Reduce risks with pre-contract qualifications

Saifee Tarwala.

Saifee Tarwala, senior proposal engineer at TAV tells us what to keep in mind before signing a contract.

The recent financial crisis has put many large scale UAE-based contractors in a soup, particularly in Dubai.

Projects are on hold, cancelled or have slowed down. Payments have been delayed indefinitely, with some developers even having gone bust, leaving contractors in an ambiguous situation.

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Some contractors entered into agreements with clients without much detail. The recent economic crisis has made these contractors vulnerable and some of them have paid a heavy price. After realising their mistake, they’ve hurriedly begun browsing Fidic laws.

Most of the tenders for construction jobs in UAE, particularly in Dubai, are governed by Fidic (also referred to as the old ‘Red Book’). The primary concern for every contractor is receiving due payments on time.

The said set of conditions does not contain any clause through which contractors can look into the financial arrangements of the developer or client and warrant the surety of their payments.

However, as per the new Fidic Red Book (1999 edition), the employer is now required to submit under sub-clause 2.4, reasonable evidence within 28 days after receipt of request from contractor that financial arrangements have been made to ensure payment to the contractor, in accordance with the payment schedule, failing which, the contractor can give 21 days notice to suspend work or reduce rate of work as per sub sub-clause 16.1.

Further, if the contractor does not receive reasonable evidence, within 42 days after giving the aforesaid notice of 21 days, then he will be entitled to terminate the contract as per the provision under sub sub-clause 16.2.

The new Red Book also states that the contractor is now entitled under sub-clause 16.1 to suspend or reduce the rate of work after giving 21 days notice to the employer where the engineer fails to certify an interim payment certificate.

Whereas, under the provision of the old Red Book sub-clause 69.4, the contractor was only entitled to suspend or reduce the rate of work in the event that the employer had failed to pay the amount due under the certificate of payment.

The contractor, besides noting the above clauses and qualifying the same prior to entering the contracts, should also consider some other sets of qualification conditions (see table), which have been realised on many projects and have now become paramount for smooth project operation and to avoid any hassles.

By mentioning the set of qualifications shown in their contracts, contractors can reduce a huge portion of their risk and stand a better chance for claims on time extension, cost escalation, price adjustment and financial claims.

Only defining technical ambiguities will not make a successful project, but well qualified commercial aspects should also be agreed to, before entering into a contract.