In the past decade, there have been noteworthy advances in case law with respect to adverse physi... more In the past decade, there have been noteworthy advances in case law with respect to adverse physical conditions as well as the development and use of digital ground models that have become more widespread. This article looks at the development and changes in risk profiles that may result due to these two developments.
Early contractor involvement in construction projects, whether onshore
or offshore, brings many d... more Early contractor involvement in construction projects, whether onshore or offshore, brings many direct benefits such as cost savings, better communication and collaboration, innovation and creativity, and positive relationships between all parties with a decreased risk of disputes and claims. In marine infrastructure projects, ECI can achieve direct benefits during the site investigation stage and when developing project budgets using open book pricing as well as when preparing constructability reviews and construction risk assessments. It has also been used effectively during the regulatory and permitting stage of a project. Parties need to be open and mutual trust needs to be built in a collaborative relationship. With it comes vulnerability. Without acceptance of this trust is impossible to build on and lack of trust can thwart a successful collaborative partnership. ECI is becoming increasingly popular as an alternative procurement method and is seen as a key way to improve the construction process and mitigate the unique challenges of any project.
This article reviews various court cases over the past 50 years and considers their influence on ... more This article reviews various court cases over the past 50 years and considers their influence on marine infrastructure contracts and the allocation of risk between contract parties. The establishment of case law and legal precedent is an ever-evolving process, it being dependent on claimants to put their disputes through the court process to seek the outcome they desire. It is often a long and costly process. The rise of adjudication in various common law jurisdictions and countries means that often disputes are resolved without recourse to the courts and various industry standard contracts have arbitration as the final and binding mechanism to resolve disputes.
Vesting of Plant refers to the transfer of ownership or title of the Contractor’s Equipment from ... more Vesting of Plant refers to the transfer of ownership or title of the Contractor’s Equipment from the Contractor to the Employer for the period the Equipment remains on the Site. It may even include the right to sell the Equipment to recover monies as a debt due. The intention of a vesting provision is that in the event of Contractor default or insolvency the Employer can retain the Contractor’s Equipment in order to complete the Works.Vesting of Plant clauses originated from the Institution of Civil Engineers (ICE) Conditions of Contract and its use has spread around the world. Despite it falling out of favour in the United Kingdom, under FIDIC contracts and in other jurisdictions it can still be seen in a number of countries’ standard conditions of contract most notably in parts of the Middle East, Malaysia, Hong Kong and Australia. Although there has been lobbying to remove draconian vesting provisions from international contracts such as FIDIC, these provisions have not been abandoned. The question remains: Are such provisions a workable contract solution for clients in economically uncertain times or should they be consigned to history? INTRODUCTION The right of vesting or right to claim title of ownership is generally used in construction contracts when it applies to materials and goods supplied and delivered by the Contractor for incorporation into the Work. This is to enable the Employer to complete the Works by using the materials and goods supplied in the event that the Contractor’s employment is terminated. It is generally accepted that the materials and goods change ownership when they are clearly identified as the property of the Employer upon delivery to the Work Site or upon payment by the Employer when they are incorporated into the permanent works, whichever comes first. However the position regarding the Contractor’s Equipment deployed on the Work Site is different. The Employer whilst gaining title to materials and goods supplied for the permanent works will not have the right to use the Contractor’s Equipment following termination unless there is a “Vesting of Plant” clause. Vesting of plant refers to the transfer of ownership or title of the Contractor’s Equipment from the Contractor to the Employer for the period the Equipment remains on the Site. It may even include the right to sell the Equipment to recover monies as a debt due. The intention of a vesting provision is that, in the event of termination of the contract by the Employer for Contractor default or insolvency, the Employer can retain the Contractor’s Equipment in order to complete the Works. A BALANCED PERSPECTIVE There are opposing interests with respect of a vesting of plant clause. In the event of the Contractor’s default and the subsequent termination of the contract then the Employer will wish to secure the completion of the Works by the quickest and most economically advantageous method. If the Employer is able to use it, then the Contractor’s Equipment is essential for this. The Employer would then Vesting and Ownership of Plant on Dredging Projects: A Fair Remedy or a Relic of the Past? 15 16 Terra et Aqua | Number 115 | June 2009 the Contractor’s responsibility to operate and maintain the same. Upon removal, with the consent of the Engineer, the Contractor’s Equipment shall be deemed to revest in the Contractor”. International Applications Some countries such as Oman and Bahrain took the FIDIC 3rd Edition and used it as the template for their standard conditions of contract but without including the Part III amendments for dredging and reclamation works. This had the unfortunate result of re-instating the vesting of plant requirements. Dredging contractors working in these countries are faced with the potential of the vesting of plant provisions being enforced in event of contractor default and would be expected in all cases to qualify such tenders. Other countries such as Malaysia, which used the former ICE Contracts as their template, incorporated the vesting of plant clause in their Public Works Contracts. However, with the privatisation of the port and infrastructure market, Employers increasingly turned to either FIDIC or their own drafted contracts and the vesting of plant provisions were for the most part largely discarded. In the Dredging Handbook for Engineers 2nd Edition, the authors question whether the Employer would not be better advised to increase the value of the performance bond instead of resorting to a vesting of plant clause. In practice, a more important provision is the Employer’s right not to release a vessel from the work site until the work related to that vessel has been completed. VESTING CLAUSES AROUND THE WORLD The vesting of plant provision was first used in the Institution of Civil Engineers (ICE) Conditions of Contract as far back as 1945 and its use has spread around the world, particularly in Commonwealth Countries. Use of the ICE Contracts was slowly replaced by the FIDIC…
Escalation refers to a provision in a contract which calls for an adjustment in price in the even... more Escalation refers to a provision in a contract which calls for an adjustment in price in the event of an increase or decrease in certain costs. Escalation clauses are becoming increasingly common in dredging contracts as a means to cover unexpected costs resulting from fluctuations in the prices for raw materials, fuel and labour during the course of the construction project. The Contractor when preparing a tender estimate includes for costs of fuel, steel and wages and has to evaluate the appropriateness of an escalation clause to cover the risk of price fluctuations during the execution period of the contract. Based on the analyses presented here, the recommendation is made that any dredging contract of a duration of more than three to six months should have an escalation clause included, as it will take speculation out of the tasks of the Contractor, which will result in a better focus on the projected work itself. Major contributions to the total dredging price subject to fluctuations are fuel, steel and labour costs. INTRODUCTION An escalation clause is a clause in a contract that guarantees a change in the contract price once a particular factor beyond the control of either party results in an increase or decrease in the Contractor’s costs. It is also referred to as “Rise and Fall” which indicates that if the price of certain costs fall then the contract price will be adjusted in the client’s favour. What goes up may also go down after all. In mature dredging markets like Europe, escalation clauses in one form or another are common, but they are not widely applied by clients in emerging dredging markets. Quite often escalation clauses are little understood by clients unfamiliar with the specifics of the dredging industry. Often the question arises, “Why do tenderers qualify their offers especially with respect to fuel escalation?”, which is a major component of Above: In the € 1 billion Maasvlakte 2 contract a price escalation system is successfully in place. The Client (Port of Rotterdam) initially listed a set of indices available for use, upon which the Contractors proposed the applicable percentages for the indices. Subsequently the Client covered the fuel price risk through a fuel hedge contract. WHEN IS AN ESCALATION CLAUSE NECESSARY? DEALING WITH PRICE FLUCTUATIONS IN DREDGING CONTRACTS DAVID KINLAN AND DIRK ROUKEMA unit price – usually 20 to 30%. Expecting Contractors to absorb the escalation risk of this in their rates is not exactly the perfect start for a professional contractual relationship between Client and Contractor. Moreover, it could well backfire for the Client with all Tenderers having no other option than to put a hefty risk premium into their prices to cover for sharp increases of component prices. Based on research and experience, the recommendation is made that any dredging contract of a duration of more than three to six months should have an escalation clause included. In this way, speculation is removed from the tasks of the Contractor and this results in a better focus on the projected works themselves. PRICE FLUCTUATIONS The extent and the details of the escalation clause and formula can and do vary according to the situation at hand. A few examples are given below. Fuel The use of escalation clauses in dredging contracts goes back to the early 1970s when the oil crisis imposed a huge spike in oil prices. From September 1973 to March 1974 the oil price increased 260% in real terms paralysing When is an Escalation Clause Necessary? Dealing with Price Fluctuations in Dredging Contracts 3 4 Terra et Aqua | Number 125 | December 2011 the world economy. Further spikes occurred in 1979 with the fall of the Shah in Iran and more recently from 2001 onwards the oil price has been driven up with the rise of demand from the emerging countries like China, India and Brazil competing with the continuous demand for oil in the US economy. Figure 1 shows a chart of the nominal and real fuel prices over about 150 year period. With the current political and social unrest in parts of North Africa and the Middle East, fuel prices are very volatile and are expected to remain unstable in the coming years. Recent events (2011) have shown that the rise and/or fall of the fuel prices in even a short timeframe of say a few months can be very significant. Figure 2 shows the World crude oil prices from 1980 to 2009 and as projected to 2035. Steel From 2004 onwards steel prices more than doubled as a result of China’s unending demand for iron ore, with only a brief respite caused by the Global Financial Crisis. Now the demand for raw materials has resumed and steel prices have hit record levels. Figure 3 shows the average monthly price of Iron Ore Carajas in U.S. cents per Dry Metric Tonne Unit (Units) from 1980 through 2011. Steel is a not an obvious – but nevertheless important – element in dredging prices as the dredging contractors use steel in new-build vessels and for running repairs to their…
Despite significant improvements in the past thirty years in precision of the dredging process an... more Despite significant improvements in the past thirty years in precision of the dredging process and accuracy of hydrographic survey information overdredging is still an inherent part of dredging. Both port developers and contractors alike have to deal with the allowance for dredging beyond the Client’s design dredge depth. The two issues of dredging to design only and the operational capabilities of the dredge equipment and (unavoidable) overdredging need to be considered. Clear wording is required in contract documentation to deal with this aspect and in particular whether the overdredge volume is paid or included in the Contractor’s rates and prices. Disputes can and do arise when dealing with overdredging caused by the lack of clarity in the contract’s technical specifications and Preambles.
Variations have the potential to generate substantial extra costs and pose significant delay and ... more Variations have the potential to generate substantial extra costs and pose significant delay and disruption to a dredging project. Moreover, the valuation of a variation can be a contentious issue between contracting parties. Often the engineer has an obligation under the terms of the contract to value any varied work. Where appropriate the engineer should apply the contract rates, such as where the work executed under the variation is of a similar nature and carried out under similar conditions to work set out in the contract.
In the 1 billion euro Maasvlakte 2 contract a price escalation system is successfully in place. T... more In the 1 billion euro Maasvlakte 2 contract a price escalation system is successfully in place. The Client (Port of Rotterdam) initially listed a set of indices available for use, upon which the Contractors proposed the applicable percentages for the indices. Subsequently the Client covered the fuel price risk through a fuel hedge contract.
In the past decade, there have been noteworthy advances in case law with respect to adverse physi... more In the past decade, there have been noteworthy advances in case law with respect to adverse physical conditions as well as the development and use of digital ground models that have become more widespread. This article looks at the development and changes in risk profiles that may result due to these two developments.
Early contractor involvement in construction projects, whether onshore
or offshore, brings many d... more Early contractor involvement in construction projects, whether onshore or offshore, brings many direct benefits such as cost savings, better communication and collaboration, innovation and creativity, and positive relationships between all parties with a decreased risk of disputes and claims. In marine infrastructure projects, ECI can achieve direct benefits during the site investigation stage and when developing project budgets using open book pricing as well as when preparing constructability reviews and construction risk assessments. It has also been used effectively during the regulatory and permitting stage of a project. Parties need to be open and mutual trust needs to be built in a collaborative relationship. With it comes vulnerability. Without acceptance of this trust is impossible to build on and lack of trust can thwart a successful collaborative partnership. ECI is becoming increasingly popular as an alternative procurement method and is seen as a key way to improve the construction process and mitigate the unique challenges of any project.
This article reviews various court cases over the past 50 years and considers their influence on ... more This article reviews various court cases over the past 50 years and considers their influence on marine infrastructure contracts and the allocation of risk between contract parties. The establishment of case law and legal precedent is an ever-evolving process, it being dependent on claimants to put their disputes through the court process to seek the outcome they desire. It is often a long and costly process. The rise of adjudication in various common law jurisdictions and countries means that often disputes are resolved without recourse to the courts and various industry standard contracts have arbitration as the final and binding mechanism to resolve disputes.
Vesting of Plant refers to the transfer of ownership or title of the Contractor’s Equipment from ... more Vesting of Plant refers to the transfer of ownership or title of the Contractor’s Equipment from the Contractor to the Employer for the period the Equipment remains on the Site. It may even include the right to sell the Equipment to recover monies as a debt due. The intention of a vesting provision is that in the event of Contractor default or insolvency the Employer can retain the Contractor’s Equipment in order to complete the Works.Vesting of Plant clauses originated from the Institution of Civil Engineers (ICE) Conditions of Contract and its use has spread around the world. Despite it falling out of favour in the United Kingdom, under FIDIC contracts and in other jurisdictions it can still be seen in a number of countries’ standard conditions of contract most notably in parts of the Middle East, Malaysia, Hong Kong and Australia. Although there has been lobbying to remove draconian vesting provisions from international contracts such as FIDIC, these provisions have not been abandoned. The question remains: Are such provisions a workable contract solution for clients in economically uncertain times or should they be consigned to history? INTRODUCTION The right of vesting or right to claim title of ownership is generally used in construction contracts when it applies to materials and goods supplied and delivered by the Contractor for incorporation into the Work. This is to enable the Employer to complete the Works by using the materials and goods supplied in the event that the Contractor’s employment is terminated. It is generally accepted that the materials and goods change ownership when they are clearly identified as the property of the Employer upon delivery to the Work Site or upon payment by the Employer when they are incorporated into the permanent works, whichever comes first. However the position regarding the Contractor’s Equipment deployed on the Work Site is different. The Employer whilst gaining title to materials and goods supplied for the permanent works will not have the right to use the Contractor’s Equipment following termination unless there is a “Vesting of Plant” clause. Vesting of plant refers to the transfer of ownership or title of the Contractor’s Equipment from the Contractor to the Employer for the period the Equipment remains on the Site. It may even include the right to sell the Equipment to recover monies as a debt due. The intention of a vesting provision is that, in the event of termination of the contract by the Employer for Contractor default or insolvency, the Employer can retain the Contractor’s Equipment in order to complete the Works. A BALANCED PERSPECTIVE There are opposing interests with respect of a vesting of plant clause. In the event of the Contractor’s default and the subsequent termination of the contract then the Employer will wish to secure the completion of the Works by the quickest and most economically advantageous method. If the Employer is able to use it, then the Contractor’s Equipment is essential for this. The Employer would then Vesting and Ownership of Plant on Dredging Projects: A Fair Remedy or a Relic of the Past? 15 16 Terra et Aqua | Number 115 | June 2009 the Contractor’s responsibility to operate and maintain the same. Upon removal, with the consent of the Engineer, the Contractor’s Equipment shall be deemed to revest in the Contractor”. International Applications Some countries such as Oman and Bahrain took the FIDIC 3rd Edition and used it as the template for their standard conditions of contract but without including the Part III amendments for dredging and reclamation works. This had the unfortunate result of re-instating the vesting of plant requirements. Dredging contractors working in these countries are faced with the potential of the vesting of plant provisions being enforced in event of contractor default and would be expected in all cases to qualify such tenders. Other countries such as Malaysia, which used the former ICE Contracts as their template, incorporated the vesting of plant clause in their Public Works Contracts. However, with the privatisation of the port and infrastructure market, Employers increasingly turned to either FIDIC or their own drafted contracts and the vesting of plant provisions were for the most part largely discarded. In the Dredging Handbook for Engineers 2nd Edition, the authors question whether the Employer would not be better advised to increase the value of the performance bond instead of resorting to a vesting of plant clause. In practice, a more important provision is the Employer’s right not to release a vessel from the work site until the work related to that vessel has been completed. VESTING CLAUSES AROUND THE WORLD The vesting of plant provision was first used in the Institution of Civil Engineers (ICE) Conditions of Contract as far back as 1945 and its use has spread around the world, particularly in Commonwealth Countries. Use of the ICE Contracts was slowly replaced by the FIDIC…
Escalation refers to a provision in a contract which calls for an adjustment in price in the even... more Escalation refers to a provision in a contract which calls for an adjustment in price in the event of an increase or decrease in certain costs. Escalation clauses are becoming increasingly common in dredging contracts as a means to cover unexpected costs resulting from fluctuations in the prices for raw materials, fuel and labour during the course of the construction project. The Contractor when preparing a tender estimate includes for costs of fuel, steel and wages and has to evaluate the appropriateness of an escalation clause to cover the risk of price fluctuations during the execution period of the contract. Based on the analyses presented here, the recommendation is made that any dredging contract of a duration of more than three to six months should have an escalation clause included, as it will take speculation out of the tasks of the Contractor, which will result in a better focus on the projected work itself. Major contributions to the total dredging price subject to fluctuations are fuel, steel and labour costs. INTRODUCTION An escalation clause is a clause in a contract that guarantees a change in the contract price once a particular factor beyond the control of either party results in an increase or decrease in the Contractor’s costs. It is also referred to as “Rise and Fall” which indicates that if the price of certain costs fall then the contract price will be adjusted in the client’s favour. What goes up may also go down after all. In mature dredging markets like Europe, escalation clauses in one form or another are common, but they are not widely applied by clients in emerging dredging markets. Quite often escalation clauses are little understood by clients unfamiliar with the specifics of the dredging industry. Often the question arises, “Why do tenderers qualify their offers especially with respect to fuel escalation?”, which is a major component of Above: In the € 1 billion Maasvlakte 2 contract a price escalation system is successfully in place. The Client (Port of Rotterdam) initially listed a set of indices available for use, upon which the Contractors proposed the applicable percentages for the indices. Subsequently the Client covered the fuel price risk through a fuel hedge contract. WHEN IS AN ESCALATION CLAUSE NECESSARY? DEALING WITH PRICE FLUCTUATIONS IN DREDGING CONTRACTS DAVID KINLAN AND DIRK ROUKEMA unit price – usually 20 to 30%. Expecting Contractors to absorb the escalation risk of this in their rates is not exactly the perfect start for a professional contractual relationship between Client and Contractor. Moreover, it could well backfire for the Client with all Tenderers having no other option than to put a hefty risk premium into their prices to cover for sharp increases of component prices. Based on research and experience, the recommendation is made that any dredging contract of a duration of more than three to six months should have an escalation clause included. In this way, speculation is removed from the tasks of the Contractor and this results in a better focus on the projected works themselves. PRICE FLUCTUATIONS The extent and the details of the escalation clause and formula can and do vary according to the situation at hand. A few examples are given below. Fuel The use of escalation clauses in dredging contracts goes back to the early 1970s when the oil crisis imposed a huge spike in oil prices. From September 1973 to March 1974 the oil price increased 260% in real terms paralysing When is an Escalation Clause Necessary? Dealing with Price Fluctuations in Dredging Contracts 3 4 Terra et Aqua | Number 125 | December 2011 the world economy. Further spikes occurred in 1979 with the fall of the Shah in Iran and more recently from 2001 onwards the oil price has been driven up with the rise of demand from the emerging countries like China, India and Brazil competing with the continuous demand for oil in the US economy. Figure 1 shows a chart of the nominal and real fuel prices over about 150 year period. With the current political and social unrest in parts of North Africa and the Middle East, fuel prices are very volatile and are expected to remain unstable in the coming years. Recent events (2011) have shown that the rise and/or fall of the fuel prices in even a short timeframe of say a few months can be very significant. Figure 2 shows the World crude oil prices from 1980 to 2009 and as projected to 2035. Steel From 2004 onwards steel prices more than doubled as a result of China’s unending demand for iron ore, with only a brief respite caused by the Global Financial Crisis. Now the demand for raw materials has resumed and steel prices have hit record levels. Figure 3 shows the average monthly price of Iron Ore Carajas in U.S. cents per Dry Metric Tonne Unit (Units) from 1980 through 2011. Steel is a not an obvious – but nevertheless important – element in dredging prices as the dredging contractors use steel in new-build vessels and for running repairs to their…
Despite significant improvements in the past thirty years in precision of the dredging process an... more Despite significant improvements in the past thirty years in precision of the dredging process and accuracy of hydrographic survey information overdredging is still an inherent part of dredging. Both port developers and contractors alike have to deal with the allowance for dredging beyond the Client’s design dredge depth. The two issues of dredging to design only and the operational capabilities of the dredge equipment and (unavoidable) overdredging need to be considered. Clear wording is required in contract documentation to deal with this aspect and in particular whether the overdredge volume is paid or included in the Contractor’s rates and prices. Disputes can and do arise when dealing with overdredging caused by the lack of clarity in the contract’s technical specifications and Preambles.
Variations have the potential to generate substantial extra costs and pose significant delay and ... more Variations have the potential to generate substantial extra costs and pose significant delay and disruption to a dredging project. Moreover, the valuation of a variation can be a contentious issue between contracting parties. Often the engineer has an obligation under the terms of the contract to value any varied work. Where appropriate the engineer should apply the contract rates, such as where the work executed under the variation is of a similar nature and carried out under similar conditions to work set out in the contract.
In the 1 billion euro Maasvlakte 2 contract a price escalation system is successfully in place. T... more In the 1 billion euro Maasvlakte 2 contract a price escalation system is successfully in place. The Client (Port of Rotterdam) initially listed a set of indices available for use, upon which the Contractors proposed the applicable percentages for the indices. Subsequently the Client covered the fuel price risk through a fuel hedge contract.
Uploads
Papers by David Kinlan
or offshore, brings many direct benefits such as cost savings, better
communication and collaboration, innovation and creativity, and positive
relationships between all parties with a decreased risk of disputes and claims.
In marine infrastructure projects, ECI can achieve direct benefits during
the site investigation stage and when developing project budgets using
open book pricing as well as when preparing constructability reviews and
construction risk assessments. It has also been used effectively during
the regulatory and permitting stage of a project.
Parties need to be open and mutual trust needs to be built in a collaborative
relationship. With it comes vulnerability. Without acceptance of this trust is
impossible to build on and lack of trust can thwart a successful collaborative
partnership. ECI is becoming increasingly popular as an alternative
procurement method and is seen as a key way to improve the construction
process and mitigate the unique challenges of any project.
on claimants to put their disputes through the court process to seek the outcome they desire. It is often a long and costly process. The rise of adjudication in various common law jurisdictions and countries means that often disputes are resolved without recourse to the courts and various industry standard contracts have arbitration as the final and binding mechanism to resolve disputes.
or offshore, brings many direct benefits such as cost savings, better
communication and collaboration, innovation and creativity, and positive
relationships between all parties with a decreased risk of disputes and claims.
In marine infrastructure projects, ECI can achieve direct benefits during
the site investigation stage and when developing project budgets using
open book pricing as well as when preparing constructability reviews and
construction risk assessments. It has also been used effectively during
the regulatory and permitting stage of a project.
Parties need to be open and mutual trust needs to be built in a collaborative
relationship. With it comes vulnerability. Without acceptance of this trust is
impossible to build on and lack of trust can thwart a successful collaborative
partnership. ECI is becoming increasingly popular as an alternative
procurement method and is seen as a key way to improve the construction
process and mitigate the unique challenges of any project.
on claimants to put their disputes through the court process to seek the outcome they desire. It is often a long and costly process. The rise of adjudication in various common law jurisdictions and countries means that often disputes are resolved without recourse to the courts and various industry standard contracts have arbitration as the final and binding mechanism to resolve disputes.