Business for engineers: The project contract.
2017-05-22. Complex investment projects in plant engineering / custom-built machinery commonly experience significant volatility in terms of the contractual scope. Murky technical specifications, disruptions in building processes, obstructions of construction work and additional or reduced volumes in contractual performance ordered by the Employer require careful and judicious actions on the part of everyone involved. The following article explores which actions are necessary and who must know and implement them in practice.
A fictitious project.
The project contract with the Employer has finally been signed. Preparing the quotation and the subsequent contractual negotiations between the Employer and the Contractor took nearly two years. By then, the Contractor was already feeling the pinch of insufficient new projects. The word ‘short-time work’ was already doing the rounds in the Contractor’s company due to sluggish business. “That was a lucky break”, thought everyone involved in the project, from the sales team to the board. But to secure the order from the new Employer, the Contractor had been forced to accept extremely tight deadlines for the basic engineering, the start of assembly and for provisional acceptance. And there were truly ‘eye watering’ liquidated damages contractually agreed for each of these milestones.
Viewing the project realistically, and not through rose-tinted spectacles.
“We can do this; we have proven our ability in numerous projects to cope with tight schedules.” This was the unanimous opinion of everyone on the Contractor’s staff when preparing the quotation. But the Contractor had failed to include in the equation that the Employer might behave differently to previous Employers.
The project contract was signed by both parties and entered into force. As mentioned above, the contractually agreed milestone schedule was extremely tight, so the Contractor’s project team immediately set about completing the system’s basic engineering.
The parties had agreed that the Employer would make a ten percent down payment on the contractual amount once the agreement was signed. But the Contractor actually received the money three months later than agreed. That immediately cast a shadow over the project. Nevertheless, from a contractual perspective, the Contractor’s delivery and performance deadlines were rock solid and immovable.
"No plan survives initial contact with the enemy" (Helmuth Graf von Moltke).
The Contractor gradually realised that the down payment was not the only area in which the new Employer would make him wait; insufficient financial resources meant that the Employer’s project organisation was not as lavishly staffed as had originally been expected. As a result, the Contractor experienced repeated delays in receiving design authorisations from the Employer. Moreover, the Employer ordered changes in instrumentation and the cable routing concept on an almost weekly basis, leading to a substantial amount of unscheduled overtime in the Contractor’s engineering department.
By now, the clock with ‘liquidated damages’ on its dial was already ticking, albeit primarily for the Contractor. In response, the engineering department decided to work weekends in order to catch up. By doing so, the Contractor hoped to escape the ‘penalised’ deadline trap.
But it was all in vain for the Contractor; ultimately, the accumulated delays in the project deadline were so significant that the Employer was entitled to demand payment of full liquidated damages. Claims by the Contractor for the Employer to remunerate the significant additional workload in engineering were abruptly brushed aside by the Employer, who blithely commented that he had been entirely unaware of any delays in design authorisation. In addition, he emphasised his right to demand changes from the Contractor at any time. Claims by the Contractor for an Extension of Time for Completion were also rejected with the words: “That’s not how it happened.”
Underlying cause: lack of cooperation and inadequate commercial awareness in the project team.
But the Contractor’s troubles did not begin with the delayed down payment by the Employer. Indeed, they started much earlier, namely during negotiation of the project contract. The contractual price seemed adequate to the Contractor, and he hoped that experience and performance alone would be sufficient to satisfy the tight schedule. The troubles were also compounded by a contractual structure that defined immovable fulfilment dates for the Contractor without demanding any performance in kind on the part of the Employer. But this is only half the story. The whole, naked truth is that throughout the engineering work, the Contractor stuck to the idea: “We’ll deal with this in a rational manner instead of immediately firing off an angry letter.” However decent this may seem at first glance, a second glance reveals its fatal repercussions for preserving the Contractor’s claims to an extension in the construction period and additional remuneration.
Nobody on the Contractor’s sales team had paid attention to the provisions in the contract that define what happens ‘if things turn out differently’. Provisions of this kind are installed to ensure that consequences for the contractual parties due to disrupted procedures, deviations and changes remain manageable. Moreover, they help to ensure a spirit of fairness if things ‘come unstuck’ or when disputes are looming. Even if these provisions are contained in the commercial section of the project agreement, the technical disciplines cannot simply close their eyes to the reality of commercial terms by arguing: “I’m an engineer; I just build the system. The business folks do all the rest.”
An opinion of this kind is quite simply false. The attitude that “engineers are responsible for making the system work properly, while the business people ensure that everything gets paid and the lawyers step in when all else fails” is hardly an expedient manner of dealing with industrial projects. Technical professions must also perceive teamwork from an interdisciplinary perspective.
This begins with preparing the quotation. Commercial staff, engineers and jurists need to discuss their misgivings about individual passages of the contract and must always listen carefully to the representatives of other disciplines. Mutual dependencies between technical, commercial and legal risks must be dealt with as a team, and any possible remedial measures to structure the contracts differently must be defined. Technically sophisticated projects, after all, have the capacity to wreak the greatest commercial damage, possibly with unmanageable legal consequences for the company itself.
Contractual parties have to get along, is a statement one hears quite frequently. But for this to happen in practice and for the parties to ‘get along’, it is imperative that the object of the contract is defined unequivocally and that neither contractual party feels placed at a disadvantage. And indeed, an initial framework within which the project parties can ‘get along’ has only been created once the contract contains instruments that clearly define what parties must do when reality lays waste to the best laid plans that were originally prepared.
But that’s not everything. It’s not enough for these framework conditions to be included in the contract. They must be familiar to the project team to ensure that its members are aware of what they must do in the event of deviations, and in particular which records must be kept to ensure that claims can be preserved. This documentation must use written forms whose formal requirements and limitation periods are defined by the project contract and/or applicable law. In our case, for instance, proceeding in this way may have been the key to the Contractor enforcing claims for an extension to the construction period, in addition to pecuniary compensation for the exorbitant additional workload in the engineering department due to demands by the Employer.
Put a little flippantly: “There is no place for common sense in project fulfilment.” However provocative this proposal may be, common sense and a judicious approach are mainly required during the phase of preparing a quotation and designing the contracts. Once the project contract has been concluded, the parties have no choice but to ensure its fulfilment. To ensure this is possible, everyone involved in project management must have sufficient knowledge of the contract and must always act accordingly.