Are Caring about the Penalty Clause in a Mega Construction Project? 3 Questions Need to be Addressed!

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Key Words

Construction, penalty, Delay, Contractor, Client, Owner, Construction Project, Project Delivery, Project Controls, Brown Field, Green Field, Cost Estimates, Schedule, Integrated Cost Risk Analysis, Risk Register, Execution, Planning, Remote Area, Skilled Labor, Material Handling, Bulk Material, Construction Equipment

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Summary

In construction contracts, usually a limit is put on the bonus but not on the penalty. If you’re a builder, contractor, or subcontractor, you know that there’s no such thing as “just get it done.” And if your project is delayed, it’s important to understand the impact this will have on your bottom line.

If you’re building or maintaining a construction project, then it’s important to understand the penalties that you might be facing when delays occur. This article will show you how to anticipate delays and minimize/mitigate any penalty that may occur due to project delays.

The project schedule and cost risk analysis has already been done. Read article: 

https://www.gleeym.com/2021/02/16/accessroad/

Case Study

Access Road Construction Project that is required to be done well before commencing process plant construction. The project schedule, schedule risk and cost risk analysis has already been discussed in previous article.

The contract included a $5,000 penalty for each day of delay after the deadline and a similar bonus amount for finishing ahead of schedule, with an “X amount” cap on the bonus. Interestingly, there is no cap on penalty.

Top Risks

The top identified risks are:

  1. Flash Flood
  2. Delay in Delivery of Material
  3. Unavailability of Skilled Labor

 

Is it important to focus on Access Road Construction for mega Complex remote project? 4 Figures Depict a Complete Story!

Benefits for Client/Owner

When it comes to construction projects, the timelines are always tight. And when they’re this tight, there’s only one thing that makes all the difference in getting your project done on time — and that’s hiring a construction company with an impressive track record.

Delays in construction projects are not an uncommon occurrence. However, the key to avoiding delays is to learn from the mistakes made by others so that you can be better prepared.

It’s an opportunity for a client to make it a mandatory clause for submitting schedule and cost risk analysis with bid submission. It will help owner (client) to evaluate the project planning and execution roadmap of the contractors. It can be a hiring criterion along with capacity, capability, and financial strength. Furthermore, client can also assess the probabilistic project completion dates and compare the results with the reports submitted by the different. This exercise will be helpful to set performance criteria and headway to risk management, change management, EVM, and overall project controls.

Risk assessment for a mega complex construction project-www.gleeym.com/qra
Pic. 1 - Risk Assessment for Mega Complex Projects

Benefit for the Contractors

Delays in construction projects are not an uncommon occurrence. Nevertheless, the key to avoiding delays is to learn from the mistakes made in past (lesson learned) so that you can be better prepared.

By analyzing various scenarios, contractors can forecast their performance and calculate the financial and reputational loss.  In addition, by performing schedule and cost risk analysis; contractors can negotiate the project timeline, cost and performance criteria for unknown-unknown risks or even known-unknown risks with substantial impact.

Knowing complete picture before project execution helps to make changes in advance and decision making under uncertainty.

Construction risk assessment-www.gleeym.com/qra
Pic. 2 - Construction Risk Assessment Services by GleeYM

Project Scenario

Project Complete target date is 26-8-2021 with cost estimates of $9 M. The project integrated cost and schedule risk analysis (IRA) has already been discussed in previous article –

Project owner put a penalty clause that if project delays after the contractual deadline i.e., 26-9-2021, then there will be a penalty of a five thousand ($5,000) dollars per day.

This analysis provides and equally opportunity to the client and the contractors including subcontractors to revise the schedule accordingly and negotiate the timelines and the budget.

Why to develop a model and run a Monte Carlo simulation? The simple answer is to forecast your project execution while planning in present.

QUANTITATIVE RISK ANALYSIS

There are three important questions that can be addressed for a client and a sub contractor:

  1. What are the chances that project schedule will be delayed and cost overrun?
  2. What will be the 50th percentile for a penalty in case of project delay?
  3. What will be probabilities of occurrence of different possible outcomes for a penalty?

Quantitative Risk Analysis

GleeyM Offer services to identify risks and perform Quantitative Schedule Risk Analysis (QSRA) and Quantitative Cost Risk Analysis (QCRA) for mega complex projects!
Probability distribution graph by www.gleeym.com/qra
Pic. 3 - Probability Distribution for a Project Schedule

There is 50% (mean) chance that project will be delayed by 62 days. Furthermore, there is 80% chance that project will be delayed by 85 days.

Project cost overrun distribution graph by www.gleeym.com/qra
Pic. 4 - Probability Distribution Graph for a project Cost

There is 50% chance that the project cost overrun will be $4.474 M. Whereas cost overrun will be $3.194M between P50 – P80.

Penalty

Penalty S-Curve by www.gleeym.com/qra
Pic. 5 - Penalty S-Curve

It’s crystal clear that based on the current schedule and mapped uncertainties and risks; penalty will be substantial.

As per the contract, the penalty will be $5,000 per day. Therefore, there is 50% chance that penalty will be $ 160K in case of project delay beyond the contractual deadline of 26-9-2021.

What if a project delays further? Then from a distribution graph, there is 80% chance that penalty will be $325K.

The question is what will be the monetary benefit to the contractor? How to address it while negotiating the contract and mitigate plans it during the project planning? In case of delay, will there be an impact to CAPEX. Will there be an impact on OPEX?

Kindly give your comments and like our  articles for more updates!

 

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Conclusion

Integrated risk analysis is an equally important for both Client and Contractor. Risk Based Decision Making is required to demonstrate ALARP/ALARA. By incorporating what if analysis in ITB, contracts and planning will definitely help to forecast project health and EVM.

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GleeYM can help you with a valuable service to pick and incorporate risk management software for decision making and meeting strategic goals!

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