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Contract, Commercial & Disputes
Every project needs a solid foundation – both literally and figuratively. All too often though we see the same fundamental problems manifest before the first shovel hits the ground because of poor documentation. Many problems are created by poor tender processes and buried deep within the head contract agreement. As the binding and governing document that creates the culture and environment under which the project is executed, getting things wrong at this stage makes contracting a risky business.
Here are some of the most common problems:
1. Poorly scoped projects sent out to tender
Projects often go out to tender partially designed. While it is unrealistic to expect that all projects will be completely scoped when they go out to tender, it is a real challenge for contractors to accurately cost a project when the balance of the design is to evolve during construction and, without appropriate risk and change management processes in place, things can quickly get out of control.
2. Inappropriate tender process
Often, project owners set very short time frames for contractors to respond to tender requests. For the contractor, rushing the tender process increases the potential for errors, mistakes and gaps that may only come to light once the contract has been signed and construction has begun. For project owners, it can result in a huge variation in the quality and detail of the tender responses, making it difficult to evaluate the relative strengths and weaknesses of each bid. For both parties, it significantly increases the potential for future conflict.
3. Under-estimation of time/cost/resources required
Poorly defined scope and a rushed tender process hampers a contractor’s ability to develop a proper construction critical path in the schedule, without which the time, cost and resources required to complete the project cannot be properly assessed. Under-estimation of time, cost and resources generally leads to inadequate performance, excessive risk taking to minimise overruns, and a decline in construction quality.
4. Lowest price syndrome
Competitive bidding drives the entire industry towards the lowest price. Tenders that are awarded on price alone often go to the contractor who has made the biggest mistake or who has given little consideration to any risk assessment. Extreme vigilance and the associated cost is then required in order to minimise the risk of time/cost/schedule overruns.
5. Inappropriate risk allocation in contract
Contract terms and conditions that heavily favour one party or require one party to shoulder a disproportionate or unreasonable amount of risk establish an adversarial culture from the outset of the relationship. This increases the likelihood of future conflict that may require an expensive army of lawyers and experts on both sides to resolve.
6. Inadequate budget
Nothing has more potential to cause conflict and a breakdown in the project owner/contractor relationship than shortfalls in the project budget. In most cases, expecting the price disclosed at tender to be the price for the completed project is a misconception. Inadequate budget is often compounded by inadequate contingency, particularly if the original design is poorly scoped at the outset.
7. Inadequate cash flow planning
Poor cash flow is perhaps the biggest single reason projects fail. If cash flow is severely restricted or the tap gets switched off entirely, contractors and sub-contractors don’t get paid and the project grinds to a halt as the parties’ battle it out in the courts, or worse, the smaller guys go out of business.
8. Poor or inadequate resources
Skills shortages are a constant concern on most projects and an under-estimation of resources required or no defined critical path in the schedule can further exacerbate the problem. Having poor or inadequate resources increases the risk of defects which may go unidentified or only manifest through subsequent failure of the structure, sometimes with catastrophic results.
So, what can you do to improve your tender processes and documentation?
Few projects would ever get off the ground if we waited for everything to be perfect but, with a bit of forward planning, there are a number of steps you can take to minimise the likelihood of problems occurring.