Construction Law/Lump sum
Dear Sir thank you for your previous answer.
Could you please provide your priceless comments on the following issues such as:
(FIDIC 2005 MDB)
1. Lump sum. As I know the lump sum (eg. Mobilization and demobilization Q.1 Rate.7,963,890USD, Provision and maintenance of the Engineer's survey equipment Q.1, Rate 85,900USD, Provision and maintenance of Engineer's mobile phones Q.1 rate 26 800USD) is given once throughout the project. Now when we have the contract extended by 6 months (actual duration of the contract was 18 months), the Contractor claims further payments of lump sum money. The Contractor has increased lump sums just by dividing the lump sum money by the number of months and multipliying by the number of months extended, I think it is wrong.
Does the Contractor is eligible for such claims, is it right to increase lump sum (of some of pay itmes)like that?
2. during the progress of works the price of cement bought locally has increased three times. The cement is used for the construction of four lane cement concrete pavement. Now they claim additional 812,000 USD. However according to (e)BOQ, Preamble to BOQ of the contract documents, 15.Concrete is says the rates for concrete are to include for (2)supplying all material ()including any admixtures, storing, mixing, transporting, placing and compactin. And as per aforesaid preamble, 5. Rates and sums to be work complete says "The rates and sums must therefore include for all incidental and contingent expenses and risks of evey kind necessary to construct, complete and maintain the whole of the works in accordance with the contract". Our intention is based on these statements to reject the Contractor's claim. What do you think, Sir, are we right to do that, in general why should we pay additionally when the "rates and sums which he enters in the Boq shall be for the work finidhed complete in every respect, he shall be deemed to have taken full account of all requirements and obligations, whether expressed or implied, covered by all parts of the contract, and to have priced the items herein accordingly".
and third is import of additional equipment and materials from abroad by the contractor. They are claiming reimbursement of custom dutied, charges, import fees, excise, vat, other wees, brokerage fees, fees to authorities relatd to import, certification fees, and fees for interim storage at the custom's warehouse. As per cl. 1.13 Compliance with law, the contractor shall pay all taxes, duties and fees....in relation to executiona and completion of the works and cl.4.16 tarnaspoprt of goods, where it says, the contractor shall indemnify the Employer ... and expenses (including legal fees and expenses) resulting form the transport of goods, and shall nogotiate and pay all claims arising from their transport. So my question is can we reject all these claims with reference to these provisions of clauses? I would appreciate if you could provide me your own comment on these issues. Thank you in advance.
Dear Karimber (Uzbekistan)
It seems that you have many relevant questions pertinent to the administration of FIDIC-borne contracts and, sadly, insufficient guidance from your superiors, which may have been served in your own professional development as contract administrator.
Answer-1: Unfortunately, I would have to respectfully disagree with your assessment. It appears that the Contractor’s approach to calculate some of the categories of relevant prolongation costs arising out of Extension of Time is perfectly legitimate. Even though the grant of EOT is usually worded as “time-no-money” the very existence of the grant of EOT is a tacit admission of the Owner that the risk for the delay event causing the EOT in the first place – the dominant delay event (or the over-riding delay event “subsuming” all other non-dominant delays) was the Owner’s risk – such as in your case – and therefore, the Owner will have to pay the prolongation costs to the Contractor. The prolongation costs are those which will directly connected to (hence the term “DIRECT COSTS” - and immediately arising out of - the extended presence of the Contractor on-site due to, primarily, the Owner’s conduct.
BTW, such Owner’s conduct may be caused by collateral agencies who are not party(ies) to this contract, but, from the Contractor’s perspective, such actions transparent and are still classified as the Owner’s interference. So any Owner’s conduct – or misconduct, i.e. resulting in a breach of material terms of the contract – directly causing the Contractor to stay on the site longer than anticipated in the base-line schedule has to be reimbursable by the Owner. In your example, the telephones, Operation & Maintenance of Contractor’s offices, site, shop, survey equipment, etc. has to be pro-rata extended in proportion to the duration of EOT. It seems logical and adequate to me that the Contractor developed a monthly figure and just applying it to the period of EOT. You, as you are apparently acting as the Owner’s representative, have to pay these entitlements.
BTW, the Contractor, under the circumstances, will also be entitled not only to the DIRECT COSTs of what Brits call “Preliminaries” and Americans call “general Conditions” –i.e. telephone, site offices, survey equipment, laboratories, Safety personnel, power, machines and on-site crew / personnel), but also INDIRECT COSTs, such as bonds and insurance extended, home-office overhead, loss of opportunity, or any costs proven to be allocated by Contractor to enable him to run this project. Since you did not bring up the question of INDIRECT costs in your inquiry, I assume the Contractor is not asking form them to be paid as well. Rejoice and quickly pay the smaller bill, for if you resist now, and the Contractor hires some wiz-kid lawyer and hardens his negotiating stance, you –the Owner – may end up paying a lot more.
Answer-2: This one is a 2-part question in itself:
a. Reimbursement of custom duties, charges, import fees, excise, vat, other fees such as brokerage fees, fees to authorities related to import (and as often as not in all ‘-stan countries, bribes and kick-backs or Backshish?), certification fees, customs fees, §1.13, and §4.16, including legal fees and expenses, associated with transport and importation of goods had been included into the BOQ rates for these items. You assertion is correct – all true – that these charges are included in the lump-sum bid price and can’t be charged separately, except in cases where the new government charges have been introduced after the letter of award (acceptance of offer = bid) issued by the Owner;
b. “during the progress of works the price of cement bought locally has increased 3 times. The cement is used for the construction of four lane cement concrete pavement. Now they claim additional 812,000 USD.” – This one is a more difficult decision to make. Sure, the Owner can “throw a book” at the Contractor and reject these claims for additional charges – if the Owner is cluster-phobic and short-sighted. The actual decision-making process on such issue has nothing to do with the literal reading of a contract, but is rather a business decision-making analysis based on doctrine of equity, or fairness. What did the Contractor bargained for in his bid? He bargained for normal fluctuations of all materials and commodities which were to be purchased on the market. If the market price on these commodities fluctuates +/- 10% or even 20%, contractors routinely build in the risk of such fluctuations in their bids. However, no reasonable contractor in the market – no matter how experienced – would have included in his price a sudden surge of 300% for any materials, lest he is insane enough to lose his bid to the next lowest bidder. When the price of any commodity spikes up by 300%, you or any other Owner’s representatives, can safely classify the event as a Force Majeure and pay the extra costs incurred, or to be incurred, by the Contractor, as his economic reality of completing the Project has suddenly, and usually without any culpability on his part, has drastically changed.
c. If the Owner hardens his position and refuses to pay the extra costs to the Contractor, i.e. reject Contractor’s claim – as you indicated your Owner intends to do – the Owner may face an unpleasant consequence of the Contractor walking away from the job uncompleted. Although I do not have all pertinent facts to make a determination of a validity of such risk on your site, the Owner must carefully consider the risk of facing termination of the Contract with this Contractor, and/or hiring a different contractor to finish a job. Keep in mind that if the material shortage has resulted in significant price surcharge, the replacement contractor will also charge the Owner the same high price as the original Contractor and the Owner would have lost the time and additional expenses of hiring new = replacement contractor for nothing.
d. The best thing to do is to investigate with the site staff whether the same-spec material is indeed unavailable at a cheaper price anywhere and to bargain with the Contractor – i.e. strike a deal mutually beneficial, or acceptable, to both parties - without interruption of work on the site.
e. I urge you not to be “trigger-happy” cowboys rejecting all claims from a contractor across the board no matter what the nature of the claim is, as aggravated contractor(s) is not a pin cushion to spike and drive needles through for personal entertainment, or worse, for personal ego trips. Contractors are in business to make a reasonable profit from their work and provide valuable service to the Owners. Please refrain from treating contractors as sub-humans, the practice of which, unfortunately, is all too common, especially in the Middle East. Before pulling a fast one on a contractor; put yourselves in his shoes and consider whether you would be able to live with the risky business of contracting yourself – it is called professional maturity and detachment. Learn to treat the contractor as you colleague in accomplishing the common goal with the least amount of friction, sometime despite the rigid terms of the contract which was not written to contemplate all the risks occurring on many sites.
I hope this helps and the answers are responsive to your query. In the future, please limit your queries to one issue, so that I do not have to write a treatise, or a text book, on this site, as this forum is not designed for it.
Gerry Sverdlin, PE, Esq.