Expensive Toys
Sometimes, I meet up with some friends on Monday evenings. On one of those Mondays, Byron, a businessman, interested me in a toy he was purchasing—a purpose-built Range Rover. When the Range Rover finally hits the road, it will have bulletproof windows and tyres with accompanying sport rims, leather interiors, and the latest AI-supported Android entertainment system, among other things.
As we jointly perused the factory photographs, I tried but failed to digest the colossal sums Byron has agreed to pay for his toy. Perhaps I should work towards having deeper pockets. These sums were about USD 150,000, excluding the shipment cost to the Range Rover’s destination and the import taxes due. As Byron concluded narrating his decision to purchase this toy, the process he navigated to arrive at his preferred specifications, and how the supplier will test and deliver the Range Rover, I am reminded about a similar process on a construction project.
What type of construction project do you want?
A construction owner may build a project independently and bear all the construction-related risk or engage a contractor to bear a portion of that risk. If that owner decides to engage a contractor, it is usually via a standard construction contract, a design-and-build-type contract, or an Engineering Procurement and Construction (EPC)-type contract.
Under the standard construction contract, the owner tenders for the construction works with a detailed design, specifications, drawings and bills of quantities, and any interested and competent contractor offers a price based on these documents. However, under the design-and-build and EPC-type contracts, the owner must develop the Employer’s Requirements and an accompanying conceptual design and then go to tender.
Byron’s desire to have bulletproof windows, bulletproof tyres and accompanying sport rims, leather interiors, and the latest AI-supported Android entertainment system is equivalent to the Employer’s Requirements on a construction project. Byron most likely outlined additional requirements like horsepower, headlight beam strength, and ground clearance. Byron was not required to provide requirements down to the last nut, bolt or micro-chip, as such detail would be the output of the dealer’s detailed design and similar to design specifications produced as an output of the detailed design for a typical design-and-build or EPC-type contract.
Byron was not required to provide requirements down to the last nut, bolt, or microchip, as such detail would be the output of the dealer’s detailed design, and similar to design specifications produced as an output of the detailed design for a typical design-and-build or EPC-type contract.
Byron was excited as he shared the conceptual images he had given the dealer. These images are equivalent to an owner’s conceptual design on a construction project. However, Byron’s wishes had to be within certain limits. For instance, motor vehicle parking slots and carriageway lanes are normally designed to an international standard, which accommodates both luxury and simplicity. So, if your vehicle is too big, it will be “unusable.
After receiving Byron’s requirements and a conceptual design, the dealer returned to Byron with a development cost and a preliminary design. Byron approved the development cost and the preliminary design, and the dealer commenced building the car. In a typical design-and-build or EPC-type construction project, a contractor submits a preliminary design and an accompanying offer to build at bid submission. The owner (Employer) and the contractor then proceed to sign a contract based on the preliminary design and the contractor’s final financial offer. Immediately thereafter, the contractor commences the detailed design process. Typically, construction work commences when the contractor completes and the Employer approves the detailed design.
Under the EPC-type contract, the Contractor takes on a large portion of the risk. In this article, I neither explore the nuances of such risk nor the mechanics of the contracting mechanisms under each contract type. Instead, I share the implications of the often misunderstood and overlooked area of the Employer’s Requirements. Perhaps, along the way, you will discover where you have gone wrong and how you, and others alike, can correct past mistakes.
In this article, I neither explore the nuances of such risk nor the mechanics of the contracting mechanisms under each contract type. Instead, I share the implications of the often misunderstood and overlooked area of the Employer’s Requirements.
What can go wrong if the Employer’s Requirements are poorly prepared or non-existent?
Recently, I met Gregory at Bole International Airport. Gregory was reading a hard copy of the Chartered Institute of Arbitrators’ 2024 spring edition of The Resolver. The cover page had the title, Here come the Adjudicators. Noticing that we perhaps had similar interests, I initiated a conversation, and it turned out that Gregory and I were headed to Cape Town to pursue similar interests.
Gregory: “Cyrus, do you know where I can find a charger for my smartphone, or do you happen to have a power bank?”
Cyrus: “The charging ports are over there,” I responded.
Gregory: “Oh God, couldn’t they have put them closer to the boarding gates?” Now I must walk a long way to charge my phone. Perhaps this was a missing detail in the Employer’s Requirements.”
I could not miss an opportunity to unpack Gregory’s thoughts on this subject, and we wasted no time. So, I joined Gregory on his long walk to the charging point, and after he had plugged in his phone, an interesting discussion ensued.
Project 1 – A design and build road project
Gregory: “I am the resident engineer (RE) on a FIDIC 1999 Yellow Book contract in a Sub-Saharan country in Africa. On this project, the government decided to build a single-carriageway road in one of the upcoming suburbs, went out to tender, and eventually signed a design-and-build-type contract with an Asian contractor.
I assumed the RE role soon after the parties had signed the contract. Inevitably, I had to familiarise myself with the entire contract to develop a contract administration strategy. Since it was a design-and-build contract, I looked for the Employer’s Requirements first. Fortunately, they were bound in the contract.”
Cyrus: “In your opinion, were the Employer’s Requirements well prepared?”
Gregory: “I have worked on road projects for quite a while, and in my opinion, the Employer’s Requirements were reasonably well-prepared. But there can never be perfection with such documents. Some requirements are usually omitted or ill-defined.
The Employer often assumes that the Contractor can correct, improve and refine the Employer’s Requirements to include what they have omitted, yet this is not the Contractor’s responsibility. The Contractor’s duty is to prepare a detailed design and accompanying specifications, all based on the Employer’s Requirements. Contractors also want to do the bare minimum and maximise profits on their offer, so they are unlikely to yield to new tasks without adequate compensation.”
There can never be perfection with such documents. Some requirements are usually omitted or ill-defined, and in many cases. The Employer often assumes that the Contractor can correct, improve and refine the Employer’s requirements to include what they have omitted, yet this is not the Contractor’s responsibility. The Contractor’s duty is to prepare a detailed design and accompanying specifications, all based on the Employer’s Requirements.
Implementation challenges
Cyrus: “Were there any challenges related to the Employer’s Requirements?”
Gregory: Currently, I am dealing with two challenges.
“First, at a particular section of the road, the drainage design provided is inadequate to convey the runoff. The Employer has demanded that the Contractor change the design at no additional cost to improve functionality because the Contractor’s design is purportedly unfit for purpose. The Contractor has claimed that since the Employer has approved the design, the design should remain unchanged and further states that the Employer’s Requirements do not explicitly state this fit-for-purpose requirement.
Secondly, after completing the major (high-value) project components, the Contractor is dragging its feet to execute the smaller components under the same contract. I observed that the Employer’s Requirements did not succinctly describe and break down the project components and price schedule to avoid this issue, and I am convinced that a deep dive into the price schedules comprising the contract sum may be inevitable.
The Contractor took advantage of this and front-loaded the execution costs for the high-value components. Yet, the smaller value components are equally crucial for the completion and subsequent use of the road. Contractors frequently engage in this practice to disadvantage other bidders who may have carefully considered their breakdown of the contract price and priced their proposals realistically.
I instructed some variations on the smaller project components, but the Contractor has contested my valuation of these variations.”
Cyrus: What’s your plan for resolving these issues?
Gregory: “In the first scenario, I am leaning towards the Contractor because the Employer’s Requirements did not succinctly specify the fit-for-purpose obligations for the drainage sections. Under the FIDIC 1999 Yellow Book, in such circumstances, this fit-for-purpose obligation defaults to fit-for-ordinary-purpose, which the Employer says is inappropriate. I disagree with the Contractor that if the Employer has approved the design, the design is cast in stone.
Under the FIDIC 1999 Yellow Book, the Employer’s approval does not absolve the Contractor from ensuring that what is built is appropriate or fit-for-purpose. This notwithstanding, I have recommended that the Employer consider paying some additional money to the Contractor (via a variation) to achieve their current fit-for-purpose requirements, which were unclear in the Employer’s Requirements. It is unreasonable for Contractors to bear such risk without proper compensation.
I have recommended that the Employer consider paying the contractor some additional money (via a variation) to achieve their current fit-for-purpose requirements, which were unclear in the Employer’s Requirements. It is unreasonable for Contractors to bear such risk without proper compensation.
In the second scenario, the Contractor has suggested that my valuation of the variations is incorrect because the initial scope in the small project components was unclear and that the valuations should adopt the Contractor’s pricing model for similar works under the major components. I have informed the Contractor to consider the actual value of the work rather than pricing it at the same rate as that in the major project components.
Experience shows that adequate project preparation precipitates proper risk allocation. When the construction scope is unclear from the onset, Contractors may (at the bidding stage) disproportionately allocate resources across the various project components that comprise the Contract Price. During execution, this subsequently impacts the valuation of potential variations.”
When the construction scope is unclear from the onset, Contractors may (at the bidding stage) disproportionately allocate resources across the various project components that comprise the Contract Price. During execution, this subsequently impacts the valuation of potential variations.
Dinner with Scott
Gregory and I arrived in Cape Town after just over six hours of flying. At dinner that evening, Gregory introduced me to Scott, who originates from Glasgow in Scotland. Scott is the Employer’s Representative on a project to construct a fast-moving consumer goods (FMCG) factory in Panama. The Employer is a wealthy wheat farmer, and the Contractor is a European outfit. The contract parties have adopted FIDIC’s 2017 Silver book.
Scott had an interesting twist on the same topic. In between trying to comprehend Scott’s accent and wrapping my head around a simultaneous discussion Gregory brought up (Why do Scottish men wear skirts?), I finally figured out what Scott was saying.
Project 2 – A fast-moving consumer goods (FMCG) factory
To be continued…