Wednesday, June 13, 2012

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

Most construction contracts for larger yachts include a schedule of “progress” payments that are based on the achievement of designated milestones during the duration of the build.

Unfortunately, the number of milestones used to break up payments on account during a build is almost always too few. And just as often as not, the definitions of the milestones are deficient in detail, and fail to provide an adequate basis on which to provide financial control for the project.
For example, a commonly designated milestone is, “Payment due of x% when the main propulsion engines are set.” Pretty clear? Not on your life. Many times, a builder pressed for cash flow will choose to “set” the engines on their beds, long before other logically and operational precedent work has been completed. Then, having drawn down the payment associated with the main-engines-set milestone, will remove the engines in order to complete tanks, bilge plumbing, electrical in the engine room, or what have you. As a result, the original intent of the milestone, namely, to define and link a percentage of vessel completion to the release of a progress payment, is entirely defeated.

There are several non-exclusive precautions which can be taken to avoid being placed in, or having your client being placed in this unacceptable situation:

1)  In every definition of milestone, include an omnibus clause to the effect that, “…every task logically, operationally, or customarily according to commonly accepted industry standards as precedent to the achievement of this milestone is, in fact, completed.”
2) Improve on the use of an omnibus clause by actually defining in detail every task or task group that must be completed before the milestone is to be considered achieved.

3) Increase the number of milestones from the usual six or eight to 18 or more milestones, thereby breaking the project duration into segments more amenable to meaningful financial control. Indeed, best practice is to have one milestone for each month of the anticipated project duration.
Of course, during the course of any build, circumstances may militate in favor of breaking with, or modifying the project plan and the associated milestone designations. For instance, engines may be late coming in from their manufacturer, or some other item coming up for installation may be delayed. In such cases, the exercise of good judgment and experience by a project manager and/or owner’s rep can avoid seeing the build slow to a crawl, or even grind to a halt.

Next time, we’ll discuss surveys, classification, and industry standards.   

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