Written contracts provide businesses with a legal document stating the expectations of both parties and how unfavourable situations can be resolved. Contracts also are legally enforceable in a court of law. They often represent a tool that companies use to safeguard their resources.
However, not everything is clear-cut with contracts. Subhash Pritmani, vice president for general management at Al Sabbah Electro-mechanical Company (SEMCO), says that the main contractor usually takes on a project at a very challenging price and time frame. And because of this the MEP contractor, who is part of this project, gets told by the main contractor of things being “missed out” on the project, such as civil works. He 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 this three months’ time. Often you don’t get money for that. Additionally, some subcontractors will push their own labourers to work with you.” He says that subcontractors may charge you more than three times for providing a workman.
Pritmani says that all such issues fall under the purview of contra charging. In simple terms 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. A few years back, Suzannah Newboult, a construction specialist at DLP Piper LLP, said 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.
Another contra charge is case of scope gaps. 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 main contractor, the project escalates along with the cost. The job that we have taken at a challenging cost starts suffering further.”
But can’t everything be defined well as part of a clause in a contract?
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 and then it will be a win-win situation for everyone. Unfortunately, he says that because jobs are taken at low prices and when they are not completed on time, people look for scapegoats. “Often, the MEP contractor is the first to become a scapegoat,” he says amusingly. He admits that the MEP industry takes up too many jobs. “We are also unsettled as an industry and many of us have not learnt what has happened in the past with many MEP companies [for accepting too many projects].”
The Singapore solution
Pritmani is a Singaporean citizen, and draws parallel between the lion city and the Middle East.
In order to solve the contra charge conundrum, Pritmani suggests setting up a fast redressal system as present in Singapore. He says: “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.”
Secondly, in Singapore, they have the Security of Payment Act. The Act stipulates that if your payment certificate has been certified, 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. Whereas in the Middle East region, Pritmani says, “most of the contracts, it is pay-in-pay-out. We call it 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. And that too you are at the mercy of the main contractor. Now, in Singapore, if the certificate has come but cash has not come through, it is the responsibility of the main contractor to arrange the money and pay the subcontractor. If he doesn’t do that, you have you can go to a small mediation court and it can be solved in 15 days. Here, also you can do it, but it goes into longer process. I have been canvassing such issues at various forums. The time has come when MEP contractors need to be protected through a similar Security of Payment Act process.”
The issue of variations
Then there are variations that need to be considered in a project.
A variation (sometimes referred to as a variation instruction, variation order (VO) or change order) is an alteration to the scope of works in a construction contract in the form of an addition, substitution or omission from the original scope of works.
Talking about the percentage that variations these days account for, 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%.” He says that it is difficult to predict when these variations will be requested. He says, “Possibly, 70% of the work is done and then some big variation is included.”
Citing an example, he says: “Suppose there is a residential and mixed development project, which has a shopping mall, mini mart, etc. 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 the contract such as BOQ (bill of quantities) rates. He says: “When you sign the contract, you are bound by that. The question is once the variation comes in, you are only paid the amount after doing the entire work. In very few cases you will be able to pay 50% of your claim value. In other words, if huge amount of variations are there, then you are financing it [yourself]. 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 lodging 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 and this is hurting very badly.”
Pritmani share a few solutions to the problem of variations. He says that 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. He says: “I think three months is a fair time to do it.”
He says that the other alternative is to not do the variation. However, Pritmani say this is an extreme step and that it is also contractually wrong.
“I say three months, every three months give a timeline, any variation/change, and we agree on it in three months’ time. It should be in the contract. And it should be implemented. It will solve cash flow problems. You won’t have the anxiety to wait till the end. Lastly, your supply chain will not suffer. And you cannot function without the support of supply chain.”
If something like variations can be set in a time-bound manner, it will be good for the industry.
The other issue quite rampant in the industry is forcing MEP workmen to work for MEP contractors by the main contractor.
He explains: “The main contractor sometimes hire workmen and inundate around, say, 200 people. They charge you 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 happens many times. And the company which is supplying the workers, they keep changing the people based on availability. That is adding insult to
“The forcing of main contractor comes primarily when there is a delay in getting the construction done, or the work is not progressing as per the plan.” SEMCO is currently working with many good contractors who are very well ahead in the civil works. He adds: “You have to pull people. You don’t have to push people. The main contractors should be looking at pulling you, rather than pushing from behind. Such a strategy works.”
He concludes with this wisdom: “MEP contractors should not book a job in anticipation of the revenue. Bite what you can chew. I keep saying this every time. Securing a job is an event, 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.”