Construction Law/Price Variation in LS Contract
QUESTION: Dear Femi,
Let me share the following event –
Recently we are awarded nine hospitals at different locations in our state. State Govt. is the client & it’s a “Design & Build” contract on turnkey basis.Out of nine hospitals four are only 5 storied and will follow isolated footings instead of pile foundation . A payment schedule on percentage basis were agreed with client upon completion of certain milestones which specifies as stated below -
a)On completion of 50% foundation ( Pile only) @ 5.5% of Contract value
b)On completion of balance 50% foundation ( Pile only) @ 5.5% of Contract value
Now here is a dispute. .As per Payment schedule it seems payment will be made against pile foundation only. Now instead of pile foundation if we adopt isolated footings client may ask for savings by saying that they bought the building including pile foundation and raft etc which is now changed to isolated footings which are more cost effective. So , client may treat this event as a part of “value engineering” to issue a variation order in their favour.
As a contractor are we entitled to get full payment as agreed ?
Contractually how to protect ourselves ? If you kindly advise, thanks
Regards - Kallol Seal , Larsen & Toubro- Kolkata , India
ANSWER: Dear Kallol,
Thank you for your question.
I am assuming that before you entered into the D&B contract, there were "Employer Requirements" and or "Performance Specification" which formed the basis of the price you agreed. Under Design and Build Contract which has been contracted on lump sum basis (except the contract terms and or condition indicates otherwise), the payment would be based on a schedule of stages. As you have informed, the schedule you agreed stated 50% Foundation (pile only) and if pile is no more applicable, then, it means, the Employers Requirement may change in description particularly if it specifically mentions "pile". If that it the case and make it becomes imperative that, a change has occurred in the Employer's Requirement", then, you may not have any contractual right not to honour the change and its related implication.
If it become obvious that the Employers Requirements contain the use of the word "pile" in the foundations, then, you would need to work out the cost implication of the change as it would be difficult for your to implement or place the design liability on the Contractor for what it not contained in the Employers Requirement. In your interest, as the Contractor, you need to do everything in line with the Employers Requirement and if your employers requirement has changed from Pile to other type of foundation, it is good to raise such as a variation for Employer to document as a change to his requirement otherwise, if you complete the works and there is any structural challenge, the Client may attribute it to your deviation from his requirement and it would be a big issue because of your design liability.
Hope this helps you?
---------- FOLLOW-UP ----------
QUESTION: Dear Sir,
Let me share the following event -
-Project : Construction of 900 bed hospital with all modern facilities
-Client : Ministry of Health - Govt Of India
-Contract Value : 300 Cr INR Or 50 Million USD
-Type of contract : Item rate re-measurable basis
-Original duration : Original 24 Months which was extended by 20 months. 48 months running as on today.
-Completion status : 80% completed
Project was already delayed by 20 months & there is possibility of further delay due to several reasons not attributable to us . Now due to such prolongation our Profit Margins are also getting eroded .
1)cost approval for several variable items are Pending . Procurement / execution are getting delayed.
2)For the new items what ever the rates are determined /proposed by Client are too low to administer in the present market condition & not acceptable to us. We will incur more loses if we execute such variation / additional works at under price.
3)Price for the material, labour , plants has been escalated many fold. Substantial amount are still unsettled though recovery against Price Escalation is mutually agreed as per contract.
4) There are several areas are under "Hold" by client and sequentially many related activities are also getting affected / delayed.
5)in response to our request client issued provisional EOT keeping LD clause open. Therefore, We are exposed to LD.
6)In such situation we proposed client for exclusion of conflicted areas so that we can complete the on going works and settle this contract amicably . But our proposal of "Scope reduction" were also not accepted by client.
7)As per contract there is a minimum requirement of Technical Staff 35 Nos and the same was maintained through the contract. But due to extension more than 20 months and non-availability of client's approval we reduced the staff strength at site from 35 to 10 Nos just to reduce overheads. Now that also become an issue as client consider the event as non compliance with contract & looking for recovery against our RA Bill.
Though 80% of the job was already completed but we are stuck in between and have no idea how to deliver balance 20% as it goes to an indefinite direction. Could you please advise what will be the best option to deal with ? How to proceed further ?
Thank you for your follow up question.
I will answer your question in the order you have listed them as below:
1. You as a Contractor is are entitled to submit claims for EoT as you can demonstrate from your baseline and updated programme of works considering all the impact of the delay events including delays resulting from submittals and procurement. You must keep you records very well and in detailed form with good narratives that would be clear to whoever is evaluating your submissions.
2.If any of the rates for new items (variations) is not reasonable, you have a contractual right to object and to submit adequate and necessary justification and supporting documents to back up your proposed rates. I do not think that, any professionally qualified contract administrator will deny any good ground for reasonable rates. If you are not getting fair evaluation, follow the remedy prescribed by your contract regarding disputes and dissatisfaction.
3. If your contract allows for escalation, you would be able to claim and if not, it may be challenging as you may need to study the law of the nation governing your contract if you would find any basis to support such extra-contractual claim. If the amount agreed for escalation is below what you have suffered and you have evidential proof, you can demonstrate it and i should think, if you prove same beyond reasonable doubt, you would get your entitlements.
4.Any areas (part) of the works that is under "hold" which affect the smooth execution of the whole works and delayed the whole works or milestones thereof would entitle you to EoT. You would only need to check your contract provisions and procedures of administering this claim and submissions.
5. Yes, if your contract allows for provision EoT, then, is okay and it is now your responsibility to continue to gather together your contemporary records to demonstrate the actual entitlement and get it finalized and granted by the Engineer.
6. If Client does not accept your proposal, then, you have not choice other than to follow the Engineers instruction and if the parts of the works continued to be "held" more than necessary, i am sure your contract would have a cap for which works or parts of the works can be suspended and the recourse after such suspension is prolonged more than the cap. Some contract precludes that, the Contractor can treat such parts of the works suspended more than the cap period, as being deleted from the scope of the works. Please, check this out from your contract. Otherwise, you would need to continue to submit claims for your time and cost entitlements in line with the contract provisions.
7. If the contract allows you to reduce staff because of delay or suspension of any parts of the works, you can do that, otherwise, the client would be correct to say you are not complying and may use it to also consider it when evaluating any valid compensation for any delays, time lost and cost.
I hope i am able to answer you?
Thanks and good luck.