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Construction Law/Price Variation in LS Contrct


QUESTION: Dear Mr R.Sivaraman,

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 under -
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 , L&T- Kolkata , India

These are the pitfalls of Design & Build and Turnkey contracts in Indian context where a deep thinking is NOT going into framing a contract.
In my opinion, the client cannot limit the payment for pile foundation only. A project may contain many buildings and all buildings need not have pile foundation. In this case, you have to propose an equivalent stage / milestones of isolated footing and get the approval from client.
Since you have mentioned that this is a design and build project, you are free to optimize the design subject to the standard codes, soil type, structural stability and client requirements. In a design build project, the client cannot determine how you have to design the foundation as long as his performance intent is satisfied.
You have not mentioned who changed the foundation type. if client had given the direction to change from pile foundation to isolated footing, he can claim benefit of value engineering (as per contract terms)
Have the client shared the soil test report before you submit your quote? If soil test report is already availed to you, who designed pile foundation for all buildings? If you have maintained a chain of documentation, there are possibilities for you to get the full payment as per the contract.
Even in case of value engineering by client, he cannot take all the difference in cost as savings. There should have been an agreed percentage of sharing in the cost savings.
in this case, the strength of documentation you have shall determine  / maximize your eligibility to claim as per contract.
sorry for the delay in response and I hope your question is answered

---------- 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 ?

Regards -
Kallol Seal

this is not a question of doubt that could be directly answered. It is a contract dispute that needs to resolved after thorough study of contract. In a contract there would be lot of commitments between you and the client. You need to answer about 20 questions to completely understand the background and the documents and evidences you had created so far in order to support your case.
On the surface, you seem to be on the advantage as client has kept many things open including decisions and clarity. The advantage of your side could be determined only by the volume of documentation you had created to defend your innocence.  
if I answer without knowing the complete background, my answer / suggestion would be inappropriate to the right context of the case.
I hope this is clarified
---r sivaraman

Construction Law

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