Dealing with delay


Dealing with delay	February 2007

This article appeared in Construction Today in February 2007 and was written by Neal Morris, Pinsent Masons. Neal Morris of Pinsent Masons focuses upon the particular risk of delay and how that can best be managed, by both contractual and practical means. In the UK a recent study showed that 40% of the projects studied over-ran their original contract period. However the UK is not alone and the risk of delays to construction and engineering projects throughout Europe is, sadly, both common and serious. Having a risk management strategy in place, which uses both contractual and practical measures to reduce the likelihood for delays, is essential for all construction projects. The risk of delay The first step in any risk management strategy is to identify the problems the risk of delay creates for the different parties involved in the project. For the owner, delay means that the asset cannot be used when intended, causing alternative accommodation costs to be incurred or a delay in receiving income from the asset. The cost of financing the project could also increase, and depending upon the contractual allocation of risk and the events causing the delay, the delay could give rise to claims by the contractor. For the contractor, a delay means an increase in overheads, such as site staff and facilities, potential liabilities to the supply chain and depending on the reason for the delay it can mean a liability for delay damages to the owner. The delayed recovery of payments and the tie up of resources in the project can also create cash flow problems and the risk of insolvency. Contractual Management So, how can these risks of delay best be managed, either by contracts or by practical measures? Contracts, if properly drafted, can manage the risks of delay in a number of ways. Liability for the financial consequences of delay can be allocated between the parties. Creative sharing of the financial risks with the other parties is another way. For example the contract could contain terms which ensure the parties agree to a limited period free of delay damages, apportion the financial liability with another party by calculating a lower, liquidated level of delay damages or agree that certain events would only entitle another party to time, but not to money. The contract could also establish contractual powers to manage the risk of delay, including powers to accelerate the work or terminate the contract. Practical Management In addition to contractual terms what are some practical ways parties can best manage the risk of delay? Owners need to be realistic from the outset as to the time their project will take to reach completion. They should undertake their own risk assessment and add a contingency. They should be wary of unrealistic completion dates. In particular, they should allow enough time for the design to be fully completed and checked before work or procurement commences. Contractual obligations should be placed on programming the works, services and procurement. This should also include sanctions for failure to meet these obligations. Employing a Project Manager to record progress in detail and, in particular, to record the real causes of delay and their effects should be considered. Contractors can best manage the risk of delay by being realistic and allowing for contingencies. They should involve the site team, key subcontractors and consultants in their tender plan at an early stage. In many cases their input is obtained too late, often after a contractual commitment has already been taken on. They should plan for the usual contingencies such as plant breakdowns, bad weather and de-snagging – which is usually on the critical path to completion. Contractors also need to take the time to understand the contractual allocation of risk for delay events and ensure they comply with their obligations such as the serving of notices required by the contract. It is important to remember that the contractual management of delay risk can be undone by notice requirements being ignored or by poor record keeping. So although a party may not contractually bear the delay risk of an event they could still lose their entitlement because they have failed to serve the required notices within a set period of time or because they fail to keep adequate records to prove their entitlement. Consultants also need to be made aware of their obligations to provide timely design information. Design development as the project proceeds remains one of the biggest causes of delay to a project. The risk of delay is unfortunately unavoidable. This is despite the emergence of new forms of contract, best practice construction methods and detailed, computer based critical path programming. Contracts are however the key tools to enable the risk of delay to be managed, provided that they are properly drafted, understood and, of course, complied with! A Brief Case Study One case in recent times that illustrates the need for management of risk through the terms of the contract and also by practical management is Great Eastern Hotel Co Ltd v John Laing Construction Limited (2005). The redevelopment of the hotel by Laing was programmed to take 35 weeks for a budget of £34.8m. In the end, the programme was delayed by 49½ weeks and the project ended up costing some £61m. Laing was appointed under a construction management contract, with a view to converting that contract to a lump sum contract once the sub-contractors' prices were finalised. It so happens that the contract never was converted to a traditional lump sum contract. Laing's master programme "MP/1" was drawn up in August 1997. The first updated master programme was issued by Laing in October 1997 showing an 8-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 its "Consum 3" programme, in which it purported to recover delay to an overall delay of 4 weeks. The delay reported in that programme was 20 weeks when in fact the actual delay was 33 weeks. In short, the effect of the Consum 3 programme was that Laing attempted to recover 29 weeks delay in a period 9 months. In respect of the terms of the contract, the delay risk 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. In terms of practical management, amongst the many causes of delay identified by His Honour Judge Wilcox, was the issue of the failure to update the programme and to accurately report progress. The points to be taken from the judgment in Great Eastern Hotel v Laing are as follows: 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 is a need to accurately inform the client of progress and delay, so that delay can be properly managed. Where the project has already suffered delay and disruption, the failure to accurately update the programme will often result in an inability to manage the risk of delay spiralling further out of control. Finally, unless the updated programme shows accurately the current position, it cannot reliably be used as basis for any future claim. For media enquiries contact : Lakhbir Rakar CM PR Advisor Pinsent Masons Direct Dial +44 (0)121 260 4005 Fax +44 (0)121 626 1040 E-mail lakhbir.rakar@pinsentmasons.com