CONTRACT MANAGEMENT

Preparation

Construction

Defects Liability Period

In order that all parties to a construction project (developer / employer, engineer / technical supervisor, contractor, subcontractors) may fully benefit from contract management, the activity should start early, at design stage, before tender (public procurement), because crucial factors, influencing the implementation of the entire project, such as the type of contract and the scope of work, are decided at this stage.

Apart from megaprojects, the usual practice in the construction industry was to leave financial affairs to be “managed” by the head office, or, even worse, they were not handled by anyone at all, instead of having a finance manager beside the project manager. Nowadays, it is beyond question that each project has its own finance manager, too, who is mainly “on site”, just like the project manager. The dual management system of financial and technical affairs has gained widespread acceptance in the entire construction management hierarchy.

Similarly, contract management is also becoming an integral part of the construction project management organization. In Western Europe it is common to have an on-site contract manager beside the project manager and the finance manager, and contract manager positions are to be found in higher levels of management, too. In Hungary, this trend has also been recognized by the largest companies, but mostly they have reacted by involving external support.

The contract management tasks vary according to the stages of the project, and they also depend on whose side the contract manager is working:

Preparation

  • select the most suitable type of contract, standard form of contract or individual contract for the project
  • proper risk sharing between participants
  • select technical and contractual requirements properly
  • assess the design and specify further design requirements
  • assess and respond to contractors’ (tenderers’) questions and proposals
  • recognize problems arising from the contract
  • RISK MANAGEMENT: identifying and pricing of risks, (see separate chapter)
  • assess the requirements
  • assess the design
  • questions, proposals

Construction

  • create a contract management strategy
  • establish and maintain cooperation and information exchange
  • mediation during discussions
  • contractual correspondence and communication
  • comparison of ongoing and completed work with the contract (as-planned vs. as-built)
  • define necessary variations and modifications
  • process variations and modifications
  • defend against contractor’s claims and extra work
  • review and determine contractor’s claims
  • CLAIM MANAGEMENT: provide supporting particulars of contractor’s claims, check claim enforcement possibilities (see separate chapter)
  • prepare employer’s claims, counterclaims
  • review and assess employer’s claims, counterclaims
  • defend against employer’s claims, counterclaims
  • prepare contract modifications
  • process and evaluate contract modifications
  • review and approve proposals
  • review proposals
  • prepare proposals
  • approve documentation
  • review documentation
  • prepare documentation
  • RISK MANAGEMENT: (see separate chapter)
  • contribute to successful handover-takeover
  • dispute management, dispute resolution (see separate chapter)

Defects Liability Period:

  • assess construction defects based on contractual requirements
  • prepare defect repair notices
  • assess defect repair notices
  • handling of documentation

If all goes well, upon completion of all construction activities, including a successful handover-takeover, the majority of contract management activities are over, too. However, the management of previously submitted claims and counterclaims may still be necessary, if open or disputed issues remain.

The complex tasks faced by contract management also make it clear that it is not a one man job, neither for in-house, nor for external consultants. The support provided by consultants for an efficient completion of a project requires cooperation with members of the project management team, in order to call their attention to contractual issues from an objective external viewpoint. The contract manager is not there to do the construction team’s work: he will not make an entry in the construction log book, prepare a cost calculation, or a new programme. These tasks will still have to be carried out by the allocated team members, but in line with the contract manager’s instructions and proposals. A contract manager is not a decision maker. Decisions are to be made by the project manager, but a contract manager can make valuable proposals using his professional knowledge and experience.

Recurring situations and questions in contract management

How to deal with errors and contradictions discovered in the tender documentation?

What to do, if the construction site is not fully available, or completely unfit for use?

Will a contractor’s claim start a ”battle” with the employer, or can it be managed as part of a fair cooperation?

Is the submission of a new programme, prepared as a result of employer’s hindrances, sufficient for an extension of time and additional cost claim?

Does an extension of time automatically result in the reimbursement of additional costs?

How to deal with a situation, where an authority imposes conditions for a permit that require extra work to be carried out?

What to do, if the employer modifies the design?

If the contractor is relieved of Key Date(s), because of employer’s delays / hindrances, who and how can determine new deadlines, and what if the project is left without deadlines (“time at large”)?

When can the completion date be considered achieved during handover-takeover?

Does it pay off for the employer to use all its power to reject (justified) contractor’s claims?

Such questions arise during the implementation of all projects, but the answers may vary depending on the projects. The right answer can only be given on the basis of an in-depth analysis of the contract and the circumstances.

It is rather late to contemplate contract management, when the first claims or counterclaims have already been submitted, because in this case you are only chasing the events.

Professionals should preferably be involved right from project preparation, but latest when the tender has been awarded.

The total amount of claims, extra work, or penalties significantly exceed the amount paid for contract management, therefore a net loss results from lack of expertise.

FIDIC FORMS OF CONTRACT

The main forms of FIDIC contract, i.e. the Red, Yellow and Silver Books, that are partially available (previous versions) in Hungarian too, provide an adequate solution to the majority of projects.

In addition to these main forms of contract, and in order to meet the special demands of employers, other forms of FIDIC contract have also been prepared, such as the Gold Book for design, build and operate contracts, or the 2019 Emerald Book for underground works, with particular focus on the proportionate sharing of geotechnical risks.

The FIDIC Rainbow Suite:

Red Book

Unit price contract for building and engineering works designed by the employer

Yellow Book

Lump sum price contract for building and engineering works designed by the contractor

Silver Book

Turnkey contract

Gold Book

Design, build, and operate contract

Green Book

Short form of contract for engineering and building works of relatively small capital value

2019 Emerald Book (new!)

Conditions of contract for underground works, designed by the contractor according to the reference design by the employer and the geotechnical baseline report

CLAIM MANAGEMENT

The international (primarily British and FIDIC) term ‘claim management’ is ambiguous, because it is not equivalent to the “conventional” Hungarian term that refers to the enforcement, recovery, or factoring of claims. Claim management encompasses the handling of claims that arise as a result of a deviation from the contract, and influence the contract price and/or the time for completion.

Depending on the type of the contract, deviations may include all sorts of changes: variations, extra work, contractor’s and employer’s claims, contract modifications, etc.

Claim management is therefore just one segment of the wide-ranging activities that belong under the heading contract management.

As far as FIDIC forms of contract are concerned, claim management follows a stipulated procedure, specifying each party’s obligations, the content (and sometimes formal) requirements of notices, as well as the deadlines in those cases, when, for instance, the contractor considers himself to be entitled to additional payment and/or extension of the time for completion.

Individual contracts, or the employer’s own form of contract may contain a different procedure, but if the provisions are not clear, the procedure itself becomes a subject of dispute.

Claim management encompasses the following main tasks on the contractor’s/subcontractor’s side:

  • develop and implement a claim strategy;
  • monitor deviations and make plan-fact comparisons with project technical staff;
  • monitor and document employer’s defaults, notification and cooperation failures;
  • document unforeseeable events and analyse their unforeseeable nature;
  • prepare variations, extra work, contractor’s claims, and substantiate them from a contractual and technical point of view (Merit);
  • calculate additional cost and time with project cost planning and programming staff (Quantum);
  • analyse the impact and consequences of delay (e.g. penalty), as well as possible countermeasures (e.g. acceleration);
  • defend against employer’s counterclaims;
  • raise objections against employer’s claims, and substantiate them from a contractual and technical point of view;
  • investigate the costs of employer’s claims;
  • document and maintain claim records;

Obviously, the same tasks must also be carried out on the employer’s side with a “reverse sign”, and on the Engineer’s / technical supervisor’s side in a fair an objective manner, taking due regard of both parties’ arguments and contractual possibilities.

It is rather late to involve a professional claim manager, when the first claims have already been rejected, or the limitation period has expired.

With proper substantiation, the future of claims should be established at the beginning of a project.

CONTRACT / CLAIM MANAGEMENT TEAM SUPPORT

Some large construction companies already have an in-house contract management team, or at least a person in charge, others delegate contract management-related tasks to engineers or site managers.
However, an “external” consultant can provide valuable services even for them, because his objective approach mostly yields better results.
  • Tenders are often prepared by less experienced engineers, who are unable to assess the contractual risks and the impacts, their main target being to achieve a price that can be submitted with the tender;
  • By making use of his experience gained from various types of contracts, a consultant can more efficiently discover hidden or delegated risks, as well as cost-increasing factors that should be taken into account, when calculating the tender price;
  • People on the project are often reluctant to notify the employer about hindrances occurring right after signing the contract (e.g. construction site) for fear of spoiling relations;
  • Having contractual deadlines and obligations in mind, a consultant is in the right position to decide whether a notice is necessary, because later on, good relations are not enough to settle these problems;
  • Employees may be prompted to cover up, rather than solve problems, because of personal involvement or responsibility;
  • Using an objective approach, a consultant’s aim is to identify and solve problems, irrespective of personal motivations of the people within the organisation;
  • Employees often try and avoid conflict with the employer for fear of retaliation, which may lead to justified claims left unreported (in time);
  • A consultant weighs the chances of submitting a claim exclusively on the basis of professional aspects. A “counterstrike” should be treated separately. The possibility of conflicts is another matter, which depends on the claim strategy;
  • Employees’ personal emotions regarding the completed work often hinder a clear view, sometimes they overestimate their performance, or remember that certain items were not calculated in the tender, so they wish to submit a claim;
  • A consultant judges the work exclusively according to the contract. If an item is “included” in it, then there is no basis for a claim, irrespective whether or not it was forgotten;
  • Employees often attempt to control situations by way of personal contacts, daily meetings, verbal agreements and gestures, however, most of the time, these attempts do not lead to results;
  • A consultant works unemotionally and independently, and only uses written documents, thus a change in the employer’s personnel will not lead to a situation, where the new person does not remember what was agreed with the previous site manager, because all relevant communication is well documented;
  • The employer, Engineer / technical supervisor also consider external consultants as more independent than contractor’s employees, which facilitates cooperation;
  • Two heads are better than one.
The above list describes a consultant, working on the contractor’s side, but the same issues also arise on the employer’s / Engineer’s / technical supervisor’s side, evidently with a “reverse sign”.

PROJECT MANAGEMENT CONSULTANCY

Within the usual organization structure of a construction project, it is the management who is responsible for a successful completion of the works, by organizing and controlling the necessary resources in order to accomplish the project objectives on budget and on time.

Project management is no longer under one man’s direct manual control, it is an organization that is made up of various professional fields (technical, financial, legal), and its size depends on the volume and complexity of the project in question.

Project management also includes contract management, that in turn contains claim management , and risk management.

In addition to these important areas, the work of the project management team is typically supported by external (or in-house) consultants in the following matters:

  • comprehensive project audit (technical and/or financial), internal audit;
  • process analysis, efficiency check;
  • organization structure assessment;
  • documentation system assessment;
  • subcontractor and supplier assessment;
  • design coordination with the design team and the project “chief designer”;
  • review construction schedules, identify delay causes;
  • review calculations, investigate cost overrun causes

A project manager often cannot see the forest for the trees, because of his daily duties, and as a consequence, he fails to perceive administrative, operational and organizational problems in due time. The objective approach of an external project management consultant can make a project manager’s work more efficient.

RISK MANAGEMENT

Risk management also forms part of an efficient project management system. It is often considered part of contract management, because the contract itself carries risks, and the risks resulting from the work should also be dealt with in the contract.

Well-prepared and balanced contracts make sure that risks are fairly shared between the parties. Risks that can hardly be influenced by others should be borne by the party, under whose control they lie.

In this sense, the risks related to the progress of work (e.g. appropriate workforce and equipment, efficient work organization) are to be borne by the contractor. Put more simply, the employer cannot be held responsible, if the contractor works slowly. In this case, the contractor is responsible for the delay, and the employer may impose a penalty.

Similarly, site- or soil-related (e.g. geotechnical) risks should be borne by the employer. The contractor cannot help, if the employer chooses a wrong location and/or unfavourable soil conditions. In this case, the employer is responsible for the additional cost / time, and the contractor is entitled to compensation, and should be granted relief from penalty.

Proportionately shared risks are manageable by each party. The employer makes proper preparations before the invitation to tender, and sets reasonable deadlines / penalties. The contractor, in turn, also makes preparations, prices the residual risks, and takes them over in exchange for payment.

The problem is that this ideal situation is extremely rare to find in today’s contract practice.

The employer frequently attempts to place all risks on the contractor by formulating the contract and/or technical documents in a way that puts the contractor in a difficult position. Some “anonymous” examples from recent public procurement documents:

  • The Employer shall not reimburse costs arising from hindrances caused by other contractors, and the Contractor shall not be entitled to extension of Time for Completion.
  • To what extent and for how long will the contractor be hindered? Such risk is difficult to manage, price and schedule, although the contractor has no influence on other contractors’ activities, therefore it should not be contractor’s risk.
  • The Employer shall be entitled to suspend the work for a period and in such a manner as he sees fit. The Contractor shall not be entitled to claim from the Employer any additional costs arising from the suspension. The Contractor declares that the Contract Price includes this risk.
  • For how long will the employer suspend the work? Such risk can only be priced as a “shot in the dark”, although the contractor has nothing to do with the employer’s suspension, therefore it should not be contractor’s risk.
  • The Contractor declares that he has reviewed the content of the design documents, permits, approvals, authority regulations, technical specifications made available by the Employer, inspected the construction site at his own risk, and checked its feasibility. The Contractor shall not be entitled to claim additional costs or justify delays resulting from lack of knowledge of on-site conditions and/or submitted documents. Furthermore, the Contractor shall bear the legal consequences of the deficiencies in the design documentation that he as a professional contractor should have noticed with due care, but failed to notify the Employer and the Engineer thereof.
  • To what extent is a professional contractor required to notice errors (e.g. static calculation errors) in the design of a complex structure?
  • After signing the contract, the Contractor shall not be entitled to claim design errors or design deficiencies in the tender documentation.
  • Read together with the previous requirement, the contractor has no other option, but to have a complete design office to check the accuracy of all design documents before submitting the tender. Obviously, this is not possible, but still, it is a risk that must be managed, although the contractor is not responsible for the design made available by the employer.
  • The Contractor shall be entitled to extension of time only if he can justify that the time remaining after a hindrance, caused by the Employer or other contractors, is insufficient, even if the work is technologically reorganized.
  • In this case, the contractor is required to accelerate the work and/or increase staff at his own cost, in order to relieve the employer from the consequences of his own hindrance. If it is not achieved, or not fully justified, the employer may impose a penalty. This is a typical example of delegating employer’s risk to the contractor, but the employer is wrong to believe that the contractor will not price the risk in his tender.

Distorted risk sharing inevitably results in a price increase, because contractors overprice the risks, upon which they have no influence.

Nevertheless, the contractor must still pay close attention to the events that can be “turned into money”.

The employer should “keep” his own risks, which would result in lower tender prices, and later on, during construction, they would only have to pay for the consequences of employers’ risk events that actually occur.

Risk management therefore starts with the employer at project preparation stage, because the preparatory work (design, soil investigation, public property occupation) may annul, create, or alter fundamental risks, and by formulating the conditions of contract, delegate risk to the right party.

During tender stage, the contractor’s main risk management task is to realize the existence of risks on the basis of the contract documents, identify the responsible party, plan risk mitigation measures, and price them in his tender. During construction, risk management includes risk monitoring, implementation of risk mitigation measures and related cost control.

DISPUTE MANAGEMENT / RESOLUTION

If all goes well, contractual risks, claims, extra work can be agreed by the contractor and the employer, with the involvement of their own consultants / experts. Thus disputes can be managed “in house”, without resorting to external dispute resolution forums.

From the point of view of contract / claim management, it is also a relatively good starting point, when a consultant / expert is involved either right from project start, or latest when the events leading to disputes occur. In this case, if a dispute is unavoidable, a solid basis for dispute resolution can be created and put forward during the procedure, as described in the chapter dealing with claim management.

The worst case is, when the affected party (contractor or employer) contemplates support, when a dispute already exists between the parties, e.g. a contractor’s claim is finally rejected therefore the dispute must be referred to a dispute resolution forum. Under these circumstances, it becomes increasingly difficult to settle the matter, because by then, a number of important steps are either omitted or are taken wrongly, which may jeopardize the claim itself.

”ordinary” court of law

  • The aggrieved party refers the dispute to the Hungarian Court for judgment, and appeal forums, stipulated by law are available up to the Curia, the highest judicial authority in Hungary, or in extreme cases, up to the European Court of Justice.

Dispute Adjudication Board (DAB)

  • This is the most common procedure in FIDIC contracts, where disputes are adjudicated by a permanent or ad-hoc DAB, comprising usually three persons. The DAB’s decisions can be overruled by the Court of Arbitration, or an “ordinary” court of law.

Court of Arbitration

  • The aggrieved party may refer a dispute to the Court of Arbitration stipulated in the contract. The Court of Arbitration follows its own rules of proceedings and renders an award.

If a dispute can be managed by the parties, or if it is settled by a DAB, then technical – contractual / claim management consultancy support is sufficient in most cases, and the contribution of legal professionals (lawyers) is neither compulsory, nor necessary.

However, in addition to the foregoing, in-house or external legal support becomes indispensable, if a dispute is referred to an ordinary court, or a Court of Arbitration.

TECHNICAL CONSULTANCY

Professional experience in construction and management enables us to provide support in each phase of infrastructure projects, especially tunnel construction and repair of reinforced concrete structures, from technical preparation to successful completion of the warranty period, with the involvement of renowned (foreign) partners, if necessary.

Technical consultancy includes the following tasks:

Tunnel construction, shotcrete linings, slope support, retaining walls

  • Cooperation with the designer;
  • Preparation of detailed method statements;
  • Special auxiliary structures and methods (soil treatment, forepoling, ground anchors, dewatering…)
  • Recommendations for materials, products, equipment;
  • Involvement of material producers’ experts;
  • Supervision of construction activities;
  • Documentation;

Repair / protection of reinforced concrete structures:

  • Preservation of evidence, preparation of repair concept;
  • Cooperation with the designer;
  • Preparation of detailed method statements;
  • Special methods (gel-, foam-, resin- and cementitious injections…)
  • Recommendations for materials, products;
  • Involvement of material producers’ experts;
  • Supervision of construction activities;
  • Documentation;

Besides these specialities, we can also provide general technical support in the following fields:

  • Civil engineering works,
  • Structural engineering works,
  • Utility construction,
  • Road construction

CERTIFIED CONSTRUCTION MANAGEMENT

(FMV and MV)

Hungarian Chamber of Engineers’ licence for:

  • MV-KÉ - Transport structures
  • MV-M - Civil engineering works
  • MV-É - Structural engineering works

Pursuant to Government Decree 191/2009 (IX.15.) on “construction work”, the duties of a certified construction manager are as follows:

  • ensure compliance with legislation, authority regulations and permits,
  • keep a construction log, if put in charge by the contractor,
  • organize construction work processes professionally,
  • check geotechnical and other investigations, as well as the accuracy of setting out,
  • issue a statement for the completion certificate,
  • issue statements and participate in handover-takeover and commissioning procedures,
  • issue performance certificates,
  • notify authorities if the quantity of construction/demolition material exceeds limit value,
  • ensure compliance with construction material requirements,
  • select alternative construction materials,
  • cooperate with subcontractors’ certified construction managers and coordinate their activities

TECHNICAL SUPERVISION

(ME)

Hungarian Chamber of Engineers’ licence for:

  • ME-KÉ - Transport structures
  • ME-M - Civil engineering works
  • ME-É - Structural engineering works
Pursuant to Government Decree 191/2009 (IX.15.) on “construction work”, the duties of a technical supervisor are as follows:
  • check if the construction work is carried out in a workmanlike manner,
  • check geotechnical and other investigations, as well as the accuracy of setting out,
  • check construction log book(s),
  • make construction log book entries about defects and deficiencies,
  • check structures that will be hidden,
  • participate in the handover-takeover procedure,
  • check availability of material certificates,
  • record technical supervisory activities in the construction log book(s),
  • issue and hand over performance certificates,
  • issue technical certificates
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