Engineers Losing Millions through Bad Contract Administration

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Tuesday, June 28th, 2016
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Of all tasks which can lead to costly disputes if not done well, one area which is particularly critical for engineers in Australia revolves around contract administration.

Get this right and you are on the way to positive relationships with all stakeholders; get it wrong and you could have acrimony and disputes which run into the billions or tens of billions of dollars in the case of large infrastructure or resource projects.

So what are the mistakes?

One of the basic ones, according to McMullan Solicitors construction lawyer John McMullan, revolves around a hands-off mentality whereby engineers leave critical tasks in this area to legal professionals. Whilst engineers are not typically trained to perform contract administration during their studies, he says, neither are lawyers. Indeed, he adds, many of the tasks involved are actually suitable for the logical mindset of an engineer more than anyone else.

As an example, he says that arguably the most important document within a contract is in fact the single A4 sheet of paper which sits on top of the agreement and outlines the specific documents which make up the contract, including the formal instrument of the contract itself, the general conditions of contract, the drawings and specifications, and any other necessary documents. Whilst the systematic nature of listing the documents in an orderly fashion in fact means the task is ideally suited to an engineering type of mindset, McMullan says this is in fact something which is often not done well.

“The number one mistake is not doing it themselves,” he said, when asked about some of the critical mistakes which engineers can make in this area. “Engineers just get distracted by the lawyers, they need to take charge of this area themselves.

“This is an area that’s not taught. It’s not taught in engineering school except in dribs and drabs and it’s definitely not taught in law school.”

He says a great deal of contract work is far better suited to engineers and that engineers needed to control this area themselves.

“The administration of construction contracts is something which is superbly suited to a profession where everyone comes out of university after four years of engineering and mathematics, a lifetime of comprehensive attention to detail, and an understanding of programming, cost accounting and describing whether or not work complies with extremely detailed specifications,” he said.

“It’s a very engineering task. Its connection with the legal profession is really a bit peripheral.”

In terms of what the contract should cover, McMullan says critical concepts revolve around time, cost and quality. With regard to time, he says it is imperative to outline the critical deadlines within which work is to be done in a systematic program so that progress can be monitored throughout the course of the job. Immediately upon the occurrence or discovery of any reason where work could be delayed (such as bad weather or poor ground conditions) and/or a claim for variation could be made, meanwhile, it is imperative to provide the principal with a notice of delay and/or a notice of potential variation as the case may be.

Not doing so, he said, may not only affect the ability to make a successful claim for either an extension of time and/or a variation, but can also deny the principal of the opportunity to decide upon alternative courses of action in response to the unanticipated phenomenon. Finally, it is imperative for the specifications and drawings to set out exactly what is to be done and the standard by which it is to be performed, McMullan said.

Other experts agree there are areas where things can go wrong. Robert Buchanan, a construction lawyer and partner at Norton Rose Fulbright says one such area revolves around the certification role. Whereas the need to conduct certification in a fair or impartial manner may indeed be a requirement under the terms of the contract in question, Buchanan says engineers may not always realise that that is indeed the case and may instead adopt a mentality which revolves primarily around being a representative of the principal and acting on the principal’s behalf.

Another area is latent conditions – unexpectedly adverse conditions with regard to the site in question (such as poor soil) which could not be reasonably foreseen with prior observation. Buchanan said a common mistake revolves around not communicating changes to the construction program immediately as a result of said conditions, thus having contractors working off of out-of-date programs and schedules – a situation which can lead to smaller teams making up their own program.

Buchanan says costs associated with disputes can be substantial. Indeed, he is aware of one current case where the amounts involved in a dispute total a whopping $880 million.

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