Case Study: 30000 Frigidaire Neither The Contractor Nor The ✓ Solved

Case Study 30000 Frigidaireneither The Contractor Nor The Owner

Case Study: $30,000 Frigidaire Neither the contractor nor the owner had any idea that such a small issue could snowball into an incident of such proportions. At first, it did not look as though such a small issue could grow into a situation of uncontrolled words and behaviors, and almost bring the whole project to a halt. And, such a small issue was called in the contract specification, “special cooling device.” Its cost of $30,000 in a half-a-billion-dollar international project was almost nothing, but as the experienced know, the poison comes in small bottles. According to the contract procedure, every piece of the hard-special cooling device ware that the contractor delivered for a project had to be physically accepted and taken in the property by the owner’s committee of experts.

This process is called physical inspection and acceptance. This is a critical incident designed with the specific purposes of introducing a type of contract and the contract situation that seems to have both sides to react in a way as their contractual rights are breached. More specifically, the contract type is the turn-key contract that is not much used in the United States but is appropriate for U.S. companies transferring technology to less developed countries. The Turn-Key Contract: The contractor is a $1 billion, a European company that makes a living building industrial plants, like the one in this critical incident, mostly using turn-key contacts. The owner is a state-owned manufacturer from the Middle East.

To oblige with the contract, the contractor’s engineers submitted what they called a “special cooling device.” When the owner’s engineers saw it, it is fair to say that they looked astonished. Also, there was rather unusual behavior. It more resembled some secret ritual than the work of an engineering committee. This was what the owner’s engineers did: They spent about 10 minutes going around it, looking at it from different angles with intense curiosity, opening the door of it, putting their heads inside, making different facial grimaces, whispering to each other, all the time not asking any questions. Finally, they said they would be back in 20 minutes, without mentioning what the problem was, for it was obvious that the whole situation smelled of a problem.

After the 20 minutes they came back with a verdict in writing—the owner’s committee was presented with an offer of an ordinary Frigidaire, asserting that it was a special cooling device, and the contract sum was to be reduced by $29,600, or to be determined on the level of the price of an average Frigidaire. The heated debate began. Everyone on both sides formed an opinion and shared it publicly and unselfishly. It appeared as though no one had control of the situation; at least neither management side did. In uncontrolled discourse, words like “the contractor is dishonest,” and “the contractor is ripping us off” on the owner’s side and “the owner does not understand the contract” on the contractor’s side began to circulate.

The conflict bubble was close to bursting. This was a “turnkey” contract that was never really understood by anyone on the site. Basically, the essence of the contract is “function of the entirety.” That means that the contractor guarantees that the plant which is the subject of the contract shall function. It also means if the contractor “forgot” to include in the contract specification an item which is necessary for the plant’s function of the entirety, the contractor shall deliver the missing item free of charge. Moreover, the contractor is to “use and choose” subcontractors in a coordinated way in order to realize the function.

For both of the essentials - the entirety of function and coordination of subs—the contractor is entitled to a fee between 20 and 30 percent of the contract sum. Regarding the dispute about the special cooling device, the owner’s engineers thought that the contractor’s delivery of a Frigidaire for $30,000 was a huge rip-off, and so reducing the contract specification item to the Frigidaire price would be the only fair outcome. They did not recognize that the contract was the turn-key. The contactor’s opinion, of course, is based on their understanding of the meaning of the contract type. They based it on a recent example of delivering, free of charge, an overhead crane, which was not part of the contract specification.

Namely, the contractor established the need for the crane in the process and delivered it to secure the function of the entirety. The contractor presumed that the item figure of $30,000 for the special cooling device was proper. The device was not a typical Frigidaire one could buy anywhere; it was a special industrial Frigidaire bought in Germany from a manufacturer of specialty cooling equipment. For that reason, the contractor was against the reduction of the item contract price. As there was no change in the total contract sum when the contractor delivered any item free of charge to secure the entirety function, there should be no change of the total contract sum in the case of typos or similar instances.

As the contractor held his ground, the owner contacted his headquarters, specifically, the corporate contract department, with the question of how to proceed in this case. To the owner’s surprise, he was told to leave the issue to the contract department, which is responsible for cases like this. Questions: 1. What are the major traits of turn-key type contracts? 2. What are the major traits of unit type contracts? 3. Contrast the attributes of turn-key type contracts with those of unit type contracts. 4. Is the owner right in demanding the price reduction of the $30,000 Frigidaire? 5. Is the contractor right in refusing the price reduction of the $30,000 Frigidaire?

Paper For Above Instructions

The construction industry often involves complex contractual agreements which set forth the obligations and rights of the parties involved. Among the various types of contracts, the turn-key contract plays a significant role, particularly in international projects. This essay aims to explore the major traits of turn-key contracts, the significant characteristics of unit type contracts, and a comparative analysis between the two, culminating in an examination of the specific case involving the $30,000 Frigidaire.

Turn-Key Contracts

Turn-key contracts are designed to provide a complete facility that is operational upon completion. The following are some major traits of turn-key contracts:

• Fixed Price: Typically, turn-key contracts operate on a fixed price basis. This means the contractor must complete the project within the agreed-upon price, regardless of any additional costs incurred.
• Comprehensive Responsibility: The contractor assumes full responsibility for the project, from design to execution, and even after construction, ensuring that the completed project meets the specified functional requirements.
• Risk Transfer: The risk is significantly transferred from the owner to the contractor. This attaches the burden of managing unforeseen circumstances to the contractor who must deliver a functioning facility.
• Use of Subcontractors: Contractors typically utilize subcontractors to fulfill specialized tasks. However, it remains their responsibility to ensure that all elements integrate smoothly within the completed project.

Unit Type Contracts

In contrast, unit type contracts are a more traditional method wherein projects are divided into specific units of work. Key traits include:

• Unit Pricing: Payment is based on an agreed price per unit of work completed, allowing for flexibility in overall project costs.
• Owner Oversight: The owner often retains greater oversight and control over the project, as they can review and approve individual units before payment.
• Incremental Risk: The risk remains more balanced between the contractor and the owner, as costs may be incurred incrementally and billed accordingly.
• Flexibility in Design: Changes can be implemented during the project based on evolving requirements without necessarily redoing the entire project.

Contrasting Turn-Key and Unit Type Contracts

The differences between turn-key and unit type contracts are significant, particularly regarding pricing structure, responsibility, and risk management. Turn-key contracts are characterized by a fixed price and comprehensive contractor responsibility, which makes them ideal for projects where the owner desires minimal involvement. Conversely, unit type contracts promote owner involvement and risk-sharing; they allow for adjustments and changes throughout the project as owners review work on a unit basis.

Assessment of the $30,000 Frigidaire Case

In the incident concerning the $30,000 Frigidaire, the contractor provided what they termed a “special cooling device” which the owner’s engineers effectively classified as an ordinary Frigidaire, prompting a request for a reduction in price. The owner’s standpoint arguably lacks awareness of the specialized nature of the cooling device, as it was not simply an ordinary appliance but rather an industrial-grade equipment designed for a specific function within the project. Therefore, the owner's demand for price reduction may not be justified, especially under the terms of the turn-key contract, which mandates that the contractor ensure all necessary components are delivered.

Conversely, the contractor’s refusal to lower the price appears justifiable considering that the cooling device was explicitly included in the contract, aimed at fulfilling the plant's operational efficiency. Furthermore, the historical precedent of the contractor previously providing an overhead crane at no additional cost demonstrates a commitment to fulfilling the entirety of the contract's functional requirements.

Conclusion

The circumstances of the $30,000 Frigidaire incident underline the complexities of construction contracts. Understanding the distinctions between turn-key and unit type contracts is crucial for both owners and contractors to navigate their rights and obligations effectively. In this case, both parties exhibited misunderstandings rooted in the contract type, highlighting the need for clear communication and agreement on contract specifications and project management.

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