Ten commandments of better contracting : a practical guide to adding value to an enterprise through more effective smart contracting

477 Pages·2003·23.62 MB·English

by  Hartman

Ten Commandments
of Better Contracting
Also of Interest
How to Work Effectively with Consulting Engineers: Getting the Best Project at
the Right Price (ASCE Manuals and Reports on Engineering Practice No. 45,
updated edition). 2002. Stock # 40637
Quality in the Constructed Project: A Guide for Owners, Designers, and
Constructors (ASCE Manuals and Reports on Engineering Practice No. 73,
second edition). 2000. Stock # 40506
Surety Bonds for Construction Contracts, edited by Jeffrey S. Russell. 2000.
Stock #40426
Construction Contract Claims, Changes and Dispute Resolution, second edition,
edited by Paul Levin. 1998. Stock # 40276
Capturing Client Requirements in Construction Projects, edited by John M.
Kamara, Nosa F. Evbuomwan, and Chimay J. Anumba. 2002. Stock # 3103
Ten Commandments
of Better Contracting
A Practical Guide to Adding Value to an
Enterprise through More Effective SMART
Contracting
Francis Hartman
aSCE
a
press
Published by American Society of Civil Engineers
Library of Congress Cataloging-in-Publication Data
Hartman, Francis T., 1950-
Ten commandments of better contracting : a practical guide to adding value to an
enterprise through more effective smart contracting / Francis T. Hartman.
p. cm.
Includes bibliographical references and index.
ISBN 0-7844-0653-7
1. Contractors'operations-Management 2. Civil engineering contracts. I. Title
TA210.H282003
658.4-dc21
2003052470
Published by American Society of Civil Engineers
1801 Alexander Bell Drive
Reston, Virginia 20191
www.asce pubs.asce.org
Any statements expressed in these materials are those of the individual authors and do not necessarily
represent the views of ASCE, which takes no responsibility for any statement made herein. No
reference made in this publication to any specific method, product, process or service constitutes or
implies an endorsement, recommendation, or warranty thereof by ASCE. The materials are for
general information only and do not represent a standard of ASCE, nor are they intended as a
reference in purchase specifications, contracts, regulations, statutes, or any other legal document.
ASCE makes no representation or warranty of any kind, whether express or implied, concerning the
accuracy, completeness, suitability, or utility of any information, apparatus, product, or process
discussed in this publication, and assumes no liability therefore. This information should not be used
without first securing competent advice with respect to its suitability for any general or specific
application. Anyone utilizing this information assumes all liability arising from such use, including
but not limited to infringement of any patent or patents.
ASCE and American Society of Civil Engineers—Registered in U.S. Patent and Trademark Office.
Photocopies: Authorization to photocopy material for internal or personal use under circumstances
not falling within the fair use provisions of the Copyright Act is granted by ASCE to libraries and
other users registered with the Copyright Clearance Center (CCC) Transactional Reporting Service,
provided that the base fee of $18.00 per article is paid directly to CCC, 222 Rosewood Drive,
Danvers, MA 01923. The identification for ASCE Books is 0-7844-0683-9/03/ $18.00. Requests for
special permission or bulk copying should be addressed to Permissions & Copyright Dept., ASCE.
Copyright © 2003 by the American Society of Civil Engineers.
All Rights Reserved.
Library of Congress Catalog Card No: 2003052470
ISBN 0-7844-0653-7
Manufactured in the United States of America.
Contents
Figures xi
Tables. xi
Acknowledgements xiii
Introduction xv
Terms You Should Know xvii
Icons xxiii
Chapter 1 Thou Shalt Contract Within the Law and the Working
Environment of the Contracting Parties 1
Typical Contract Problems and their Causes: Common Law
and Tort Issues, Changes in the Contracting Environment
1.1 Contracting Basics 3
1.1.1 Contract Law as Part of Common Law 3
1.1.2 Contract Formation 4
1.1.3 Breach of Contract 7
1.1.4 Terms and Conditions 8
1.1.5 Typical Content of a Contract 9
1.1.6 Obligations Outside the Terms of a Contract 11
1.1.7 "Legal" Versus "Ethical" or "Fair and Reasonable" 13
1.1.8 Contract Failure and Termination 16
1.1.9 Recourse in Law 18
1.2 Changes that Influence Contracts 19
1.2.1 Change over the Past 30 Years 20
1.2.2 Effect of These Changes on How We Do Business 21
1.2.3 Effect of Changes on Contracting Options 22
1.2.4 What Has Been Found by the Construction Industry Institute
and the Cost Reduction Initiative for the New Era 28
1.3 What has Changed 31
Chapter 2 Thou Shalt Not Mix Up the Wrong Work Packages 37
Packaging Work: Combining the work and materials supply
for optimal performance
2.1 Contract Types 37
2.1.1 Stipulated Price 38
2.1.2 Unit Rate 42
2.1.3 Cost Plus 45
2.2 Tendering Options 50
2.2.1 Bidding 52
2.2.2 Request for Proposal 56
2.2.3 Negotiation 59
2.3 Scope of Work 61
2.3.1 Supply Only 61
2.3.2 Services Only 63
2.3.3 Engineering, Procurement, and Construction (EPC) 64
v
2.3.4 Engineering, Procurement, and Construction Management
(EPCM) 69
2.3.5 Design/Build 71
2.3.6 Build, Own and Transfer (BOT) and Build, Own, Operate
and Transfer (BOOT) Contracts 73
2.3.7 Turnkey 75
2.3.8 Other Flavors 76
2.4 Vertical Integration 77
2.4.1 Financing 78
2.4.2 Subcontracting 80
2.4.3 Equipment and Material Supply 81
2.4.4 Operating 82
2.5 Horizontal Integration 82
2.5.1 The Effects of Mixing Some or All of the Steps in Delivery
of a Project 82
2.5.2 Fast-Tracking 85
2.5.3 Concurrent Engineering 88
2.6 Multicontract Projects 90
2.6.1 Coordination 92
2.6.2 Management of Contracts and Contractors 93
2.7 Multiproject Contracting 94
2.7.1 Evergreen Contracts 95
2.7.2 Alliances 96
2.7.3 Term Contracts 98
Chapter 3 Thou Shalt Listen to, and Understand, the Real
Wishes and Needs of the Customer 99
Contract strategies: intent and client objectives, contractor
and supplier responses
3.1 Relevant Company Policies 99
3.1.1 Procurement Policy 100
3.1.2 Value for Money 104
3.1.3 Auditability 105
3.2 Project Requirements 106
3.2.1 Balancing Performance, Cost, and Time 107
3.2.2 Vendor Learning Curves 107
3.2.3 Reputation and Relationships 110
3.2.4 Clarity of Requirements and Specifications 111
3.2.5 Business Drivers for the Project 112
3.3 On-Staff Expertise and Availability of Key Skills and People 114
3.3.1 Technical and Other Complexities 115
3.3.2 Project Priority in Sponsor Organization 117
3.3.3 Impact of Funding for the Project 117
3.3.4 Politics and Compliance Issues 119
3.4 Risks Associated with the Client 120
3.4.1 Can the Client Pay? 120
3.4.2 Expertise and Experience of the Client 124
3.4.3 Client's Attitude to Contractors and Suppliers 125
3.4.4 Fairness in Contract Administration 127
VI
Chapter 4 Thou Shalt Not Blindly Pick the Contractor Who was
Cheapest Because It may Have Made the Biggest
Mistake 133
Contractor or supplier selection: picking partners for success
4.1 Picking a Contractor: Selection Strategy 133
4.2 The Bid Document 151
4.3 Bid Comparisons 158
4.4 Bid Process 160
4.5 Games People Play 170
4.6 Negotiations 174
4.7 Award: Do we Really have an Agreement? 176
Chapter 5 Thou Shalt Not Be Ambiguous and Vague 179
Clarity in wording: ambiguity, latent disputes and
interpretation of contract clauses
5.1 Language and Technology Growth 179
5.2 The Implicit Specification 183
5.3 Latent Disputes 187
5.4 Risk as a Tool to Identify Latent Disputes 189
5.5 Clarification of Clauses: Before or After Bid? 197
5.6 Managing Expectations: The Soft Side of Improving Contracting
Effectiveness 204
Chapter 6 Thou Shalt Share Out Risks Equitably and with
Intelligence 207
Risk assignment through contracts: risk assessment, cost
and allocation
6.1 The Cost of Assigning Risk: The Study, Its Limitations and How it
was Validated 207
6.1.1 The Origins of the Study 208
6.1.2 Common Beliefs 211
6.1.3 The Investigation 213
6.1.4 Limitations 214
6.1.5 Validation 215
6.2 The Cost of Assigning Risk: What We Found 217
6.2.1 Cost of Weasel Clauses 217
6.2.2 Value of Clauses 218
6.2.3 Things that Affect the Premiums Charged 220
6.2.4 Ingrained Habits and Mistrust 222
6.3 Eliminating Risk Premiums 224
6.3.1 Awareness of these Costs 226
6.3.2 Awareness of the Issues 227
6.3.3 Trust and its Limitations 231
6.3.4 Auditability 233
6.3.5 Value for Money 233
Chapter 7 Thou Shalt Trust thy Contracting Partner, but not
Do So Unreasonably 235
The role of trust in contracting: types of trust and trust profiles
VII
7.1 The Cost-Trust Relationship 235
7.1.1 Cost Elements 236
7.1.2 Trust Components 239
7.1.3 The Relationship between Cost and Trust 241
7.2 Trust Types and what they Affect in the Contract Relationship 242
7.2.1 The Color Trust Model 244
7.2.2 Myth and Reality: Post-rationalization and the Need for
Auditability 247
7.2.3 The Effect of Auditability on Contracts 249
7.3 Contracts in a Context of Trust 251
7.3.1 Competence Trust 252
7.3.2 Integrity Trust 255
7.3.3 Intuitive Trust 257
7.3.4 Balancing Trust Types 259
7.3.5 Adapting Contracts and Managing Them Based on Trust... 260
Chapter 8 Thou Shalt Not Mess Unduly with the Contract
After it is Agreed 265
Administration of contracts: payments, meetings, and
documentation
8.1 Payment and its Implications 266
8.1.1 Payment Processes 266
8.1.2 Holdbacks and Lien Acts 268
8.1.3 Lender and Investor Concerns 272
8.1.4 Implicit Contract in Common Law 275
8.2 Notices Under the Contract 276
8.2.1 Purpose of Notices 276
8.2.2 Notices Often Defined by the Contract 277
8.3 The Power of Progress Meeting Minutes 280
8.3.1 Using Progress Meeting Minutes to Serve Notice 280
8.3.2 Using "Standard" Minutes 281
8.4 Documents that Affect Contract Terms and Conditions 286
8.4.1 Memos to File 286
8.4.2 Diaries 287
8.4.3 Written Communication 288
8.4.4 Confirmation of Important Items 289
8.4.5 Other Forms of Communication 290
8.5 Legal Recourse: Will the Real Contract Please Stand Up?! 292
8.5.1 Reading the Contract 292
8.5.2 Knowing What the Contract Means 294
8.5.3 Last Resort: Turning to the Law 296
Chapter 9 Thou Shalt Deal Rationally and Fairly with
Inevitable Changes to a Contract 299
Changes and Markups: Types of changes, processes, costs
and games played
9.1 Change Orders 300
9.1.1 Change Basics 302
9.1.2 Processes Needed for Managing Changes 303
VII!
9.2 Process for Managing Changes 305
9.2.1 Flowchart 305
9.2.2 The Need for Process to Meet Buyer and Vendor Needs.... 308
9.3 When is a Change a Change? 309
9.3.1 Recognizing a Real Change 309
9.3.2 What Can Change? 312
9.4 The Effect of Changes and how it Alters Over Time 317
9.4.1 Effects 317
9.4.2 Time Effect on a Change 318
9.4.3 Contracts 319
9.4.4 Relationships 320
9.4.5 Morale 321
9.5 Pricing Change Orders 322
9.5.1 What Is Affected? 323
9.5.2 Opportunities and Risks 324
9.6 Contract Provisions for Markups and what they may Mean 325
9.7 Gamesmanship in Pricing, Negotiating and Managing Changes 327
9.7.1 Pricing Change Orders 327
9.7.2 Negotiating Change Orders 330
9.7.3 Managing Change Orders 331
Chapter 10 Thou Shalt Not Kill (Your Contracting Partner) 333
Claims and Disputes: Resolution Options and Avoidance
10.1 Negotiating Changes and Disputes 333
10.2 Mediation 337
10.3 Arbitration 339
10.4 Litigation (Classic Dispute Resolution) 342
10.5 Mini-Trials 346
10.6 Dispute Resolution Boards 347
10.7 Other Options for Dispute Resolution 348
Chapter 11 Smart Contracting: An Interlude 351
Chapter 12 Smart Contracting: a Framework for Better Performance
of Contracts and the People Involved 353
It pays to be SMART about how we manage our clients
and our supply chain
12.1 Thou Shalt Contract within the Law and the
Working Environment of the Contracting Parties 354
12.2 Thou Shalt not Mix up the Wrong Work Packages 364
12.3 Thou Shalt Listen to, and Understand, the Real Wishes
and Needs of the Client 374
12.4 Thou Shalt not Blindly Pick the Contractor who was
Cheapest Because it made the Biggest Mistake 380
12.5 Thou Shalt not be Ambiguous and Vague 383
12.6 Thou Shalt Share out Risks Equitably and with Intelligence 389
12.7 Thou Shalt Trust thy Contracting Partner,
but not do so Unreasonably 393
12.8 Thou Shalt not Mess Unduly with the Contract after it is Agreed 396
IX