Warning to MEP contractors about contract abuses

Mark Bull.
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In the current economic climate, an increasing amount of financial risk is being loaded onto MEP works contractors by the deliberate slowing down of the certification process under many contracts and sub-contracts.

This forces the MEP works contractor to carry more of the cost, and thereby deplete its own precious financial facilities. “It has never been more important for MEP contractors to manage their contracts in a proactive and prompt manner through the application of well-established and commercial risk management techniques,” argues Mark Bull from Illumine LLP.

Illumine LLP is a specialist consultancy serving the construction, engineering and manufacturing sectors, providing contractual, commercial legal and project management services. Bull is a contracts and commercial agreement specialist with over 20 years’ experience in the construction, engineering and wastewater sectors.

“One of the key mistakes made by some MEP works contractors is the failure to observe the connections between critical contractual clauses in their project contracts, and to understand the ensuing financial consequences,” argues Bull.

Key issues

“In all versions of FIDIC, whether modified or not, you will find clauses dealing with the key issues of delays, payments, suspension and claims. The connection between these four clauses is that they each contain time periods for giving notice and responding to notice, for the certification of sums due, and for the settlement of outstanding matters.”

FIDIC is short for Fédération Internationale Des Ingénieurs-Conseils, which is French for the International Federation of Consulting Engineers. It is headquartered at the World Trade Centre in Geneva, Switzerland. FIDIC represents the global consulting engineering industry, and is well-known and respected for its seminal work in defining conditions of contract.

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Before a MEP works contractor agrees to commence work under FIDIC, or a modified version of it, or under a letter of intent that cites such a contract, it needs to calculate the cumulative amount of time under the four clauses it would take the engineer and/or employer and/or disputes board to certify, respond to, process and pay all the associated claims. When this calculation is performed using a simple project planner, a contractor will then be in a position to know whether or not it must negotiate a reduction in the combined amounts of time that the engineer and/or employer can take to carry out all of its related duties.

“Given the disproportionate amount of power that the engineer has under FIDIC, this attempt to reduce the cumulative time span is critical, and must be done either before the whole of the works is commenced, or before a new section or phase of the works is commence,” says Bull.

Best practice

“In the name of good commercial practice, MEP contractors should always aim to partition their works into as many sections or phases as possible in order to maximise their cash flow and minimise their contractual risks. When partitioning their works, they must ensure that a float or contingency is built into the programme for agreeing a sectional final account, and receiving the full or residual payment for each section or phase of the works, prior to commencing the next one,” concludes Bull.

A FIDIC delegation visiting the Gulf region recently confirmed that organisations representing business interests remain key to enhancing local capacity. Breakneck growth in recent years has encouraged authorities to strengthen instruments to improve regulation, notably in the construction and property sectors. For instance, several authorities have taken out new licences to allow FIDIC conditions of contracts to be amended in line with local requirements, thus eliminating the need to verify country-specific particular conditions that accompany general conditions.

FIDIC has responded to the changing market conditions by holding more training events and by strengthening co-ordination with local organisations. In spite of the global financial crisis leading to the closure of numerous, mainly private sector, construction projects, the demand for consulting services remains strong.

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