Contracting makes for global debate

The question of whether engineering, procurement and construction (EPC) or engineering, procurement and construction management (EPCM) is a preferred or advisable contracting strategy in the South African context has attracted much debate, says University of Pretoria project management associate Professor Giel Bekker.

“This has been noted especially in the public sector,” he says.

To manage risks better, collaborative contracting is being applied to large projects more often, but with mixed success.

“These contracting strategies are all but unfamiliar, which begs the question of why the increased concern in contractual failure in recent years,” he adds.

Having participated in the Megaproject Workshop in Sydney, Australia, last month – which was attended by global representatives of the construction sector – Bekker notes that these concerns are seemingly not confined to the South African construction sector.

Contracts, whether written or verbal agreements, stipulate the expectations of the project and govern the relationships among the parties and are probably as old as the very concept of projects, he elaborates.

However, despite the “supposedly” mature nature of contracting, the quest for the perfect format and strategy for the appropriate conditions remains.

Bekker says that, based on discussions with practitioners, it has become clear that the failure of contractual agreements is not necessarily owing to the wrong strategy or poorly stipulated conditions.

“The very fundamental aspects on which contracts are based, such as the scope and specifications, are so vague and poorly defined that too much is left to interpretation, leading to many changes and amendments.”

Clients and contractors are guilty in this regard, he stresses.

Clients do not provide a proper scope of the work required, and contractors do not sufficiently disclose their capacity, generally taking on too much risk to win the contract.

Competences of scope formulation (by the client) and evaluation (by the contractor) are lacking, while the use of bespoke contract formats that extend beyond the standard clauses, mostly to the benefit of the client, add additional risk and ambiguity to the principal-agent relationship.

The drafting of contracts is subjected to numerous factors such as the level of scope definition, contractor competences, the internal capacity of the client, the approach to penalties and incentives, contracting strategies and stakeholder relationships.

Bekker adds that the engineering, design and construction aspects of projects are mostly contracted, with construction forming the bulk of the capital value.

Importantly, a company wanting to contract a professional team and/or contractor must first conduct an in-house, transparent review regarding the company’s capacity to formulate the project scope, define the specifications and acceptance criteria, and its ability to provide oversight.

The contractor’s level of competency will determine the level of involvement during the contract period. This assessment will determine whether an EPC or EPCM approach will be followed.

In general, a high level of in-house competency and weak scope definition may lean towards an EPCM strategy.

Bekker suggests that, for a low level of in-house competency and good scope definition, an EPC approach maybe more advisable.

Additionally, the procurement of goods and services are highly constrained by legislation, such as the requirements for localisation and preferential procurement, which make it difficult to assess and select contracting parties based on competency, capability and capacity, let alone the price.

“The redevelopment of skills lost will take time and can happen only if there is sufficient capital released so that the project can proceed,” he adds.

Training will also not materialise if there is no work, and the construction industry must help to create opportunities and other forms of contractual relationships such as public–private partnerships or build, operate, transfer-type projects.

As opposed to bespoke contracts, Bekker suggests that companies should also use standard forms of contracts such as those of the International Federation of Consulting Engineers and the Joint Building Contracts Committee, as well as the New Engineering Contract, which balance risk and protect client and contractor interests.

To improve the technical definitions of contracts, companies should invest in the technical and scope-writing skills of their workforce to ensure proper contract scopes on which the conditions can be based, he concludes.