Pipeline Construction Contract Dispute
The following is an excerpt from an Interface Consulting work product issued for use in litigation, arbitration, or mediation (dispute resolution). Names, dates, and other information has been modified for client confidentiality purposes.
Texas Coast Pipeline Services v. Waterford Onshore Litigation
On October 17, 2008, Waterford Onshore, LLC (Waterford), entered into two (2) contracts with Texas Coast Pipeline Services, Inc. (TCPS), to construct a pipeline from Hamptonville, Louisiana, to Galveston Bay, Texas, known as the Burgundy Pipeline Project. One (1) contract covered work performed in Louisiana while the second contract covered work performed in Texas....
The contract pricing was based on reimbursable costs plus an Equipment Charge and Contractor’s Fee, along with a risk sharing arrangement based on a target price concept…as summarized in the following table.
Total Initial Target Price – Basis: Actual Costs Plus Contractor’s Fee
Additionally, the contract includes a risk sharing procedure (Article 3.5 of the Louisiana contract)….The bonus/penalty provision depended on how the actual costs compared to the Updated Target Cost. As shown in the previous excerpt, TCPS could receive a bonus if the actual costs were less than the Updated Target Cost. Likewise, TCPS would share in the overruns on a 50/50 basis up to 25% of the Contractor’s Fee should the actual costs exceed the Updated Target Cost. The following graphic illustrates how the bonus/penalty provision works.
Contract Bonus/Penalty Provision
Exhibit C to the contract contained the contract schedule, which included all the work associated with.... It is our understanding that the Louisiana contract scope of work was approximately five (5) months late.
TCPS has been paid all Reimbursable Costs under the contract. It is our understanding that the primary dispute relates to adjustments to the Target Price for mats and alleged change orders.
I.B. The Dispute
On June 4, 2010, TCPS submitted its “Final Invoice” to Waterford claiming $45,073,106.24, which includes prior invoices. TCPS’s Final Invoice is based on proposed Target Price adjustments to the following items:
Quantity increases/decreases over the initial contract estimate
Interface Consulting has been asked to evaluate TCPS’s major Target Price adjustments including the construction mats, Equipment Charge, and Contractor’s Fee. Interface Consulting addresses these issues in the “Summary of Opinions” and “Discussion of Opinions” sections of this report.
On November 12, 2010, TCPS filed its Amended Statement of Claim. In its legal pleading, TCPS incorporated its June 4, 2010, Final Invoice and the amounts included in that document....In its Final Invoice and Amended Statement of Claim, TCPS included the following primary adjustments to the Target Price that we have been asked to address.
TCPS’s Major Adjustments to Target Price
In addition to the three (3) major adjustments to the Target Cost outlined in the previous table, TCPS provided a 4-page spreadsheet attached to its Final Invoice which purports to adjust the Target Cost based on the actual quantities installed....
Based on these adjustments as well as a number of others, TCPS claims an adjusted final Target Price and identifies its Total Actual Costs. Based on its Actual Costs, TCPS has adjusted its Contractor’s Equipment Charge and its Fixed Contractor’s Fee.
TCPS’s June 4, 2010, Final Invoice also claims an adjustment in the Equipment Charge...by taking 63.33% of the actual labor cost plus a reclassification of costs from the Texas contract. TCPS adjusted the fixed Contractor’s Fee…by taking 11.92% of the Actual Reimbursable Costs.
The following table summarizes the contract initial Target Price, TCPS’s June 4, 2010, adjustments to the Target Price, and the alleged bonus it is due from Waterford.
Summary of the Initial Target Price and TCPS’s Proposed Adjusted Target Price
Based on these TCPS adjustments, TCPS is seeking a bonus payment of…; the difference is $31,990,291.
TCPS arrived at the final amount due from Waterford as follows. This amount is based on TCPS’s proposed Target Price adjustments as well as a $15-million bonus for TCPS’s alleged actual cost underruns of the adjusted Target Cost.
II. Summary of Opinions
Interface Consulting has used its extensive experience in construction management, knowledge of the engineering and constructing of pipelines, and education to perform our evaluation and analysis of the issues discussed in this opinion. Our industry experience as engineers, contractors, and owners, as well as our experience and knowledge of construction management and claims, has served us in performing this work and providing this Statement of Opinion.
Introduction - Mats
Construction mats are used by contractors to aid in the construction process. The construction mats are laid in certain areas along the pipeline right-of-way (ROW) to aid the contractor in moving its construction equipment along the ROW and performing its work. The use of construction mats is typical in the pipeline industry, especially in areas of the country that contain wetlands and/or significant amounts of rainfall. Mats provide a more stable platform for the contractor’s equipment and personnel to work. The following pictures show mats on a construction project.
(for illustrative purposes only)
Construction mats can be and are sometimes used multiple times on a construction project....
Contract Reimbursable Costs - Mats
Waterford has paid TCPS all Reimbursable Costs associated with either purchasing the mats or handling the mats on the project. Thus, there is no dispute as to the Reimbursable Costs associated with the mats.
Contract Target Cost Adjustment - Mats
The Waterford/TCPS contract addresses construction mats in numerous places. Exhibit B-3 to the contract addresses mats and their inclusion in the “Wetland Lay Price” adder.... It appears that there is no dispute between the parties that the Wetland Lay Price includes the handling and use of mats....
Additionally, there is a unit price for mats included in the contract.... Exhibit B-3 to the contract includes the estimated quantity per spread as well as the purchase price of the mats. These mats are included in the contract’s Initial Target Price.
Based on our pipeline industry experience, the purchase price of the construction mats in question typically ranges from $400 to $500 per mat depending on the size of the mat, availability, and any transportation costs. Thus, the price included in Exhibit B-3 is consistent with the purchase price for mats; therefore, it is Interface Consulting’s opinion that the mat price in Exhibit B-3 is associated with purchasing the mat, not for handling the mat each time it is moved.
TCPS has taken the position that each time it handles mats on the ROW, TCPS is entitled to a Target Price adjustment of $442.48. In Interface Consulting’s opinion, TCPS’s position is erroneous, and not supported by the contract as follows:
Pursuant to Article 7.1.3 of the contract, TCPS did not obtain a change order prior to using the additional mats.
The use of additional mats by TCPS was not approved by a change order by Waterford as required by the contract.
TCPS decided to change its welding method, and any additional mat requirements due to this methodology change are TCPS’s responsibility.
The price in Exhibit B-3 is not supported by TCPS’s actual cost to handle the mats.
The price in Exhibit B-3 is consistent with the purchase price of a construction mat.
Opinion – Reimbursable Costs
TCPS has been paid for all Reimbursable Costs, including Reimbursable Costs associated with purchasing and handling mats on the project.
Opinion – Mat Target Price Adjustments
- Mats - Target Cost Adjustments:
o TCPS did not follow the contractual requirements for changes to quantities or out-of-scope work.
Construction contracts contain change order provisions and procedures, such as the one in the Waterford/TCPS contract, to allow the owner and contractor to discuss and agree on the change prior to expending additional money. This allows each party the opportunity to minimize its exposure and mitigate potential costs before they are expended for changes.
Even if it is determined that the pricing included in Exhibit B-3 is valid for handling mats, TCPS did not adhere to the contract change order provision as outlined in Article 7.3.
o We have not seen any evidence that Waterford approved the charging of the unit price for the handling of mats.
o The unit price for the mats in contract Exhibit B-3 is associated with purchasing a mat, not handling a mat.
o There is no unit price in the contract for handling mats.
o TCPS’s decision to change the welding procedure may have required TCPS to use additional mats for which TCPS would bear the responsibility.
It is our understanding that TCPS requested a deviation from Specification 8.3 and that it be allowed to use mechanized/automatic welding. As such, TCPS should bear the cost and risk to the Target Price should TCPS’s decision to use automatic welding result in increased costs for the project.
Automatic welding typically requires more machinery support than manual welding. Because of this additional support equipment, automatic welding may have required more mats than manual welding would have.
o The Wetlands Lay Price includes the supply or purchase and handling of the mats.
o It is inappropriate for TCPS to include $7,740,200 for the value of the mats supplied free of charge to TCPS in its Target Price adjustment.
o It is Interface Consulting’s opinion that TCPS is not entitled to an adjustment to the Target Cost for purchasing or handling mats.
o The purchase of mats is a material item and does not require equipment, and thus, there should be no adjustment to the Equipment Charge.
o The mat handling was performed almost exclusively by TCPS’s subcontractor, Southeast Clearing, Inc. (SCI). SCI utilized its own equipment, and as such, TCPS did not require additional equipment.
o There is no contractual support for TCPS’s calculation of the increased Equipment Charge. Furthermore, there is no contractual support for TCPS’s use of 63.33% of actual costs in calculating a Target Price adjustment.
o There should be no adjustment to the Equipment Charge for additional mat handling except where previously approved in a change order.
o There was no agreement between the parties....
o TCPS’s proposal stated that the Contractor’s Fee was fixed.
o The basis of TCPS’s calculation (11.92% of the Reimbursable Costs) of the increase in the Contractor’s Fee is not supported by the contract.
o There should be no adjustment to the Contractor’s Fee except where previously approved in a change order.
Alternative Target Price Adjustments
If it is determined that TCPS is entitled to an adjustment to the Target Price for the purchasing and handling mats, Interface Consulting has developed an alternative mat pricing model.
Target Cost Adjustments:
o The contract includes a unit price for purchasing mats in Exhibit B-3. The Target Cost should be adjusted at the unit price in Exhibit B-3 for TCPS’s purchase of additional mats.
o The Wetlands Lay Price includes the supply or purchase and handling of the mats.
o The contract does not include pricing for handling mats outside of the wetlands.
o As the contract does not have a unit rate for handling mats, the best measure of pricing is the actual costs. If there is to be any adjustment to the Target Cost for the movement of a mat, it is Interface Consulting’s opinion that the Target Cost should be adjusted based on the actual costs associated with mat handling.
TCPS entered into a subcontract with SCI on November 19, 2008, to handle the mats on the project. The TCPS/SCI subcontract contained pricing for hauling and setting mats at $48.00 each, as shown in the following document scan. The TCPS/SCI contract also included other similar mat pricing, in the same range, for hauling mats extended distances or only setting mats.
Based on SCI’s actual invoices to TCPS, TCPS incurred actual subcontractor costs of $18,382,623.50 to handle all the construction mats. TCPS included $1,877,712.00 in the Initial Target Price to handle the mats. When this amount is deducted from the actual handling costs incurred, the total is $16,504,911.50 for the handling of the additional mats. A significant portion of the $16,504,911.50 includes mats used in the wetlands. For this comparison and to be conservative, Interface Consulting has not credited any amount for the wetlands, although the wetlands price included the handling of mats.
While TCPS had actual costs of…for handling the additional mats, it is requesting the Target Cost to be increased by 4.7 times the actual cost for the additional mat handling, as shown in the following graphic.
Comparison of TCPS’s Target Price Adjustment
Versus Its Actual Costs – Mat Handling
This type of imbalance between the actual cost and Target Cost adjustment is not envisioned by the contract, as it creates a situation where TCPS will benefit beyond the amount contemplated in the contract.
o There should be no adjustment to the Equipment Charge for purchasing additional mats or handling mats.
o There has been no agreement of the parties, and thus, there should be no adjustment to the Contractor’s Fee unless agreed to by the parties.
The Waterford/TCPS contract does not contain a unit price for a move-around.
In the absence of a contract unit price for move-arounds, another method for calculating the cost of a move-around is analyzing the progress of the crew that has to move around. The particular crew’s progress is measured prior to, during, and after the move-around to understand the actual impact on the crew’s progress caused by the move-around.
Thus, without an agreed upon contract unit price per move-around, the progress method of evaluation is appropriate.
Alternative Construction Mat Pricing
If it is determined that TCPS is entitled to an adjustment to the Target Cost for purchasing and handling mats, Interface Consulting has developed an alternative mat pricing model as follows:
Pricing – Construction Mats Plus Other Charges and Fees
If TCPS is Entitled to an Adjustment of the Target Price
III. Discussion of Opinions
III.A. Construction Mats – Actual Reimbursable Costs
III.B. Construction Mats – Contract Pricing
III.C. Construction Mats – Pricing Conclusion
III.D. Move-Around Pricing
III.E. Bid/Contract Documentation