Chinese contractors involved in construction should pay close attention to contract and claim management to avoid falling into traps
Contractors for most EPC (engineering procurement construction) and construction projects in India, especially those tendered out by government agencies, are selected on “lowest cost” basis. Such global tenders attract bidders from many countries and, unsurprisingly, include a significant number of Chinese companies due to their cost competitiveness.
However, qualifying as the lowest cost bidder (L1) is only the beginning of the journey towards profitability. Aggressive price competition leads to extremely thin margins, so contractors need to employ effective contract management and claims management strategies in order to sustain their business as an EPC or construction contractor in the Indian market.
Contract management. One universal principle in many standard forms of construction contracts – such as FIDIC (International Federation of Consulting Engineers), NEC (new engineering contract), or JCT (Joint Contracts Tribunal) – is that a specific risk is allocated to that party that is in the best position to manage it.
However, in India, and many other jurisdictions, the practical realities do not match this theoretical framework. The project sponsors tend to pass most project risks to the developers, who in turn endeavour to pass them on to contractors through turnkey contracts. Although the contractors formally assume such risks due to commercial compulsion, they might not necessarily have the ability or the experience to manage these risks.
During construction, numerous contracts with multiple tiers of contractors must be administered smoothly, and advice provided by a slew of consultants must also be assimilated in real time to keep the project ticking. In summary, a good contract management process is one that leads to competitive advantage through better understanding of existing contractual obligations, developing foresight into the contracts, uncovering contractual and regulatory risks, and improving compliance through standardised processes.
Claims management. In India, claims management has not been regarded as a specialised activity. Instead, it has been seen as a part of the overall contract management effort of developers or contractors, to be “activated” upon the happening of an event that triggers a claim, such as a delay event or a change or variation in the contract terms.
Even though proactive management of claims can make a difference between profit and loss, most developers and contractors have in the past preferred to deal with claims in an informal manner (until a dispute occurs), given the stigma attached to making claims and the reluctance of the contracting parties to discuss claims, as the effect of admitting claims is often an increase in cost or time for completion of a project.
Due to the reliance on contractual conditions for the successful realisation of claims, it is important to have a contract that is fair to both contracting parties. It is for this reason that an efficient claims management process begins with the drafting of the construction contracts and the negotiation process, even before the commencement of construction. However, in the Indian context, this is easier said than done.
In most competitive bids, especially those that involve government agencies, construction contracts are often drafted to pass most of the construction risks to contractors, even if they are not the best placed party to handle those risks, and there is little chance to negotiate the contract, as any deviation from the contract can be assessed to be a “material deviation to the terms of the tender”, thus inviting disqualification.
Standard form contracts have a more equitable claims process, however they impose strict requirements in terms of notices and records, necessitating the inclusion of an experienced and competent claims manager in the contract management team. In private sector construction contracts, however, there exists an opportunity to avoid the debilitating effect of disputes by adopting best practices in the area of claims management.
Prevention trumps cure. Indian judicial pronouncements have often highlighted the importance of claims management. Delhi High Court, in Jakki Mull v Jagdish Thakral, upheld the decision of the arbitrator to reject claims on the grounds that appropriate books of accounts of adequate quality were not maintained.
The Supreme Court of India also endorses the need for a fairly sophisticated claims management process in construction contracts. In the case of National Highways Authority of India v ITD Cementation India Limited, where a FIDIC standard form contract with certain changes (conditions of particular application, or COPA) was used, it was held that the claimant had failed to prove his claim to the expected degree of satisfaction.
Both these sets of unfortunate circumstances were easily avoidable if contractors had put in place a systematic claims management process that included legally vetted project correspondence, daily, weekly and monthly progress reports, minutes of review meetings, updated/revised programmes, test reports, etc.
One last trap that Chinese contractors should avoid in India is that of “excepted matters”. Simply put, an exhaustive review of the contracts must be undertaken to ensure that all disputes arising under the contract are legally arbitrable and are contractually subject to arbitration.
A mere suggestion to adopt effective contract and claims management strategies in India as a means to achieve profitability might sound overly simplistic. Yet the collective experience of more than 50 major Chinese contractors operating in India in the fields of steel, power, roads, solar, waste to energy, etc., suggests that their path to profitability could have been much shorter if they had heeded such advice sooner, rather than later.