The role of contracts in owner/contractor engagements
Who is to blame for project overruns? Many owner/operators who have watched a capital project or plant turnaround spiral out of control will point the finger at one or more contracting companies. But is that fair? Often the owners cannot make the blame stick, because the original contract specifying the work was not clear enough. And that’s their fault. In the case of a safety disaster, the public also will blame the owner/operator, not the contractor. Think back on recent catastrophes. Though the contractor is accountable to the owner/operator, final responsibility for all projects lies with the owner who drew up the contract in the first place.
At DuPont, we believe contracts are crucial to establish effective relationships and communications between the owner and contract management teams. They need to be extremely detailed and well-written to ensure contractor engagement is successful; not because we want to have a watertight document with which to sue contractors at a later stage, but because it is only when all parties in a contracted engagement know exactly what the expectations are, that they can achieve positive outcomes for the project and for themselves.
Our aim is a win-win for everyone, because we want to develop relationships with contractors that turn into reliable, long-term partnerships. Too often, we see battles going on between owners and contractors. They don’t benefit anyone. The worst case scenario is kicking a contractor off the job. Viable, commerciallyable contractors are at a premium, and we want them to do well and become part of our team for years to come.
Finding the right contractor and agreeing to an effective contract with that company starts even before the bid package is put together.
If there is a choice of location for a capital project, DuPont will look at the local contractor landscape before making a decision, taking into consideration which site offers a great availability of commercially able contractors. Commercial ability for DuPont includes safety. We therefore research the contractors’ historical safety performance, as well as past liabilities and their bottom line. That information allows us to determine which type of contract environment is likely to be suitable.
On most large capital projects we will work with an external contract management team as our first level or prime contractor. On large capital construction projects, we first contract a construction management firm. This partnership becomes the foundation for many of the planning processes that follow. We work closely together to map out the execution phase of the contract environment.
The bid packages we put together for a project will already contain a detailed scope of work and language that will later appear in the contract. Several meetings will take place with tendering contractors to clearly outline expectations and answer any questions. This helps contractors put together an accurate bid. DuPont also requires all contractors to carry out a Hazard Risk Analysis that is reviewed by our company in the bid package return.
It’s all about planning. Our front-end-loading processes are very detailed to avoid costly changes and potentially catastrophic events during contract execution.
Contract development & award
Once the bidders have been selected, DuPont will draft a contract for review and will then hold a series of pre-bid meetings to discuss any questions and carry out gap analyses. All questions and answers are documented and later circulated for clarification. These clarifications are integrated into the owner-contractor agreement.
The award process is equally critical. With larger contracts, we often spend several days with essential parties from both sides reviewing work scopes and expectations, means for measuring execution and safe work practices, and again, clarifying in writing any ambiguities or misunderstandings either representative parties might have.
DuPont contractor contracts will not only include standard terms and conditions, but also site-specific conditions, as well as a clear delineation of responsibilities, a detailed definition of the scope of work that is measurable and quantifiable, performance requirements, safety expectations, communications and cost. All stakeholders involved with a project, from engineering to safety, sourcing to contract administration, finance to environmental, and possibly maintenance or operations, can contribute to the scope of work and terms and conditions process. DuPont also includes a requirement that there is transparency and no apparent difference in contracts between the first level or prime contractor and their sub-contractors. This ensures that there is no loss of control or detailed clarity by the owner/operator over sub-contractors hired by the first level/prime contract management team as you dive down the contract levels. DuPont reserves the right to see sub-contractor contracts and measure them for effectiveness.
Multi-national companies sometimes have little choice about the contractors they work with. They may be in a region where they work with an international contractor who develops the workforce locally or there is a shortage of qualified contractor supervision. In regions where contractors can take their pick of work available, companies may have to decide what is non-negotiable in their expectations - for DuPont that would be safety – and then compromise on the type of contract they agree on, e.g. putting in place a time and materials contract instead of a fixed-cost contract.
If the choice of contractors is limited to companies that fall below the generally expected standard, owners can put in place a contract variance process that allows them to accept contractors under very stringent conditions. The contract would include controls that would not be in place for more trusted contractor partners. Take, for example, a contractor with unacceptable safety scores. At DuPont we might hire that contractor under a contingency, which specifies measurement of safety performance while on the project. DuPont would contractually specify safety and behavior-based training to ensure that, over time, the contractor’s safety standards would develop to such a degree that they become a regular partner. That can also work to the benefit of the contractor who can highlight his safety performance when tendering for future projects with other owner operators.
Measuring contract performance
All DuPont agreements for contracted work will contain quantitative measurement requirements relating to quality, performance and safety. We believe these are inseparable contributors to positive project outcomes. Good safety leads to good quality as safety is clearly linked to productivity and operability.
We apply leading metrics as indicators for contractors’ performance. This is monitored by dedicated field contract administrators who act as the eyes and ears of the owner on site on a daily, weekly or periodic basis.
Once a project has been completed, DuPont checks contractor performance against contractual expectations, and also provides detailed, constructive feedback to the contractor to facilitate improvement. Where expectations were not met, records are updated to reflect this, so we know to avoid or monitor this contractor more closely in future. If the contractor has not performed sufficiently with regard to safety performance, he may not be selected for future contractual consideration.
To their detriment, many owners learn that poorly written contracts, which lack precise work scopes, result in difficulties or complete loss of control of the contractors’ work. They may have thought to protect themselves with the right to stand down work on quality issues, but very few companies include tangible clauses related to safety. If work is halted for safety reasons, companies often find they still have to pay the contractor for the work disruption. To avoid risks associated with inadequate contracts, careful planning in the early stages is vital. We use our many years of project management experience to work with other companies across all industries from the planning stage to help them draw up adequate contracts for capital projects, turnarounds and work-safety-related ventures right from the start. DuPont is frequently called in by other companies to take corrective action after overruns, fatalities or catastrophes have already occurred. At that stage, it is possible to take some corrective action and re-negotiate contracts, but much of the damage has already been done. It is far better to take action sooner.