Project Management Best Practices for Engineering and Construction: Part 2 – Contract Negotiation and Execution

This is the second in a series of articles based on the authors’ combined 70 years of experience in project engineering and management. Part 1 of the series covered the bid process. This part will cover contract negotiation, a critical step as contracts define and guide the construction process. Part 3 covers construction management. Part 4 covers software project management.

Contract Negotiation & Execution
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“A verbal contract isn’t worth the paper it’s (not) written on,” said movie mogul Samuel Goldwyn. The same applies to any construction project. Before project contracts are signed, the owner/developer has control and bidders are likely to be accommodating in hopes of winning the bid. Once a contract is signed, the owner and the contractor(s) have a partnership—and much of the control of the execution, quality, cost, safety and schedule or the project passes to the contractors.

Partnership risk is often significant and difficult to assess beforehand. One of the most subjective and difficult aspects to evaluate is the relative ranking of each contractor’s cooperative nature. To ascertain contractor attitudes and the likelihood of each being a good partner, a ranking of each contractor’s reputation for completing difficult projects without excessive change orders should be made.

Contractors spend a considerable amount of effort preparing bid packages, and the owner should ensure that the bidders feel they are being treated fairly in the review process, as this will facilitate positive contract negotiations. A single point of contact in the owner’s organization should be identified for contractors to ask questions and seek clarifications. A list of answers to each contractor’s questions should be provided to all bidders. As a rule of thumb, price without scope clarity is useless, so defining exactly what each contractor will do is critical for effective contract negotiations.

A property survey will be required in the contract documents. Surveys can contain errors and should be reviewed for inaccuracies in access, boundaries, utility interconnects and so forth by conducting a detailed site walk. Each bidder should be invited for a site visit a few weeks after issuing the request for bids. Upon seeing the site, bidders may have insights and suggestions that could reduce the cost of construction and result in improved contracts.

Each contract should have a Division of Responsibility list included as an exhibit. This list summarizes the contract scope and delineates who (owner, contactor or others) is responsible for each task. Relevant contract or specification sections should be referenced with each listed task.

Entering into a construction contract with an incomplete design or making significant changes after the contract is signed are likely to result in expensive cost overruns due to contractors change orders. Change orders for modifications made during construction can involve significant and undefined costs for overtime, added manpower, express shipping, construction delays, crew stand-by and remobilization charges.

Construction changes typically come at a much higher cost than if the work was included in original designs and priced prior to completion of the competitive bid process. If the owner/developer cannot adequately define part of a project upfront, then a unit-cost pricing basis for the undefined scope will likely be easier to manage than time-and-materials work. An example of this is negotiating an exhibit to the contract specifying all-in unit prices for additional installed above-ground piping on a cost-per-foot basis for each pipe size.

Each contractor’s current labor and equipment rates should be added as an attachment to the contract so any time-and-materials based change orders can be negotiated on scope only, instead of on both scope and price. This will simplify and speed change order negotiations, as well as contain change order costs.

All construction contracts should have a clause requiring timely notification and submittal of change orders by contractors. The contract should not allow contractors to delay notification of change orders until after revised construction decisions and pricing are finalized.

Legal Boilerplate

Difficult and unanticipated problems are a fact of life during the construction process in any large, complex project. Disagreements regarding the project and its construction will be settled based on the contract documents and exhibits. Ideally, these issues will be dealt with fairly and quickly during construction. If things go really wrong then they will be settled through arbitration or even in court in a worst-case scenario. Because many things can go wrong in project contracting and construction, contract language has grown to handle many unplanned and remote possibilities. As a result, all contracts must contain their share of relevant legal boilerplate.

Early on, and throughout any complex project, it is critically important for the project manager to stand back from the laborious details, decisions and day-to-day routine to seek a wider perspective. In quiet moments, think through the unique challenges and to overcome and achieve project success. Are all the higher-probability failure modes getting appropriate attention? Ask yourself often if you are focused on the right things.

Keep a list of these challenges whether they are technical, physical, economic, environmental, organizational, bureaucratic or political. As a project moves forward, it’s rewarding to check off steps accomplished. It can be just as gratifying to acknowledge when you have successfully avoided a threat by anticipating it and taking corrective measures. Such thinking will also ensure focus on key project success items.

The phrase “time is money” is especially true in construction projects. To finish a project on time, construction needs to start on time, move at the scheduled pace and avoid becoming stalled. Proactively addressing the many things that can delay the start or derail progress during construction is crucial. Combining proactive handling of issues with good contracts will result in a high probability of project success.

Subjects in a Division of Responsibility contract exhibit could include:

  • Engineering and design work
  • All major construction scope delineations
  • Required studies, surveys and coordination
  • Permits and “Notice of Intent to Construct”
  • Fees, leases and construction utility billings
  • Temporary power, water, sewer, phone, and communication connections for construction
  • Additional geotechnical evaluations
  • Required reviews by independent engineer/bank’s engineer
  • Construction hold points
  • Required site safety orientations and training
  • Site specific safety plan and safety inspector, including spill and accident response and reporting
  • Site specific QA/QC plan
  • Emergency contacts
  • Site fencing and gates
  • Site environmental monitoring
  • Erosion control and storm water pollution prevention plan
  • Construction spill prevention control and countermeasures plan
  • Clearing and grubbing
  • Site construction office and owner trailers
  • Site sanitary facilities
  • Site security
  • Site signage
  • Cleanup and trash collection
  • Earthwork including testing and sampling
  • Recognized environmental concerns, preservation of sensitive areas
  • Underground hazards and utilities
  • Receiving, unloading and inspection of equipment and materials
  • Assembly and rigging of equipment including required heavy-lift plan reviews
  • Repairs, cleaning and painting
  • Permanent utility connections including water, sewer, power, phone and other communications
  • Commissioning and start-up staffing and plan
  • Training of permanent operations and maintenance staff
  • Project bonding
  • Taxes
  • Contractor mobilization and demobilization
  • As-built survey

Guest Post by Dan Hebert, PE and Kevin Fullerton, PE (Originally published by IHS)

About Celoxis:

Celoxis is a comprehensive project management tool that helps companies streamline management of projects, time sheets, expenses and business processes, specific to their organization. Over the last decade, Celoxis has specialized in delivering improved collaboration and increased efficiency for teams of all sizes, both in SMB and Enterprise segments. To know more visit www.celoxis.com 

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