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‘Best for Project’ Outcomes - Essentially this means that all parties involved in the project are focused on achieving what is best for the project rather than putting themselves and their commercial interests ahead of the project
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‘Best for Project’ Outcomes
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ABH323 (Week 10)
Purpose of good contract administration AND Commercial considerations for the in
| Question | Answer |
|---|---|
| ‘Best for Project’ Outcomes - Essentially this means that all parties involved in the project are focused on achieving what is best for the project rather than putting themselves and their commercial interests ahead of the project | E.g. engineers, architects, subcontractors, head contractor, users etc |
| ‘Best for Project’ Outcomes | - It requires everyone to be ‘on the same page’ - Focus needs to be on what will produce the best end result, whether that is cost, functionality, timing, long term performance, etc |
| ‘Best for Project’ Outcomes - Legislation creates adversarial relationships: - it forces each party to put their interests before others e.g. | - preparing payment claims as if the claim will be disputed - preparing payment schedules as if the claim is going to go to adjudication |
| Best for Project’ Outcomes - Legislation creates adversarial relationships: - it forces the parties to include tough terms in contracts and to have harsh processes e.g. | - Deeds of Release at PC and end of DLP - Limited opportunities to claim additional costs for latent conditions, variations, delay damages, EOTs, program changes etc |
| Relationship Management | - During the design process, everyone has to work together to properly scope and document the project - On site, everyone has to work together to get the project done |
| Relationship Management - Involves: | - Good communication - Good reporting - Exchange of information - Understanding and compromise with regard to risk management - Negotiation in dispute resolution - Confidence in quality and end product performance |
| Relationship Management - Relationships to be managed include: | - Principal to users - Head contractor to principal - Subcontractor to head contractor - Supplier to head contractor/subcontractor - Design team to principal - Design team to head contractor - Principal to financier - Head contractor to financier |
| Good Administration | - Is important for all types of contracts in all sectors - Minimises disputes - Minimises unfair contract terms |
| Good Administration - Assists progress of the works | - Variation management - Delay / EOT management - Claim management - Request for Information (RFI) management - Document management - Program management |
| Meeting Management - Must ensure that meetings are properly managed: - Document who attends and who is an apology - Document time, duration and location - Schedule regularly - Meet with: | > Design team and key personnel for contractor > Design team and user groups/stakeholders > Contractor and Subcontractors |
| Meeting Management - Set an agenda: | - Safety concerns - Hold points - Program issues - Two week look aheads - Design issues - Environmental concerns - Traffic management - Contractual issues - Procurement - Supply / trade concerns |
| Information Management - Keep registers | - Document/drawings - RFIs - Delays - EOTs - Payment claims - Payment schedules - Variations – proposals plus approvals |
| Document Management - So much paperwork on construction projects - Must be able to locate a document - Not enough to number all docs if you can’t find a particular document | - Software systems e.g. Aconex - Manage RFIs/emails/directions/site inductions/safety/quality/drawings/programs/certificates etc |
| Claim Management - Variation claims/EOT claims/payment claims - Need to track: | - Submission of claims - Variation requests - Status of claims - Value of claims - Date of claims |
| Financial Management - Prepare: | - Initial project budget - Forecast cashflow - Forecast resource plan - Program - Supplies / deliveries / lead times / site management |
| Financial Management - Update regularly: | - Cost incurred to date - Forecast cost to complete (based on what you know now that you didn’t know previously) - Calculate forecast cost at completion - Compare to contract price - ‘Status’ the program |
| Risk Management - Risk of: (1) | - Supply - Labour - Weather - Industrial relations - Latent conditions |
| Risk Management - Risk of: (2) | - Natural disasters - Program - Safety - Resources - Financial viability of project - Statutory changes - User requirements and changes |
| Commercial Challenge in Construction | There are many commercial risks when completing a construction project and not all are controllable or quantifiable |
| Pre-Project risk events | - Inappropriate Head Contract type relative to the risk profile - Estimation of project cost is deficient - Construction methodology assumptions are not aligned to the project site - Project client lacks financial capacity (credit worthiness) |
| During the Project risk events | - Scopes are sub-standard - Mismatch of Head Contract to Sub-Contract variations - Supply chain may be unable to meet contractual obligations - Weather and other disruptions - Head contract payment shortfalls & cashflow - Fraud |
| Completing the Project risk events | - Works performed don’t meet design requirements - Subcontractors unable to meet warranty requirements - Disagreement regarding defects and warranties - Disputes |
| Commercial Challenge in Construction - How the impact of risk is allocated between the | parties is a key element of Contract Management and inappropriate risk allocation can be disastrous |
| Client => Head Contractor => | - Sub-Contractors - Suppliers - Consultants - Internal Staff |
| Know Your Contract - Key elements to understand (1) | - Who are the key individuals that have power in the contract and how will they interact? - Who holds what authorities under the contract? - What is the agreed scope of the contract and how is it determined? |
| Know Your Contract - Key elements to understand (2) | - What is the commercial risk within the contract and how is it allocated? |
| Know Your Contract - Key elements to understand (3) | - Is there anything in the contract that is “unusual” and creates a requirement beyond that normally expected (understanding that the contract may refer to other documents outside the main document? (indemnities, operational requirements, etc) |
| Know Your Contract - Key elements to understand (4) | - What are the termination and dispute clauses and are they time bound? |
| Initial Procurement Approach - Elements of the Procurement Strategy - Supply and labour versus packaged sub-contracting decision - Sub-contractor and supplier assessments (non-price considerations) | - Licensing and regulatory requirements (know the local rules) - Pass through of specific Head Contract procurement of contract obligations - Effective scoping of works - Relationship versus transactional strategy |
| Ongoing Head Contract & Sub- Contract Management - Ongoing Head Contract Management Tips (1) | - Be clear with client and sub-contractors on scope decisions, site instructions and variations (follow the contract) - Variations to scope are not to be done without documented client approvals |
| Ongoing Head Contract & Sub- Contract Management - Ongoing Head Contract Management Tips (2) | - Issue payment claims clearly, on-time and in line with agreed requirements - Be pro-active regarding payment claims and processing |
| Ongoing Head Contract & Sub- Contract Management - Ongoing Head Contract Management Tips (3) | - Follow the principle that “Not documented is not done” - Get an understanding of what else is important to the client - If a dispute do not wait, raise it and deal with it on a timely basis |
| Contract Completion - Contract Completion Tips (1) | - Have a completion process and follow it - Ensure that key dates are clearly understood as they have important commercial outcomes - Ensure warranty and defects claims are raised within relevant time periods |
| Contract Completion - Contract Completion Tips (2) | - Carefully consider retention claims, security requirements and release deeds - Consider where insurance claims may be relevant to significant defects in design or sub-contract works |
| Cashflow and Working Capital - Key Elements (1) | - “Profitability” is not the same thing as cashflow - The definition of an insolvent business is one that cannot meet its financial obligations as they fall due (a “profitable business” can still be insolvent) |
| Cashflow and Working Capital - Key Elements (2) | - Forecasting cashflow is a key responsibility and requires an understanding of the project program - Supply chain requirements and the type of contract may cause a mis-match in cashflows between Head Contract and Supplier costs |
| Cashflow and Working Capital - Key Elements (3) | - Cashflow negative projects require working capital from the business which has a cost and is limited |
| Project Trusts & Commercial Regulations - Key Elements (1) | - Understand that each jurisdiction has different approaches in commercial management that are changing - QLD requires separate project trusts bank and accounting ledger structures to be applied for projects of a certain financial size |
| Project Trusts & Commercial Regulations - Key Elements (2) | - Head Contract funds must be received into the account and certain sub-contractor and supplier payments must be made from the account directly (not all) |
| Project Trusts & Commercial Regulations - Key Elements (3) | - Retentions are held separately and there are statutory requirements on how activities are conducted - Understanding these requirements is an element in managing both the Head Contract and Sub-Contract relationships. |
| QBCC MFRs - All licensees are required to meet the requirements of the Queensland Building and Construction Commission (Minimum Financial Requirements) Regulation 2018 | It is designed to ensure that contractors have a strong and financially sustainable business with an appropriate level of working capital |
| Three main aspects of the MFRs: 1) Allowable Annual Turnover (AAT) which is essentially the Maximum Revenue that the contractor can have for the reporting year (typ financial year) | 2) AAT is determined by the contractor’s working capital which is essentially its Net Tangible Assets (NTA) 3)Must have a Current Ratio (of assets to liabilities) of at least 1 i.e. more ‘current assets’ than ‘current liabilities’ |
| QBCC MFRs - Licensees are allocated to a specific Category based on their | Maximum Revenue – SC1, SC2, Cat 1 to Cat 7 |
| QBCC MFRs - Mandatory annual MFR reporting requirements | Requirements differ depending on the category of the contractor |
| QBCC MFRs - QBCC (MFR) Regulation specifies: (1) | - what assets can be included in the calculation of the NTA (net tangible assets) i.e. ‘Allowable Assets’ - what assets are not included in the calculation of the NTA i.e. ‘Disallowed Assets’ and ‘Intangible Assets’ |
| QBCC MFRs - QBCC (MFR) Regulation specifies: (2) | - what assets can be included in the calculation of Current Assets (for the ratio test) - what liabilities must be included in the calculation of Current Liabilities (for the ratio test) |
| QBCC MFRs - NTA = | [total assets] less [liabilities] less [intangible assets] less [disallowed assets] |
| QBCC MFRs - Licensees must pay all debts owing by the licensee to a contracted party, or a supplier of goods or services, on or before the day the debt becomes due and payable (s17N QBCC (MFR Regulation) | Regulation sets out the following for s17N: - what is a debt - when a debt is due and payable |
| QBCC MFRs - Monies Owed Complaints – a person who is owed money by a licensee can lodge a Monies Owed Complaint with the | QBCC and the QBCC will determine whether there is a breach of s17N |
| QBCC MFRs - If there is, QBCC may suspend the | licensees’ licence and do an MFR audit of the licensee’s business. If it does not pass the audit, the QBCC will cancel the licence |
| QBCC MFRs - So very real and serious consequences for failing to meet the Minimum Financial Requirements for licensees and this requires all | licensees to ensure that they manage their contracts properly and have good commercial management |
Created by:
Asher - S