Cost Reimbursable Contracts

Transcription

1 Cost Reimbursable Contracts Where s the Risk? ABA Forum on Construction Law D5Special Topic June 19, Agenda Introduction Key Considerations Practical Implications Recap Common Disputes and Key Issues 2 1

2 Continuum of Cost Reimbursable Contracts Subcontractor Contractor Risk / GC Risk Lump Sum Hybrid GC / Owner Risk Risk Cost Reimbursable 3 Continuum of Cost Reimbursable Contracts Hybrid GC Owner / Owner Risk Risk Cost Reimbursable Pure Cost Reimbursable Cost Sharing Contracts Cost Plus Incentive Fee Contracts Cost Plus Award Fee Contracts Cost Plus Fixed Fee Contracts Target Price Guaranteed Maximum Price Hybrids 4 2

3 Reasons to Select Cost Reimbursable Contracts No clearly defined scope of work; possibility of a large number of scope changes Design incomplete Fast track project Uncertainty in means and methods or unusual site conditions Increased quality little incentive to cut corners Final cost may be less because contractors do not have to budget for contingency to cover risk 5 Potential Disadvantages From the time the owner engages the contractor the owner does not know what the work will cost Less incentive for cost efficiency Additional administrative expenses for the owner Properly crafting award and incentive fee arrangements also requires additional oversight and administration Exhaustive accounting efforts, record keeping, and additional management to determine exactly what costs have been incurred Increased disputes 6 3

4 Agenda Introduction Key Considerations Practical Implications Recap Common Disputes and Key Issues 7 Key Considerations un 2011 Jul Reimbursable Costs Schedule Delay Proper Performance Course of Conduct 8 4

5 Reimbursable Costs Discussion Points What are the typical reimbursable costs allowed by the contract? Cost types (labor, material, overhead, etc.) Billing rates vs. cost rates How is compensation calculated? Risk / reward provisions How is the Target Price modified based on the provisions set forth in the contract? Are audit provisions in the contract? What is "Reasonable"? 9 Key Considerations un 2011 Jul Reimbursable Costs Schedule Delay Proper Performance Course of Conduct 10 5

6 Schedule Delay Discussion Points How do delays affect the compensation outlined in the contract? Bonus / Liquidated Damages Are delay costs reimbursable? Treatment of concurrent delay 11 Concurrent Delay Clause Relevant Contract Provisions 12 6

7 Key Considerations un 2011 Jul Reimbursable Costs Schedule Delay Proper Performance Course of Conduct 13 Proper Performance of the Work Discussion Points What is Proper Performance? Industry standards Expert opinion How is contractor rework addressed based on the provisions set forth in the contract? How do the contract provisions address inefficient performance and associated costs? 14 7

8 Proper Performance Clause 15 Gross Negligence or Willful Misconduct Relevant Contract Provisions 16 8

9 Defects Clauses Relevant Contract Provisions 17 Rework Clause Relevant Contract Provisions 18 9

10 Labor and Personnel Clause Relevant Contract Provisions 19 Key Considerations un 2011 Jul Reimbursable Costs Schedule Delay Proper Performance Course of Conduct 20 10

11 Course of Conduct Discussion Points Contemporaneous project records as they relate to Owner s review and approval of reimbursable invoices Contemporaneous project records as they relate to contractor s notice of impacts resulting in a projected increase in reimbursable costs 21 Course of Conduct Scope Changes Owner assumes certain risks such as increases in price of materials and wages, force majeure events and possible errors in estimating Contractor should be diligent in review of unanticipated changes in scope and notify the Owner of potential scope changes Impact of scope changes on target price 22 11

12 The Cost Reimbursable Mindset 23 The Cost Reimbursable Mindset 24 12

13 The Cost Reimbursable Mindset 25 The Cost Reimbursable Mindset 26 13

14 Agenda Introduction Key Considerations Practical Implications Recap Common Disputes and Key Issues 27 Steam Turbine Generator Case Study

15 Key Factors Case Study 1 Enforceability of side letter agreement outlining Liquidated Damages provisions Responsibility for 5 months of schedule delay, including entitlement to Force Majeure events Use of Change Management process The Owner designated changes as Variances rather than adjusting the Target Price Many real changes did not get executed as formal change orders 29 Change Management Process Case Study 1 50 $7.0 M $3.0 M Overrun $10M $51 M Overrun ($) Million $1.5 M $39.5 M Variances Change Orders Contract Price Total Price

16 Key Factors Case Study 1 Despite the Owner s exhaustive monthly invoice review process, the Owner disputed very few submitted costs during the course of the Project The Owner attempted to use Commercially Reasonable Efforts clause in the Contract to allege the EPC Contractor s negligence in schedule and cost control Per Diems 31 Productivity Analysis Case Study 1 Impacted Timeframe Unimpacted Ramp Down Per Diem Approval 9/16/07 Planned Mechanical Completion 1/17/08 Per Diem Non PD 50 # of Men /3/06 11/17/06 12/1/06 12/15/06 12/29/06 1/12/07 1/26/07 2/9/07 2/23/07 3/9/07 3/23/07 4/6/07 4/20/07 5/4/07 5/18/07 6/1/07 6/15/07 6/29/07 7/13/07 7/27/07 8/10/07 8/24/07 9/7/07 9/21/07 10/5/07 10/19/07 11/2/07 11/16/07 11/30/07 12/14/07 12/28/07 1/11/08 1/25/08 2/8/08 2/22/08 3/7/08 3/21/08 4/4/08 4/18/08 5/2/08 5/16/08 5/30/08 6/13/08 6/27/08 Ledger Date 32 16

17 Productivity Analysis Case Study Job to Date PAB Summary PAB Week 49 9/21/2007 Week 89 6/27/ Productivity Analysis Case Study 1 Description Amount Total Actual Man Hours Impacted Period (WK 49 9/21/07) 74,580 Total Earned Man Hours Impacted Period 32,500 Unimpacted PAB (WK 89 6/27/08) 1.40 "Should Have Been" Man Hours In Impacted Period 45,500 Inefficient Man Hours 29,080 Hourly Rate $ Subtotal $ 1,454,000 Mark up (15%) 218,100 Total $ 1,672,

18 Residual Disposal Area at Alumina Refinery Case Study 2 35 Key Factors Case Study 2 Owner s right to recover claimed amounts hinged on their ability to demonstrate gross negligence or willful misconduct on the part of Contractor 36 18

19 Key Factors Case Study 2 Despite admitted cost overruns resulting from inefficiencies, Owner was unable to establish Contractor s gross negligence or willful misconduct Owner s failure to follow its own gated design review and appropriation procedure Project details not known at FEL stage budget definition Owner s unilateral directives on design decisions Contractor advised Owner of additional costs well ahead of the end of the Project 37 Residual Disposal Area at Alumina Refinery Case Study

20 Key Factors Case Study 2 Owner s course of conduct failed to support Owner s allegations Full payment of all invoices except the final three Owner s positive performance evaluations Clean audits of Contractor throughout the Project Owner used Contractor personnel on other Projects 39 Invoiced Amount v. Paid Amount (USD) Case Study 2 Major Audit 7/06 Project Completion 1/08 3/08 7/08 $25,000,000 Major Audit $20,000,000 $15,000,000 $10,000,000 $5,000,000 $ 3/22/2005 5/22/2005 7/22/2005 9/22/ /22/2005 1/22/2006 3/22/2006 5/22/2006 7/22/2006 9/22/ /22/2006 1/22/2007 3/22/2007 5/22/2007 7/22/2007 9/22/ /22/2007 1/22/2008 3/22/2008 5/22/2008 7/22/2008 9/22/ /22/2008 Amount Invoiced Amount Paid

21 Parties Course of Conduct Case Study 2 July 2006 Audit Report Agenda Introduction Key Considerations Practical Implications Recap Common Disputes and Key Issues 42 21

22 Recap Common Disputes & Key Issues Responsibility for schedule delays LD s applicable per contract, but are subcontractor s extended performance costs still reimbursable? Risk of perceived budget overruns Are simple budget overruns and/or labor inefficiencies cause for nonpayment by Owner or GC? Failure to apply change management process GC or subcontractor says It s cost reimbursable, what s the point? Can result in negligence argument (high cost overruns) Can impact bonus/ld/fee calculations 43 Recap Common Disputes & Key Issues Owner s course of conduct Does Owner s detailed review and approval of cost reimbursable invoices curtail its ability to backcharge at the end of the Project (buyer s remorse)? Notice of impacts and/or forecasted cost increases by subcontractor Negligence and standard of care Compensation based on a comparison of actual vs. target costs 44 22

23 Michael Birmingham, CCP, PSP group.com Christina Casciato, CFE group.com 45 Disclaimer The material in this presentation has been prepared by The Rhodes Group, Inc. ( The Rhodes Group ). Except as cited within, all materials contained within this document are protected by copyright law and may not be reproduced, distributed, transmitted, displayed, or published without the prior, express written consent of The Rhodes Group. You may not alter or remove any copyright or other notice from copies of this content. The Rhodes Group offers no representation or warranty, express or implied, as to the accuracy, reliability or completeness of the presentation or any information contained therein. This material is intended solely as a general information resource and for educational purposes only. The material presented is not tailored to your specific circumstance(s) and should not be construed as legal advice or opinion, nor should it be construed as an indication of future results. The material should not replace independent professional judgment and YOU SHOULD EVALUATE ALL INFORMATION, OPINIONS AND ADVICE PROVIDED HEREIN IN CONSULTATION WITH YOUR LEGAL OR OTHER ADVISOR(S), AS APPROPRIATE