Risks associated with medium-sized construction contracts in Africa under FIDIC IV Conditions of Contract (Continued)

In this article Chris Binnington discusses construction risks associated with the use of FIDIC IV (red book) Conditions of Contract in Africa on medium-sized projects (up to US$60- million), and he suggests some improvements that could be considered.

(Continuing from this Article)

Extension of time for completion

Evaluation of delays is one of the most contentious issues that a contractor may face. While legal authority recognises that it is the effect on progress, not the effect on programme, which should be the basis of evaluating any delay, an accurate programme can frequently assist the parties in determining the effect on progress.

FIDIC Clause 14.2 requires the con tractor to produce a revised programme at the request of the engineer, if at any time it should appear that the actual progress of the works does not conform to the programme to which consent has been given.

The New Engineering Contract provision (Clause 32.2) allows the contractor to produce a revised programme, when requested by the project manager (engineer), when the contractor chooses to, and in any event at no longer interval than that stated in the contract data from the starting date until completion of the whole of the works. The NEC (Clause 32.1) requires the contractor to show on each revised programme the actual progress achieved on each operation and its effect upon the timing of the remaining works, the effects of implemented compensation events and of notified early warning matters, how the con tractor plans to deal with any delay and to correct notified defects and any other changes which the contractor proposes to make to the accepted programme.

NEC recognises that the programme is a vital tool in the evaluation of progress and the regular updating thereof leads to a situation where programme and progress are largely coincident and thus adjudication of the effect on the programme is no different from the effect on the actual progress.

It is submitted that a regular update at six monthly intervals, to reflect a snapshot of the progress at that time and to include all the events impacting on the work in the previous six months should be considered to be a necessity. The evaluation and analysis of delay, effected with the technique of ‘Window Analysis”, applied to a CPM Schedule or a Linked Bar Chart, would accomplish the results of identifying the specific activities delayed in the given period of time and the amount of delay, the causes of delay and the responsible parties, the con currency of causes and responsibility, the excusable non compensatable delays, the compensatable delays and the inexcusable delays.

The regular updating of the programme and the evaluation of delay, with the method of “Window Analysis” can assist the contractor and the engineer in the evaluation of the claims for delay.

FIDIC should recognise such benefits and give specific directions in Clause 14.

Disruption

Where variations of the work affect the performance of the planned work or there are successive variations as a result of a prior variation, we have what is sometimes referred to as the ‘impact effect’ or ‘ripple effect’.

The result is loss of productivity, increased costs and delays. Early recognition of disruptive events is vital. The contractor may have a difficulty in evaluating the ultimate cost of a particular variation, because of the difficulty in estimating the impact of the variation on the work; therefore he might be willing to claim the additional cost caused by disruption when the work is completed and the total cost is known.

It could be helpful to establish in die contract provisions the method of monitoring the disruptive events and the method of compensating the con tractor for time and cost of disruption. The regular update of the programme of works, the evaluation and analysis delay effected with the technique of “Window Analysis”, would assist in identifying events which have caused disruption and in analysing and evaluating its cost.

Engineer/contractor relationship

Interpersonal relationships at the level of engineer’s and contractor’s representatives are frequently underestimated as a risk determinant; neither do the conditions of contract address this interrelationship.

The contractor’s ability to establish a good relationship with the engineer is almost as important as the contractor’s ability to manage the contract. The con- tractor must recognise the requirement to cooperate in a positive way in order to ensure that the objectives of contractor and engineer are in fact achieved.

It is up to the contractor to cultivate the relationship and minimise the potential dispute.

In order to avoid lengthy exchanges of correspondence between the engineer’s representative and the contractor’s superintendent, it is suggested that the contract should provide for regular meetings and communications at a level which involve the employer and representatives of the contractor and engineer with decision making authority. This could be an inexpensive way of resolving problems when they are still small and manageable. The employer would be aware of developments which may have a financial impact.

Experience indicates that simply copying die minutes of meetings to the employer does not necessarily keep the employer informed of developments. It may be advisable for the employer to appoint a representative who, if not possessing decision making authority, is able to source such authority as and when required. The extent of delegation of authority to the engineer’s representative should be limited. The ability of the engineer to delegate his full authority to his representative and to appoint an assistant engineer’s representative with similar delegated powers has been the source of much concern for a contractor on road projects. The full authority of the engineer in terms of Clause 2.1, (including the authority of giving engineer’s decisions in terms of Clause 67.1) has been given to the engineer’s representative under Clause 2.3 and in addition the same authority has been given to his assistant under Clause 2.4. This procedure has weakened the whole chain of authority and placed an additional burden and risk upon the employer and the contractor.

How to minimise effects

Some forms of contract have adopted a more proactive method of minimising this potential conflict, by allowing disagreements between the engineer and the contractor to be brought before a true independent expert; this is described in the New Engineering Contract as the ‘Adjudicator’.

Under the NEC, if the contractor believes that an action of the project manager (equivalent to the engineer) is not in accordance with the contract or is outside the authority given by the contract, the contractor may give notification to the adjudicator. All disputes arising out of or in connection with the contract are submitted to the adjudicator. Once he is in possession of the necessary information he communicates his decision, his reasons and any assessment within a four week period. Thereafter the project manager is obliged to implement the adjudicator’s assessment, if the adjudicator’s decision is not referred to arbitration within the following four weeks.

While the introduction in FIDIC IV of the Amicable Resolution Procedure (Clause 67.2) might well include the type of dispute resolution provided by way of the adjudicator, the new engineering contract deals with disputes on a far more proactive basis and the adjudicator is nominated at the time of concluding the contract. Early intervention is the key to prompt resolution of disputes.

For contracts less than US$60-million, it is considered that the adjudicator approach is to be welcomed. In excess of that value and for projects having a life expectancy of more than two years, the introduction of a Disputes Review Board comprising an independent panel of three members has been suggested as being more useful.

In a major dam and tunnelling project in the southern African region, the contract was entered into in December 1990. Mobilisation took most of 1991. The actual construction began at the end of 1991 with the darn excavation. Several disputes arose at that time between the engineer and the contractor. Discussions took place for over one year, before the employer and the engineer agreed with the contractor to establish a Disputes Review Board for the purpose of minimising the time, effort and costs necessary to resolve disputes, which could arise during the prosecution of the works.

The DRB Agreement was executed in June 1993. The employer and contractor agreement constructively modified Clause 67 of the Conditions of Contract to the extent that a dispute had to be referred to the Disputes Review Board, after a decision had been rendered by the engineer, and before arbitration could commence.

The board believed that it could foster the declared intent of the parties to minimise the time and effort to resolve disputes, by means of suggestions and encouragement to both parties and to the engineer during its regular site visits.

However the agreed procedure that a dispute could only be referred to the board after a decision of the engineer in terms of Clause 67, has delayed the resolution of disputes, because of the time required to go through the entire process: contractor’s notification of the claim, request for the engineer’s representative decision, issue of the decision, contractor’s request for die engineer’s decision in terms of Clause 2,3(b), engineer’s decision, contractor’s request for the engineer’s decision in terms of Clause 67.1, engineer’s decision, contractor’s notification of the intention to refer the matter to arbitration, notification of the dispute and presentation of the claim documentation to the DRB, request for further information by the DRB, presentation of the position papers for the hearing, DRB hearing, DRB recommendation.

Claims which were notified in 1992 and early 1993 have followed the process indicated above, and only reached in April 1996 the stage of DRB recommendation.

Notwithstanding die introduction in FIDIC IV of Clause 2.6 (engineer to act impartially), in the event of disputes between the parties, the attitude of the engineer is generally to behave as the employer’s representative and not as a “quasi arbitrator”.

It is therefore suggested that the Alternative Dispute Resolution techniques for settlement of disputes between the parties, in the form of ‘expert’ or ‘adjudicator’ for contracts smaller than US$60-million and ‘Disputes Review Board’ for contracts of higher value, be introduced by FIDIC and be made mandatory. The timing for the agreement of the terms of reference of the expert of DRB, their composition, the frequency of meetings, etc, should be included as a special condition of contract. To he cost effective and to function properly the expert and the DRB must be established at the outset of the project, should give quick responses, prefer ably in a binding format, alternatively in a non binding format, but before the engineer’s decision.

Where either party has the right to proceed to arbitration or to the engineer for a Clause 57 (1) determination, any decision expressed by the suggested board, expert of adjudicator should stand until overturned or confirmed by the arbitrator. In the event of the decision containing a directive on payment, relief through the terms of Clause 53 or by such other agreement should be effected.

The FIDIC Conditions of Contract for Design-Build and Turnkey (orange book), and most particularly CC 20.3, (claims, disputes and arbitration), adopt the concept of an expert defined as a suitably qualified person who is independent of the parties and shall act impartially and in accordance with the contract. The expert is to be mutually agreed by the parties, preferably named in the contract, or to he agreed within 28 days of the effective date. The par ties share equally the expense of remunerating the expert. The expert deals with all disputes between the parties, has 42 days in which to give notice of his decision and, unless referred to arbitration, his decision is final.

The New Engineering Contract, the ENAA model form, the World Bank standard bidding documents ‘Procurement of Works—Smaller con tracts’ provide for adjudicator or expert to be available from the inception of the contract. The World Bank standard bidding documents ‘Procurement of Works’ provide for a ‘Dispute Review Board’ to be available from the inception of the contract.

FIDIC should follow the same policy and introduce in the conditions of contract the expert and DRB procedures; these should be mandatory and should be effective from the outset of the project.

Mitigating cash flow problems

The contractor’s concern that the employer or funding agency will have sufficient funds to timeously pay all amounts which are due in respect of certificates or awards made by conciliators/arbitrators is both appropriate and legitimate.

Cash flow is at the heart of most contractual problems. When multiple sources of finance are required to meet the payment of any certificate, delays in payment occur frequently.

In 1995 the delayed payment by the funding agency of monthly certificates over a period of six months in several projects in eastern and southern African countries obliged a contractor to reduce the rate of work or to suspend the work The ability of ally con tractor to remain solvent ill such a situation is put at high risk.

Compensation by way of interest on late payments is a palliative rather than a solution. Provisions should be made, if these problems are to he resolved, for adequate funds to he in place to ensure that certificates issued timeously are paid timeously.

The use of cash retentions continue to impact on contractor’s cash flow and the employer should be willing to accept alternatives by way of suitable guarantees to allow maximum cash to flow to contractors.

The provision of various ‘shock absorbers’ could assist the contractor’s cash flow problems and allow timeous payment.

  1. The availability of a reasonable contingency sum in the contract, to give confidence to the engineer to deal expeditiously with the approval of variation orders. A contingency sum of say 10% to 15% should be added to the extended bills to arrive at the ‘contract price’; such contingency to be for the sole use of the engineer/employer.
  2. The amendment of Clause (it) to reduce the time required for the certification procedure by the engineer and for the approval by the employer. The time for certification should be reduced from 28 to 14 days.
  3. The use of a retention trust fund rather than being retained by the employer/funding agency.
  4. Adequate funds lodged in a trust account to cover the payment of the future three or preferably six months certificates in accordance with the cash flow schedule produced by the contractor in terms of Clause 14.3. Such funds to be under the control of an independent party who is then obliged to make payments against the presentation of an approved certificate.

The entitlement to give notice of suspension or reducing the rate of work under Clause 60,4 should he extended to the situation where the trust account has been reduced below a viable level.

Conclusion

The employer’s objectives of a timeously completed contract within budget are not necessarily consistent with the contractor’s objectives.

The implementation of sonic of the suggestions in this article may lead to the primary objective of a harmonious working relationship in order to achieve time completion at minimum cost, particularly with regard to the cost of disputes.

The early resolution of disputes is less expensive, reduces tile financial risk for the contractor, has a beneficial effect on the cash flow and the performance of the works, gives to the employer the benefit of being informed as to final predicted costs and being in position to budget for the final foreseeable costs.

Contractors do not wish to eliminate the risk, they merely wish to be placed in a position where they can manage the risk effectively.

FIDIC IV Conditions of Contract have gone some way towards achieving this objective; some further improvements are required in order that risks are allocated more precisely and the instruments for any early and impartial resolution of disputes are provided with the conditions of provisions of contract. At the end of the day a successful contract must result in a situation where both employer and contractor are equally satisfied and looking for ward to the next contract.

THE CIVIL ENGINEERING CONTRACTOR JULY 1997