Delay tactics

25 April 2008

Around 40% of Projects in the UK over ran their original contract period, according to a recent study. However, the UK is not alone and the risk of delays to construction and engineering projects throughout Europe is common and the results are serious.

Having a risk management strategy in place, which uses both contractual and practical methods, to reduce the potential for delays is essential for all construction projects. The first step to developing a risk management strategy is to identify the practical problems that the risk of delay creates for each of the parties involved in the project.

For the owner or client of the project, a late completion date means that the asset cannot be used when intended, which might result in alternative accommodation costs or a delay in receiving income. The actual cost of funding the project will also increase and, depending on the contractual allocation of risk, the cost of construction may also rise.

For the contractor, and also any sub-contractors, delays mean an increase in time based costs, such as site staff and facilities, and potential liabilities to the supply chain. There may also be delay damages to be paid to the project's owner. Also the slower recovery of value and an inability to recover overheads and profits from resources tied up in the project creates a strong risk of cash flow induced insolvency.

Time based costs are also likely to increase for the project's consultants if delays are encountered. If the consultant is responsible for the delay, then there may be potential liabilities payable to both the project owner and contractor.

Contractual Management

Properly drafted contracts can manage the risk of delay in several different ways. The liability for the financial consequences of delay can be transferred to another party, for example to the contractor, a novated consultant or to an insurer in the case of a force majeure event.

Contracts can also be used to split the risk of delay. Terms can be applied to apportion or cap financial liability with other parties, which give a limited period free of delay damages, or that certain events entitle a party to more time but not to money. The contract can also be used to distribute the risk of different factors that cause delay, such as legislation changes or bad weather, among the parties by extension of time provisions.

The contract can also establish powers to manage the risk of delay, including powers to speed up the work or to terminate the contract because of delays to enable others to complete the work.

Practical Management

In practice, the contractual management of delay risk can be undone by contractual requirement for delay notices and/or records not being met. In many cases a party may lose its entitlement not to bear the risk of delay through failure to serve a notification of delay within a set period or not keeping adequate records to prove how the delay was caused.

In addition to contractual terms, a practical approach to the construction process can help avoid the risk of delays.

Project owners need to be realistic from the outset about how long it will take to reach completion and this amount of time needs to be planned forward from the start date. Imposing an artificial completion date and fitting design, procurement and construction into the time available may not allow sufficient time for the design to be fully checked before work on site gets underway.

Clients should also place contractual obligations on programming all works, services and procurement and impose sanction for failure to meet these obligations. Employing a project manager to record progress in detail and, in particular, document the real causes of delay and its effects is also vital.

There are also a number of ways in which contractors can manage the risk of delays more effectively. First, they need to be realistic during the tender stage and not assume that the contract period is achievable. Involving the site team - key subcontractors and consultants - is also essential during the tender stage. Often their input is obtained too late, after the contractual commitment has already been taken on.

Contractors should also programme for usual contingencies, such as equipment breakdown, bad weather and snagging, and make this clear in tender documents and method statements. This establishes that these are not unforeseen events.

Taking time to understand the contractual allocation for the risk of delays is also important to enable the contractor to comply with them and serve notices required by the contract.

Despite the emergence of new forms of contract, best practice construction methods and computer based critical path programming, the risk of delay remains a common and potentially severe problem. Contracts are the key tool for managing the risks of delay, provided that they are properly drafted, understood and, of course, complied with.

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