Have you ever submitted a claim and had it denied? Have you ever been presented with a claim, and had to deny it? It happens all of the time, even when it shouldn’t.
By Peter G. Hessler
Editor’s Note: The article is based on portions an upcoming book by Peter G. Hessler. He is also the author of Power Plant Construction Management: A Survival Guide, published by PennWell Books. For order information visit http://pennwell.stores.yahoo.net.
Say you’re a contractor and you just won the bid for a major outage, but you did so by the skin of your teeth. Now you’re mobilizing and it’s time to perform. Based on your previous experience, this will be a tough job, but with the right attitude, the right confidence and some crafty imagination, it could still be a winner. It all boils down to “enhancing margin with extras” and you make sure that your site staff understands.
This year has been extremely busy. In addition to outages, there are several scrubbers under construction as well as a coal-fired unit that’s stretching resources thin. The labor supply is tight and getting experienced supervision is almost impossible-on-the-job training is becoming the norm. So it’s no surprise that the site management and the home office contracts people rarely communicate. Everyone is busy, and no one has taken the time to digest the terms of the contract.
Six weeks into the outage, the turbine reblading runs into a snag. There’s going to be an extension to the schedule. Your site supervisor, mindful of your earlier suggestions, presents the plant with a list of extra work items that could be easily accomplished now that there’s a lull in your schedule. The plant’s outage manager, very busy and under lots of stress with the turbine issues, nods his head and tells you to go for it, saying, “Just be sure to keep accurate records and get daily signatures.”
With lots of smiles and away you go, ordering and replacing valves, patching pump and motor foundations, and even doing some extra pressure part work and insulation repairs on the boiler.
Finally, with the turbine reblading completes you are done with your scope of the job and the unit returns to service. The plant is relieved to be back on line and have all of the contractors out of the gate.
Now it’s time for the paperwork and invoicing cleanup. You submit your claims for the extra work and go on to the next job. But several months later, after your accounting department has invoiced and invoiced without being paid, you get a call. You set up a meeting with the client that starts off amicably enough. He acknowledges the work performed, and thanks you for it. With a puzzled look, you ask about payment.
“Ah ha, we have a problem,” says the client. “You see, our contract was very specific. Section 12 of the General Terms and Conditions clearly states that before proceeding to perform any extra work, the contractor must have an extra work order, signed by the outage supervisor and the outage coordinator.” You did not follow this process.
“Although there’s no denying that the work was done, and that it was not in the original scope, there’s the issue of our budget. Had you followed the contract requirements, our budget people would have had the opportunity to either say no to the work, or say yes and shuffle monies around to cover it. We spent all of the money in the budget on the items originally planned, and there’s nothing left to pay for your extras. I’m sorry.”
Unfortunately, this case, adapted from a real situation, turned two originally friendly parties into adversaries. And it did not have to happen.
As the old saying goes, “the best laid plans of mice and men often go astray,” and on a construction site, when reality sets in, certain things just will not happen as they were planned. Managing changes during the power plant construction process is a very important part of managing the overall project. Projects do not spontaneously fail. They fail because when things change, the changes are not properly managed.
Some changes result from one party’s actions against the other. Some are the results of third parties and some are due to causes outside of the control of any party. But whichever form changes take, or from wherever they come, they must be addressed and they must be managed. In the case just cited, changes were consciously made, agreed to by both parties, but then improperly managed, by both parties. (The plant outage manager should not have allowed this work to proceed, let alone continue, without the proper paperwork in place.)
The issue of proper authorization to perform extra work is not new. Most old timers are familiar with the concept and inherently know to get permission, in writing and per contract terms, before moving on. But some of the new guys, both on the owners’ teams and on the contractors’ staff, have not honed these skills sufficiently. The above case cost the contractor over $100,000.
How could this be avoided the next time out? The traditional answer is (a) hire experienced staff and (b) invest in training. Both are great suggestions, but today there’s a lack of experienced personnel remaining in the industry and there just never seems to be time for training. So what can one do?
With potential losses like this contractor experienced, prudent management would invest in some risk management restructuring. The management team would design a system of contract analysis. They would insist on a formalized method of abstracting the risk management tools from the contract language. And they would closely audit the site management staff to be sure each one understands these tools and diligently uses them.
To address extra work opportunities, the contractor would have a checks and balances system. This system would require that no work be allowed to commence without some additional approval, either from the home office or from an administrative person at site. This approval would then be given only if the contract rules were followed.
Here, we’ve only addressed the case of out-of-scope work and what can happen if one does not follow the contractual rules. But there are many other risk items that should be addressed as well. For example, both parties, owners and contractors, should be aware of notification rules that apply to things such as delays, unexpected access restrictions, unexpected actions of others and more. These are part of a group of risk items, sometimes referred to as the Deadly Dozen that, if not managed properly, can lead to trouble. Prudent construction managers keep this list close at hand so they can be ready to manage change.
Change management can be likened to a three-legged stool: one leg represents the contract language, another represents claims management and the third invokes the insurance process. All three together support the seat, or the change management process upon which the contract is based.
This article addressed one leg of this stool, the contract language and the importance of knowing and following it. What is important to recognize is that changes will occur and one must be ready to manage them. The unexpected can be tamed!
Peter Hessler is the President of Construction Business Associates, LLC, a provider of business management services to the power plant construction industry. He has over 30 years of experience in the power plant maintenance and construction industry worldwide, having worked as an owner, contractor and consultant. He holds a Bachelor’s degree in mechanical engineering from Virginia Polytechnic Institute and is a member of ASME and the Lean Construction Institute. In addition to consulting for owners and contractors, Hessler also speaks at industry conferences, is a guest lecturer at Columbia University on the topic of the construction world overseas