Penalties in a project contract can come with quite different word- ing and meaning. As global project managers we have to fully understand the meaning of these penalties. We need to bring our lawyers into the picture if we have to clarify or modify certain contract clauses. Then we have to relay all of the information related to a project contract’s penalties in detail to our team mem- bers and to our upper management. Liquidated damages are good examples of a project contract’s penalties.
In one of my project contracts, the liquidated damages were worded as follows:
If Seller does not deliver goods in conditions stipulated and in accordance with delivery times provided in this Contract, Purchaser is entitled to recover reasonable liquidated damages per each week of delay.
This was a vague penalty statement. What was the meaning of reasonable? Who decided on the “reasonable” damage? I had to get this statement modified before the start of the project. I got my upper management and my legal department involved to clear up this vagueness in the contract. After two weeks of negotiations with the customer, the final version of the contract for liquidated damages read as follows:
If Seller does not deliver goods in conditions stipulated in this contract and in accordance with delivery times provided in this Contract, Purchaser will recover 4% of the total purchase price per each week of delay as liquidated damages. A delivery delay in goods caused by a force majeure impediment is excluded from liquidated damages.
In another project contract, a penalty clause was stipulated as follows:
Seller is obliged to deliver all goods according to packing, preser- vation and marking instructions of Purchaser. If Seller does not carry out these instructions, Purchaser is entitled to a price reduc- tion of 5% of the total contract price.
I reviewed the entire contract in order to find these instructions, but there were none. I called my customer’s project manager and discussed missing packing, preservation, and marking instruc- tions. We agreed on all the details in such a way that the price of the contract did not change. He sent me a written confirma- tion of all packing, preservation, and marking instructions. I was relieved to finalize a missing item from my project’s contract before it was too late.
In a chip design project contract, the following contract statement was very restrictive to the progress of my project in a timely fashion.
Purchaser shall have the right to request changes from this con- tract agreement. Seller shall not proceed with any such change until an official change order is received from the Purchaser.
This clause was impossible to implement. The chip design speci- fications were very fluid. My team members and my customer’s engineers conferred daily for specification clarifications and for additions and deletions to specifications. The project could not progress if I waited for an official change order from my cus- tomer for every specification change event. I discussed this show- stopper clause with my customer’s project manager. We agreed to modify this contract clause as follows:
Purchaser shall have the right to request changes from this contract agreement. Seller shall not proceed with any such change until an e- mail describing the change is received from the Purchaser’s Project Manager. All changes approved by e- mails shall be col- lected monthly into an official change order by the Purchaser.
In one of my offshore oil platform equipment delivery projects, the contract stipulated the delivery time as the date the equipment in question was installed and was operational on the platform. If I missed that date I was penalized by a liquidated damage clause in my contract. I had to watch like a hawk for any equipment installation delays caused by my customer. Several times their power lines were not ready. On one occasion they had to perform extensive welding, which blockaded the area of our equipment installation. I recorded all these delays caused by my customer and immediately informed my customer’s project manager so that I would not get penalized for events that were beyond my control.
Penalties in a project’s contract can be ambiguous, too general, vague, inconsistent, redundant, and conflicting. As global project
managers, we have to catch these sinkholes before the execution of our contracts and have them clarified without any reservations.
LESSONS LEARNED FROM THIS PROJECT EVENT
• As project managers, we have to fully understand all penalties written into our project’s contract.
• We have to get vaguely worded contract penalties well defined by our customer and if necessary with the help of our legal department.
• We have to explain project penalties and their conse- quences to our team members, to our upper management, and to our subcontractors at the beginning of our projects.
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Case studies
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sCope ManageMent
As project managers, we have to watch the scope of a project like a hawk and we have to be the final authority for the project’s scope changes. Changes and misinterpretations of a project’s scope can occur very easily behind our backs.
In a chip design project, the specifications were written in a very concise fashion and they were open to many interpretations. As the design progressed, my team started to have numerous questions about the specifications that needed clarification. Also, my customer in Germany wanted to add several enhancements to the chip design along the way. Specifications that are in a constant flux can be very challenging to control as depicted in Case 2.1.
During the manufacturing phase of a research safety vehicle proj- ect, there was a sudden program manager change with our customer. The new program manager was clueless about the history of the program. He started to demand changes to the vehicle design that were above and beyond the specification clarifications and changes we had agreed to with his predecessor. As project manager, I had to put the brakes on and bring him back to reality in my project as detailed in Case 2.2.
In a fixed price contract, the customer’s specifications had quite a few TBDs (to be determined items). For a project manager, TBDs required a lot of attention and caused tremendous headaches between the cus- tomer’s project manager and myself. I had to watch these TBDs like a hawk. When a TBD specification was finalized by the customer, I had to make sure that the clarified specification was doable and that it did not affect my project’s cost and time constraints as shown in Case 2.3.
In one project, I had dual customers and therefore two customers’ project managers. To keep both customers’ project managers in sync and happy took a lot of extra effort during the execution of my project.
I detail the issues I encountered with the dual customers’ project man- agers in Case 2.4.
We had to finish the manufacturing phase of a project destined for Russia by the end of January so that we could test and ship the heavy equipment mover system for installation and training during the summer months there. Our customer’s project manager called me and told me that several of their other subcontractors were delayed in completing their tasks. They also had some cash flow issues so they wanted to delay our mover system to be installed during the following summer’s window. A year delay to complete a project requires several adjustments to tasks as shown in Case 2.5.
I took over a project right in the middle of its design phase. My customer’s project manager was accustomed to calling my team’s design engineers and ordering minor variations to the specifications on the telephone without my knowledge. Nothing was documented and we were drifting away from the original project technical speci- fications. Apparently, the previous project manager closed his eyes to these minor specification variations and my customer’s project man- ager became used to forcing these minor specification changes on my design engineers as detailed in Case 2.6.
I had several projects where minor scope changes occurred. I went along with my customer’s requests without going through the mind- boggling change approval cycle. My customer’s project manager followed a similar process. This was a documented bartering process of minor scope changes between my customer and me as detailed in Case 2.7.
Software used in a project has to be scrutinized for compatibil- ity very carefully. There can be many unforeseen conflicts and issues between customers, subcontractors, and internal users of software. I ran into several serious issues with software as detailed in Case 2.8.
Case 2.1: Specification Clarifications