Risk management is key to avoiding claims in construction boom

The U.S. Shale boom is fueling another wave of petrochemical projects and with $185 billion expected in potential capital investment, effective contract provisions and controls for managing these projects is paramount, an industry attorney told Petrochemical Update.

Craig Ledet, a partner at King & Spalding’s Houston Litigation Practice Group says there are important contractual provisions necessary to keep mega projects on track and avoid claims.

The American Chemistry Council (ACC) estimates there are 310 projects currently under construction or planned and $185 billion in potential capital investment as of mid year 2017, up from the 97 projects and $72 billion in Mach 2013.

Craig Ledet, a partner at King & Spalding’s Houston Litigation Practice Group talked to Petrochemical Update about some of the most important contractual provisions to keep projects on track and avoid or resolve claims for today's petrochemical projects. 

Contractual Provisions

Contracts must have robust specifications on schedules, labor and cost controls and a keen focus on change management.

Image Source: American Chemistry Council (ACC)

"The owner needs to make it very clear what it will require in terms of project controls and change management so that the contractor has a clear understanding of what is expected. Then, most importantly, both the owner and the contractor need to ensure during project execution that the contractual requirements are met," Ledet said.

The owner should ensure that it has withholding rights tied to the contractor’s failure to provide the required information. The contractor should have contractual protections that ensure owner’s timely review and handling of change requests, Ledet said while speaking at a Panel at the Downstream Engineering, Construction and Maintenance Conference in New Orleans. 

"Comprehensive scheduling requirements in the contract, for example, are of little value unless they are complied with during execution," Ledet said. "Schedule milestone incentives can also be effective, so long as the right types of behaviors are being incentivized."

Project Risks

Identifying time and cost risks early and taking prompt action before it is too late are important as well. 

The owner and contractor need to agree on a comprehensive critical path method (CPM) baseline schedule and then update it regularly.

"Causes of critical and near critical delays should be investigated as soon as they are identified so they can be addressed," Ledet said. "Impacts of any such delays need to be incorporated in schedule updates. Cost risks need to be identified by type as soon as possible (direct labor, material, indirect costs, etc.) and owner/contractor teams need to collaborate to find meaningful resolutions and track project impacts."

Best Practices 

Owners and contractors tend to manage the claims management differently, so each would have their own set of best practices to follow. 

"Owners tend to be less focused on the claims process, so we think it is generally a good idea for the owner’s side to have a person or group focused on change management and claims, particularly if the project becomes distressed from a schedule or cost perspective," Ledet said. 

"Contractors should submit claims timely, in accordance with contractual notice provisions, and provide reasonable support for whatever relief they are requesting," he added. 

Additionally, owner’s should review claims promptly, and make reasonable requests for additional supporting documentation if needed.  

Contractor's should ensure that it has a short timetable under the contract for its claim to be resolved, or else it is allowed to go to formal dispute resolution (either interim or final), Ledet said.  

"When the inevitable letter-writing campaign starts over unresolved claims, both sides should endeavor to take positions in correspondence, meetings, etc. that will appear reasonable to arbitrators or jurors if the disputed claim were ultimately litigated," Ledet said. 

Owner, contractor consortiums

As projects have become more and more complex, many projects today involve owner and contractor consortiums with multiple interested parties which inevitably impacts the claims management process. 

"This makes it much more difficult to resolve claims as either the owner’s side or the contractor’s side needs to work through its own management issues to reach resolutions," Ledet said. "It is important for the owner/contractor consortiums to agree up-front in the project entity creating contracts as to how claims will be managed and decided."

Image Source: American Chemistry Council (ACC)

Modularized environment

Many petrochemical projects now involve modular, offsite construction. Best practices to anticipate and minimize problems with offsite construction include ensuring that both parties recognize that offsite modular construction essentially creates multiple construction sites. 

Each of these sites needs to be controlled and managed as its own work site, Ledet said. 

"All the same project controls, claims management, and other project management processes need to be in place to avoid and efficiently resolve claims at each of the offsite module fabrication sites," he added.

Contract types and challenges

Contracting strategies depend on cost, contractor availability, skill set availability, and project size and complexity, but each presents its own challenges. 

In a cost reimbursable contract, an owner can avoid having a contractor show up with its D team through contractual provisions that allow the owner to interview and select key personnel and remove underperforming personnel. 

"The contract should also make it clear that the contractor is required to perform the work in accordance with industry standards and that the owner is not required to pay unreasonable costs," Ledet said. "Incentives tied to performance improvements can also be helpful."

In a lump sum contract, the contractor must document constantly when engineering schedules are not met and the engineering is riddled with errors.

"It is very important to document impacts in monthly reports and otherwise, and to implement comprehensive request for information (RFI) process and track the owner’s performance metrics in terms of how lost it takes to resolve RFI issues," Ledet said. 

Incentives vs damage provisions

Both delay liquidated damage provisions and schedule milestone incentive payments can be effective at keeping projects on schedule.

"It is important that the right types of milestones are incentivized and that the incentives or penalties are effectively spread throughout the lifecycle of the project," he said.

"Particularly with liquidated damages provisions, it is important from an owner’s perspective that caps on those provisions are not exhausted early in the project execution to where the contractor no longer has the avoidance incentive driving its behavior."

By Heather Doyle