Baker & O'Brien, Inc.

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The Importance of Work Scope Definition for Turn-key Construction Contracts

International Arbitration, Asia-Pacific

October 1, 2014

Large turn-key construction jobs in the hydrocarbon processing industry require a well-defined and complete work scope if cost overruns and schedule delays are to be avoided. Failure to provide or ensure an adequate project definition may lead bidders to underestimate and underbid the necessary work, leading to negative consequences—and many disputes—during the construction phase.

Based on what turned out to be a relatively ill-defined scope of work, an oil refining company accepted a lump-sum, turn-key bid with an aggressive schedule and budget from an engineering contracting firm to expand and upgrade a fluid catalytic cracking unit. The main contractor subcontracted out the on-site erection of the facilities.

Problems arose almost from the outset. Design changes continued to be made months after the erection work had commenced, resulting in considerable re-work and delayed receipt of key equipment items.

Equipment that was to have been shop-fabricated and delivered to the site “fully assembled” arrived in many pieces. Improper delivery sequencing of key vessels and space limitations at the site required “dressing” of fractionator towers vertically instead of horizontally, resulting in additional man-hours of work. Costs escalated, and the schedule was extended until the subcontractor’s contract was eventually terminated. The subcontractor filed for arbitration to recover unpaid costs.

Baker & O’Brien was engaged to review the contract documents and engineering plans to ascertain whether each of the parties had met their contractual obligations, and if not, what reasonable steps they might have taken to do so. We were also asked to estimate the cost and schedule impacts arising from a party’s failure to meet its obligations. Our report was entered into evidence in the arbitration and we provided testimony at the hearing.