Written contracts provide businesses with a legal document that states the expectations of both parties and how unfavourable situations can be resolved. Legally enforceable in a court of law, contracts are often used as a tool by companies to safeguard resources. However, with contracts, not everything is as clear-cut as it seems.
Subhash Pritmani, vice president for general management at Al Sabbah Electro-mechanical Company (SEMCO), notes the main contractor usually takes on a project at a very challenging price and time frame. Because of this fact, the mechanical, engineering, and plumbing (MEP) contractor that is part of a project, gets told by the main contractor of things being “missed out” on the project, such as civil works.
Pritmani adds: “However, your project completion date doesn’t change. Suppose your project has to be completed by 1 January, but it extends till 31 March. You then have to recover that three month period. You often don’t receive money for that. Additionally, some subcontractors will push their own labourers to work with you.” Subcontractors, he adds, may charge you triple for providing a workman.
Pritmani says that all such issues fall under the purview of contra charging. Put simply, contra charging is a legal process by which party A defends a claim brought by party B – by A setting off in extinction or diminution of B’s claim – claims which A alleges against B.
Suzannah Newboult, a construction specialist at law firm DLP Piper, has previously said that the concept of contra charging is so rampant that it is often accepted that the deduction – a form of set-off – is simply part of the account assessment process. The employer or main contractor assumes a right to set-off their contra charges; the contractor or sub-contractor assumes that they are permitted.
Scope gaps are another contra charge. Pritmani explains: “A creative commercial representative can say, ‘this was in your scope’, and then you get into a vicious circle. And, despite good intention of both the MEP contractor and the main contractor, the project escalates along with the cost. The job taken at a challenging cost starts suffering further.”
But why can’t everything be well-define, as part of a contractual clause?
Pritmani says that it’s very subjective. “You cannot define an entire contract in words. When you start defining everything in words, there will always be someone who will punch holes in that. It doesn’t work that way.”
Pritmani says that a ‘trust factor’ should be established which will benefit everyone. Unfortunately, some jobs are taken at low prices. And when they are not completed on time, people look for scapegoats.
“The MEP contractor is often the first to become a scapegoat,” he says, admitting that some MEP companies take on too many jobs. “We are also unsettled as an industry, and many of us have not learnt from what happened in the past with MEP companies that accepted too many projects.”
The Singapore solution
A Singaporean citizen, Pritmani draws parallel between the Singapore, known as The Lion City, and the Middle East.
In order to solve the contra charge conundrum, Pritmani suggests setting up a fast redressal system which is already present in Singapore.
“I would be wrong in saying that such contra-related problems do not exist in Singapore. However, their redressal system is quicker than what we have here,” he says.
Secondly, Singapore has the Security of Payment Act. This legislation stipulates that if a firm’s payment certificate has been certified, regardless of whether the main contractor has been paid by their employer or not, the MEP contractor is supposed to be paid as per the contract terms.
In the Middle East however, Pritmani says, “most of the contracts, are pay-in-pay-out. We call this back-to-back.
“If the employer has paid the main contractor in 30 days, the MEP contractors will finally be paid in 60 days to 90 days. So the MEP contractor is at the mercy of the main contractor.
“In Singapore, should the certificate have come through but the cash not, it is the responsibility of the main contractor to arrange the money in order to pay the subcontractor. If the main contractor doesn’t do that, a firm can go to a small mediation court and the case can be solved in 15 days. Firms can also go through this process in the Middle East, but it ends up taking much longer.
I have been canvassing such issues at various forums. The time has come for MEP contractors to be protected through a process that is similar to the Security of Payment Act.”