Part 11 - Do You Know the Entire Contract

 

Critical Components in Special Conditions/Supplemental Terms and Conditions  -  Part A

In most contracts, the Contract Terms and Conditions may be amplified using sections for Special Conditions (SC) or Supplemental  Terms and Conditions (STC).

This is the 11th in a series of discussions that is intended to prompt Project Teams to be aware of the entire contract document, including Information For Bidders (IFB), General Conditions/Terms and Conditions (GCs) and the Technical Requirements [Specifications and Drawings.] 

In the rail transit domain, there may be unique requirements that are created by work conditions, from implementation of alternative delivery methods, for multiple milestones with liquidated damages and for incentives to beat performance milestones.   By exception, these requirements are expressed in SC and STC.

LIQUIDATED DAMAGES (LDs):    As discussed in Part 8 of this series, most contracts with liquidated damages are based solely on a performance milestone for substantial completion.    However, the Buyer can incorporate more milestones and different LD amounts depending on the contract delivery method and interdependencies with predecessor or successor contracts.    Contracts where these requirements may be applicable include design-build construction contracts, design-build system contracts, and bid-build construction contracts with Buyer furnished materials.    These contracts may incorporate milestones for delivery of major equipment, completion of design submittals, completion of construction submittals, and completion of construction corresponding to access constraints and work restrictions. 

INCENTIVES:   Incentive requirements are the exception to 99% of contracts.  For Buyer’s with a defined benefit for early completion of milestones, the opportunity to utilize the contract provision may off-set the premium cost for accelerated work.  In these cases, the contract may incorporate incentives for Seller payments tied to performance schedule milestones.  

Incentives are intended to encourage contractor creativity to accelerate completion of milestones while achieving the form, fit and function of products.     Similar to decisions on LDs, Buyer incorporation of incentives needs to be carefully considered.   Schedule benefits should be tabulated and quantified in the Buyer’s business case that justifies the incentives in a contract.  

While LDs reduce a contract amount for delays, incentives can increase the contract amount for completion of milestones ahead of the contracted dates.   As a result the Buyer’s project finances need to ear-marked funding to cover the liability for Seller’s success.   

The contract language is likely to be more extensive and include specific criteria for the Buyer confirming entitlement for the Seller achieving early completion of defined milestones.    The contract will also amplify the claims, remedy and resolution requirements regarding variances between Buyer and Seller interpretation of entitlement.

TIP:   LDs and Incentives should be carefully balanced with the administrative effort to monitor, manage, document and enforce.   

TIP:   Contract language should define the coordination between LD and incentive requirements to ensure Buyer and Seller clearly understand enforcement, conflict resolution and remedies.    

TIP:    The Buyer’s procurement/contractor acquisition should select either the LD or Incentive requirements to avoid conflicts in focus by the contractor during contract execution.   LDs and Incentives in a single contract will create distractions as the contractor makes internal decisions to capitalize on milestones tied to incentives while accepting delays and cost liabilities on milestones tied to LDs.   

TIP:   Incentive estimate should be vetted thoroughly to ensure the document can be defended by the Buyer in response to a claim from the Seller or subsequent litigation action by the Seller.