-important dispute resolution clauses. Contract • Keep professional arm’s length relationships between the parties. Getting an independent company, such as Mack, to provide independent project review services would help avoid nasty surprises. • Don’t underestimate the importance of the engineering and quality processes. • Administer the Contract in accordance with its provisions. • Monitor planned v actual on the costs in real time on a regular basis. • Deal with difficult issues such as claims, extensions, variations etc., promptly. Dispute • Manage any dispute process fairly and ensure you use the contract provisions for this, whilst actively seeking a negotiated resolution. Due to constraints of time and internal personnel, it is often not possible to resource a project with the requisite capabilities. However, Mack can support you to help identify commercial risks at the start of a project and then manage those risks right through to completion, with the objective of on time and on budget delivery. 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 &

ANATOMY OF DISPUTE – PART I Mack Energy: 06 September 2023 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: Commercial & Contract – Services through complete project life cycle from tender to delivery, including contract drafting, review & negotiation, contract administration and final account process 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 Commercial Management – Services provide clients with expertise to develop or support the corporate commercial management function Independent