CHAPTER 11 KEY CONSTRUCTION CONTRACT CLAUSES: SCHEDULES AND CHANGES
| Jurisdiction | United States |
(May 1979)
KEY CONSTRUCTION CONTRACT CLAUSES: SCHEDULES AND CHANGES
Asarco Incorporated
New York, New York
I. Problems and Goals
Once an orebody has been found and the definition drilling and the feasibility studies have been completed a mining company is faced with the final job of designing and building the surface facilities and, depending on whether the mine is to be an underground mine or a surface mine, the development of the underground access shafts and drifts or the pre-production surface stripping must also be performed. Some people consider this mine construction phase of mineral development as a pro-forma engineering exercise that should proceed without event or complication. Others have such a high regard for the difficulties of the construction effort, or such a low regard for the abilities of those involved in the effort, that they consider all advance estimates of construction completion dates and final completion costs as engineering wish lists which are at the mercy of forces completely beyond rational control.
The truth, of course, lies between these extremes. Notwithstanding the great uncertainties and high odds against success which are faced by the explorationists in their attempts to discover orebodies, the construction of the mine and mill necessary to develop a proven orebody is by no means the easiest part of the process. One writer has
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catalogued the problems that are encountered in a typical construction project as follows:
"The volatility of the construction industry, the large amounts at stake, the usual absence of a continuing relationship between owner and contractor, the unpredictability of subsurface and weather conditions, the complexity of the project in contract documents, the wealth of separate entities involved in the process, the power of labor unions, and the plethora of local law controls over construction — all combine to make the construction project peculiarly susceptible to conflict."1
A mining company owner is not, however, defenseless against these difficulties. Much of the risk and uncertainty of large scale construction work can be contained and mitigated if an effort is made to understand the potential sources of problems and if this understanding is applied to the preparation and administration of the construction contracts.
This paper will consider how to deal with problems that fall into two general areas. One of these problem areas is the need to effectively manage, coordinate and schedule many different types of work which may often have to be performed by different contractors operating in close proximity to each other at the same time. It is not uncommon to have shaft sinking crews working underground while mechnaical contractors work on the concentrator building and earth moving contractors do the grading for the tailings dam; and all of them may be dependent on the work of an electrical contractor installing
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the substation power equipment. Because of the number of different activities that have to be conducted at the same time, and the need to provide adequate support without creating undue interference, the co-ordination-management-scheduling component of construction work has a great potential for avoiding and/or creating problems and should receive much care in the preparation of the construction contract.
Another general problem area for construction work is the need to make changes in the plans, specifications and schedules to deal with the many unforeseen conditions which become apparent as the work progresses. Some elements of uncertainty can be reduced by pre-construction activities, such as the use of soil sampling work to reduce uncertainty as to required foundation design, but other areas of uncertainty such as weather, long term supply availability, labor situations, and even capital availability are difficult to reduce by any amount of preconstruction effort. While it is not always possible to reduce these uncertainties it is possible to design construction contracts that allow an owner a maximum amount of flexibility to deal with the types of uncertainties and changes that are likely to occur.
An owner can be affected negatively in two ways by problems arising in the above areas: the work can cost
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more than was anticipated and it can take longer to complete than was expected. Traditional contract techniques can be employed to significantly reduce the risk of cost overruns, but it is much more difficult to insulate an owner from the risk of sustaining lost profits from completion delays.
An owner can reduce the risk of cost overruns by requiring contractors to submit fixed-price bids for their components of the work. The risk can be further reduced by requiring the contractors to provide performance bonds to guarantee the bid prices. An element of cost overrun risk remains, even with fixed price bids and performance bonds, if unforeseen conditions require the owner to change the scope of the contract, but barring such changes an owner has a substantial degree of assurance he can get the work done for the contract price.
The owner cannot, however, obtain the same degree of assurance that the work will be completed by the time stated in the contract. For a private owner of a profit making facility this lack of assurance of completion time can be very significant. In the case of the construction of a mine and mill complex the damages to the owner of lost profits from late completion may be more significant than damages from cost overruns. If an owner anticipates a 20% rate of return on the investment from the operation of a 100 million dollar mine each day the completion of
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the mine is delayed will cost the owner more than $55,000 in lost profits.
It is possible to draft contracts in a manner that provide incentives to contractors to finish ahead of time by using means of bonuses for each day the contract is completed ahead of schedule. It is also possible to insert liquidated damages clauses to attempt to compensate the owner for delay damages2 , but the realities of the economics of construction work for a large scale mining project suggests that while these incentives may be useful in motivating contractors they will not be effective in making the mining company whole and fully protecting it from effects of delays. Contractors simply do not have as large a financial interest in the project as the owner, and they cannot afford to agree to damage clauses of an amount which would effectively make the owner whole in the event of lost profits. For example, in the hypothetical case of the construction of the 100 million dollar mine a contractor with a 3 1/2 million dollar contract for concrete work to be performed over a year would have a fairly large portion of a 100 million dollar project. Such a contract would mean the contractor would be charging approximately $10,000 a day in invoices, and assuming a 20% profit the contractor would expect to make a profit of approximately $2,000 a day. If the owner stands to lose over $55,000 a day for each day the project is delayed and a contractor will only
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be realizing profits in the order of $2,000 per day, it is clear that the contractor cannot agree to provide the owner with any kind of full indemnity from the contractor for the consequences of delay in the project.
It would be possible for an owner to obtain a performance bond to protect it in the event that the contractor defaulted on the work and the owner subsequently had to pay a total of 4 1/2 million dollars to get the concrete work finished by another contractor. The performance bond would indemnify the mining company owner for the 1 million dollar increase in the cost to the owner of performing the work. There is no bonding protection, however, to protect the owner in the event that the process of terminating the initial concrete contractor, negotiating with the bonding company...
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