What to expect from your FIDIC dispute adjudication board members

This article is selected on the internet by AfiTaC because of its interest for the readers of this blog (source: out-law.com) :

 

A dispute adjudication board (DAB) aims to stop disputes over FIDIC contracts ending up in commercial arbitration.

FIDIC is the International Federation of Consulting Engineers, known by its French acronym. It was formed in 1913, with the objective of promoting the interests of consulting engineering firms globally. It is best known for its range of standard conditions of contract for the construction, plant and design industries. The FIDIC forms are the most widely used forms of contract internationally, including by the World Bank, the Asian Development Bank, and the African Development Bank for their projects.

The DAB is the first step in the dispute resolution process for these contracts, and aims to resolve disputes before they go on to more formal arbitration. If it does its job well, a DAB can help both sides to see the truth of a situation and to accept its decision, so that arbitration is no longer needed.

That’s only going to happen if the DAB has the right panel members, with the right mix of skills, experience and empathy to understand the situation, make an informed decision and communicate that well to both parties.

This guide outlines the qualities that a DAB member should have.

Each DAB will have either one member or three, nominated by the parties involved in the dispute. To do the job well, these members must have:

  • experience in the specific field being investigated;
  • legal knowledge; and
  • language fluency.

A member with significant in-field experience in the type of construction contract being discussed is going to have a much better chance of understanding the practical, commercial and technical issues involved. This will give them a better chance of understanding both parties’ positions.

A good working knowledge of the relevant contract law as it applies to construction contracts is also needed, along with the ability to understand the often complex interactions of rights and obligations, and the ability to interpret a contract. This does not mean that the panel member needs to be a lawyer, but some knowledge of the relevant laws, and the ability to assess potentially contradictory interpretations of law, will lead to better decisions being made.

Language fluency is also essential, as the role will involve reading and analysing large quantities of information, including detailed contractual provisions, project records, plus written and oral submissions from the parties, witnesses, and legal authorities. An understanding of contractual language and of DAB proceedings is also needed.

Experience in resolving disputes in the industry is also useful, including familiarity with recognised techniques of dispute resolution.

Behaviour of members

A member of a DAB has to act fairly and impartially if the process is to work successfully. They can’t act as an advocate for, or represent, the party that nominated them, and parties should make sure that they nominate truly independent experts to the DAB.

Members are expected to disclose any facts or circumstances that might affect their independence or impartiality, and any conflicts of interest. In particular, they must not advise the parties or their employees on the contract.

Each party should be given a reasonable chance to put their case, and to respond to the other party’s case, and members must not express their opinions on the merits of either party’s argument.

Reasoned decisions

After considering the case the DAB has to present the parties with a well-organised, reasoned decision showing that all applicable rules and procedures have been followed. This should guide the parties through the legal principles involved, and explain all grounds for the final decision.

Well-argued decisions with rational explanations can speed the resolution of a claim, persuading both parties that the DAB has considered all aspects and come to a sensible conclusion.

The better and more convincing the reasons given, the more likely it is that parties will accept the decision and avoid going forward to arbitration. The DAB’s decision should make the strength of the winning party’s case clear to both parties.  If a member of a three-member DAB does not agree with the conclusions of the other two members then that member can be invited to publish a minority report. This prevents confusing or inconsistent decisions, or long deliberations to reach agreement.

Binding decision

The DAB’s decision is binding on both parties, and final if neither party submits a ‘notice of dissatisfaction’ within 28 days.

If the DAB members are experienced, fair, logical and independently-minded, and explain their (or the majority’s) decision well, they stand a better chance of instilling confidence that the dispute has properly considered and that the decision is fair and acceptable.

The original article can be found at this location: https://www.out-law.com/en/topics/dispute-resolution-and-litigation/arbitration-and-international-arbitration/what-to-expect-from-your-fidic-dispute-adjudication-board-members/

We can also recommend you the attached presentation by FIDIC:

PresentationCSeppFIDICandDisputeAdjudicationBoards

Package deals, when and how to propose them in contract negotiations? 7 questions answered.

On several negotiations, when I brought up the idea of doing a package deal while brainstorming with my negotiation team, I mostly got resistance: too early; the other party will take and not give; showing too much into our cards; etc. We are talking  here about big infrastructure and power plant deals with negotiations that could last weeks or months. However, the principles analysed below are certainly transposable to most types of negotiations, except maybe to pure price negotiations. Let’s dig a bit deeper into this subject.

1) Why use a package deal?

A package deal is a powerful approach to resolve, in one go, a substantial number of issues during a contract negotiation. It can help unblock situations. Both parties can get what is important for them while conceding on what they can live without.

2) Better to be the first mover or wait for the other party to act?

Even though many people are afraid to propose a package deal, it is an advantage to be the first mover. The fear to take the initiative is based on an assumption that the other party will see the points that you are willing to concede and will disregard the concessions that are expected from their side in return.

3) Advantages and risks of being the first mover?

The first mover advantage comes from the fact that you can establish the reference framework for (that part of) the deal. Your package proposal, if credible, will inevitably be the starting point of further discussions. The inherent risk is that you propose something unrealistically favourable for your side. Then, this proposal cannot become the reference. There will be no value in your proposal and you will only have created distrust.

4) What are the criteria to establish the package deal?

The party receiving the proposal should be able to acknowledge it as a step in their direction, at least on some important points. It is still necessary to keep a bit of negotiation margin in your package deal. Not too much, just enough to let the other party adjust your proposal. Otherwise it will be seen as a too one-sided proposal where the other party feels they have accepted something exclusively coming from your side. This regardless of whether it was a balanced proposal from the start, or not. In their mind, you will be owing them one, which is a situation you have to avoid.

5) What is the right timing to propose a package deal?

Many people will have the tendency to think it is still too early to propose a package deal, no matter how much time you have already spent on the negotiation. This is linked to one’s personality. If you are of that type, you need to force yourself to start thinking about a package deal early in the process. Of course, you have to first conclude the round of explorations, where each party explains its arguments, where observation is key and concessions are not yet required. Delaying the package deal to the very end of the negotiations is a pity as explained below.

6) What is the impact on the dynamics of the negotiation?

In complex negotiations, it can be necessary to have various, consecutive phases. These will include some package deals and some direct exchanges on a point-by-point basis. The advantage of an early package deal is that it can create a positive dynamic in the negotiations. Once the negotiators from both sides have jointly resolved a substantial amount of subjects, you can feel the relief in the negotiation room. Suddenly, reaching an overall deal does not seem so far away any more. That’s why it can be a brilliant move to propose an early package of easy subjects.

7) How to present a package deal?

This time I have to make some advocacy for a bit of disorder. It is not a good idea to make the deal explicit by grouping the points showing the concessions for either side. Be smart, include as the first point a clear concession to the other party but then randomly present the other concessions. Let the other party do the counting and do not make it too easy. My recommendation is not to label the subjects too much as your points or theirs. You should present them as overall solutions for the good of the project. A win-win outcome for all at the table. On the other hand, you should do your best efforts to clearly spell-out the resolutions leaving no ambiguity. And always state that the deal is valid for the package as a whole but remain flexible to adjust a bit the package. If, in the end, you cannot agree on the package, you are back to square one without agreements on any of the points included in the package.

Conclusion:

Package deals are a “must have” in the toolbox of an efficient negotiator. Here above, we have analysed some important aspects around initiative, timing and presentation of such deals.

Click here for other articles on negotiation.

AfiTAC.com is the blog on commercial and contractual subjects for the Project Businesses (Construction, Infrastructure, Oil & Gas, Power & Renewable, Water Supply & Sanitation, etc). Its objective is to stimulate reflection, learning, convergence to balanced contracts and positive dispute resolution. You can subscribe to our newsletter by writing to “newsletter@afitac.com”. You can also connect to our LinkedIn page. Engagement with the readers is what keeps us going. So, don’t hesitate to exchange with us by commenting here below, liking our publication on LinkedIn and writing to us “advice@afitac.com”. 

Contract Risk Scoring, 10 questions answered

Contract Risk Scoring is a hot topic. IACCM is actively promoting it. But, as this subject is quite new for many of us, we’ll all have a couple of questions. Here below we provide the answers to the most usual ones on the topic. If you have more questions, don’t hesitate to write in the comment section here below and I, or someone else, will certainly provide you with the answers.

1) How can I start with Contract Risk Scoring?

You could set-up your own scoring system, buy software or look for books on the subject. The most straightforward way to start is to go to an existing tool like TRaCRs – an abbreviation of Tender Risk and Contract Review system – available on https://afitac.com/tracrs/.

2) Do I need to be a contract expert to do Contract Risk Scoring?

Not at all. The very purpose of Contract Risk Scoring is to analyse “dry” contracts from the viewpoint of real-life users, situations and risks. For each question, TRaCRs is providing five possible answers written in simple language. It is much easier to choose out of multiple choices than to have to describe a risk from scratch. The report that you will get out of TRaCRs will help you to provide solid feedback on your contract to your risk board in a professional and focussed way. In the near future, we will try to include more tutorials within the system and we will certainly write more posts on the subject. We recommend you to follow us on LinkedIn or directly on our blog www.afitac.com .

3) Is Contract Risk Scoring something for big multinational companies or for SME’s?

It is something extremely useful for both. Big multinational companies usually have their own risk department. They naturally set up a risk evaluation questionnaire. For small and medium sized companies, a pre-formatted system like TRaCRs can be of great help in order not to reinvent the wheel. We have made a post on this subject: Manage your risks like “the big boys & girls” do!

4) When can I consider my contract is low risk or high risk?

On TRaCRs, a score below 30 means the contract has low risk. Between 30 and 50, we find the projects with moderate contract risk. Above 50, we can speak of a high risk project that should be followed-up with special care. To give you an idea, a typical World Bank financed project got a score of 25 while a privately funded IPP project can easily go over 50.

5) When tendering, can I determine a level of provisions based on the score of my contract?

The golden rule is to provision 1% of contract price for each 10 points scored. This means that, if your project scored 30, we would recommend you to provision 3% for general contingencies related to contractual and commercial risks.

6) Can risk scoring increase my selectivity during Go-No Go meetings?

Certainly. You can probably not handle all the tenders you get to look at. So, you need to be selective. What better way to do so than to objectively establish the risk level of your potential tenders? If the success probability level is the same, the rational choice is to go for the less risky projects.

7) Can the risk score help you during negotiation?

Definitely, It will show the risk areas in the contract that you are negotiating. This visibility will give you clear targets of where to improve. If you set yourself the challenge to always lower your score, you are on the right track to negotiate balanced contracts for your company.

8) Is Contract Risk Scoring a costly affair?

Absolutely not. TRaCRs is a free tool, available to all (no membership required). And it will remain so. This is a service we provide to everyone working on contracts. It is our pleasure to share more than 20 years of experience on negotiating and analysing the risks in international infrastructure and renewable power contracts.

9) If a question/answers in TRaCRs is/are not applicable to my particular case, what should I do/answer?

First you have to think whether the question is really not applicable to your project. If you are convinced of it, you can simply choose the first answer with a risk level 0. No need to compute risk where there is none. This would artificially increase your score and, as you understood, the lower the score the better. For example, if the Contractor is from the country where the project is located, the question related to tax and importation is not applicable.

When answers are not exactly matching with your situation, we encourage you to choose the answer that comes closes to it. You can then provide some information in the box immediately below the answers to explain your choice and the difference with the actual situation.

10) Can TRaCRs be customized for my particular business, adapted to all types of industries/businesses?

It is possible that the current questionnaire doesn’t match perfectly with the risks your company is facing. In that case, you can write to advice@afitac.com and ask for a more adapted version. The current version is especially suited for civil works, infrastructure and power projects. You are welcome to suggest adapted questions and answers for your industry / business.

That’s all for this time. Let’s keep interacting on such a passionate subject as is Contract Risk Scoring. Test TRaCRs on your specific project and let us know how did it go and if you find the outcome useful.

Contract Risk Scoring: how does a World Bank contract for PLANT score?

Contract Risk Scoring is an effective way to analyse contracts for their risks on commercial and contractual issues. But how can you do this?

AfiTaC has developed a free tool, available to all, TRaCRs, to rapidly obtain an objective analysis of the commercial & contractual risks. By replying 20 questions covering the whole spectrum of contractual and commercial issues you get an overall Contract Risk Scoring. You will also have identified specific risk areas on your project.

In previous posts, we explained what is Contract Risk Scoring and how works TRaCRs. We recommend you to read these:

TRaCRs will rate your contract on 20 different subjects from 0 (very low risk) to 5 (very high risk). A score below 30 means the contract has low risk. Between 30 and 50, we find the projects with moderate contract risk. Above 50, we can speak of a high risk project that should be followed-up with special care.

Now I am curious to see this applied on a typical World Bank Contract for PLANT (click here to access the reference contract on the World Bank site). I am a big fan of these WB contracts! They strike a good balance between the rights and obligations of Employers and Contractors.

Here are the results:

  • You can access the TRaCRs report here: TRaCRs report for World Bank PLANT project
  • The Contract Risk Scoring is 25. Not surprisingly, this is a low risk contract. With these limited risks, we would recommend you to provision 2.5% for general contingencies. The golden rule is to provision 1% of contract price for each 10 points scored.
  • The worst score for an individual question is 4. This is for the question related to the payment terms. Indeed, the payment terms of “10% for advance payment, 80% on shipment and 10% on acceptance” lead to a substantially negative cash flow on projects where the supplies are not off-the-shelf but specifically designed and manufactured for the specific project.
  • One answer scores 3: Contractor may have to implement variation orders without prior agreement up to a total value of 15% of contract price (for all variation/change orders jointly). This is quite harsh for the Contractor when a lot of disagreement exists on the price adjustment or the extension of time.

Such a report will enable you to proceed to a risk board meeting to get the green light to submit your tender. Also, the portfolio of ongoing contracts can be scored to identify risk areas and deal with risk with anticipation.

You can now try TRaCRs on your specific contract. And don’t hesitate to let us know your thoughts about the results.

You can contact AfiTaC in case you want to customize TRaCRs for your specific business.

Afitac.com the blog on international tenders and contracts

Afitac.com is the blog that provides you with posts on a variety of subjects of interest for companies and people working on contracts whether as a leader, a commercial manager, a project manager or a contract manager.

The topics that are dealt with cover the following:

  • standard contracts (FIDIC, World Bank, NEC etc)
  • different contract structures (including EPC)
  • tender advice
  • negotiation advice
  • win-win negotiations
  • risk management
  • contract risk scoring
  • tax, insurance, financial subjects
  • company & process transformation

Have a look directly at our website www.afitac.com and follow us on LinkedIn in order not to miss any of our latest articles.

Don’t hesitate to give your comments on the website or on Linkedin. Your “likes” are highly appreciated and encourage us to continue.

You can also contact us with various means of communication as shown on our “contact us” page (click here for direct access).

Transformation of companies, the role of external resources

Having a track record in big multinational companies over the past two decades, I’ve been able to witness how, even the “biggies”, are gradually reducing their staff to below the levels that they would normally need in order to be fully operational. In such a new configuration, there are two possibilities:

(i) either work understaffed, doing a sub-optimal job, jeopardizing your Customer’s results and, in the long run, your company’s own reputation; or

(ii) being able to complement that lean organization with first-class external resources, continue delivering successful projects, maintain Customer satisfaction and keep your company on the virtuous cycle of growth, development and profitabilility.

Big companies want to act as start-ups now, instead of the other way around.

When it comes to Project Management (PM), Commercial Management (CM) and Risk Management (RM), there are a few important questions and preconceptions that need to be tested and answered to see if externalisation is possible. Here we go with 4 of them:

Issue 1: In view of preserving confidentiality, certain vital functions like CM can only be done by internal employees, loyal to the company.

Companies cannot guarantee 100% loyalty of their staff because of attrition, the impact of restructuring, salary freezing etc. While preservation of confidentiality should be granted from in-house staff, the reality may be quite different. When signing NDA’s (non-disclosure agreements / confidentiality agreements) on a project-by-project basis, external resources are well reminded of their duty and the possible consequences of a breach of confidentiality. They would risk their medium-term collaboration opportunities and their reputation if they would not handle the confidential information with due care.

Issue 2: Using external resources will lead to dependency on these resources. They can disappear as quickly as they have arrived and will leave your company without the ability to perform.

Avoidance of dependency is a managerial responsibility that applies as much to internal resources than to outsiders. Often, long-standing internal resources want to preserve their job by controlling the information at hand and creating dependency. When working with external parties, one can be more concentrated on the question of what will happen on the next project in case you would work without them. External resources that seem to have their own agenda of information preservation and dependency creation should absolutely be avoided. You can set-up an information storage platform where all the relevant information of your project is gathered and where you can provide (and remove) the access of external resources on a need-to-know basis. With current technology this is perfectly achievable.

Issue 3: External resources will not care about the value creation for your company.

Internal resources often take their job for granted. The starting point for their value creation is to overcome the “negative value” of monthly salaries. External resources will understand that they need to create more value to you than they cost, every month. Otherwise, they are out. They will pro-actively look for and propose to create value for your company in the medium-run. Otherwise, they are at risk of becoming irrelevant.

Issue 4: The risks related to your projects can only really be analysed and judged by the insiders.

This is partly true; a deep knowledge of your business is required. My recommendation would be to set-up mixed risk review boards including various functions of your own organization and, at least one, external resource. This can even be the facilitator of the discussion (the Risk Manager), bringing an outside point of view, not affected by an emotional attachment to certain projects and able to structure the risk analysis around objective criteria preserving the real goal of finding successful projects for your company.

Conclusion:

We have reflected on vital points for a company: confidentiality, dependence, value creation and risk analysis. In my opinion, the successful companies of the future will only have a core of employees required to establish and maintain the company’s culture, strategy, brand, focus etc. This applies obviously to small and medium companies but, more and more, also to big companies. The companies own resources will barely be able to fulfil the minimum scope. In order to grow, or even simply perform, companies will have to rely on well-selected external resources with whom they can build strong, medium-term relations not necessarily based on exclusivity but rather on value creation. This externalisation will also include vital functions such as project management, commercial management and risk management. An important success factor for companies will be their ability to select such external resources while, at the same time, avoid dependency and preserve the long-term viability of the company.

IACCM is promoting tools to score the risk of your contract portfolio

IACCM, the International Association for Contract & Commercial Management, is promoting that we would start risk scoring our contract portfolio. Here is an extract of what they state on their website:

We’ve all heard stories about bad contracts that caused a crisis, cost a fortune and killed careers.  Yet despite these scandals, most people still have little insight into the good, the bad and the ugly of their own contract portfolio.  Many of us will still suffer serious financial pain because of contractual weakness that reveals itself too late.  But what if we could get ahead of the problem?  What if we could analyze, measure and score our contract terms, and flush out the weak links? Well now you can.

With contract scoring, […] you can benchmark your contracts against your peers and demonstrate measurable improvements in performance.  You can ensure that higher risks are factored into pricing and commercial decisions.  And you can demonstrate how contracts make hard, measurable contributions to the financial performance and health of you business.  

At AfiTaC we fully agree with the above words. Even more, with TRaCRs, the Tender Risk and Contract Review system, we have developed a tool for contract scoring. This tool will rate your contract on 20 different subjects from 0 (very low risk) to 5 (very high risk) enabling you to identify the problem areas, subject by subject, and also in the aggregate for your project. A score below 30 means the contract has low risk. Between 30 and 50, we find the projects with moderate contract risk. Above 50, we can speak of a high risk project that should be followed-up with special care.

We recommend you to:

In case you would like a demo on your specific contract, the AfiTaC team is willing to fill out the tool with the relevant answers for your contract for the 5 first candidates that request us to do so on the following e-mail: tracrs@afitac.com. Free of charge, of course!

By doing the above actions, at AfiTaC, we hope that we can contribute to your objective to negotiate and execute balanced contracts. Please don’t hesitate to write us, in the location foreseen here below, with any reaction you have on this subject.

Thank you FIDIC for explaining changes introduced with FIDIC Rainbow Suite (ed. 2017)

Maybe you have already received it from another source but this is a must-read. I therefore prefer to also share with you the FIDIC document available at the link below. It explains the changes from the first (1999) to the second (2017) edition of the Rainbow Suite (Red, Yellow and Silver Books):

http://fidic.org/sites/default/files/press%20release_rainbow%20suite_2018_03.pdf

After 20 to 30 minutes of reading, you will have a good understanding of the changes. Most of us have over a decade of experience with FIDIC 1999. We know the clause numbers and where to look for the appropriate mechanisms. Here you have a short summary of what I got out of reading the attached document and where to find the changes:

There are few but important changes to the contract structure and some relocated clauses:
  • Limitation of liability is no longer in Clause 17 but has been moved to become the last sub-clause of Clause 1.
  • Former “Force Majeure” has been renamed “Exceptional Event” and is delt with in clause 18.
  • Insurance has been moved to clause 19.
  • We now have 21 clauses. Former clause 20 is split in two parts to deal first with claims (new clause 20, also covering Employer’s Claims) and then only with disputes (new clause 21).
FIDIC cares about conflict/dispute avoidance:
  • There are encouragements to reach agreements between the Parties.
  • The role of the Engineer or Employer’s Representative is clarified in order to “act neutrally between the Parties” on certain issues and “to fairly consider the amount of interim payment due” (sub-clause 14.6).
  • FIDIC favours standing Dispute Avoidance/Adjudication Boards (now DAAB instead of DAB) under clause 21.
Step-by-step approaches also reflect this. The parties will know where they are in the process on the following subjects:
  • Claims and determinations (sub-clause 3.7).
  • Unforeseeable conditions (sub-clause 4.12).
  • Review of Contractor’s design (sub-clause 5.2).
  • Advance payment (sub-clause 14.2), interim payments (sub-clause 14.6) and Final Statement (sub-clause 14.11/14.13).
  • Termination by Employer (clause 15) and Contractor (clause 16).
  • Employer’s and Contractor’s claims for time and/or money (sub-clause 20.2).
  • Disputes (sub-clause 21.4)
Variations are an important source of conflict and are therefore further detailed:
  • Employer to show financial arrangements are in place for Variations (sub-clause 2.4).
  • Mechanism to recover in case an instruction does not state that it is a variation (sub-clause 3.4/3.5).
  • Determination does not just apply to claims but also to issues like: variations, payments, EOTs, day-works etc.
  • Contractor’s right to object to an instructed variation (sub-clause 13.1).
  • Additional entitlement for changes to permits/permissions/licences/approvals obtained for the Works (sub-clause 13.6).
And finally, further Project Management best practices are incorporated: 
  • Regular management meetings (sub-clause 3.6/3.8).
  • Detailed requirements for initial programme and updates (sub-clause 8.3). For example, the requirement for a supporting report to overcome effects of any delay.
  • Detailed test programme (sub-clause 9.1) and repeat testing (sub-clause 11.6).
  • Equal time bar for claims from both parties (sub-clause 20.2).
Conclusion:

We will all need some more time before we are as familiar with the FIDIC 2017 editions as we were with FIDIC 1999. Personally, I am happy to change. FIDIC has put good efforts in making their standard contracts more balanced (dispute avoidance, dealing with delicate issues like variations and programme and further introducing project management best practices). The ultimate goal remains, of course, to have a maximum of successfully completed projects, which meet the expectations of all parties and the end users.

Other publications concerning FIDIC can be found by clicking here.

Contract negotiation, 5 things you should not do!

In previous posts, we already gave some tips on what to do in the evening after a day of negotiation and how to give negotiations a positive twist by going for win-win solutions. In the reality, as negotiators, we also need to be aware of the things we should not do.

Here we go with 5 “don’ts”:

  1. Avoid to start your reply to a passionate argumentation of your counterpart with a negative word or rejection sentence. Especially the word “no”. It is very tempting to counter an argument as quickly and powerfully as you can. But, when the other party explains or requests something, they have some hope that you will agree, at least partly. So, control yourself and don’t go for simple rejection or opposition. Try to find some common ground in their argumentation.
  2. Never get really angry because doing this will get you nowhere! There is no worse combination than the right arguments and anger; nothing worse than being right and angry at the same time. People will stop listening to you and concentrate on observing your angriness. In another post, I’ll give a more detailed REX on how I got “in the angriness trap” and what were the consequences. If you have the arguments to make your case, you also have the luxury to state them calmly. This will allow you to insist, patiently, up to inclusion, in some form, in the final agreement.
  3. Don’t admit that you are under bigger time pressure than your counterpart. Obviously, you will be pushed to accept ever more issues getting closer to that often self-imposed deadline. To get a good deal for you, you need to have the time on your side.
  4. Don’t mention, before each and every concession you need to make, that you first have to go back to your management. People don’t like to negotiate with counterparts that have no power at all. Therefore, make sure you always have some negotiation margin in your pocket and anticipate what your counterpart is going to ask. You don’t necessarily have to give in on the same day. Overnight, you can get those approvals that you need. But don’t admit that you parked the issue just because you have no authority. Only for the really big concessions, you can insist that they are to be approved by your board. This will show the seriousness of a specific concession and allow you to get an equal step-in-your-direction from your counterpart.
  5. Don’t try to benefit from obvious mistakes in the contract documents that are strictly opposite to what your counterpart has been defending. It is tempting to overlook something in the wording that is unfavorable to the other party. But, consider that – sooner or later – they will become aware of this mistake. It will be obvious that you had seen it. You can lose your credibility and their confidence over this.

The above points of things – not to do during negotiation – are pretty straightforward. Keep them in mind during your next negotiation session. You have to stay away from these to remain a credible and successful negotiator.

You can find other articles about negotiation on our blog afitac.com or by clicking on the link here below:

https://afitac.com/?s=negotiation

About AfiTaC

AfiTaC.com is the blog on commercial and contractual subjects for the Project Businesses (Construction, Infrastructure, Oil & Gas, Power & Renewable, Water Supply & Sanitation, etc). Its objective is to stimulate reflection, learning, convergence to balanced contracts and positive dispute resolution. You can subscribe to our newsletter by writing to “newsletter@afitac.com”. You can also connect to our LinkedIn page. Engagement with the readers is what keeps us going. So, don’t hesitate to exchange with us by commenting here below, liking our publication on LinkedIn and writing to us “advice@afitac.com”. 

EPC Contract, win-win negotiation, LNTP on private investment project

Context:

In a previous case study, we analysed the positive impact on the atmosphere brought by negotiating a win-win subject like “completing the construction phase early and sharing the value generated by this”.

Many times, private investment projects take more time than expected to reach financial closure. Allow me please to state the obvious:

“The easiest way to finish early is to start early.”

In practice, starting early requires a Limited Notice to Proceed (LNTP) agreement. I would propose the following definition :

A limited notice to proceed (or LNTP) is a notice by the Employer instructing the Contractor to proceed with a part of the works. This situation occurs when all the conditions to fully proceed with the project have not yet been fulfilled. Typical obstacles to a full notice to proceed (or NTP) are the need to reach financial closure, lacking some permits or ongoing contract negotiations. Usually, the Contractor and the Employer share the risk for the spending during the LNTP period in case the full NTP is never achieved.

Here below, you will find a summary of the challenges and outcomes observed on several cases I actively participated to. Rather than lengthy descriptions, for once, I felt it was better to write some bullet points:

The advantages of an LNTP for the Project Owner are:

  • More work done before NTP (Notice to Proceed) can lead to a shorter time required between NTP and taking-over, which means less IDC (Interest During Construction).
  • If some extra project float is generated by the early start, the project risk is reduced.
  • It is a good opportunity to see the Contractor in action before full NTP. If this turns out to be a disaster, it is not too late to take the necessary actions (to put some pressure on the Contractor to implement corrective actions or, in the worst case, go back to the second evaluated bidder).

Contractor can benefit from the following advantages:

  • Reduction of the painfully long waiting time between contract signature and NTP will avoid increased cost from pre-mobilised resources that are just standing-by. The costs of pre-NTP idle time can rarely or never be recovered from the Owner.
  • Usually, Contractors have to overcome some inertia to start and reach good working speed. Nothing better than an LNTP period to do so and not accumulate delay in the first months after NTP.
  • Additional float generated during the LNTP period will reduce the risk of being late and of paying corresponding delay liquidated damages.

The challenges to conclude an LNTP agreement include:

  • Agreement on payment during the LNTP period: The Owner has considerable difficulties to pay out-of-pocket amounts because the development expenses often exceed initial expectations. Only at financial closure fresh cash will be available. On the other hand, one cannot expect the Contractor to finance the project during the LNTP stage. A compromise should be found.
  • Agreement on a potential reduction of the post-NTP time for completion: This reduction can rarely be on a-day-for-a-day basis because of the lack of full mobilisation. I’ve seen agreements going from no reduction and intermediate forms where 40-50% of the effective LNTP period was deducted from the time for completion.
  • Agreement on the scope of the works that should be performed during the LNTP. This goes together with the two previous bullet points; the wise thing to do is to select as LNTP works only those activities that have the most favourable impact on risk reduction and time for completion.
  • Agreement on the deliverables that can justify interim payments during LNTP or at termination. Because the LNTP period is usually relatively short (3 to 6 months), it can be extremely difficult to identify deliverables that can actually be completed and/or handed over to the Owner. Design documents are often the only realistic deliverables. Regularly, the only payment during the LNTP is a preliminary advance payment against a bank guarantee. This preliminary advance payment is then absorbed into the full advance payment at NTP by deduction.
  • Termination of LNTP, without direct continuity into the EPC Contract, is definitely the most difficult subject. If the Owner/project developer is a special purpose vehicle, not reaching financial closure almost certainly means liquidation with no recourse available to the Contractor. The parties need to reflect jointly and realistically on this regretful scenario and on the consequences of never reaching financial closure/full NTP.

Conclusion:

While negotiating an LNTP agreement represents additional work for the Owner’s and Contractor’s negotiation teams, they are worth the effort. The win-win outcomes brought by starting early include risk reduction, smoother project start-up and cost savings. Negotiating this can be a catalyst for a positive negotiation process and can avoid impatience and conflict between Owner and Contract before full NTP.

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