Monday, January 9, 2012

Non-Legal Fine Points of Contract Negotiations and Management – VII

If your new-build or refit contract doesn’t detail how emergent work and change orders will be handled and priced, the agreement has a hole in it big enough to drive a superyacht through.

Unless a procedure governing pricing and effect on schedule has been established prior to the time a build or refit begins, you are open to being forced to pay for change orders and/or emergent work at a unit rate much higher than in the original contract; and you may be forced to accept unreasonable delays to the scheduled completion/delivery date. The reason is pretty clear. Once a build or refit is underway, the boatyard no longer finds itself subject to the same competitive pressures it felt leading up to the original contract. So what to do?

Understand that nothing you can do assures 100% that there will not be any disagreements concerning price and/or schedule. However, some straightforward precautions can go a long way toward avoiding irresolvable conflict.

The original contract should specify clearly an all-inclusive hourly shop rate that is to be applied to emergent and/or change-order work. The original contract should also lay out clearly a reasonable procedure for calculating any schedule changes that will ensue from such work. And there should also be a detailed procedure for the shipyard to submit, to the buyer, pricing quotes and proposed schedule modifications. Such detail should include spcification of definite time periods to be allowed for submission, review, and approval or rejection.

The original contract should also provide for mediation and, if necessary, arbitration in the event an irreconcilable disagreement arises over emergent or change-order work. I am personally not a big fan of arbitration in respect of the main body of a new-build or major-refit agreement. However, getting a dispute before an arbitrator can generally be accomplished much more quickly than getting a litigated matter before a judge, so there are some very real advantages to arbitration, when it comes to disagreements concerning emergent or change-order work.

To avoid unnecessarily delaying a project, consideration should be given to incorporating further agreement into any arbitration clause pertaining to emergent work or change-orders, that the yard's work on the vessel shall proceed as normal, subject retroactively to any pricing and schedule modification ultimately awarded by agreed upon arbitration. This type of supplemental agreement alone brings significant pressure upon all parties to achieve a negotiated resolution to any disputes involving emergent or change-order work.

Next time, we’ll cover milestones and progress payments.

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