Following on from the article on delay analysis in last month’s edition of Gulf Construction, ADAM WEBSTER explains how to manage the risk of delay through proper contractual and practical management in the region’s fast-track construction industry.

The construction boom in the Middle East has reached such proportions in recent years that the construction industry cannot cope with the number of projects that are being tendered out.

Shortages in equipment, materials and resources, and a lack of skilled construction executives mean that time overruns are commonplace.
Having a risk management strategy in place, which uses both contractual and practical measures to reduce the likelihood of delays, is therefore essential for all construction projects, not least in the UAE.

The risk of delay
Delay means different things to different parties. From the outset of a project, therefore, it is important to identify the problems that the risk of delay creates for the different parties involved.
If a building cannot be used when intended, all manner of problems are potentially created for the client.  Realisation of an income from the asset may be postponed, alternative accommodation costs may be incurred, financing costs may increase, and depending upon how risk is allocated in the contract and the nature of the delay events, the client may be faced with claims from the contractor.
For a contractor, a delay means an increase in overheads, potential liabilities to the supply chain and a liability for delay damages to the client if such a provision has been included in the contract.  A risk of insolvency may also be created by cash flow problems resulting from a tie up of resources and delayed recovery of payments.
Managing these delay risks is, therefore, something that must be considered by all parties involved. Is it best to cater for risk in the contract, employ practical measures to avoid it or use a combination of the two?

Contractual management
Contracts can be a key tool in managing the risks of delay in that the financial risks can be distributed between the parties.
This may be achieved by including provisions that the parties agree to, a period free from delay damages, apportioning financial liability by agreeing a level of liquidated damages or stipulating that certain events only entitle a party to time, not to money.  Contractual obligations may be placed on programming the works, services and procurement including sanctions for failure to meet such obligations.  The contract may also create powers to accelerate the work or terminate the contract for prolonged delay.

Practical management
Clients should be realistic from the outset as to the time the project will take to reach completion, allowing enough time for the design to be fully completed and checked before work or procurement begins. An assessment of risk should be carried out and contingencies added as appropriate.
The employment of a project manager is essential to ensure that a detailed record of progress is maintained and, in particular, to ensure that the real causes of delay and their effects are documented.
Contractors should also be realistic and allow for the usual contingencies such as plant breakdowns, bad weather and de-snagging.  The site team, key subcontractors and consultants should be involved early on, as often their input is obtained too late when a contractual commitment has already been assumed.
Time should be taken by contractors to understand how the risk for delay is allocated in the contract and the notices that are required therein.  Although a party may not contractually bear the delay risk of an event it could still lose its entitlement because it has failed to serve the required notices within a set period of time or because it failed to keep adequate records to prove its entitlement.  As such, contractual management of delay risk can easily be unravelled by ignoring notice requirements or by maintaining records poorly.

Case in point
The English case of Great Eastern Hotel Company Limited Vs John Laing Construction Limited (2005) provides a recent illustration of the need for management of the risk of delay through the terms of the contract and also by practical management.
Laing was appointed to redevelop the hotel on the basis that it would take 35 weeks for a budget of £34.8 million.  In the end, the programme was delayed by 491/2 weeks and the project ended up costing some £61 million.
Laing drew up a master programme in August 1997.  The first updated master programme was issued by Laing in October 1997 showing an eigh-week critical delay. The updated master programme issued by Laing in March 1998 showed the critical activity as complete.  In fact, it was still 17 weeks late with the corresponding effect on the completion date.
In December 1998, Laing tabled a further programme, in which it purported to recover delay to an overall four weeks.  The delay reported in that programme was 20 weeks when, in fact, the actual delay was 33 weeks.  In short, the effect of this programme was that Laing attempted to recover 29 weeks delay in a period nine months.
The delay risk under the contract was effectively placed upon Laing by reason of its management, control, administration and planning obligations and its obligation to report on the progress of the works.  Judge Wilcox identified many causes of delay and criticised the failure to update the programme and to accurately report progress.
The points to be noted from the judgment in Great Eastern Hotel Vs Laing are:
• The detail of each and every contract needs to be carefully considered and the risk allocation determined by reference to all the terms.  In this case, the allocation of risks at the outset was changed by reason of the obligation upon Laing to programme the works and to report on progress;
• There is a paramount need for accuracy in the programme;
• There client must be given accurate information of progress and delay, so that delay can be properly managed;
• Where the project has already suffered delay and disruption, the failure to update the programme accurately will often result in an inability to manage the risk of delay spiralling further out of control; and
• Finally, unless the updated programme shows accurately the current position, it cannot reliably be used as basis for any future claim.
The risk of delay is unfortunately unavoidable.  If contracts are used effectively, however, they can be used to manage the risk provided that they are read, understood and complied with, and not simply put in a drawer until a dispute has arisen.

Gulf Construction

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