SEMCO's boss on Middle East MEP contractors' legal challenges
Often the first to be 'scapegoated' when issues arise on a project, MEP contractors should bite off only what they can chew so they can deliver what they promise, Subhash Pritmani says
Written contracts provide businesses with a legal document that states the expectations of both parties and how unfavourable situations can be resolved. Legally enforceable in a court of law, contracts are often used as a tool by companies to safeguard resources. However, with contracts, not everything is as clear-cut as it seems.
Subhash Pritmani, vice president for general management at Al Sabbah Electro-mechanical Company (SEMCO), notes the main contractor usually takes on a project at a very challenging price and time frame. Because of this fact, the mechanical, engineering, and plumbing (MEP) contractor that is part of a project, gets told by the main contractor of things being “missed out” on the project, such as civil works.
Pritmani adds: “However, your project completion date doesn’t change. Suppose your project has to be completed by 1 January, but it extends till 31 March. You then have to recover that three month period. You often don’t receive money for that. Additionally, some subcontractors will push their own labourers to work with you.” Subcontractors, he adds, may charge you triple for providing a workman.
Pritmani says that all such issues fall under the purview of contra charging. Put simply, contra charging is a legal process by which party A defends a claim brought by party B – by A setting off in extinction or diminution of B’s claim – claims which A alleges against B.
Suzannah Newboult, a construction specialist at law firm DLP Piper, has previously said that the concept of contra charging is so rampant that it is often accepted that the deduction – a form of set-off – is simply part of the account assessment process. The employer or main contractor assumes a right to set-off their contra charges; the contractor or sub-contractor assumes that they are permitted.
Scope gaps are another contra charge. Pritmani explains: “A creative commercial representative can say, ‘this was in your scope’, and then you get into a vicious circle. And, despite good intention of both the MEP contractor and the main contractor, the project escalates along with the cost. The job taken at a challenging cost starts suffering further.”
But why can’t everything be well-define, as part of a contractual clause?
Pritmani says that it’s very subjective. “You cannot define an entire contract in words. When you start defining everything in words, there will always be someone who will punch holes in that. It doesn’t work that way.”
Pritmani says that a ‘trust factor’ should be established which will benefit everyone. Unfortunately, some jobs are taken at low prices. And when they are not completed on time, people look for scapegoats.
“The MEP contractor is often the first to become a scapegoat,” he says, admitting that some MEP companies take on too many jobs. “We are also unsettled as an industry, and many of us have not learnt from what happened in the past with MEP companies that accepted too many projects.”
The Singapore solution
A Singaporean citizen, Pritmani draws parallel between the Singapore, known as The Lion City, and the Middle East.
In order to solve the contra charge conundrum, Pritmani suggests setting up a fast redressal system which is already present in Singapore.
“I would be wrong in saying that such contra-related problems do not exist in Singapore. However, their redressal system is quicker than what we have here,” he says.
Secondly, Singapore has the Security of Payment Act. This legislation stipulates that if a firm’s payment certificate has been certified, regardless of whether the main contractor has been paid by their employer or not, the MEP contractor is supposed to be paid as per the contract terms.
In the Middle East however, Pritmani says, “most of the contracts, are pay-in-pay-out. We call this back-to-back.
“If the employer has paid the main contractor in 30 days, the MEP contractors will finally be paid in 60 days to 90 days. So the MEP contractor is at the mercy of the main contractor.
“In Singapore, should the certificate have come through but the cash not, it is the responsibility of the main contractor to arrange the money in order to pay the subcontractor. If the main contractor doesn’t do that, a firm can go to a small mediation court and the case can be solved in 15 days. Firms can also go through this process in the Middle East, but it ends up taking much longer.
I have been canvassing such issues at various forums. The time has come for MEP contractors to be protected through a process that is similar to the Security of Payment Act.”
The issue of variations
There are also variations that need to be considered in a project. A variation order (VO), or change order, is an alteration to the scope of work in a construction contract. They come in the form of an addition, substitution or omission from the original scope of work.
Pritmani says: “In general, the variations these days are swinging in the vicinity of 15% to 20%. In some cases, it could go up to 25%.”
It can be difficult to predict when these variations will be requested, he adds: “Possibly 70% of the work is done and then some big variation is included. Suppose there is a residential and mixed development project, which incorporates a shopping mall, a mini mart, and so on.
“The client might want to change it to apartments again. This could be a problem.”
But does one get paid for that change? Pritmani says there are conditions in a contract such as BOQ (bill of quantities) rates that may influence this.
“When you sign the contract, you are bound by that. The question is that once the variation comes in, you are only paid the amount after doing all the work. In very few cases will a firm be able to pay 50% of your claim value. In other words, if there is a large number of variations, then the MEP contractor has to finance it. Unlike the main contractor, where you get 10% or 20% advance against bonds, for variations, you don’t get anything.”
MEP contractors keep clamouring for time and the clause in the contract states that they are supposed to continue with the project.
He says: “You can keep talking about it, and lodge your claim, but you have to keep doing the work. Now this is a Catch-22 situation. Your supply chain wants money. You don’t get the money. There’s a variation fine. The process of agreeing the amounts for variations is not defined which hurts very badly.”
Touching on the problems associated with variations, Pritmani says the first step it is to accept that variations exists. Once the client requests for a variation, at least three months should be given to factor that change: “I think three months is a fair time to do it.”
The other alternative, he explains, is not implement the variation. However, this is an extreme step and would also fall foul of the contract: “I would advise every three months to give a timeline of any variations or changes. We can then agree again in three months’ time. It should be in the contract and it should be implemented. This will solve cash flow problems. MEP contractors will not have the anxiety of having to wait till the end.
“Lastly, their supply chains will not suffer. And they cannot function without the support of their supply chains.” It would also benefit the industry if variations were to be set in a time-bound manner, he adds.
Another issue quite rampant in the industry, Pritmani says, is the practice whereby main contractors force MEP workmen to work for MEP contractors: “The main contractor sometimes hires workmen and inundates around, for example, 200 people. They charge obscene amounts of money, and this is a law of diminishing returns. You have more people of poor quality, and less productivity. It doesn’t happen all the time, but it does happen many times.
The company that is supplying the workers can keep also change workers based on availability. That is adding insult to injury, Pritmani believes.
“This forceful behaviour from the main contractor comes [to the fore] primarily when there is a delay in getting the construction done, or when the work is not progressing as per the plan.”
The road ahead
SEMCO is currently working with many established contractors that are well-known for their quality of civil works: “You have to pull people [forward]. The main contractors should be looking at pulling you with them, rather than [pressurising you]. Such a strategy works.”
He concludes: “MEP contractors should not book a job in anticipation of revenue. They should bite only what they can chew. I keep saying this every time. Securing a job is an event and executing the job is a journey – and it is arduous journey.
“Don’t get enamoured or carried away by the booking order. You got to deliver the job. And you need to see how the banks, your supply chain, and your main contractor are supporting you. This is important,” Pritmani adds.