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Construction Law/Unit Price of particular Item on road construction project

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Question
QUESTION: This is about a road construction in Ethiopia, Africa.

Project: Yabello – Metagefersa Road Construction Project

Client: Ethiopian Roads Authority/ERA
Contractor: SHED General Construction PLC (Local Company)
Consultant: Transnational Engineers PLC (my Company)

Contract Type: Measurement / BOQ, the Contract is governed by FIDIC Fourth Edition 1987 version.

Contract is signed in August 2011 and more than 50% is accomplished to date.
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My Question is: about a unit price of one particular item (Reinforcement bar).
During the Contract signing the Contractor has offered 280,000 Birr/ton for Reinforcement steel bars.

Item No.   Description   Unit   Contract Qty   Unit Price   Amount
33.12 (b)   High-tensile Steel Bars   ton   16.31    280,000.00   4,566,800.00
         

Though the Contractor has won the competitive bid with the overall project cost of 133,500000.00 Birr (Birr= Ethiopian money), there was a Pre – Contract Negotiation Meeting before signing the Contract, whose minutes will be part of the contract documents.
1)   According to The Minutes of Pre-Contract Discussion held on August 01, 2011; No. 5 says the following:  
“The Client, ERA noted that the rate given for pay items 33.12 (b) Steel Reinforcement, high tensile steel bars ETB 280,000.00 per ton is very high. Hence, ERA requested the contractor to submit cost breakdown. The contractor submitted price breakdown for the above bill items i.e. Bill item 33.12 (b) Steel Reinforcement, high-tensile steel bars.

ERA reviewed the rates and found it to be unrealistic. However, since the total offer of this bidder is found to be the best offer for this project as per the multiple bids evaluations of 12 Contractors, ERA accepted this unit rates only up to the quantity given in the Bill of Quantity i.e. 16.31 ton for Bill item 33.12 (b) Steel Reinforcement, high-tensile steel bars.
Nevertheless, ERA and the Contractor agreed the unit rates, if there is any additional quantity under these bill items during the construction period, the rate shall be adjusted to 28,000.00 ETB (ETB Twenty Eight Thousand only)

2)   According to Conditions of Particular Application, Sub-clause 2.5 Priority of Contract Documents; “The Minutes of Pre-contract Discussion” is one of the documents that form the contract document, and prevails the conditions of Contract in precedence.

Problem:
1.   The actual quantity on the project site now is above the original BOQ quantity i.e.

Unit   Description   Contract Qty   Actual Qty.   Difference
33.12 (b)   High-tensile Steel Bars   16.31 ton   44.20 ton   +27.89 ton

Contractor’s Position: So, in principle we should pay the excess quantity from BOQ, with 28,000 Birr, however the Contractor thinks this is not reasonable.
And consequently, claims the rate adjusted during the pre contract negotiation shall be waved and the original rate i.e.280, 000.00 shall be used throughout.
Consultant’s Position: the rate fixed during the pre contract negotiation is inconsistent with Clause 52.2, which says rate shall be adjusted only when quantity reaches 25% above the BOQ quantity and 2% of overall project cost. The original cost shall apply up to this point(i.e.25% above the BOQ quantity) and rate shall be adjusted for the rest. Which means pre contract minute shall be waved to be fair, or pre contract rate shall be used for any quantity exceeding the BOQ
Client/ERA: wants both the pre contract negotiation rate and Clause 52.2 shall apply.
     Which means three types of rates to apply:
1.   Original rate shall be used upto BOQ quantity
2.   Pre contract minute rate shall apply for quantity exceeding BOQ quantity and upto 25% of BOQ quantity
3.   Rates shall be revised for quantiy exceeding above 25% of BOQ(just to apply sub clause 52.2)


So the question is which rate shall apply for the increase in quantity as indicated in the tabulation above? The Client is insisting and we think the Client’s use of three rates is not consistent with  sub clause 52.2


Regards,
Samson S.

ANSWER: Dear Samson Solomon,

I believe that you are referring to clause 52.3 not 52.2, which covers the Engineer's power to fix rates.  It appears that clause 52.3 has been modified in the Conditions of Particular Application, but not significantly, relative to this question.  

You state that the record of negotiations takes precedence over the conditions of contract.  Thus the payment for steel reinforcement should follow the record of negotiations.  It would appear that the Contractor misplaced a decimal point in pricing steel reinforcement in his offer.  He has probably made a balancing mistake somewhere else to achieve the lowest compliant bid and wishes to balance his loss on other items.  

I see no conflict between clause 52.3 and the stated requirements.  Remember that clause 52.3 does not apply until the Taking Over Certificate is issued.  Thus the agreed rates rule until the Taking Over Certificate is issued.  If the final price exceeds the limits of clause 52.3, the Engineer could reduce unit rates for some items due to excess recovery of site and general overheads, so your Contractor should beware not to push this item too much.  Generally rates are reduced not increased due to the economies of scale.  

If I have misunderstood anything, please resubmit your question with better details, including the relevant parts of the Conditions of Particular Application.

---------- FOLLOW-UP ----------

QUESTION: Thank you sir,
But I don't think you got my point. I'm referring to clause 52.2 not 52.3, clause 52.2 is particularized on this project as shown in my previous question ....CONSULTANT'S position section.
So will you please reconsider my question accordingly?
Sorry for not explaining clearly.

Regards,

Samson

ANSWER: Dear Samson,

The authorised FIDIC version of clause 52.2 states:-

"52.2 Power of Engineer to Fix Rates

Provided that if the nature or amount of any varied work relative to the nature or amount of the whole of the Works or to any part thereof, is such that, in the opinion of the Engineer, the rate or price contained in the Contract for any item of the Works is, by reason of such varied work, rendered inappropriate or inapplicable, then, after due consultation by the Engineer with the Employer and the Contractor, a suitable rate or price shall be agreed upon between the Engineer and the Contractor. In the event of disagreement the Engineer shall fix such other rate or price as is, in his opinion, appropriate and shall notify the Contractor accordingly, with a copy to the Employer. Until such time as rates or prices are agreed or fixed, the Engineer shall determine provisional rates or prices to enable on-account payments to be included in certificates issued in accordance with Clause 60.

Provided also that no varied work instructed to be done by the Engineer pursuant to Clause 51 shall be valued under Sub-Clause 52.1 or under this Sub-Clause unless, within 14 days of the date of such instruction and, other than in the case of omitted work, before the commencement of the varied work, notice shall have been given either:

(a) by the Contractor to the Engineer of his intention to claim extra payment or a varied rate or price, or

(b) by the Engineer to the Contractor of his intention to vary a rate or price. "


I see nothing about 25% nor 2% in those words.  Perhaps you would be kind enough to send me the exact words of clause 52.2 in your contract, because the exact words are important.    

---------- FOLLOW-UP ----------

QUESTION: Thank you sir,
the addition to the Clause 52.2 on my project is shown below as it is.

Sub – Clause 52.2
Power of Engineer to Fix Rates

Add the following paragraphs at the end of Sub Clause 52.2:

“ provided further that no change in the rate or price for any item contained in the contract shall be considered unless such item accounts for an amount more than 2 per cent of the contract Price, and the actual quantity of work executed under the item exceeds or falls short of the quantity set out in the Bill of Quantities by more than twenty – five(25) per cent ”

Answer
Dear Samson.

I see nothing in your later comments to change my original comments.  I assume that the varied value of the reinforcing steel exceeds 2% of the Contract Price.  The Contractor agreed to a revised rate once the BoQ quantities had been exceeded, because he could not justify the rate in his bid.  Perhaps he had extra information that suggested the quantity was under measured and therefore included an inflated rate to get a windfall profit from the increased quantities. In case of inconsistencies, the higher document takes precedence and you said that the negotiations took precedence over the conditions of contract.

The Client is correct in his interpretation of the Contract in that three types of rates apply:
1. Original rate shall be used up to BOQ quantity
2. Pre contract minute rate shall apply for quantity exceeding BOQ quantity and up to 25% of BOQ quantity
3. Rates shall be revised for quantity exceeding above 25% of BOQ (just to apply sub clause 52.2)

In the case of 3, the rate is likely to be less than 28,000 Birr per tonne due to the economies of scale and reduced overhead recovery.  

I suggest that you ask him for a contractual basis for his claim that the pre-contract negotiations should be waived, bearing in mind that if you waive one item, you may have to waive all items included in the negotiations.  

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Peter M. Elliott

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First response to queries regarding extensions of time, variations orders, site instructions and payment using FIDIC and other forms of Conditions of Contract, based on English Law, and derivatives only. Anyone who needs advice about EoT should download and study the SCL Delay & Disruption Protocol www.eotprotocol.com before submitting a question.

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