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Transparency Throughout Entire Contract Process Saves Time and Boosts Profit

25 March 2009

With claims over contracts rising in the oil and gas industry, EC Harris believes simple steps can be taken to avoid the cost and time involved in resolution. John Mason, partner at the international built asset consultancy examines those simple steps.

Resolving contract claims is a time-consuming and costly business. Any organisation may have several contracts in dispute at any one time. Retrospectively looking at claims rather than concentrating on matters ahead is detrimental to the project and the business as a whole, not to mention the hidden costs involved in a dispute resolution process which could last up to two years or longer.

There is ever increasing pressure to achieve cost delivery and profit certainty in both capital and operational expenditure investment. The resolution of contract claims through proper and appropriate claims defence, rebuttal and preparation of counter-claims is ultimately one of the critical factors that dictate the likely success of a project and ultimately overall business performance.

It is probably fair to say that, for many, the consideration of contract claims only starts when the claim is presented, bringing to mind stable doors and bolting horses! Quite simply consideration at this time is too late and may prove to be more costly and damaging to the project and the business.

However, with transparency as part of the contract process organisations can ensure that risks are properly managed. What is more is that both the client and contractor need to understand the full liabilities and the final costings and how those liabilities and final costings have arisen.

Most engagement models include provisions for additional cost claims and extensions to delivery dates and, even if the model does not contain such provisions, other rights not expressly stated in the engagement model may subsist in specific jurisdictions such as inflation costs, damages etc. As such there is almost an invitation given to make such claims.

It is therefore critical that positioning, defence and rebuttal of contract claims starts during the project procurement and contract strategy stage. The engagement model and specific terms and conditions that form part of the agreement must include access to and copies of information that may be required to evaluate and assess any entitlements. In other words, evidence as to purported costs, resources and delays to the intended programme should not be left until receipt of a claim. The terms and conditions at the outset should provide for this occurring throughout the project duration. As an alternative a properly managed cost plus model may be considered.

Once appropriate terms and conditions are put in place, that provide for transparency as to costs, resources and programme activity, the next stage is to ensure that the project is set up to effectively manage the defence, rebuttal and preparation of claims or alternatively properly manage the proper costs allocated to a project if a cost plus model is used.

This will include consideration of evidence surrounding matters such as purported costs and resources, intended versus actual build programmes, critical path analysis and reasons for delay, purported acceleration measures and costs, contract commentary and correspondence in respect of contract entitlement or otherwise.

With these measures in place all purported claim entitlements or properly incurred costs will be spotted early and appropriate resolution strategies can be considered and implemented to establish the best position in order to defend and rebut any claims and prepare any appropriate counterclaims.

For projects without these measures in place, specific contract audits can be carried out to establish what needs to be done to minimise the exposure to contract claims, manage their resolution and achieve a final outcome and overall settlement.

But to avoid the bolting horse, the stable door needs to be closed. The right measures in place at the right time, i.e. at the procurement and contract strategy phase, mitigates the risk of spiralling project costs and time-consuming retrospective activity in resolving submitted claims.