CHAPTER 9 PERFORMANCE SPECIFICATIONS, WARRANTIES AND OTHER KEY PROVISIONS FOR MAJOR MINE CONTRACTS
| Jurisdiction | United States |
(May 2008)
PERFORMANCE SPECIFICATIONS, WARRANTIES AND OTHER KEY PROVISIONS FOR MAJOR MINE CONTRACTS
Holland & Hart LLP
Denver, Colorado
INTRODUCTION
This presentation focuses on the reducing of risk in major mine and smelting contracts through the careful use of performance specifications and warranties, and the interplay between those provisions and other construction contract terms. While a thorough discussion of all major mine construction contract provisions is beyond the scope of this presentation, it will, however, highlight certain terms that can impact a project's success. The first subject of this discussion will be contract structure, followed by a focus on performance specifications and warranties, and then a discussion of various other contract considerations.
CONTRACT STRUCTURE
At the outset, it is important to note that complex mining projects require a thorough consideration of the various options for pricing and project delivery methods.
A. PAYMENT OPTIONS
1. Lump sum. The contractor is paid a fixed sum to deliver a conforming product. It is most often used where the project scope, definition and design drawings have progressed in sufficient detail to accurately price the project. It has the advantage of locking in the project cost early and tends to shift risk for cost and schedule overruns to the contractor, but allows the contractor to benefit where cost and schedule can be brought in under budget.
2. Cost reimbursable. The contractor is paid on the basis of a defined cost, plus a percentage or fixed fee. This payment method allows a project to move forward
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quickly without the need for lengthy contract negotiations and is suitable for fast track projects. Obviously, trust between the owner and contractor must be highly developed. This system places a portion of the risk for cost and schedule on the owner, but also has the potential for substantial cost savings to the owner if the contract is well managed. The system, however, requires capable and committed management from the owner.
3. Cost reimbursable with a guaranteed maximum price. As the name implies, the contractor is paid on a reimbursable basis, up to a cap. If the guaranteed maximum price ("GMP") is not reached, the savings can be divided between the contractor and owner to incentivize the contractor.
4. Unit rate. The contractor is paid on a per-unit basis for an installed product. It is most often used in the construction phase of the project when the types, but not total quantities, of activities are known and can be accurately priced. Obviously, the owner bears the risk for any increase in the units.
5. Hybrid. It is possible, and sometimes advisable, to use more than one of these payment methods on a single mining project. It is not unusual to have some portions of a project paid for on a lump-sum basis, others paid for at unit prices, and still others paid for on a cost-reimbursable basis. Likewise, it is not unusual to begin a project on a cost-reimbursable basis and then convert to a GMP when scope and schedule are more clearly understood.
B. PROJECT DELIVERY METHODS
There are a number of project delivery methods or contract structures to be considered. The definitions of these structures are not necessarily rigid and there can be a great deal of variation in and overlap between the available methods. There are
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also a number of permutations of these various contract systems that can be implemented in unlimited ways for the most advantageous system or systems.
1. Design-Bid-Build or Design-Build. A key initial question is whether a single entity will be responsible for both design and construction. Under design-bid-build systems, the project's design and construction are contracted for separately. In design-build systems, a single entity is contractually responsible for project design and construction.
(a) Design-bid-build advantages:
▪ Design is more precise and detailed at beginning of construction;
▪ The engineer works for the owner and represents the owner's interests, not the builder's, thus more potential for a system of checks and balances exists;
▪ More ability to determine the acceptability of the final end product; and
▪ The owner can maintain complete control throughout the design development process -- changes can be directed through the design engineer, and the owner can, throughout the design process, obtain input from design management, construction, and operations and maintenance personnel. This process facilitates peer review in many instances.
(b) Design-bid-build disadvantages:
▪ Design-bid-build is inherently a linear, sequential process, as opposed to design-build which is capable of overlapping the phases
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of the design and construction, thus creating more potential for a higher overall cost and a longer schedule. It is difficult, if not impossible, to use this method to design and construct all major components of a mine project;
▪ Coordination responsibility between multiple design, construction and procurement contracts requires more management and possibly more delays and disputes in change orders;
▪ Increased probability of disputes since the engineer and contractor can become adversarial;
▪ Little opportunity for contractor input into design and construction methods, and quality is often an issue of dispute between designer and contractor; and
▪ The owner warrants the adequacy of the plans and specifications to the contractor.
(c) Design-bid-build variations:
▪ It is possible to use a design-bid-build contract combined with construction management and performance warranties and specifications. This approach can allow construction to be done separately under the traditional design-bid-build system. However, by using the same entity for both design and construction management and using well-defined warranties and performance specifications, it is possible to gain many of the efficiencies found
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in design-build projects, i.e., flexibility, quicker construction, cost savings and streamlined decision-making.
▪ Under a design-bid-build system, the owner can furnish partial plans requiring such phases as mechanical, process piping or conduit routing to be designed in large part by the responsible engineering consultants. These various phases may be defined only by performance specification and operating costs performance targets. This system, too, facilitates speed and flexibility.
(d) Design-build advantages:
▪ Input from the contractor is available during design phase for value engineering, budgeting, scheduling, and innovation early in the process;
▪ Ordinarily saves time and allows accelerated start of construction; completion of drawings for construction and bidding are not necessarily required and design and construction can overlap;
▪ Design can be changed earlier in the process;
▪ Single point of responsibility resulting in fewer contracts and fewer administrative costs;
▪ Several varieties of design-build have evolved, including design-build-maintain, design-build-operate-maintain, and design-build-operate-maintain-warranty for complex or unique projects;
▪ No warranty of plans and specifications by the owner; and
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▪ Possibility of use of phased construction for a large, complex project. In this process, the project is divided into several phases, each of which can be designed and constructed in a staggered manner. After completion of the design of the first phase, construction can begin without waiting for completion of the design of the second phase, and so forth. If proper coordination is exercised, the total project duration can be greatly reduced.
(e) Design-build disadvantages:
▪ Requires decisions to be made earlier in the process and potential for owner to lose control of quality and details;
▪ The potential for the submittal process bogging down and thus causing schedule delays is increased;
▪ More difficult to question decisions of engineer and less potential exists for checks and balances between designer and contractor; and
▪ Peer review is potentially more difficult.
2. Engineer Procure Construct ("EPC"). In EPC projects, one entity is responsible for all design, construction and procurement and holds the various contracts in its own name. This type of contract is a variation of design-build and is typically lump sum, but can also be cost reimbursable. EPC contracts are most often used where there is a well-defined scope of work and cost control is critical. The risk to the EPC contractor can be large, and many EPC contractors are now insisting on significant limitations of liability in their contracts. Procurement is often done in the name of the
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EPC contractor. An EPC contract is desirable when the owner does not possess a strong control group, management skills or a design/construction project controls team.
3. Turnkey. A turnkey contract is similar in many respects to an EPC contract, except that it also includes start up, testing and commissioning. In other words, the keys to a fully operating project are turned over to the owner.
4. Engineer Procure Construct Manage ("EPCM"). In this variant the same entity is responsible for design, procurement and construction management. Typically, the construction manager serves as the owner's agent and often holds trade contracts in the owner's name. Procurement is done by the construction manager, and often in the owner's name. EPCM is most often used when project definition is lower in scope or uncertain. This alternative is also useful when the equipment specification is unclear. This method tends to shift some considerable risks to the owner, particularly where the EPCM contractor functions as the owner's agent. EPCM is most often used as a cost-reimbursable...
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