EPC projects are predominantly executed through the LSTM or Lump Sum Turnkey Model, especially in the Energy Sector where the scope is defined for the Contractor to execute the project within a given schedule. In this model, the risk of schedule and cost variations is borne entirely by the Contractor.
Contractors win projects through the competitive bidding process. There is literally no scope for any deviations because these projects tend to be executed at cost or with a very small margin. Neither the Contractor nor the Owners want a deviation in scope or hindrances during the execution phase as these will cause undue delay in realizing the project objectives for the Owner while increasing the execution costs for the Contractor. Yet that is exactly what is happening around the industry – in almost every project being executed there are variations, claims, EOT requests, etc. How are these to be resolved? At whose cost? Is there a way to have a win-win situation for all the stakeholders?
These are tough questions that have plagued the industry for a long time. To resolve them, here are some general procedures that can be enforced:
- The Contractor must submit the request for change in the contract.
- The Owner/Consultant must evaluate the request carefully before accepting the contractually tenable ones (for further evaluation) or rejecting the non-tenable ones.
- The Owner must insist that the Contractor provides supporting documentation to help review the tenable requests.
- The Contractor must substantiate the change request with the appropriate documented evidence.
- A rejected change request must follow the prescribed claim resolution process.
These may sound simple, but over the years I have seen multiple instances where Contractors failed to submit documentary evidence to support change requests even though the Owner had accepted them as tenable change requests! In this case ie when the Contractor fails to provide the requested evidence as support documents, the owners cannot do more than sympathize with the Contractor as there is no further processing that can be done without solid evidence to prove that this was a change initiated by the Owner.
So the question arises: even when it is in his best interests why does a contractor not submit the requested documentation to the owner?
In my view, it could be because the contractor tried to do “Gold Plating” (made an improvement or enhancement without the owner’s approval), proceeded with a change on merely verbal instructions, or omitted to intimate the Owner about a change and its potential impacts (as he should have done per the terms of Contract) – or all the above. I have also seen situations where the Contractor executed the additional scope of work and the Owner was ready to compensate him for it but was unable to process the change requests due to a lack of documentary evidence.
These are just a few examples of the kinds of lose-lose situations that arise due to the lack of documentary evidence ready to hand.
How do we resolve this?
For a start, I believe all the communications should be properly documented from the get-go, and they should be tracked in real-time and stored in a central location. Also, Contractors and Owners must collaborate on a common platform, which will allow them to track all project correspondences as required.
Fortunately, today’s technology can provide the above.
The advent of modern digital solutions has made it possible to establish a common space for all the correspondences that are exchanged and stored during a project so that at any point in time all the correspondences are visible to all the stakeholders, including correspondence pertaining to the status of the incoming and outgoing communications between parties and the time taken to respond to each. In these digital systems, if any of the correspondences are not duly responded to the system will automatically send alerts and escalations to the appropriate stakeholders.
The fact is, changes will happen in the scope/condition of every Project – that is inevitable. But a digital system can ensure that the change in schedule and the cost gets approved only if the change in scope and bid conditions are proved to the hilt with undisputed documentary evidence.
In conclusion, contract changes need to be managed based on the merits of each case with concrete evidence of the changes requested/approved/executed and not at an individual’s discretion (which may or may not be contractually or legally tenable). This will go a long way in ensuring that the owner and contractor both maximize their profits.