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.

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

So you have the contract well defined. You’ve defined the scope of work. You’ve agreed upon and set the project schedule. You’ve determined and contracted a price for the work, and defined milestones for the project. In other words, you’ve got it all covered, right?

Well, no. Not yet, anyway. If you haven’t dealt contractually with emergent work and change orders, you’ve left a hole in your agreement big enough to drive a superyacht through.

A change order, which is really a modification to an existing contract, becomes necessary when the buyer wants a change to, or deviation from the originally agreed upon scope of work, or to the originally agreed upon specification. Change orders become an issue particularly when you are dealing with a firm fixed price contract, since such contracted pricing only extends to the already agreed upon scope of work and specification.

Emergent work generally crops up during major refits. It is comprised of work that comes to light after the originally contracted work begins, and almost always was not visible or discernible before that originally contracted work began. Emergent work always occasions a change order.

A well-known maxim in the residential and commercial construction sectors is, “Low ball ‘em on the price, then kill ‘em on the change orders.”  A similar approach can often be found both in yacht new build and refit.  If a buyer/owner is not protected in the initial contract with respect to potential change orders, they can later become a de facto opportunity for the yard to rewrite the original contract. Consequently, among the key questions to settle ahead of time in any contract are:

1. Under what circumstances must the shipyard accept a buyer’s/owner’s request for a change order, and under what circumstances may the shipyard reject such request for a change order?
2. How will pricing for a change order be determined?
3. How will change orders become integrated into the originally agreed upon schedule, and how will they affect any projected or agreed upon in-process milestones or completion date(s)?

Keep in mind that, even if these questions are settled and provided for in the original contract, emergent work and change orders put the buyer/owner at a disadvantage. When the original contract and price are negotiated, the shipyard is generally at a competitive disadvantage. That is, they are (or could be) bidding against another yard or yards. So the pressure is on them to price as leanly as they can, in order to assure that they get the work.

But once a new build or major refit has begun, it is not generally practical, costwise or otherwise, for the project to be moved to another shipyard. So the competitive incentive is lost for the yard to keep the pricing on change orders as lean as for the original scope of work. As a result, the cost of emergent work and change orders can, at times, mount up sufficiently to rival that of the originally planned cost. The only way to avoid this is to minimize, to as great a degree as possible, emergent work and change orders. And in cases where that is not possible, to have procedures defined in the original contract to govern the pricing and scheduling of such additional work when it arises in the course of a project.

Next post will talk about how to structure safeguards concerning emergent work and change orders.