Delay Analysis is a contentious issue in claims arising out of construction projects. Often time, there is an argument over the correct or more correct analysis method for delay analysis. The Society of Construction Law Delay and Disruption Protocol (‘SCL Protocol’) sets out the following differing methods of delay analysis that can be used to analyze the impact of a delay event to the critical path of a construction program:
Delay Analysis Methods as set out in The Society of Construction Law Delay and Disruption Protocol
On 17 October 2022, the High Court handed down its decision in Thomas Barnes & Sons plc v Blackburn with Darwen Borough Council [2022] EWHC 2598 (TCC), which related to the construction of a bus station in Blackburn.
The claimant, Thomas Barnes & Sons plc (in administration) (‘Thomas Barnes’) was the contractor employed by a local Council, with the project suffering significant costs increases and delay. The Council purported to terminate Thomas Barnes’ contract and engage another contractor to complete the works. Soon after, Thomas Barnes went into administration, with the administrators subsequently seeking approximately £1.7 million in damages. This included an entitlement to prolongation and delay-related damages, which led the Judge to provide some discussion on the differing forms of expert delay analysis relied on by the parties.
In Thomas Barnes, the Judge noted that it would be wrong to place too much importance as to whether a particular method of delay analysis had been strictly followed, stating that:
‘The SCL Protocol itself discourages such an approach. It states in the introduction that:
(a) its objective is to provide useful guidance.
(b) it is not intended to be a contract document nor to be a statement of the law;
(c) its aim is to be consistent with good practice rather than to be a benchmark of best practice; and
(d) its recommendations should be applied with common sense. It states under paragraph 11.2 that “irrespective of which method of delay analysis is deployed, there is an overriding objective of ensuring that the conclusions derived from that analysis are sound from a commonsense perspective”.
Thus, it would be wrong to proceed on the basis that, because the SCL Protocol identifies six commonly used methods of delay analysis, an expert is only allowed to choose one such method and any deviation from that stated approach renders their opinion fundamentally unreliable. It must be borne in mind that the common objective of each is to enable the assessment of the impact of any delay to practical completion caused by particular items on the critical path to completion. However, I do accept that if an expert selects a method which is manifestly inappropriate for the particular case or deviates materially from the method which he has said he is following, without providing any, or any proper, explanation, that can be a material consideration in deciding how much weight to place on the opinions expressed by the expert.’
Especially when part of the claim centres around an extension of time, expert delay analysis is commonly relied on in both adjudication or litigation to prove or disprove a claim. In light of the Judge’s comments in Thomas Barnes, it is not a requirement for a particular method to be strictly followed. However, delay experts should be conscious of the impact that a deviation from the stated method used or the use of an inappropriate method will have on the weight of their evidence without a reasonable explanation
Other observations from Thomas Barnes
Traditional approaches to the main cause of delay have been the ‘dominant cause’ approach, focusing on the main cause of the delay, or alternatively, the ‘first in time’ approach, focusing on the event that occurs first. However, the Judge found that concurrent delays had occurred, even though there appeared to be a dominant delay, separate to one that occurred first. In this instance, the Judge made a finding that ‘depending upon the precise wording of the contract a contractor is probably entitled to an extension of time if the event relied upon was an effective cause of delay even if there was another concurrent cause of the same delay in respect of which the contractor was contractually responsible’. However, the Judge noted that despite being entitled to an extension of time for a dominant cause delay, the Contractor would not be entitled to costs for loss and expense where a separate concurrent delay occurred for which the contractor was contractually responsible.
As the cost of materials, transportation and labor rise globally, construction projects are feeling the bite of evaporating margins, constrained cashflow, and extended lead times. Moving into a post-COVID operational environment, after a long (and continuing) period of reconciliation regarding COVID costs and delays, price escalation is becoming an urgent issue for global construction.
On top of COVID-driven inflation and delays, the commercial fallout of the conflict in Ukraine forced global supply chains and financing arrangements to adapt almost overnight, with an immediate impact on price-influencing fundamentals such as energy, iron/steel and other base metals. Unnervingly, a potentially similar economic shock could evolve from the increasingly tense international relations between China and Taiwan.
In this context, contractors and subcontractors are not only looking for ways to manage cost increases under existing contracts, but also becoming aware that if their future contracts do not provide for the risk of price escalation in the coming years, it could lead to further problems.
What is ‘price escalation’?
Price escalation is sometimes known as ‘cost escalation’ or ‘material price escalation’. It refers to the sensitivity of construction contracts to the prices of materials and labour. In any fixed-price contract, the impact of rising costs in the supply chain will have a direct consequential impact on a contractor’s margin and cashflow. Under variable-price contracts, these are passed on to the Employer, with similar effects.
It is unusual to see variable pricing in major international projects, in part because such projects are typically dependent on financing from institutions. Often these institutions mandate the contractual arrangements on projects they finance but, even if not the case, project finance is generally based on detailed risk assessments that view open-ended, uncertain cost structures unfavourably.
New ‘target cost’ contracts are hybridising these contract models to an extent, essentially by providing a cost-reimbursable structure subject to a cap. Although these arrangements are enjoying some success in smaller domestic projects, it remains to be seen whether such arrangements will be used internationally.
As a result, all contract models are impacted by price escalation, but it is often contractors that bear the brunt.
Types of contracts
The type of contract usually informs as to which party takes the risk of price fluctuations. In reimbursable or cost-plus contracts, the employer takes the risk. The contractor is reimbursed the actual cost, plus allowances for overheads and profit. If the contractor’s actual costs increase, the contract price will increase also.
In remeasurement contracts and fixed price/lump sum contracts the contractor usually takes the risk unless there is a mechanism for cost adjustment. In remeasurement contracts (such as the FIDIC Red Book – For Building and Engineering Works Designed by the Employer) the contract price is based on approximate quantities and a schedule of rates and prices. But, if the rates and prices can be adjusted where price fluctuations occur, the contract price is recalculated using the new rates and prices and the final agreed quantities. The actual work done is remeasured when the works are completed. In fixed price/lump sum contracts (such as the FIDIC Yellow Book – Plant and Design Build) the contractor provides an overall figure, ‘a lump sum’, for all the works that are agreed to be carried out under the contract. But, if the amounts due to the contractor can be adjusted where price fluctuations occur, the contract price is recalculated
Escalation clauses
A mechanism for cost adjustment is, potentially, a more reliable way to limit the contractor’s risk. In the FIDIC 1999 editions the escalation clause is at Sub-Clause 13.8, and in the FIDIC 2017 editions it is at Sub-Clause 13.7. Sometimes the escalation clause is deleted or modified. Sub-Clause 13.8 of the FIDIC 1999 editions (or Subclause 13.7 in the FIDIC 2017 editions) is an ‘opt-in’ clause. It applies only if:
1. Under the FIDIC Red and Yellow Books 1999 – a table of adjustment data is included in the Appendix to Tender.
2. Under the FIDIC Silver Book 1999 – provided for in the Particular Conditions.
3. Under the FIDIC 2017 forms – a Schedule(s) of cost indexation is included in the contract.
The table of adjustment data or Schedule(s) is a complete statement of the adjustments to be made to the cost of labor, goods and other inputs to the Works (for example, fuel). Any other rises or falls in the Costs are deemed to be included within the Accepted Contract Amount. No adjustment is applied to work valued on the basis of Cost or current prices. Where it applies:
1. Under the FIDIC 1999 editions – the amounts payable to the contractor are adjusted for both rises and falls ‘in the cost of labor, goods and other inputs to the Works’ by adding or deducting amounts calculated in accordance with a prescribed formula (in the FIDIC Red and Yellow Books) or as set out in the Particular Conditions (in the FIDIC Silver Book).
2. Under the FIDIC 2017 editions – the amounts payable to the contractor are adjusted for both rises and falls ‘in the cost of labor, Goods and other inputs to the Works by adding or deducting amounts calculated in accordance with the Schedule(s).
In the FIDIC Red and Yellow Books 1999 a formula is set out, but this may be amended as the parties choose. The wording states: ‘The formulae shall be of the following general type’. The formula is as follows:
The n in the above formula refers to a defined period. This is usually the relevant payment period and so will typically be the month of the payment application. The o refers to the base date. Therefore, it applies the difference between the base index and the current index to the adjustable price element, bringing the contract price up in line with the change in the index (or down, if de-escalation is permitted).
It is recognised that the formula set out above to calculate the adjustment multiplier (Pn), which is to be applied to the estimated contract value, is crude, but it is a fast and reasonably credible way of calculating and reimbursing fluctuations in costs. The formula relies on:
1.A fixed element (a), representing the nonadjustable portion in contractual payments, which is fixed at the time of Contract. FIDIC suggests 10% in the Appendix to Tender or Guidance.
2.The weighting of the resources (b) (c) (d), which is determined at the time of contract. For example, a road project might be 20/40/40 for labour, equipment and materials.
3. Cost indices for the current ‘now’ value (n) and the original value (o) for each of, for example, labor (L), equipment (E) and materials (M), which need to be updated frequently (preferably monthly rather than quarterly or annually, but that will depend upon the cost indices chosen).
The mathematics involved are, therefore, relatively straightforward but the output of any formula is naturally dependent on the inputs which, although mathematical, are contractually defined. Consequently, both contractual and commercial review are essential.
The FIDIC Silver Book 1999 and the FIDIC Gold Book 2008 do not set out a formula. The FIDIC Silver Book Guidance suggests that the wording for provisions based on the cost indices in the FIDIC Yellow Book be considered. The FIDIC 2017 editions do not set out a formula either. The Guidance states: ‘It is recommended that the Employer be advised by a professional with experience in construction costs and the inflationary effect on construction costs when preparing the contents of the Schedule(s) of cost indexation’
What needs to be considered?
Careful attention should be given to define key variables, such as:
The base date and/or start date
Triggers for applying the clause
Any caps on price increases
Any non-adjustable portion
Cost elements and weightings
The relevant reference indices
Whether different formulae are required for different costs
Currency variables, if needed
Any provisions for price de-escalation
The price adjustment clause can directly define the commercial success of the project for the contractor in an inflationary environment. As a prime example, triggers for price adjustment often require a certain degree of increase before the clause is engaged, while a cap may prevent any cost above a certain degree of increase being passed on. This effectively creates a window of defined margin on certain core costs, and allocates an open-ended risk above the cap.
Conclusion
In the current macroeconomic environment, contractors are increasingly concerned about how to handle recent cost increases, which are unprecedented in the modern era. For contracts without a price escalation clause, a detailed contract review may provide avenues to recover certain costs under other headings such as change of law, force majeure, or the variation procedures. Local law may also allow recovery, depending on the jurisdiction.
In severe circumstances, commercial negotiation may become a necessity if the contractor is in risk of default, or if there are other risks to the project. Negotiated arrangements seen in practice include new financing, allowing some of the contractor’s proven costs to be deducted from liquidated delay damages, or new lump-sum contracts for work packages which are then removed from the main contract. All of these options are fraught with legal and commercial dangers and can bring further contentious issues if not handled carefully.
With a view to the future, including price escalation clauses in contracts may seem disadvantageous to employers, as they are accepting the risk of increasing costs. However, price escalation clauses allow contractors to bid more accurately and competitively, resulting in lower bid prices for the employer. It also opens the door to price de-escalation, which would favour the employer if deflationary trends prevail during the project.
Ultimately the most immediate benefit is that the project will not be endangered by contractor defaults, or contractor delays related to procurement and delivery issues arising from cost increases. In this regard, it should be borne in mind that the contractor’s delay is usually subject to liquidated delay damages, whereas the employer’s delay liability to other contractors is usually, at least theoretically, unlimited.
Although it may seem like a risk for employers to accept price escalation clauses, the current and continuing uncertainty in global supply chains may cause havoc on future projects if not appropriately provided for in the contract. In this respect, the certainty provided by price escalation clauses has significant value in itself.
Construction projects have peculiar characteristics unlike other commercial transactions and these characteristics result in construction projects being particularly sensitive to a large spectrum of risks. The prevailing influencing factor is the parties themselves. International construction projects for example, involve parties from differing cultural and legal backgrounds who bring with them their own ideas of not only how the works themselves should be performed, but also the way in which the parties are to structure and manage their contracting and project management. This is particularly influential when parties from differing jurisdictions enter into joint venture arrangements for the performance of works. The Uganda National Roads Authority (UNRA) project status report of March 2021, for example, showed that 14 out of 31 (45%) of the Upgrading Road Projects were being executed with joint ventures between consultancy companies from differing jurisdictions. More joint venture arrangements are expected with the advent of oil drilling and processing and the push for more involvement of local companies in these undertakings. Key considerations have to be taken, therefore, to consider who will undertake the essential functions required to take the project from concept to completion, and how the project risk including the risk inherent in valuing and paying for the work, will be handled.
Checking for concrete slump at Drainage Improvement Works Project in Kawempe, Kampala City by CG Engineering Consults Staff and a member of the Consultant’s team.
Risk management in Construction projects
Successful project execution dictates that this risk must be managed and that parties settle the issues associated with project risk through contract provisions. These provisions allocate the project risks between the parties and offer specific remedies in the event of breach of contract or the occurrence of specified events. It is in this light, that the modern construction contract has become a sophisticated instrument and one that begs a question about what an ideal construction contract is. Also, important to note is that a project delivery method and a contract type that mirrors the risk profile of the project are congruent with risk allocation strategy.
Project Delivery methods
One distinguishing factor between various project delivery methods is who will carry the design responsibility. This concerns the level of the contractor’s involvement during the design phase. The traditional project delivery method is the “design-bid-build” where design and construction are contracted separately. Here, the owner carries out the design and only enters into a construction contract subsequent to the completion of design. The contactor is then selected by a means of competitive tender that includes a fully detailed design. The successful bidder has the obligation to construct the work designed by the owner in accordance with the owner’s detailed specifications and drawings. The March 2021 UNRA Project progress report of the upgrading roads projects showed that over 10 projects are being delivered with this method for instance Civil Works for the Upgrading of Rwenkunye-Apac-Lira-Puranga Road. Alternatively, the owner may allocate the design function to the contractor. This is commonly referred to as the “design-build” where design and construction are combined in a single contract with a single contractor. The design is accomplished in accordance with the Employer’s requirements after the award of the contract, with the contractor given broad leeway to design the job in an efficient manner. Ideally, the contractor is told what is needed, not how to achieve the desired product. This contract places additional risk on the contractor but may also leave the Employer facing a higher contract price as a result. The March 2021 UNRA Project progress report of the Upgrading roads project showed that over 3 projects were being delivered with this method for example Package 3 and Package 5 of the Critical Oil Roads.
Once the owner has determined the delivery method, the next focus is on the type of contract. The choice of type of contract is linked to the overall payment and pricing structure that will govern the transaction.
Types of Contracts
The three basic types of contracts that are most commonly encountered in construction are: fixed price/lumpsum, re-measurement (admeasurement) and cost-plus. Fixed-price contracts are contracts where the contractor is paid a pre-agreed sum of money when they have successfully performed all of his or her obligations under the contract. Payment is made in pre-determined stages and the contractor assumes the risk for both performance and price. Re-measurement contracts involve the contractor having a fixed price for each item of work in accordance with the owner’s estimated quantities. During contract execution, the work completed by the contractor is measured and the amount the contractor is paid is determined as a product of the measured quantities and the contractor’s price for each item. In this, the Employer assumes the risk for the quantity and the contractor assumes the risk for the pricing. Under a cost-plus contract, the owner retains the cost risk, and the contractor is paid his or her costs including overheads and profit. This is more flexible in that it does not require full information at the time of tender, but this flexibility comes at a huge price for the owner. Additionally, administration of these contracts comes at a greater cost because complete records of all time and materials spent by the contractor on the work must be maintained and must be verifiable.
Contract documents
Construction contracts must include principal documents that identify and allocate the project risk and describe the works. The principal documents in a construction contract include:
· The conditions of contract, general and specific
· Technical documentation
· Schedules
· Programmes
· Bills of quantities
The contract sets forth the basic terms under which the parties are doing business together for example price and payment terms, commencement date, completion date, description of scope of work, allocation of risks of loss, alternative dispute resolution and indemnification provisions. The general conditions are a set of rules that cover problems such as claims, disputes, sub-contracting, changes, time, warranties, insurance, remedies, and termination that routinely arise in construction contracts.
Specifications provide even more detail as to the materials to be used, the performance requirements for aspects of the project and the method or techniques of construction to be employed. The specifications fill in the necessary information that is not evident from the drawings and includes materials and workmanship clauses, schedules to provide additional information and provisional sums if required, for instance the General Specifications for Roads and Bridge Works by the Ministry of Works and Transport used in the execution of Road and Bridge projects in Uganda.
The Employer’s requirements, as explained by Nael Bunni, are the main source of information for the general obligations of the contractor and should be drafted in a balanced manner so as to effectively specify the Employer’s needs, while not limiting the contractor’s flexibility in design to meet those needs. This term is used by FIDIC to denote the document that defines the purpose, scope and design and technical criteria of the works in design-build contracts. In Uganda, these are normally issued by a Procurement and Disposal Entity for example UNRA at the tendering stage.
The bill of quantities, as used in an admeasured contract, is a list of the materials and their estimated quantities against which the contractors provide their rates during the tender phase. The agreed prices are then used for the periodic valuation of the works that have been executed.
Conclusion
In conclusion, the ideal contract -the one that will be most cost effective- is one that assigns each risk to a party that is best equipped to manage and minimize the risk, recognizing the unique circumstances of the project. Therefore, it is important to undertake a comprehensive and systematic approach to identifying, assessing, and developing a risk mitigation strategy which can aid in drafting of proper construction contracts by construction parties and their representatives. It is also important to choose a project delivery system and a contract type that match the risk allocation and mitigation strategy. Drafting construction contracts, therefore, requires party representatives to be well conversant with the construction industry and the risks associated with it in order to avoid the danger that can arise from “copy and paste” of “construction contract templates”.
