Financial Management in Construction Contracting - Coursework Example

CASE STUDY ON SCENARIO CONTRACTS Name Institution Professor Course Date Introduction The purpose of this report is to offer a sound professional advice to a client embarking on a project while experiencing some challenges or issues in relation to post contract stage. The Ministry of Health focuses on constructing a new University Teaching Hospitals with capital cost of £135 million. Moreover, the proposed hospital will be the largest within the nation with approximately 300 beds inclusive of a 52-bed Critical Care Unit, 21 operating theatres, and one of the largest emergency departments in the country. The proposed hospital seeks to have an underground car park for patients and visitors while being one of the ‘greenest’ institutions in the United Kingdom. The construction of the hospital expects to generate approximately £180 million to the local economy, thus creation of 75 to 100 apprenticeships (660 full-time jobs during the construction period) with 60 percent of the employment positions to the local people. The challenge to the project arises because of the issues after 15th month of activities leading to exchange of accusations and delay in payments, as well as lack of workers on site and the tendency to operate behind schedule in relation to late project administrator’s instructions. In addition, there was substantial conflict in determining the contractor’s main responsibilities especially in terms of the contractor’s design portion, as well as rules underpinning subcontract. There were also issues in relation to misunderstanding on testing and defects with references to terms of inspection, rectification, and uncorrected defects. The report seeks to handle diverse objectives in relation to the situation or the case study concerning the construction of the proposed hospital. These objectives include: i. Determination of the general principle governing main contractor’s responsibilities in executing construction contracts ii. Assessing the conditions guiding payment in the NEC 3 ECC conditions of contract iii. Investigation of the contractual standing in terms of conditions governing contractual programme iv. The principles guiding testing and defects in construction contracts v. Dispute resolution methods to resolve diverse issues in the case study General principle governing main contractor’s responsibilities In the course of executing diverse responsibilities, main contractors focus on adhering to different principles, which are essential in the achievement of effectiveness and efficiency in the service delivery in accordance with the proposed elements. In the modern context, engineers, managers, and contractors have the obligation of understanding and executing terms of the construction contracts. In most cases, these professionals tend to have little or no legal training, thus relying on their intuition. The main contractor is in-charge of the whole supervision of the whole construction project. I believe it is of great interest for you to understand responsibilities and duties of the main contractor in building and construction. Some of the duties of the main contractor include plan implementation, payroll functions, procurement of materials, acquisition of permits and licences, law reviews, proper budget allocation, and implementation of changes. The main contractor has the obligation of meeting the expectations of the client constructing the project in accordance with the plans of the designer of the project (Weddell, 2006). In the course of executing these obligations and duties, the contractor has the obligation of adhering to the health and safety principle. The principle ensures that contractors promote healthy and safety standards in the development of the project while supervising the activities. In addition, the contractor has the obligation of adhering to non-discriminatory principle with the intention of hiring individuals or employees on competence rather than other critical factors such as race and religious affiliation. Similarly, the contractor has to adhere to the ethical principles in making decisions and communicating these elements to the employees in a timely approach. These principles are critical in determining effectiveness and efficiency in planning and supervising activities during the construction process, as well as procurement of products and materials to facilitate the achievement of goals and targets of the project. Furthermore, contractors focus on promoting these principles to limit diverse issues or sources of conflict among the members or stakeholders of the project (McInnis, 2001). Conditions Guiding Payment in the NEC 3 ECC In the first instance, I would like to bring to your attention that ECC focuses on the achievement of three critical objectives: flexibility, clarity, and good management. The achievement of flexibility is vital in accord with the multi-disciplined approach while clarity focuses on exporting and understanding to minimise the number of conflicts or disputes for the realization of good management for the shareholders and stakeholders. In the case of payment, NEC 3 ECC indicates the triggering of the employment payment under the influence of the assessment process prior to taking 14 calendar days for payments to be processed prior to transfer of the monies into the PBA after the due date. In addition, it takes a further 5 working days for payments to reach the recipients bank. Introduction of simple changes to the payment process is vital in the reduction of the timescale to approximately 3 days from the due date. The NEC 3 ECC proposes diverse processes for the reduction of the timescale. In addition, NEC3-ECC contract outlines the costs forming part of the defined cost and the amount due for payment to the subcontractors, but in order for it to be payable, there is need for a contract to exist in writing. You should also have substantial information on the obligations on the Contractor to bet subcontractors’ terms agreed complying with the requirements of clause 26 of the NEC3 ECC. From this perspective, I would propose the need for the contractor to make substantial payments prior to the next assessment date, in which case definition of the price for work done to date might cover the eventuality. In certain cases, there is need to forecast what the contractor will have paid by the next assessment date. These attributes are critical in the achievement of the efficiency and effectiveness in the execution of different responsibilities and duties in relation to the construction project. Contractors need to adhere to these principles or guidelines to limit or eliminate payment disputes with the employees working towards the achievement of the goals and objectives of the project (Cibinic, Nash, & Nagle, 2006). From this perspective, the payment within the contract must consider or assess amounts due, payment provisions, and pain/gain share where appropriate. This would bring me to assessment of the contractual standing in accordance with the NEC3-ECC contract implementation in the next section of this discussion. Contractual Standing The project concerning the proposed hospital was awarded in accordance with the NEC3-ECC conditions of contract. The contractor has the obligation of designing parts of the works in accordance with the works information. I am made to understand that the work on site delayed for 3 weeks because of the delays in handing of the site to the contractor (Rowlinson, 2011). I believe the duration was to be 32 months while exploiting interim valuations in determination of payment to the contractor. The project ran into great difficulties after 15th month of execution of duties by the contractor leading to exchange of accusation and lack of making agreed payments. The workers also pulled off site by the contractor leading to disputes. The project came to a standstill because of late payment, lack of workers on site, and working behind schedule, as well as late project administrator’s institutions. According to the assessment of the situation, I can categorically state the essence of conflicts in determination of the contractor’s main responsibilities in terms of contractor’s design portion, as well as rules underpinning subcontracting. Furthermore, the contractual programme experienced disputes in relation to misunderstanding on testing and defects with reference to inspection, rectification, and uncorrected defects. In the course of overcoming these issues, I would recommend on the need to incorporate both contractor and project manager. Both contractor and project manager have key roles to play in the acceptance of the project programme. This is through provision of the detail as well as the transparency of the programme in such a manner that it offers the project manager and subcontractors for visibility of the updated sequence of work prior to acceptance. Similarly, the project manager has the duty to consider whether the project is acceptable or not prior to communicating this within the timescales of the contract (Ross & Williams, 2012). The effectiveness and efficiency of the programme or the project should focus on elimination of the problems or challenges under the influence of incorporating diverse conflict resolution techniques and mechanisms. Testing and Defects in the Case Study In this context, you should understand that NEC3-ECC focuses on illustration of diverse clauses. The core clauses incorporate nine sections, which are the same in every form while covering the basics in relation to application of every contract. One of the key clauses is the testing and defects. In this context of discussion, I will focus or concentrate on the testing and defects clause. This clause focuses on tests, inspections, notifying defects, correcting defects, accepting defects, and uncorrected defects. Unsurprisingly, defects come out as the major causes of dispute and construction litigation, hence the need for degrees of familiarity with law, building technology, and practice to handle construction failures. The role of the contractor is divided into two aspects: testing on the one hand and defects management on the other hand. The testing aspect focuses on integration of inspections on and off site. The supervisor has the obligation of understanding and identifying the requirements. The execution of tests and inspections should be notified to other in reasonable time prior to the start of test or inspection processes. It is essential to note that no requirement for the party carrying out a test or inspection to wait for the other attends following the provision of a notice. On the other hand, there is a requirement for the supervisor to do his tests and inspections without causing unnecessary delay to the works or a payment. In case of any test or inspection, the goods and materials must be brought to the working area following the notification of the supervisor. From this perspective, it is critical to notify supervisor about the requirements of the tests and inspections with the intention of eliminating or preventing disputes among the shareholders and stakeholders. There must be mutual trust and cooperation in the course of executing these tests and determination of defects between the supervisor and contractor before occurrence of any delay. Resolution Methods I believe you are better placed to understand that construction contracting is becoming increasingly complex, as well as litigious. Most owners tend to react to more contracts, which attempt to place all responsibility on the contract. Along with the numerous complex contracts come increased opportunities for the contractual disputes. In addition, most construction contracts tend to contain some form of ADR (Alternative Dispute Resolution). This refers to a contractual means to resolve disputes without visiting the classic courtroom setting. The most common illustration of ADR is arbitration, which tends to be a valuable contract dispute-resolution technique. Nevertheless, the essence of arbitration is not a panacea. In the course of solving these issues, it is essential for the contractors to develop and implement the concept of mediation. Implementation of mediation continues to show some impressive results with 80 percent of the disputes being satisfactorily resolved. Mediation refers to a voluntary process, which enable parties to a dispute to work with an impartial mediator who assists them to find ways to resolve their conflict. Mediation is not a win/lose determination. A skilled mediator has the ability to facilitate solution to the problem, which best fit the needs of both parties. From the perspective, the mediator does not decide who is right and who is wrong. I trust in the implementation of this approach, which will be vital in harmonizing the issues towards completion of the project. The primary benefit of this resolution technique relates to risk and cost control. The parties tend to arrive at the solution, which is valuable for harmonious existence while working towards completion of the project with reference to the proposed hospital project. The mediator is neutral in keeping the parties working together rather than turning the problem over to the legal departments (Willoughby, 2005). The approach is also cost-effective, as warring factions will not visit the courtroom settings in the course of handling their conflicts. Mediation will be ideal in this context because of the ability of the approach to enable contractor and the workers to operate effectively and efficiently towards completing the project. Furthermore, unlike the arbitration, which will create inadequate or inappropriate bonding between the stakeholders and shareholders, mediation will develop quality relationship among the warring parties. This is ideal in the reduction of the cost of the project while improving efficiency in handling the duties and responsibilities by the stakeholders and shareholders. On the other hand, the project should focus on adoption and incorporation of a quality mediator to achieve appropriate outcome for the benefit of the stakeholders and shareholders. NEC3-ECC vs. FIDIC Red Book form of contract FIDIC is the acronym for the International Federation of Consulting Engineers. FIDIC focuses on representing the consulting engineering industry in the domestic and global contexts. It is critical to note that the FIDIC forms represent a starting point for the preparation of a construction contract (Glover & Hughes, 2011). On the other hand, these forms are routinely amended to reflect specific characteristics of each project and the requirements of the diverse parties engaging towards the completion of the project (Totterdill, 2006). There are diverse illustrations of the FIDIC. One of the most effective illustrations applicable in this report is the case of the ‘red book’. This focuses on demonstration of the conditions of contracts for construction for building and engineering works. The Red Book is recommended form of contract for building or engineering works in cases where the employer is responsible for all the design. Red Book is the most widely applicable international construction contract under the guidance of the employer focusing on designing different elements of the project. One of the key features of the Red Book is that payment is made according to the bills of quantities. This refers to a document, which concentrates on itemizing materials, plant, and labour, as well as their costs. Similarly, it is possible to make payments based on agreed lump sums of items of work. In addition, the administration of the Red Book is by the engineer, who is the third party rather than the contractor or the employer (Jaeger & Hok, 2009). The engineer tends to express responsibility for monitoring the construction work, but still keeping the employer fully informed in the course of making variations, as well as certification of the payments. These payment attributes are similar to the case of the NEC3-ECC, which demands the making of payments after itemization of the materials, plants, and other variables in relation to their costs and time of procurement (Humphreys & Plate, 2005). The attributes are vital in the achievement of effectiveness and efficiency in interaction between the shareholders and stakeholders in pursuit of harmonious encounter towards completion of the project (Robinson, 2013). The constant interaction between the engineer and the contractor or employer is critical in elimination of the disputes or conflict, which might hinder the achievement of the goals and objectives of the project with reference to the proposed hospital. The payment propositions of NEC3-ECC concentrate on itemisation of the materials and products vital for the completion of the projects. Similarly, the Red Black’s payment proposition focuses on providing payments to the contractor upon itemization of the materials and products while considering the cost of each element (Robinson, 2013). These attributes are vital in the illustration of the key features and efficiency in accordance with the objectives and targets of the project. Conclusively, it is ideal for the contractor and employer to understand and incorporate these elements and clauses with the intention of eliminating or reducing the opportunities for conflicts among the stakeholders. List of References Ross, A., & Williams, P. 2012. Financial Management in Construction Contracting. Chicester, Wiley. http://public.eblib.com/choice/publicfullrecord.aspx?p=1120439. Rowlinson, M. 2011. A Practical Guide to the NEC3 Engineering and Construction Contract. Chichester, West Sussex, UK, Wiley-Blackwell. http://public.eblib.com/choice/publicfullrecord.aspx?p=700658. Institution of Civil Engineers (Great Britain). 2005. NEC3 Engineering and construction contract. London, Thomas Telford. Weddell, B. 2006. Choosing the right NEC contract. London, Thomas Telford. McInnis, A. 2001. The new engineering contract: a legal commentary. London, Thomas Telford. Cibinic, J., Nash, R. C., & Nagle, J. F. 2006. Administration of government contracts. Washington, D C, George Washington University, National Law Center, Government Contracts Program. Willoughby, N. 2005. Project management for builders and contractors. Victoria, B.C., Trafford. Humphreys, T., & Plate, A. 2005. Guide to the implementation and auditing of ISMS controls based on ISO/IEC 27001. BSI Business Information. Glover, J., & Hughes, S. 2011. Understanding the FIDIC red book: a clause by clause commentary. London, Sweet & Maxwell. Robinson, M. D. 2013. An employer's and engineer's guide to the FIDIC conditions of contract. http://www.123library.org/book_details/?id=64427. Robinson, M. D. 2013. A contractor's guide to the FIDIC conditions of contract. Hoboken, N.J., Wiley. http://rbdigital.oneclickdigital.com. Jaeger, A. V., & HöK, G.-S. 2009. FIDIC a guide for practitioners. Heidelberg, Springer. http://dx.doi.org/10.1007/978-3-642-02100-8. Totterdill, B. W., 2006. FIDIC user's guide a practical guide to the 1999 red and yellow books. London, Thomas Telford. Read More