LIVE: Procurement Change & Claims Management - Jerry Pessah

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0:00You're listening to the Contract Heroes podcast, your one-stop shop for all things contract management. And now, here are your hosts, Marc and Pepe. So welcome, everybody, to another episode of the Contract Hero podcast, and we have, this time, Gerry Pesza from Fluor. He's the senior director and the contract manager at Fluor Corporation. Welcome to the show, Gerry. Thank you very much, guys. So, so Gerry, uh, can you give us just, like, a little background on what you're doing, uh, at Fluor right now? Well, I'm, uh, right now I'm working in, uh, the mining division. And, uh, what I'm doing is contracts management. I'm the overall project contracts manager for a, you know, huge project that we are having in Argentina at this point in time. So based in Vancouver, and we are going through the entire, you know, a contract management process, from the pre-award to the post-award. And that's w- it's exactly what we wanna start with, right?

0:58So, like, can you tell us, like, some of the difference, uh, of the processes or maybe per- perspective when you're working on the pre-signature versus the post-signature side of a contract? Sure. The contract management per se, it's a, it's a huge, it's a very big, uh, process. Let me put it in this way. So we have to divide it in two steps, pre-award and post-award. All the pre-award, all the pre-award, uh, includes different phases, e- especially when you, uh, start doing the bidding processes. So you do all the prequalification and then, you know, of course, bidders prequalification, and then you go into the s- I mean, the preparing the request for proposal, sending the bids to the bidders, and then receiving the proposals, evaluating, and doing the recommendation. And then after you do the recommendation, who are you planning to award and why?

1:50Of course, commercially, technically, you go multiple steps, and then you do a recommendation, and that recommendation is whether accepted or not. Normally, it's accepted. If it's accepted, you award the contract, and that's when the post-award starts, as soon as you award the contract. So the difference is at the, at the pre-award phase is you do the, the entire selection and the preparation of the bids process and the prequalification. You do market prequalification. You do bidders prequalification and all this stuff. In the post-award is the management. You award it, and then you do all the management of all this, you know, of the contractor that you awarded. Right. And you have, like, construction works all over the world, and I can imagine, like, that can change a lot when you're working with different countries. It depends. It depends on the project that you are. It depends on the client. It depend, it depends on the type of contracts, because you have multiple contracts. You have multiple, uh, clients, and you have to work in different conditions as well.

2:54So each project is absolutely different. And you normally customize, you know, whether your, your documents, your requests or proposals, depending on the market that you go, depending, for example, in, i- in, in the contract, you have, eh, different parts. We call it the terms and conditions, which is the legal portion. Then you have the commercial. Then you have, for example, the, the scope of work, which is the technical. And then you have exhibits, attachments, and so on and so forth. That's the document that you normally submit for bid. Mm-hmm. And then, of course, you can customize this. It depends on what type of contract, what kind of, you know, eh, country you go. You have to customize those documents. More attachment, less attachment. In the legal, less liabilities, more liabilities, more terms and conditions or less. And then you need to, for example, just only as simple as in the dispute resolution, whether you're gonna go to mitigation or litigation or arbitration or what are you gonna do.

3:55So it depends on where you are, what type of project, and what kind of client do you have. Right. And, and speaking about, you know, the clients, it's, um, you know, I understand now you're, you're working more on the client and customer side of things. So how has that changed your perspective, um, by, by working on the other side of, of this equation? Very good question. Absolutely, when you are on the client side, it's different than when you are on the contractor side and, of course, when you are on the subcontractor side. So it depends where you are. But interesting, because normally what we do is we subcontract, at least my specialty's on the subcontract side. So not the prime contract. We have two levels, the prime contract, which is the main contractor with the client, and the other one is the subcontractor. So the subcontractor is the, from the contractor to subcontractors. And we are representing the client.

4:49It depends, it depends what kind of a contract you have with your client that whether you're gonna do it directly with the subcontractors without requesting their permission, which is, for example, a lump sum contract. Mm-hmm. When it's a lump sum, it's like a fixed- Turnkey, right? Exactly. It's like a turnkey project or contract. So you don't have to get a lot of authorizations from the client. It's by your own risk. So you have the authority to go, of course, in your internal organization to prepare the documents, to go out, to request proposals, and to bid it. You don't have to, eh, directly ask every authorization from the client. When you are in a cost-reimbursable contract, you need to request authorization for every single step of the way, and that's where, eh, when you can be, eh, managed from the client side to a very deep, deep, deep level. What's the difference between one and another? If it's a lump sum, it's you have 100% of the risk. So everything, the client, for example, tells you, "I'm gonna give you this amount of money- Mm...

5:54to do this project, and it's up to you." There's, you know, you have to fix it for that amount of money. If in the process of this huge building, well, this huge pro- eh, project, if in the process you exceed the value- So it's on your side. It's on your risk, and you have to take it. You have to take the consequences. It depends, of course. There's some changes, and- Right... the more complicated project it is, of course, there's a lot of complexities in between. So you have changes that you can incorporate. For example, the client start asking you, "I want something that was not part of the original scope of work." Mm-hmm. So you need to do some changes, but the client will normally will tell you, that's normally what they say, "No, no, that's part of your scope of work." Right. And that's when, you know, start, you know, the debate, whether it's acceptable or not acceptable, and then like that. But this is lump sum. It's on your risk, your pocket, 100%. If you finish the project, you know, under the budget or under this amount of money, it's, it's to you. But if you exceed it, as well, that's a problem. It's your risk, and it's from your pocket.

6:59And exactly the same on the cost reimbursable side. It's based on the, the client will manage you, because you don't have risk. As the contractor, you don't have risk. It's on the client side. So you are representing the client. Everything that you do is you are representing them. It's their money. If you exceed it, the client will pay. Of course, you can, um, you know, tell them why you exceeded the budget or, or whatever required, but it's on their side. So these are the, the different, you know, projects, different type of contracts that we have. And it gotta be, like, very interesting and complex for them, because, I mean, there's currency changes involved, also the raw materials. Exactly. And, you know, like when you go to countries where unions are, like, very strong, and you have to handle that kind of things, so, and, it, it, some of the times it can be, uh, I don't know, some problems like meeting deadlines. So that's, like, a very complex one. The bigger project it is, the more complicated could be, especially during COVID times, you know, when you have to, to finish on time, and especially what type of contract.

8:03You know, if it's a lump sum and you have a deadline and you have a schedule, because all the projects are driven by cost or schedule. Right. Of course, you need to do it, uh, safely, so HSE is always priority one. Then we have quality, then we have cost, and then we have schedule. Sometimes we have, sometimes, depending on the client, you have HSE, quality, schedule, and cost, like, priorities. So you need to go through all these items. But safety is always first, at least, you know, for, for us. It's extremely important. It's the most important thing. Right. And the more, the most, you know, the, the, the more complicated the project are, it's, you know, the timing state, the... It's very complicated to achieve the target in budget, on time. That's the bottom line, to finish it on time, in budget. That happened a couple of times, yes, and, but the majority, the majority of them are, or extended or, you know, uh, over budget. Right. That's the really importance of having a very well detailed on the scope of work, right?

9:10Because, like you just said, like, when you get some changes on the, on the project, and the customer will like to say, "No, that was part of the scope," it's like, okay, let's review it again. And Jeremy, I know you're a top expert on claim management- ... that I think this is, like, one of the, uh, this is your day-to-day work, right? That's right. So- I love claims. So So for people that are not- People will, I mean, think that I'm crazy, but yes, I love claims management. Claims management, it's, you know, what I really like. And can you give us, like, a high level on, on what claim management, uh, means? When we talk about claims, it's a formal disagreement. Okay. So people start thinking about claims like a request. You know, so there's, uh, some misunderstanding sometimes. People use the term claim like request. I'm requesting you. I'm claiming you something. But in reality, a, a claim is a formal disagreement. So in the contract, in the contract terms and conditions especially, you always have, uh, claims and then dispute resolution clauses. At least, that's my, my expertise. Let me put it in this way.

10:13So you should have some mechanisms in your contract how to deal with those claims or those potential disagreements, and how are you gonna settle? The idea is to settle amicably all of them, but you have some mechanisms. And if you cannot settle them in a amicably way, so then you need the dispute resolution to see what are you gonna do, what next avenues. So you have other mechanisms. You can have the technical, or you can have the legal avenue. If you are going be, I mean, with a technical avenue, it's more on the arbitration, okay, which is the more technical avenue. Yeah. Or if you're going to the legal, you go directly to litigation, okay, which is by the law, directly on courts. You know, that's the litigation. So in reality, the projects that we, that I participated through my entire career are more technical, so the dispute resolution, in case that there are no agreements, are on the arbitration side. And there are multiple, you know, institutions, you know, or organizations, and the ones that we normally go is the ICC. Right.

11:17The, and the ICC is one of the most recognized, you know, entities or organization that can help us resolving these claims or potential claims. And of course, it's a entire, you know, different world, because the idea is, once again, to settle, you know, all those potential, you know, claims or disputes. Um, in reality, once you enter there, it's, uh, for me, it's like a black box. So you go there, and when you enter there, it's, you should be kind of certain what can be the, the outcome of the... But it's not in your control anymore. Right. Because all your, uh, your facts or all your, all your information, it depends on other technical team who will evaluate whether you were right or you were not right. Mm-hmm. Yeah. So that's how it works.

12:08And, and do you see, you know, when, when these contracts are coming in, um, you know, obviously there's a percentage of these contracts that end up coming to you and, and they have to, to work with claims. Is there specific verbiage that you think is, like, more risky that, that you see in these contracts? Do you, like, "Oh, you know what? I, I know why this one came to me," or is there any patterns like that that you, that you see? In reality, very interesting question mark. Eh, the, the... At least you have to have some verbiage in the contract. That's number one. Because sometimes there's nothing, there's no clauses in the contract saying about dispute resolution, and that's a big problem. Because the... When you enter into a dispute, it's a matter of interpretation, and you can have an interpretation, I can have a different interpretation. Of course, you can go into your side and I can go to my side, but who, who is right or who is not right, and what's the percentage?

13:02So that's why the, the more detail that you can have, you know, eh, about how to resolve these kind of issues, the better. And that's what we need to emphasize, from my point of view, a little bit more when we prepare contracts, because we don't normally go into the extent how we want to resolve them. There are so many steps in between that if you forgot one portion, it goes into, once again, interpretation, and it's a gray area. So for example, you can do it technically, and there are some aspects as well. What kind of methodology are you gonna use to prove that you are entitled to, and what kind of, you know, entitlement you may have? So everything should be clear in the contract. So how are you... For example, if you are ex- I mean, if, for example, the project got extended, let's say three or four months or five months from the original duration or extension of time.

13:58So how much money you should pay the other party if you impacted them, and how are you gonna pay them? So you need to evaluate something, that we call it the quantum. So what's the quantum and what's the merit? So merit is, are they entitled to? Right. And if they are entitled, how are you gonna compensate it and, you know, and the portion. So for example, it's not 100% your fault. Never it's 100% your fault. Never it's 100%. There's always concurrencies. So that's extremely important, because there's always something that happen in both sides, unless that, of course, you impacted them and it's 100%, and then the complications come. Force majeure, different events, and so on and so forth. COVID, for example, disruptions and loss of productivity, and then the things start getting complicated. Yeah, and can you give us, like, an example on how you make those calculations? Because, like, I, I, I, I just can't imagine.

14:55Like, how can you calculate a fine or a penalty when you don't meet the deadline for a couple of days, or... I love it. Of course. So of course, you, you need to have a detailed schedule, first of all, and you need to define your milestones. So you can have very high level or very in, eh, eh, detail level. If you go into detail level, you have intermediate milestones. So the, the contracting party should have reached different intermediate milestones. Okay, if you don't have intermediate milestones, then you have to check the final milestone. Normally, in my experience, not too many people are very detailed in defining intermediate milestones. What does that mean? So you can put liquidated damages. Let me, let go to the next level. So liquidated damages are in order to, are specifically put in, in the contract to, eh, compensate you for potential damages that you made for extension of time. Okay?

15:56So liquidated damages could be, you know, intermediate milestones. For example, the, let's say the subcontractor reached one intermediate milestone, but they didn't reach the other ones, so you're gonna penalize them partially on the other ones that they did not comply with. Okay? So that's, of course, linked to something that we call it critical path. So of course, in order to delay the project, there's a critical path that has been impacted. The critical path is the short- is the, sorry, the longest path. So you have a se- a sequence of activities that it's the longest activity, and that's what determine your completion date. If your comp- if one of the activities that are part of the critical path are impacted, of course move everything. Hmm. And that's exactly what you evaluate, if the critical path has been impacted or not, and who impacted the critical path. For example, in huge projects, we have engineering, procurement, and construction.

16:57So ima- imagine, let's say, like, the, the main contractor provides the engineering to a subcontractor. The subcontractor provides the material and the equipment. But what if the engineering, the company, delayed the presentation of the engineering drawings, so the construction company cannot start on time? So there is an impact. However, it's getting interesting, because this delay may not necessarily affect the critical path. Why? Because you still have a lot of time until completion. So there could be accelerations- Mm-hmm... okay, to g- to reach the same, or not. If it's too late, unfortunately will impact it. But what if the contracting company does not provide the materials on time, because COVID, for example? So they impact it, you see. There has been an impact from the engineering side for not providing the drawings on time, but there has been as well a material impact, you see. So there's concurrency.

18:00So that's the reason why it's so important to have... What I work with is a forensic schedule analyst. The forensic schedule analyst is a guy who can determine who impacted what during the critical path, and what is exactly the percentage that has been impacted and why, and we call it three elements. The excusable, compensable- Excusable compensable, meaning that, yeah, we impacted them. So we impacted them granting time and compensation. The excusable non-compensable, meaning that there has been some concurrencies, so both parties impacted them, I mean, themself. So okay, you allow them to extension of time, but no compensation. And the third one is the inexcusable portion. Inexcusable is that, for example, the subcontracted impacted 100%.

18:52So for those ones, inexcusable is, for example, liquidated damages, because it's on the other side, and that's how it works. But it's- It's a lot of details that are involved. Yes. And how can you envision technology being a partner there? Like, how, how can you use technology to leverage all those calculation? Because, I mean, right now, with the world to see, y- c- you can see that all the biggest CLMs are here. And, uh, but how would you envision technology helping you with some of the automation software? There are multiple software. From the schedule point of view, you have Primavera, 6, you saw P6, of course, and this is an amazing software. But it depends on the inputs that you... It's exactly, all systems are exactly the same. You know, it depends on the data that you introduce to the system. Correct. So, and it's the analysis that you perform. But there, in that particular case, for example, schedule is the, the one that drive the results. Now, this is just only the portion.

19:54Imagine that from four months extension of time, you determine that you need to compensate it one and a half months. Mm-hmm. Now, the second portion is how much money are you gonna pay them? Yeah. Okay? Because at that point in time, it depends as well. You have to slow down your terms and conditions. Normally, contractors want to get 100% the cost. And there was a no, because a- according to my analysis, you are, we're gonna pay you, for example, one and a half months. But what about the value? And the value, it depends. Normally, it's damages, because there are some damages, and in some cases, it depends on the cost. What's the cost that you impacted them? So there's another concept. There is a different between the cost and the price. The price include contingencies and all kind of items, but the cost is the cost. It's, uh, really what costing. So no profits and all of that. Mm. Wow.

20:55And, and, you know, it's, it's just crazy to hear how, how much is involved in these processes and, and, you know, needing a very flexible piece of software to be able to handle- Right... all of these, these different, um, action items that need to take place for things to hopefully flow properly. But, you know, in your case, right, these, there's, there's issues that come up, and then they need to be resolved. Exactly. Um, and, and, you know, getting an understanding of how technology can be involved in those processes, um, is, is very eye-opening. And, and, you know, this has definitely been one of our, our- Everything that I have seen so far- Yeah... it's mainly oriented to how to design your contract- Mm... document. But that's part of the pre-award. That's not management per se. Right. Everything that I just discussed with you is basically management. Mm-hmm. So if we are talking about the pre-award, yes, there are multiple software that can help you preparing the, the optimized contract, lower risk, and so on and so forth.

21:53But really, I have not seen yet to that level, you know, the management side and going further. Because when we talk about management, the post-award, we are talking about change management. We are talking about invoicing. We are about, you know, interconnecting with other areas, SAP and other software that each company may have. And we are talking about, yeah, claims management as well, which is change. So of course, if you settle and resolve this issue with this contractor or subcontractor, then it becomes a change in your contract because you settle. If you cannot settle, it goes into the dispute resolution, and the lawyers will get involved, and I mean, God forbid. Sorry. But the idea is, especially in huge projects, especially in huge projects, the idea is to resolve all the issues before going there, because in my experience, it's better to have a bad settlement than a good trial. Mm-hmm. Right. It's super expensive for both parties. Right. Right.

23:02Yeah, and it, you know, I, I think a lot of these tools, um, are, are starting to focus mo- more on the post-award, and I think there are a couple of, of them here that do do a, a good job. Um, but I think that that is something where a lot of the other tools need to catch up to, to where they are. Yeah. You see, when you, when you started talking about processes, there are so many. Right. In my, in my mind, it depends how far you wanna go, because you can do just only one process for the entire pre-award and one big process for the post-award, but it depends how complex is your project, how, or, or your industry or the, the work that you are doing. Maybe it does not require so many intermediate processes, or maybe it does, because there are multiple stakeholders involved in each individual process, and these processes needs to be interlinked to achieve the... So maybe you have different stakeholders in different phases, so that's a reason why to do just only one big process. It's by far more complicated, the individual processes that will be interconnected later.

24:04So yeah, pre-award, and then post-award. Right. No, that's been great, Gerry. I think we learned a lot. There's a lot of details that I, I had no idea- ... that they even existed. Yeah. Right? So there was a great, very, uh, high level on, understanding and a lot of, of the details on what's, like, post-award and how you have to even manage contracts. So Gerry, it's been a pleasure to have you on the show. And if folks would like to connect with you, what would be the best place? Just send me an email. No, it, it's my, it's been my pleasure, guys. Thank you so very much for this interview. Hopefully we can do it again. Yeah. And by all means, any time that you want. All right. Thanks, Gerry. That is it. Thanks, Gerry.