Reduce risks with pre-contract qualifications

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.

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.

Item Description: Work commencement
Usual Tender Conditions: Receipt of building permit or letter of acceptance
Probable Qualifications/Remarks:

Should be later of following:

• Successful handover of all municipality approved drawings.
• Complete handover of works from enabling sub contractor.
• Receipt of building permits.
• The site clear of all obstacles and impediments.

Item Description: Programme of works
Usual Tender Conditions: To be submitted within 28 days after date of letter of acceptance.
Probable Qualifications/Remarks: In some complex projects it is not viable to submit baseline programme along with shop drawings, fabrication and material procurement schedules, in four weeks time. Hence contractors can ask for more time. Also it should be noted that in some contracts first payment is based on approval of the baseline programme.

Item Description: Performance bond
Usual Tender Conditions: To be submitted within 28 days after date of letter of acceptance.
Probable Qualifications/Remarks: In UAE, Banks have tightened rules and contractors are often struggling to get one from a reputable bank. Hence there is a loss of time. Contractors need to seek more time for.

Item Description: Engineers overtime
Usual Tender Conditions: Hourly rates
Probable Qualifications/Remarks: Some contracts have high hourly rates and contractors end up paying huge sums as overtime. These rates should be qualified for effective time spent on site and not include any waiting period.

Item Description: Fixed price
Usual Tender Conditions: Fixed contract price with no escalation clause
Probable Qualifications/Remarks: All tenders should be fixed lump sum, with provision for escalation on major materials like steel and ready mix concrete. Also, the provision for VAT should be well defined.

Item Description: Provisional sums
Usual Tender Conditions: N/A
Probable Qualifications/Remarks: Often provisional sums are valued at more than the legitimate cost of sub contract items. Contractors end up loosing as they only receive a percentage of the nominated sub contract amount. Contractor to verify the real value before inserting percentages for overheads, profits and attendances.

Item Description: Decennial liability
Usual Tender Conditions: Contractor to be liable for 10 years for any defects, error negligence etc.
Probable Qualifications/Remarks: Contractors to qualify for liability only up to defect liability period and further to requirement of UAE Laws.

Item Description: Value engineering
Usual Tender Conditions: Right to transfer particular portion of work to provisional sums and nominating a specialist sub contractor.
Probable Qualifications/Remarks: In the event of savings due to design changes, the contractor should qualify for a particular ratio in which this saving distribution should be shared.

Item Description: Prime cost items
Usual Tender Conditions: N/A
Probable Qualifications/Remarks: Break up should be provided for fixed and variable costs to avoid haggling with the engineer in the future.

Item Description: Substantial completion
Usual Tender Conditions: N/A
Probable Qualifications/Remarks: Often clients are unable to solicit permanent utility connections, although works are fully completed by the main contractor. In such scenarios, contractors are unable to take up testing and commissioning. Qualifications should be written for such circumstances, if they arise at the end of the contract duration.

Item Description: Professional indemnity insurance
Usual Tender Conditions: Full liability on contractor for subcontract design items
Probable Qualifications/Remarks: Should be limited to certain percentage of contract or the BOQ price of that particular portion of work.

The opinions expressed in this column are of the author and not of the publisher.