Better Agreements: Making contract formulation more robust

Making contract formulation more robust

The dredging industry in India has witnessed significant growth momentum in recent times. A well-defined contract with a clear allocation of risks and responsibilities for all stakeholders is a must for industry growth. In the past, dredging contracts have often been criticised for lack of adequate information of the area to be dredged, clearly defined risks and responsibilities, etc. Therefore, the process of preparing and executing contracts needs to be made more robust.

To assess the type of contract to be used for a particular project, it is imperative to assess several parameters such as project magnitude, owner’s preference, design and complexity. Some of the commonly deployed contracts today include lump sum, item rate, cost-plus percentage, cost plus fixed fee and turnkey contracts.

Based on the type of contract, the associated risk factors of a project vary for both the contractor and the employer. For instance, while the contractor faces the highest risks in turnkey and lump sum contracts, the associated risks for an employer under these are the least. On the other hand, while the contractor faces the least risk exposure in cost-plus percentage, fixed fee and target cost contracts, the employer tends to face higher risks. Meanwhile, the item rate contract balances the risk profiles for the contractor and the employer, placing equal risk on both parties.

Therefore, the choice of selecting the ideal type of contract should be based on placing the risk on the party that is best equipped to manage or mitigate them. Meanwhile, the contractor should also be able to comply with the strategic vision of the employer and should have the organisational know-how and manpower for contract execution.

Contract formulation also plays a major role in defining the success of a dredging project. These projects are highly capital intensive in nature. Any changes made in the project plan after the signing of the contract can lead to significant changes in costs and affect timely implementation. For instance, variations in site conditions and hence in dredging methodologies may increase costs; insufficient planning may cause obstructions to existing port operations; and improper selection of dredgers may lead to damage to existing structures at ports and waterways. Further, in case of arbitration, the project may get delayed by several years.

Thus, it is advisable to undertake several studies before preparing a dredging contract. These include studies on the existing bathymetry, sub-bottom profiling, embedded materials/obstructions, geotechnical investigations, and met-ocean data. Further, segregating contaminated soil, identifying locations for dumping and reclamation, and adopting the learnings from previous dredging works are essential prerequisites to formulate an effective contract. Further, contracts should be formulated keeping in mind the specific characteristics of each project, such as heterogeneous/homogenous soil content, rate of sedimentation, whether it involves river dredging for inland waterways, etc.

Such considerations become especially important in the case of formulating a contract for dredging works, since these works come with several associated risks:

  • Inaccurate quantity estimation: Errors in the estimation of the quantum of rock sediments to be dredged can lead to an astronomical increase in the project cost and may lead to alterations in contracts.
  • Embedded obstructions: If embedded obstructions in project execution are not envisaged earlier, they may result in cost and time overruns with respect to the contract.
  • Monsoon woes: Adverse effects of the monsoon, such as excessive wind speeds and wave heights, can often result in an increase in the downtime of the dredging equipment, and may cause operational hindrances.
  • Type and age of dredger: The efficiency of a dredger largely depends on its suitability with respect to a particular project site and its age.
  • Mobilisation time: Site locations and the type of dredgers can also influence the mobilisation time of the equipment.
  • Achieving target productivity rate: In some cases, the targeted dredging output may prove to be difficult to achieve due to factors such as the distance of the disposal area from the dredging location, downtime, seasonal effects, inefficient dredgers, etc.

To minimise issues in contracts, the International Federation of Consulting Engineers (FIDIC) has come out with a document that has recommendations on contract formulation. It has laid out the “general conditions” of a contract that should not be tampered with. Any modifications made to these “general conditions” should be done in the “conditions of particular application” document. Given that the FIDIC recommendations suggest universal adoption of guidelines, the case for its adoption by the Indian dredging industry has strengthened in recent times.

Conclusion

Contract formulation in the industry needs to be made more robust so as to avoid disputes later. The ideal procedure should be to draft a contract which allows risks to be shared between all parties in a pre-decided manner. It should also clearly lay down the project scope and the expectations of the management. Strengthening contract formulation can go a long way in improving the quality of project execution in the industry.

Based on a presentation by Devdatta Bose, group sector head, ports & harbour, Tata Consulting Engineers Limited, at a recent India Infrastructure conference