Project Practitioners > Hidden Contracts

Hidden Contracts

By Morley Selver, P.Eng IPMA B

They Want How Much?

We were in the process of buying the electrical equipment for a new plant when the electrical engineer came in with the bad news. They had been told by the electric utility the project would have to buy the transformer from the utility company. We could understand hooking up the transformer, but to actually have to buy the transformer was crazy, which we told him in no uncertain terms! The transformer we needed cost $750,000 from our preferred supplier, while the utility wanted $1,250,000 for basically the same thing. They put a few bells and whistles on it but the cheaper version would work just as well. Was there any way around this? Apparently not. It was the law in this jurisdiction. So just like we were, $500,000 over budget.  Unfortunately this scenario is all too familiar and is just one example of what I call “hidden contracts”. These are contracts your company has with outside suppliers / agencies / government bodies that you are not usually aware of until the bill comes in.

 Utilities are just one of those hidden contracts. Whenever you are tying in to a government service, such as water, there are strict standards that have to be followed as well as a cost associated with them. You always have to check and see who has to do the actual work, your contractor or the city employees. If the city has to do it, you now have schedule and coordination issues. There are specifications you will need to follow and they will be different than the industrial ones you are using. In some cases your engineers may not understand what they are. The utilities you are typically associated with are power, potable water, sewer, natural gas, and fire water. Always be prepared to question any utility hook ups you require as the cost and schedule can have an important affect on your project.

18 Months, Are You Kidding Me?

Another hidden contract is permits. It seems that no matter how hard you try there are more permits than you have allowed for. There is nothing you can do about the costs, your project has to cover them. There always seems to be confusion as to what is required as the different stakeholders have their own interpretations of the regulation. As with most government regulations they are written in an ambiguous manner and are open to interpretation. 

We were looking at adding a fire pump out on a dock in the ocean and we required 12 permits. One of them was an environmental permit and the schedule was 18 months to get it. One other permit prohibited the dumping of fresh water into the ocean! What did they think happened to all the fresh water from the rivers flowing into the ocean? There are times when the permitting process is just not worth the cost nor the aggravation. In this case the fire pump project did not proceed.

 I’ve Been Working On The Railroad

Sometimes the requirements do not come from a government organization but a private company. If you have to work with the railways you will have to follow their requirements and seek their permission in order to work on or near their tracks /right of way. Even if your company owns the track in your plant, if you need the railway to bring their locomotives on your site, the tracks have to be up to their standards. Their requirements are going to be a lot stricter than what you are used to. 

 You Need A Permit For That?

As you are probably aware, permits are not standard across jurisdictions. Every province, state, country have their own permits and it is up to you to find out what is required. This means you will have to depend on local personnel to help in identifying what permits are required. In California we had to bring in the building inspector to count the screws in the drywall before we could tape and mud the joints. I had never heard of it before and if my on site structural inspector had not been aware of it we would have had to do a lot of rework.

Here are some permits that I have had to get at one time or another. Some of these you are familiar with and others probably not. Your project has to have funds to cover the cost of all the permits so you need a handle on what permits are required. You have to know what permits are needed before you can start construction work and what permits need to be signed off or obtained to startup equipment or occupy a building.

  • Building permits; no problem with these. You pay your money up front based on what you know at the time and adjust it later when you know the true cost.
  • environmental permits; there are all kinds and schedule is usually the bigger concern than cost. Permits that can get expensive are ones that need environmental modeling or hearings.
  • electrical permits; there are the usual electrical inspections required as the work progresses, however in some places there are additional requirements. One client requires UL / CSA stamps on anything brought into the plant. This can sometimes require on site UL certification. In Washington state they require a Gold Seal on any building brought into the state. This is a seal certifying that anything hidden in the walls is code compliant. This requires a Washington state inspector to travel to the manufacturers plant to inspect the building before the walls are sealed up.
  • transportation permits; in most cases the transportation company will get any transportation permits to ship a load to you. There is the odd time when you may have to get a permit to cross a highway but these are out of the norm.
  • police & fire departments; in California we actually had to pay a permit fee to get police and fire protection. This was a first for me and I have not come across it since.
  • radio licenses for 2 way radios; most plant sites use 2 way radios for communication. Your plant actually pays a fee for the radio channels. This is okay as long as you are on your plant site. If you have to set up another location where you need different channels you may have to pay a fee to get another frequency.
  • boilers branch approvals; typically with pressure piping and pressure vessels, approval from the Boilers Branch is required. This involves sending drawings for approval and could include a meeting and of course a fee. 
  • Department Of Labour approvals; in some provinces you are required to obtain approval of your structural drawings from the department of labour. This involves sending drawings, having a meeting and a fee.
  • fire marshal; for buildings, plans need to be sent to the fire marshall for approval along with the fee. This could be more of a schedule issue than cost. I installed a thermal oil heating system in a plant and had to get fire marshall approval. Just by chance, I got the fire marshall who had previously approved a thermal oil system at another plant, and the plant burnt down due to the thermal oil. Needless to say, he was not happy when we showed up with our plans. We had to hire a consultant to work with him to get it approved. It took about six months to get his approval.

 There may be other permits that I haven’t mentioned, but the point I’m trying to make is  ask questions to find out exactly what permits are required as each jurisdiction has their own permit requirements.

 I Didn’t Know That!

A third hidden contract you have to be aware of is demurrage. Whenever something is shipped to you, no matter how it comes, you are basically renting a piece of equipment. As part of the rental agreement, you have a certain amount of ‘free time’ to unload the item(s) from the equipment. After this ‘free time’, you will be charged a hourly or daily fee called demurrage. This is a charge for the late return of a piece of equipment supplied by one party to another for the purpose of carrying a cargo This cost is part of all shipping agreements your procurement group makes with the shipper. You have to be aware of what your ‘free time’ is, what the load is, when will it arrive, and how you will get it off. Typically for big loads you plan well in advance and advise the shipper when you want it to arrive. Otherwise, you will get a nice big demurrage bill. The same applies if you are shipping something and the cargo carrier has to wait for you to load the vehicle. Some ships can have a demurrage cost of $85,000 per day whether loading or off loading.

 Plan Well Or You Will Be Surprised!

You have to be vigilant when dealing with utilities, government bodies (permits) and shipping as you don’t want a costly surprise. Its a matter of asking questions in the planning stage to make sure you have your costs covered. 


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