In this article, we are going to focus on the contract management issues in public sector construction (works). A lot of the risk in public works contracts arises from how variations (or required changes based on matters that arise in the course of construction) are managed. Some of these issues arise from the original tender process being insufficiently clear, but we will address each of the items from the point of view of post-award contract management. This post is written from the point of view of the contractor / sub-contractor and what they can do on construction projects to reduce the risks of financial penalty and loss from projects they undertake in the public sector.
Poorly Defined Scope
Some well-known capital project case studies that have attracted attention have had significant issues with the scope of works. Where the project scope is inadequately defined, it often leads to confusion and disputes during the construction process. Unclear scope documentation sets the ground for differing interpretations by the parties involved. This can generate delays, cost overruns, and legal conflicts. Complex contract management issues can be avoided when the scope is clear.
Incomplete or Inaccurate Specifications
The first cousin of the a poorly defined scope is insufficiently detailed or inaccurate specifications. This is far more common than is commonly understood. This frequently results in subpar work and/or non-compliance with regulatory requirements. A poorly developed programme of works with detailed specifications can also lead to rework, delays, and additional costs.
Inadequate Risk Allocation
It is our view that risk is very poorly allocated in the Irish marketplace and that an undue and unfair balance of risk falls on the contractor both under the public works contract and the RIAI (Royal Institute of the Architects of Ireland) contracts. We have written about risk culture previously. The systemic failure to effectively allocate and manage risks within the contract frequently creates significant problems. As most contracts in Ireland place an unfair burden on the contractor or lacks provisions to address unforeseen circumstances, it is one of the main generator of disputes, legal challenges and contractors walking away from projects. This also drives downstream issues like the squeezing of sub-contractors which is at least in part, a consequence of the unfair balance of risk in contracts. Risk management is central to good contract management.
Inadequate Performance Monitoring
It is also quite common for the contracting authority to outsource the monitoring of contract management issues to other contractors like Architects or third party Engineers. In some (but not all) organisations, this is done to ensure there is a firewall between the contracting authority and the works being carried out and that there is always somebody outside the organisation that can be blamed for not overseeing the works correctly. Whether the supervision is undertaken by the contracting authority or a third party, the poor monitoring of contractor performance can lead to delays, cost overruns, and compromised quality. This has been an issue on residential, commercial and capital infrastructure projects across the EU. Inadequate oversight also drives missed deadlines, non-compliance with specifications, and inaccurate reporting on project progress.
Change Order Mismanagement
As already mentioned, change orders arise all the time on construction projects. Mismanagement of these changes also leads to disputes and cost escalation. Inefficient change order processes, lack of documentation, or delays in approving changes can negatively impact the project’s progress. To give an example, frequently contractors do not have written approval to proceed because consent was given over the phone. Phone calls do not provide an evidence chain. Contractors often find they have a crew onsite that cannot proceed and they cannot get written consent. Its an invidious position to be in. They pay the staff whether they are working or not but may not get paid if they commence without authorisation.
Ineffective Communication
You cannot have good contract management without good relationships. Communication breakdowns between project stakeholders, such as contracting authorities, developers, contractors, and subcontractors, can cause serious issues. Inadequate communication channels, delayed responses, and poor documentation of discussions exacerbates these issues. It is advisable for all parties that they maintain meticulous records but this does not always happen. Given the structure of contracts, contractors and sub-contractors that do not keep detailed records, carry significant financial risk.
Payment and Financial Disputes
Disputes related to payment terms, invoicing, and financial management can significantly impact the project’s progress. Late payments, billing discrepancies, and disagreements over payment milestones can strain relationships and lead to legal battles. The retention payments and use of bonds also tie up company funds and impact cashflow. Sub-contractors cannot rely on developers or main contractors and no contracting authority should be fully relied upon either. As was seen in the case of Carillion, the State operates at arm’s length from outcomes like companies going bankrupt.
Inadequate Contract Administration
Poor administration of the contract terms and conditions can create difficulties in enforcing contractual obligations. Failure to keep proper records, monitor compliance, and address non-performance can result in disputes and project disruptions. As the contract is so weighted against contractors, this is particularly important for them.
Regulatory Compliance Challenges in Contract Management
Public sector construction projects are subject to various regulatory requirements and compliance standards including but not limited to building regulations. Failure to adhere to these regulations can result in fines, project delays, and even legal penalties. Companies can also be pursued for years after projects conclude. There can also be very significant reputational damage for companies involved in high profile construction issues.
Inadequate Dispute Resolution Mechanisms
In the absence of effective dispute resolution mechanisms, conflicts can escalate and result in lengthy and costly litigation. Clear provisions for alternative dispute resolution methods, such as mediation or arbitration, can help mitigate this issue. Our view is that disputes should always be resolved on the basis of evidence. Split the difference, a common approach in construction, is a terrible approach to take. If there is a dispute, it should be resolved on the details and merits of the dispute. Forcing the contractor to accept costs, especially where they are demonstrably not responsible for the issue, does not happen in any other type of contract for a reason. All firms have a finite well of good will. It is a better idea to reshape scope than force costs on a contractor where the issue is not of their making.
