Author: Mary-Ann Goodier

As first published in Rail Professional Magazine, May 2021.

Projects, almost by definition need to be completed by a specified date, therefore time management through the use of a project programme is crucial. However, many will have witnessed project programmes that resemble a fairy tale…. where all the works go off without a hitch. That is, until someone realises that the completion date is not achievable, and the question “why” starts to be asked. An investigation ensues and what becomes apparent is that historic project delays have not been accounted for in the programme and now it’s too late to resolve without affecting the completion date.

COVID-19 has unexpectedly hit thousands of projects this year. Its impact on industries across the globe has been monumental. The engineering and construction sectors are no exception to this, with many projects grinding to a halt. The pandemic has placed a heavy burden on project teams who must assess both retrospective and forecast prospective delays, which have or will likely occur due to the virus. It is events like COVID-19 that bring the quality of the project programme into sharp focus and highlight whether the team have properly updated and maintained it or not.

In light of these circumstances, we have compiled a few hints and tips for structuring, integrating, and maintaining programmes so that events such as COVID-19 will be far easier to manage. Drawing on our experience, we have also identified and shared below common problems which impact a project programme and how they can be resolved. A well-structured and integrated programme will enhance a project teams’ ability to reliably monitor progress, forecast delay and proactively manage any identified issues.

What common problems impact a project programme?
Some of the most common problems which impact a programme are:

1)             Level of detail within the Work Breakdown Structure (WBS);
2)            Missing works scope;
3)            Missing logic and dependencies;
4)            High levels of float;
5)            The use of ‘hard’ constraints;
6)            Negative float; and
7)            No clear or identifiable critical path.

The 7 problems above all interweave with one another and can have a compounding effect which can ripple throughout a project programme.

Why do the problems above impact a project programme? How can they be resolved?
(1) Without a clearly defined WBS, drawn up (or at least integrated) by a single controlling mind, programmes can often be difficult to understand, particularly when comprising of thousands of activities. These programmes resemble a list, as opposed to a well-structured plan. By incorporating a WBS into a programme, a hierarchical structure is created. This enables the relevant sequences of work to be summarised and assessed. As a result, large and complex programmes become easier to interpret, as works can be broken up into smaller sequences of work. This also applies to activities with long durations which should also be broken down to allow accurate progress updating.

(2) Missing scope is another symptom of an ambiguous WBS. Programmes without a clearly defined scope of work are more susceptible to ‘scope creep’ where changes are not recorded against the original programme. Scope that is added during the project should be incorporated into the programme and assessed. This will then determine if an adjustment to the completion date may be required, or a recovery programme needs formulated. It is imperative that project teams ensure all work scope is included in the original programme, so they have an accurate baseline against which to measure and record any changes which occur.

(3) Programmes that do not include all scope are highly likely to give rise to missing logic and dependencies. As a programme’s logic defines the relationships between activities, if a programme contains open ends (activities with neither a predecessor nor successor activity), this will inevitably result in flawed logic which may obscure the true critical path of a programme. This is best addressed by ensuring each activity and dependency is assigned with a logical predecessor or successor. This is usually done with a ‘Finish to Start’ link, to ensure that the programme reacts dynamically to any changes made.

(4) High levels of float imply an activity has a long period of time before affecting the critical path on the project. Certain activities may genuinely have that much float attributed to them. Other activities, however, contain high float because they are missing logic and the period prior to becoming critical is inaccurate. Identifying which activities are missing a dependency and assigning the correct logic will reduce high levels of float within a programme.

(5) Programmes that contain missing logic can sometimes prompt the application of ‘hard’ constraints, i.e. ‘Must Finish On’, to artificially hold activities in place. This type of constraint must be avoided as it overrides the relationship of an activity’s predecessor to drive logic when progress is updated. It is best to remove all ‘hard’ constraints and use either a ‘soft’ constraint, i.e. ‘Finish On Or After’ (which will not override the relationship of an activity’s predecessor) or the correct predecessor to drive the activity.

(6) Negative float frequently occurs in programmes which have activities with ‘hard’ constraints. Negative float can indicate a scheduling problem caused by an activity start date set earlier than the end date of its predecessor. Removing ‘hard’ constraints in the programme will ensure an activity start date cannot be set earlier than the end date and will likely remove negative float within that logical sequence.

(7) Rectifying the previous issues highlighted above will increase the likelihood of identifying the true critical path within the programme. A clear and identifiable critical path will enhance the programme’s ability to demonstrate critical and non-critical delays which occur throughout a project.

Programme integration
Having highlighted common problems which impact a programme structure, we now come to the topic of programme integration. Having a truly integrated programme means: ONE source of truth, ONE team working together to deliver ONE common objective with ONE overall delivery.

So, what does true Integration look like?

Integrated planning requires real collaboration amongst multiple planners representing different workstreams across complex capital works. Integration will ensure stakeholders are actively involved early in the production and continuous development of the programme. It promotes the project team to  ‘buy in’ to the programme where issues are identified, discussed, and hopefully resolved. Creating an environment that promotes ‘collaboration and togetherness’ in delivering common goals often helps pre-empt problems that are otherwise likely to be encountered.

It is the best strategy to avoid gaps in the programme such as missing interfaces, interdependencies, an unreliable critical path. Without integration, a lot of the issues described earlier typically arise and can give rise to formal disputes between parties. The next step is to enable the full integration of the programme.

What does full integration of the programme mean?
Integrated planning ensures the project scope is defined using an iterative life cycle approach, with flexibility and agility built into the programme. This will give a greater chance for achieving the project’s objectives. We use these terms very deliberately, as follows:

1. Flexibility: because change always happens, and needs to be recorded as efficiently as possible; and
2. Agility, because to identify the effects of change, a dynamic and agile programme that reacts and moves according to change is paramount to a successful delivery.

Planning ‘best practice’ should be adhered to when developing, integrating and maintaining the baseline programme, as you should start as you mean to go on! The integrated baseline programme is going to be the best point of reference, so it is important that it is communicated to all parties and used as a ‘working tool’ as opposed to a mere ‘reporting tool’ of historical events!

Best practices, dependencies and interface management must be consistent throughout the project. It revolves around 4 key stages: identification, coding, integration and impact analysis, and finally impact resolution. Poor integration will not be conducive to impact analysis or scenario planning.

It is worth reiterating that collaboration is crucial to ensure all members of the team are consulted during the identification stage. This is vital as it only takes one missed dependency to introduce a delay to the project. Ensuring full Integration is no small task. It requires planning, communication, and commitment throughout the project life cycle. The benefits include:

1. Improved collaboration across the project team;
2. More accurate forecasts and what-if scenarios;
3. Faster insights for all stakeholders to align with operational planning and strategic goals;
4. Greater process visibility and transparency that strengthens risk management; and
5. A single version of the truth backed by transparent methodologies and processes.

Summary
The hints and tips covered in this article provide guidance on how to structure and integrate a programme more effectively. Whilst the approach is not exhaustive, it is intended to incorporate the most common issues which can prevent a programme’s primary purpose: to provide the project team with a dynamic and reliable tool that can be used to identify issues early and plan for change events as they occur.

Whilst it is near impossible to foresee an event such as Covid-19, a well-structured programme will enable impact and scenario analysis necessary to assess the overall impact of such a significant delay event.

If you require any further information, please contact Catherine Barthélemy or Stephen Mills   catherinebarthelemy@hka.com or stephenmills@hka.com

Catherine Barthélemy is an Associate Director and a project planning specialist with more than 15 years of experience in the engineering and construction industries, working for clients, contractors and consultants on the delivery of complex infrastructure, process, energy and utility projects throughout the UK and International. 

Her wide range of sector experience includes rail systems (including electrification and signalling), nuclear decommissioning as well as other major International nuclear projects, heavy civils, and oil and gas. She has significant experience in the development stages of major projects and programmes, working closely with designers and contractors to ensure the delivery of value-driven programmes in accordance with scope and contract requirements. 

Stephen Mills is a Managing Consultant and has over 15 years’ experience in the construction industry working as a planning engineer and site manager, for both main contractors and sub-contractors.  He has been involved in a wide range of building and major infrastructure projects with sector experience within the rail sector (tunnel M&E fitout), highways, new-build construction and construction refurbishments.

Stephen specialises in alternative dispute resolution and has prepared and assessed extension of time claims for major rail and construction projects in the UK. His hands-on knowledge of the rail and construction industry heavily influences his proficiency as a delay analyst and his familiarity with various standard forms of contract.

As first published in the RIBA Journal, March 25 2021.
https://www.ribaj.com/intelligence/site-inspection-virtual-tools-lockdown

Architects are routinely required on site to address design matters. This enables them to get to the heart of the matter, either to undertake general reviews during construction, to establish existing conditions where refurbishment or alteration is being considered or to establish physical evidence when disputes arise, and the opinion of an expert witness is required. According to HKA’s 2020 CRUX Insight Report into the causes of Construction Project Delays, projects where site access issues arise tend to be significantly larger than the average project size, based on the 194 strong sample of UK projects assessed. In part this is borne of the design and construction complexity of larger projects requiring regular site access, by the architect, to clarify issues as they arise. Notably, our research indicates that ‘access to site’ issues are involved in more than 70% of Extension of Time claims arising in construction projects, some 9% ahead of other factors.

Given the criticality of site visits, what happens when everyone is required either to stay at home or to restrict their movements in order to avoid catching or spreading a potentially life-threatening virus? For example, how will decisions requiring inspection of a part of construction that will quickly be covered up by subsequent works, be made, if site visits cannot be conducted for some time?

Where existing buildings are involved, either as the subject of refurbishment or of expert witness analysis, much information can be gleaned about a design from the architect’s design drawings and much about the construction from a good set of as built drawings. What is drawn, however, is not always what is built. Moreover, if the reality on site is critical to the understanding of issues that are central to either correct construction or to an understanding of issues in dispute, then an inspection of that reality may be necessary to underpin the credibility of the architect’s report, especially if a follow up inspection is being made of an area previously visited physically.

In addition, it is not uncommon for site inspections to require the input of more than one attendee. Such visits are made doubly difficult in current times where social distancing precludes easy collaboration on site. These problems are compounded by travel restrictions which make the time taken to get to site greater than the time spent on site, by some margin.

Where the issue involves the construction rather than the layout of a building, for example, the fabric will need to be opened up to expose the components installed and the method and quality of the construction. The areas to be opened up are often difficult to access; on roofs or high up on external walls. Inspections in such areas will need scaffold towers to be installed or access machinery, such as a cherry picker or a Mobile Elevating

Work Platform (MEWP), to be deployed. These require installation and operation by skilled and experienced operatives who will need to be on site at the same time as, and often at close quarters to, the inspecting architect.

Once access has been arranged, opening up and dismantling of construction can take place. Again this will require skilled and experienced operatives and, because the architect will usually need to see the progress of the opening up rather than just the result, operative and architect will need to work closely to make the inspection effective.

Physical site inspections were inevitably prevented when social contact was prohibited and current restrictions on social contact continue to present severe difficulties. For example, where scaffolding or wall climbers are not available, and a MEWP platform of at least 2m wide is not available, physical inspections on site may be impracticable. Bearing in mind how widespread the impact of site inspections is across a range of UK construction sectors, as shown below, the need to establish alternative means of conducting site inspections in recent times has become increasingly critical.

When working remotely from home became an unavoidable necessity, video-calling and conferencing quickly became commonplace. As this type of communication proliferated, most people mastered the software required, and adapted quite easily to the more stilted environment of the virtual meeting room. Once prohibition of social contact eased into restriction, therefore, the question naturally arose of how to use or adapt this by now familiar technology to carry out virtual site inspections.

Some professional film production companies began to develop and market interactive platforms using YouTube alongside other messaging software. Whilst many of these offer good quality visuals, they require preparation and the use of multiple software applications; themselves not always user friendly. Also, if those operating the interactive platform have no experience of site investigations, as is likely, detailed and time-consuming directions may need to be provided.

Alternatively, established applications designed for video conferencing, such as Teams, Zoom, Blue Jean and others, offer acceptable visuals alongside easy and effective real time communications. This ease of communication, using everyday smartphones or tablets, is of real benefit where an inspecting architect needs to direct the work of the operative in response to what the opening up work reveals as it progresses.

Virtual site visits using these applications can be very effective in providing the architect with the information needed to make a decision or to form an opinion. In addition to providing a vivid visual and oral record of the whole process of the opening up and the final exposed result such software can allow other colleagues to join from multiple separate locations concurrently. Thus, the need for other participants on site can be reduced or eliminated.

As restrictions ease further, and physical inspections on site become a possibility, the consideration of safety with respect to the virus will continue to be paramount. Key elements to be incorporated into the risk assessments and protocols prepared by the architect or expert include: the age and underlying health conditions of staff; the availability and quality of Personal Protective Equipment, (PPE); training in the effective use of PPE; and whether the site can be reached without using public transport. Also, the preparation of an effective Risk Assessment and Method Statement by the contractor, to ensure appropriate conditions on the work site, will be an essential pre-condition for any physical site inspection.

Nevertheless, the virtual site inspection has proved to be a valuable child of necessity. Its practical effectiveness, combined with its cost-effectiveness in eliminating the need to travel to and from far flung sites, is likely to earn this new sibling of the physical site inspection a permanent place in the architect’s family of assessment techniques.

If you require any further information, please contact Bart Kavanagh at bartkavanagh@hka.com.

As published in Rail Professional Magazine, April 2021
https://issuu.com/railpro/docs/rp_apr21_issue_271_issuu__1_?fr=sMTM3ZDI2NDYxNjI

Within commercial contracts, the use of liquidated damages is a standard way of dealing with the possibility of a breach of contract. A liquidated damage is used to determine what one party will pay the other in the event of a specific breach of its obligations by way of compensation.

The advantages of liquidated damages clauses are clear from a commercial perspective and when combined with the principle of freedom of contract, This is especially so in a commercial context, where the parties are free to apportion the risks between themselves. However, there have been times where unscrupulous contract drafters have attempted to draft liquidated damage clauses in a way which constitutes a penalty, therefore, such clauses will not be enforceable.

In some cases, the liquidated damage provisions are often only given a cursory glance at the formation of a contract as this is the point where, typically, the relationship between both parties is at its strongest and the thought of failing to meet a date in the contract is not considered. However, it is at this stage which offers the greatest chance for both parties to review and discuss the implications of the provisions. Generally, it is only when difficulties arise further down the line that a proper review of the liquidated damage clause is undertaken by the party liable to pay liquidated damages. Then there is a moment of dread which is swiftly followed by a phone call to the company director who exclaims “HOW MUCH?!”

What are liquidated damages?

Liquidated damages (also referred to as liquidated and ascertained damages) are predetermined damages that are typically agreed between the parties to a contract. Typically, these damages are to be paid upon a specific breach of the contract, for example, late performance.

Liquidated damages can be a fixed sum, for example, £1,000 for each day that the project completion is delayed. Alternatively, it could be 1% of the contract value per week of delay.

There are other damages that can be considered as part of a contract between parties, known as general damages or unliquidated damages. These are typically considered to be ‘at large’, meaning that the party who is attempting to seek the damage must prove their losses. This is considerably more difficult to prove than to have a predetermined damage such as a liquidated damage, where these damages are agreed prior to the execution of the contract.

Can liquidated damages be claimed despite the other party not incurring any loss?

In short, yes. It does not matter if the loss suffered is smaller or larger than the sum of the liquidated damage and importantly, the claiming party does not have to prove the actual loss.

The longer answer is, it depends on the construction of the liquidated damage clause, and the circumstances in which the liquidated damage is being claimed.

For a liquidated damage clause to be enforceable, and for it not to be considered as a penalty clause, the liquidated damage must be a genuine pre-estimate of loss. Therefore, the clause must not intend to penalise, but rather to compensate in the event of a breach. If it can be proven, on the balance of probabilities, that the liquidated damage is not a genuine pre-estimate of loss, and that the sum sought is extravagant and unconscionable in comparison to the actual loss, the liquidated damage may be considered a penalty.

If a liquidated damage clause is held not to be a genuine pre-estimate of the loss, then the next thing to consider is whether there is a legitimate interest. If there is a legitimate interest, is it justifiable to require the defaulting party (the party in breach) to pay the sum in excess of the sum suffered? The answer is, yes. Even where a liquidated damage is more than the actual loss, it may still be enforceable: if the amount is not considered to be penal because there is a legitimate interest, if the interest justifies the liquidated damage; and the liquidated damage is not considered to be out of proportion.

What is a legitimate interest?

The term legitimate interest is broad in definition, the interests do not have to be very compelling, and it does not rule out interests that are more trivial. An interest that could be considered as trivial or controversial could still be a legitimate interest, although they are more easily disregarded.

Showing that there is a legitimate interest does mean that there must have some clear and specific benefit or outcome in mind. It is not enough to rely on vague or generic business interests.

What constitutes a legitimate interest, and whether a contractual provision is proportionate to that interest, can only be determined on a case-by-case basis. The concept of proportionality is tied to the interest and this must be considered against what, if any, legitimate business interest is served and protected by a given clause.

What can a legitimate interest cover?

Legitimate interests can cover a broad range of interests, but in the contracts relating to rail, rolling stock and signalling, these interests may cover: profit; act as a deterrent or an attempt to prevent a breach of contract; or utilised as a way to manage the efficiency of resources.

When do liquidated damages become payable?

Liquidated damages are to be paid upon a specific breach of the contract, e.g. late performance. Once a breach has occurred, the claiming party must notify the other party of its intentions to levy liquidated damages and then follow the procedure within the contract.

What if there are multiple milestones each with a specific breach?

There is a presumption that when there is an occurrence of several different events (milestones) and the stipulated sum, i.e. the liquidated damage, is the same for all, it could be argued that the liquidated damages are not a pre-estimate of loss. This is because some of the events will not cause an equal amount of loss. In this case, the stipulated damage for all events is not going to be considered genuine.

To resolve this issue, if there are different milestones within a contract, the parties should ensure that there is a liquidated damage for each to reflect what the loss would be if a delay occurs at that point in time.

Considerations for future liquidated damage clauses

There is now a sense flexibility shown to liquidated damage clauses, which act as a potential remedy. Penalties remain the greatest risk to the enforceability of these clauses. However, the courts are reluctant to intervene in the contractual relationship between experienced commercial parties – unless strictly necessary.

The focus on legitimate interest is worth bearing in mind, and it may be sensible to expressly identify those interests in the contract.

It may also be sensible for parties to keep written notes of the background and reasons for choosing the sums they did. There is an increased awareness of the commercial background and justification underlying liquidated damage clauses and the context in which they are agreed.

Points to consider when it comes to liquidated damages

During the formation of the contract, ensure that you carefully read, understand and can calculate the amount of liquidated damages you may be liable for should the worst happen.

There is a general tendency in bespoke contracts for liquidated damage provisions to include an agreement where the manufacturer or supplier cannot challenge the validity of the liquidated damage amount once the contract has been signed. This will somewhat limit the ability to challenge liquidated damages that are considered.

Liquidated damages, within reason, do not have to be a genuine pre-determined estimate of loss.

Manufacturers and suppliers may want to ensure the liquidated damage is an exhaustive remedy for and not in addition to claim general damages for the same breach.

Seek a liability cap, if possible. Having a liquidated damage so high it undermines contract performance is in neither parties interest.

Confirm that should the overall contract value changes during performance, due to variations for example, that the liquidated damage does not change proportionately.

Where a manufacturer or supplier has been delayed by the customer or an event prescribed in the contract occurs, be sure to submit the relevant notice and follow the correct procedures to make a claim for an extension of time.

Prior to liquidated damages being levied, there is typically a two-step process that must be followed: a notice setting out that the customer “may require payment of, or may withhold or deduct, liquidated damages”; and before the sums are deducted, the customer must issue a second notice under which the customer “requires” the manufacturer or supplier to pay liquidated damages.

Carl Simms is a Director and claims management specialist at HKA with over 18 years’ experience in the rail, construction, and engineering industries. He has worked on a range of projects in the rail, rolling stock and signalling sector for a variety of clients providing support with contentious issues (dispute resolution and avoidance), drawing on skills in adjudication, arbitration and litigation, as well as, preparing and defending claims.

If you require any further information, please contact Carl Simms at carlsimms@hka.com

Following on from my recent article “The Dangers of Construction Insolvency”, which highlighted some of the warning signs to look out for in a distressed contractor, and which also set out a number of practical steps that an employer can take to protect itself from a contractor’s insolvency, this article aims to focus on the contract and what it tells us about what we can and cannot do.

Whilst there are numerous contracts under which construction projects are delivered, this article will focus on the standard form JCT 2016 (versions of the D&B, Standard without Quantities, Intermediate and Minor Works) for the scenario where the contractor has become insolvent.

In addition to the contract, in the current climate of COVID-19, it is important to be mindful of the measures set out in the Corporate Insolvency and Governance Act 2020 (“CIGA”), and to be cognisant of these recent changes to the legislation. One of the key changes introduced by this new legislation that may impact parties to a construction contract is the introduction of a permanent ban on exercising termination clauses in contracts for the supply of goods and services. 

Accordingly, subject to a limited number of exemptions, this would prevent suppliers of goods and services (including contractors, subcontractors and consultants in the context of the construction industry) to an insolvent party from relying on their contractual right to terminate the contract in the event that the company that it is supplying has entered into an insolvency procedure. This will leave the supplier obligated to continue working for or supplying goods and materials to a company that it knows is insolvent. Clearly, these parties would need to explore alternative contractual mechanisms and laws to protect themselves, such as the right to suspend the works for non-payment of monies due by the final date for payment.

By contrast, the CIGA allows the party higher up the supply chain (the employer/customer) to rely on the contractual termination provisions should a supplier become insolvent.

This ban on exercising termination clauses in insolvency situations is clearly a significant change which could have a massive impact on the construction industry in the months ahead. Given the potential impact of these recent changes, it would be prudent to seek legal advice.

Notwithstanding the above and turning to the JCT form, the summary below sets out the actions open to the employer.

Terminate the contractor’s employment at any time (Subject to the provisions set out in CIGA).

In the event that the contractor becomes insolvent, the employer may at any time, by notice to the contractor, terminate its employment. Accordingly, it will need to consider whether or not to terminate the contractor’s employment. It is sensible that during this period of consideration, the employer checks that any requirements which were required under the contract from the contractor (such as collateral warranties, performance bonds and parent company guarantees) are in place. It is also worth the employer verifying whether it has certain rights, such as step-in rights.

If the employer does choose to terminate, the contractor has to provide the employer with all relevant documents, such as design documents, assign subcontracts if necessary, and remove plant and equipment when required.

However, great care must be taken if the decision to terminate the contractor’s contract is implemented, as to do so before the contractor is deemed insolvent under the terms of the contract is likely to amount to a repudiatory breach of contract which could trigger significant ramifications for the employer. In my experience, this mistake is often made. Moreover, it should be noted that provisions contained in the CIGA have inserted some specific changes, such as creating a new moratorium procedure which is not currently included within the definition of “Insolvency” under the terms of the JCT contract. This will clearly complicate matters, as an employer will not be able to terminate the contractor’s employment where it chooses to use the new moratorium.

Suspension of works obligations from the date of insolvency.

Under JCT forms of contract, the contractor’s obligation to carry out the works is automatically suspended.

Protect and secure the site.

Following the contractor’s insolvency, it is essential that the works are adequately protected and the unfixed goods and materials are retained on site. Accordingly, the employer may take reasonable measures to secure the site and protect the works.

Payment stops, irrespective of whether or not the contract is terminated.

As with the automatic suspension of the work, the employer’s obligation to pay the contractor is automatically suspended until the agreement and issue of a final account. This payment obligation comes into force regardless of whether the employer issues a notice of termination.

Choose to stop, or terminate and employ a third party to finish the job.

In addition to the option to terminate noted previously, the employer can decide to just stop the works and, depending on the project status, it can postpone it to a revised date in the future.

Alternatively, the employer may choose not to terminate the contractor’s employment, but rather work with the contractor to agree a form of novation. This transfers the rights of the contractor to another contractor in order to minimise disruption to the works. Whilst this has obvious benefits to the employer, it is also worth noting that the continuation of the contract may be beneficial for the administrator/liquidator, as it may assist in its ability to realise any value from the contract.

Prepare a final account.

Irrespective of how the original contract is dealt with – stop the works, novate or terminate and employ others to complete the works – the employer is obliged to settle its account with the contractor.

Following the completion of the works and making good defects, the employer must prepare a statement setting out its account. This account must include the expenses that it has properly incurred in completing the works, as well as any direct loss or damage caused to the employer for which the contractor is liable. In addition, the statement must also include the amounts already paid to the contractor and the amounts that would have been payable to the contractor had the contract not been terminated.

Any payable account balance between the parties is determined by whether the sum owed by the contractor exceeds the amounts owed by the employer or vice versa. To conclude, the financial well-being of the construction sector is fragile at the best of times, but given the current pressures borne out by the pandemic, there is a heightened risk of contractor insolvency. Accordingly, given this increased risk and the changes to legislation, it is a good time to understand your contractual obligations.

If you require any further information, please contact Paul Cacchioli at paulcacchioli@hka.com.

OBJECTION YOUR HONOUR?

With the outbreak of COVID-19, contractors are experiencing severe disruption across many of their projects, with construction and engineering works facing significant delays, site closures and members of the project team being asked to work from home or forced to self-isolate.

I was recently asked whether a contractor could reject a project manager’s instruction to provide a quotation for additional work under an NEC3 contract. In that particular situation, the contractor was close to completing a difficult contract and the request for the quotation involved a significant amount of additional work that would extend the contract duration on unfavourable terms. That question has led me to reviewing a contractor’s right of reasonable objection to an instruction under the FIDIC, NEC and JCT contracts.

In my experience, variations can be a welcome source of additional work, with contractors pricing on the basis of expected variations. Variations can present opportunities and/or risks for a contractor, depending on the type of contract and timing of the instruction(s). For example, a contract such as the JCT SBC/Q/2016 edition that incorporates a bill of quantities may include an opportunity for a contractor to increase profit for an item that includes a high rate. Conversely, it may present a risk and potentially erode the contractor’s profit margin where an item includes a low rate.

In Henry Boot Construction Ltd v Alstom Combined Cycles Ltd[1] it was held that mistakes in the contractor’s rates and prices were to be disregarded for the purposes of arriving at a new rate pursuant to cl.52(1) of the ICE 6th edition even though the practical effect of such an approach was to give the contractor a windfall.[2]

Whilst the FIDIC, NEC and JCT standard forms of contract include express terms for the administrator to vary the contract, HKA’s own CRUX research has also established that “change of scope” and “variations” rank as the No. 1 and No. 2 primary reasons for causation in construction and engineering disputes.[3]

This article looks at variations, how an instruction may be given and whether a contractor can reasonably object to an instruction to vary the contract.

What are Variations or Extra Work?

Whether an event constitutes a variation depends on the circumstances and the facts. The complex nature of construction and engineering works mean that, in most cases, variations are required to account for changes to the design, quality or quantity of the work.

The ability to make variations under the contract benefits both parties as it:

• Gives the employer the power to instruct the contractor to alter or modify “the design, quality or quantity of the Works”[4] at agreed rates and/or comparable prices whilst also ensuring that the contractor is paid for providing extra or different work or materials.
• Provides the employer the flexibility to make changes so that it gets the product it wants.
• Preserves the contract while allowing changes and therefore ensures that the contract is not frustrated.[5]

The form of contract will determine the party’s obligations and contractual mechanisms for administration of variations.

What are Instructions?

Not all instructions constitute a variation, and most standard form contracts expressly provide that the Contractor is obliged to comply with all instructions.

For example:

• Clause 3.5 of the FIDIC Red Book 2017.
• Clause 27.3 of the NEC4 Engineering and Construction Contract (ECC), 2017 edition.
• Clause 3.10 of the JCT Standard Building Contract with Quantities, 2011 Edition (JCT SBC/Q 2011) and JCT Standard Building Contract with Quantities, 2016 Edition (JCT SBC/Q 2016).

Can a Contractor Object to an Instruction?

Some contracts allow the contractor to object to an instruction in limited circumstances.

In the JCT SBC/XQ/2016 contract the requirement to comply with a valid instruction is subject to certain exceptions:

• clause 5.1.2 variation instruction (access and use of the site, etc.) to the extent that the contractor makes a reasonable objection (cl 3.10.1);
• an instruction relating to a Schedule 2 variation quotation, until a confirmed acceptance has been given (cl 3.10.2);
• where the instruction might affect the efficacy of the design of the Contractors Designed Portion (cl 3.10.3);
• where the instruction might affect the contractor’s compliance with the CDM Regulations (cl 3.10.3);
• where the instruction may infringe patent rights (cl 3.10.4);
• where the instruction relates to a named specialist, and the contractor is unable to enter into a contract with that firm (cl 3.10.5, Schedule 8:9.3 and 9.4)[6]

The FIDIC Red, Yellow and Silver Books enable the contractor to object to a variation instruction on a number of grounds including the inability of the contractor to comply with its health and safety obligations and/or obtain the goods required for the variation.[7] In addition to the grounds for objection in the Red Book, the Yellow and Silver Books contain two additional grounds to object that reflect the different design risk allocation.

These are that the variation may adversely affect the contractor’s ability:

• to achieve the performance guarantees; and
• to complete the works so that they are fit for the purposes for which they are intended.

Despite this, the engineer is entitled to confirm the instruction, although the practical effect of this is not clear. If the engineer has dismissed the contractor’s objection and confirmed its original variation instruction, can the contractor object all over again? Presumably not, as it would seem meaningless to repeat the process. If the contractor still wishes to maintain its objection to the variation, then it would be reasonable to notify a claim in accordance with clause 20.

Under the FIDIC 1999 suite, the engineer is not entitled to instruct a variation that omits any work which is to be carried out by others. However, the 2017 suite allows parties to agree that work can be omitted by a variation instruction and the contractor is entitled to recover any wasted costs. To the extent that the omitted work is to be carried out by others, the contractor is also entitled to recover loss of profits and any other losses or damages arising from the omission.

If a variation instruction has a price greater than 10% of the accepted contract amount/price or the accumulative total amount of all variations exceeds 30% of the accepted contract amount/price, the contractor may request the employer to provide reasonable evidence that financial arrangements have been made so that the employer can pay the outstanding balance. Failure to do so within the necessary period could entitle the contractor to suspend work and, eventually, terminate the contract[8]

One of the most important provisions of NEC3 and NEC4 ECC is clause 27.3 which states that the contractor is required to obey an instruction which is in accordance with the contract and is given by the project manager or the Supervisor.

The importance of clause 27.3 is that in conjunction with clause 14.3 (changing the scope or a Key Date) and clause 20.1 (providing the works) it provides for variation of the works. However, clause 27.3 also implies that the contractor may resist invalid instructions that are not authorised “in accordance with the contract”.

So for example an instruction going to the order and timing of the carrying out of the works or practical directions given on site might well go beyond instructions in accordance with the contract with the result that the contractor was not bound to obey. Whether this was so might well depend on the terms of the Works Information (NEC3) or Scope (NEC4) which the project manager undoubtedly has power to change under clause 14.3. It may be that the contractor disagrees with the entitlement to have provided any such instruction. If so, the contractor will be at risk of the consequences if he simply refuses to comply with it.

Instead, the contractor should, if possible, proceed but use the project dispute resolution procedures. If the contractor expends money complying with an instruction the validity of which is successfully challenged, that outlay would be recoverable as a compensation event (under clause 60.1(18): the issue of an invalid instruction by the project manager; as agent, would be a breach of contract by the employer).”[9]

In NEC4, clause 17 has been renamed Requirements for Instructions with clause 17.2 introduced giving either party the power to notify each other “other as soon as either becomes aware that the Scope includes an illegal or impossible requirement.”

Has a New Contract been Formed for the Varied Work?

A contractor may be able to demonstrate that a new contract has been formed for the varied work, under which the contractor would be entitled to be paid a reasonable sum for the work undertaken. However, the circumstances in each case will have to be considered carefully.

If a contractor decides to argue that the varied work fell outside the contract the point should be made at the time the instruction is issued.

In Blue Circle Industries plc v Holland Dredging Co (UK) Ltd, [10] during the course of a dredging contract the parties agreed that the contractor would not deposit spoil into suitable areas of the lough as originally tendered, but instead on an artificial island it had agreed to construct from the dredged material.

The employer accepted the contractor’s quotation for this work by letter, which stated that an official works order would follow in due course. The execution of the works to construct the island was unsuccessful, and the employer brought proceedings.

The court held that because the construction of the island was work wholly outside the scope of the original dredging contract, the contractor was not obliged to accept the work as a variation. The construction of the island was not a variation of the dredging contract, but a fresh contract.

In Supablast (Nationwide) Ltd v Story Rail Ltd, [11] the sub-contractor, Supablast, carried out a significant amount of additional works. The court had to consider whether the additional works were carried out as a variation to the original sub-contract or under a new sub-contract.

The court held that there was only one sub-contract and: “Other than it being an example of work which was considered not to be a variation in an engineering contract, [Blue Circle] does not lay down, at least on this topic, any great point of principle. What one needs to do is to look at the variation clause in question and determine, depending on what the variation clause covers, whether the extra or altered work falls within it or not.”

Conclusion

The standard forms of contract discussed above contain limited rights for a contractor to reasonably object to an instruction.

Although there are perfectly reasonable grounds to object to certain instructions, such as instructions that omit works for the purpose of awarding those works to another Contractor,[12] the consequences of failing to comply with reasonable instructions may constitute repudiatory breach by the contractor and may lead to the employer paying a third-party to execute work of any kind that may be necessary to give effect to that instruction, with the contractor being liable for the resultant cost.[13]

Many contracts also include amendments that allow the employer to omit work and award to others with no recourse for the contractor. Therefore, it is important that a contractor fully understands its contractual obligations and carefully considers its rights before it decides to enter into a specific form of contract which could lead to strict liabilities if it later decides to object to an instruction.

If you require any further information, please contact Christopher Devine at christopherdevine@hka.com.

Christopher has over 20 years’ experience in the construction industry in the fields of quantity surveying and commercial management on a range of building and civil engineering projects throughout the UK, ranging from £50k to £350m. His industry knowledge has been expanded through time working as a quantity surveyor for a large international consultancy, three major main contractors and latterly as commercial manager for a specialist M&E subcontractor. Christopher has managed numerous complex main and sub-contract work packages at pre- and post-contract stages through to final account, and gained a significant amount of experience in contract administration and the management of upstream and downstream contract compliance and claim issues. 

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[1] [2000] 4 WLUK 96

[2] Chitty on Contracts 33rd Ed.

[3] https://www.hka.com/crux-insight-claims-and-dispute-causation/

[4] JCT SBC/XQ/2016 Edition, clause 5.1.1

[5] NEC3/4, clause 14.3 (Changing the Works Information/Scope or a Key Date) and FIDIC 2017 Red Book

 clause 13.1 (Right to Vary)

[6] Guide to JCT Standard Building Contract 2016, p. 80

[7] FIDIC 2017 Red, Yellow and Silver Book, Clause 13.1

[8] FIDIC Red Book (2017), Practical Law UK Practice Note w-014-9936

[9] Keating on NEC3, 3-058

[10] (1987) 37 BLR 40

[11] [2010] EWHC 56 (TCC)

[12] Abbey Developments Ltd v PP Brickwork Ltd (2003) CILL 2033

[13] JCT SBC/XQ/2016 Edition, clause 3.11

As published in Energy Institute’s Petroleum Review, November 2020 Edition.

It is no secret that current and future oil and gas projects face challenging and uncertain times, due not least to the plummeting oil price swiftly, followed by the ongoing effects of the COVID-19 pandemic. The drop in oil price led to a number of project terminations, development re-appraisals and delayed start-ups while the following pandemic has had the effect of causing delays and disruption to live projects and the delayed start to others.

Operators and contractors alike are having to manage these challenging issues, and more, in the current landscape which is resulting in a marked rise in contractual claims and disputes with parties looking to protect their commercial positions.

As part of its CRUX causation programme, which collects causation and dispute data globally, HKA carried out an analysis of the effect of the last major oil price drop in 2014 (referred to in the analysis as the “Last Major Drop” (LMD) period from July 2014 to July 2016) on oil and gas projects

As an example, HKA provides analysis of the Middle East below. The CRUX analysis identified that certain causations increased significantly in the LMD period, most notably while “Change in scope” retained the “top spot” for proportion of causations, “Approvals were late” rose from 17th place to 2nd most frequent causation, “Design information was issued late” rose from 13th to 3rd and “Contract requirements were poorly drafted” rose from 10th to 4th.

Notably, the two new highest causations relate to timing. These increases seen would be expected in periods of low oil price and reflect the reality of how the sector manages such instances. During periods of low oil price, operators traditionally re-appraise their operational strategies and delay project execution with the aim of limiting commercial exposure. This can, and evidently does, manifest in delay on the design and approvals process, which can sometimes be due to either re-designs or holds on stage gateway achievement markers, and subsequent delays in making sites available.

As might be expected, the prevalence of formal disputes including an element of delay rose dramatically for those projects executed within the last major drop period, from 29% to 50%. This demonstrates that, during periods of significantly low oil price, the issue of delay and time for completion comes to the fore, directly impacted by the expected, and in CRUX evidenced, delays in the release of design and approvals to enable projects to continue as originally planned. 

This analysis identified, amongst other points, that the disputes that were settled rose from 14% in the non-low oil price period to 24% in the last major drop period. This reflects the commercial reality of such instances, whereby, faced with tightening commercial flexibility constraints and liquidity issues, contractors generally lean more towards settling matters outside the confines of what are often expensive formal dispute resolution procedures. This could also have been driven by a change in stance from the preceding financial crisis of 2007-08, where contractors often took a more aggressive approach, which, in the eyes of many, damaged relationships in the sector. Operators and contractors usually have a good grasp of where contractual entitlement lays and, in instances whereby delay has been caused due to the operators slowing down then the reality of this is generally understood and recognised by the operators as being their responsibility.

This pragmatic approach, whereby there are a greater number of settlements in low oil price periods is to be expected, and aligns with the CRUX findings of both an increase in prevalence of time-based causations (e.g. approvals are late) and the increase in the number of delay related claims. 

Lessons from past low oil price periods can be utilised in understanding and forecasting what will occur in the current and future oil price drop periods. The reader should be aware, however, of the “double impact” on the oil and gas sector being the COVID-19 pandemic and the effects it is having on all sectors of business globally.

Combined with the oil price drop, demand for oil-based products has dropped further as a result of the pandemic. Significantly reduced travel and shipping has further sharpened oil producer’s development reviews which has resulted in projects being delayed, mothballed or completely abandoned. An increase in project terminations and a rise in the number of related claims from contractors regarding such matters is prevalent.

In the early period of the pandemic, the contracting landscape was taken up largely with questions about entitlement with regards to the changing issues. Was their contractual entitlement under the force majeure provisions? Perhaps a change in law, or failure to provide access to the site. This period saw a wave of notices of claim events being sent up the contracting supply chain. In some case, operators took the proactive approach and revisited the contract terms with the contractor to find a commercial solution which assisted both parties and protected the completion of the project. In other instances, such notices were met by rejection, often met with silence and occasionally replied to with notices of default down the supply chain for failure to continue working or informing contractors of their duty to manage the risk and to implement appropriate measures to mitigate and/or address the effects of the pandemic. Many notices were also rejected, as there was uncertainty that COVID-19 was the actual cause of the alleged project impacts.

This period has largely passed, albeit many effects and impacts of the pandemic are long lasting and will have continuing or unknown repercussions far into the future, and contracting parties to those oil and gas projects which have continued (i.e. not been terminated or mothballed) have submitted and continue to submit, interim claims in respect of time and cost due to the continuing effect of COVID-19.

Contractors on live oil and gas projects have experienced a range of different impacts on their work due to the pandemic. During the initial period, contractors were affected by having sites closed down, either by mandate of their client or of the relevant local authority. In some instances, sites were closed by the contractors themselves, albeit these are the minority and generally such “self-imposed” shutdowns did not last for extended durations.

In addition, contractors were impacted by external factors such as the reduction or complete stoppage of the movement of labour across international borders and labour camps, often off-site, being closed down or having restricted movement due to governmental rules or requirements. The effects of such shut-downs and restrictions can now be assessed. What creates a larger problem regarding the assessment of impact is the ongoing disrupting effect and state of uncertainty linked, in one way or another, to the pandemic.

This difficulty can be compounded by the transition from one contractual causation into another, for example where a government imposes restrictions and then, on release of those constrictions, similar issues continue. This example was seen in Singapore, where the government imposed national constraints on construction sites working. The constraints were lifted on 1 June 2020 and thus, at that point, it could be argued that an entitlement related to such government restrictions ceases. However, contractors in the region were then affected by re-mobilisation periods, restrictions on labour travel from different countries, which is a significant factor for nations such as Singapore, and 14-day quarantine periods upon arrival for all international visitors. 

Deliveries of materials and, especially, fabricated components from other countries particularly hit by the pandemic created breaks in when and how programmes of work could be delivered. In some cases, the delivery programmes could be re-scheduled to mitigate the effects of such but frequently these component parts to a project were unavoidable critical to progress.

There is a large number of varying disruptive and state of uncertainty effects re-started or continued projects are experiencing, and indeed those which have not yet commenced, will no doubt encounter. The effect of extensive home working on large, complex projects is not yet known. While the industry continues to see great advancements in using shared 4D models, such as coordinated design packages and other routes, to create seamless project controls, the impact of the pandemic will be, in part, to accelerate the need to place greater reliance on such systems. Whether the parties using these processes are able to implement and increase their use with sufficient capacity to manage these complex projects on a more remote, singular working basis is yet to be seen.

Contractors will also continue to experience issues with productivity on site. For example, a government may have imposed a temporary restriction on working hours during the height of the pandemic which resulted in a loss of 40% of the available working hours per week. Following the government’s release of the restriction the national oil company continued to impose those restricted working hours, thereby continuing to severely impact the progress of works and the cost to the contractor.

It is also the case that parties to oil and gas projects need to sufficiently prepare for the risk of the second wave of the pandemic. At the time of writing, most countries around the globe are seeing an uptake in cases throughout their general populations. This may result in further restrictions put in place by relevant authorities and tighter constraints on travel and the transfer of goods and fabricated items.

The effects of disruption are notoriously difficult to ascertain and require good quality, accurate records in order to substantiate them. In addition, the more time that passes after the immediate and obvious effects of the pandemic, the harder it will be for contractors to link the root causation with the disrupting effects. Therefore, contractors must ensure that sufficient controls are implemented to accurately record the continuing disruptive effects of the current pandemic if they want to secure entitlement. 

Contracting entities in the oil and gas sector are looking towards a challenging future which, in part, sees the recurrence of a COVID-19 type issue. This will inevitably lead to amended wording of force majeure and other clauses, possibly with specifically drafted pandemic clauses. The wider construction sector is still wrestling with how to fairly deal with the current situation, and no doubt will continue to do so for some time. The understanding of commercial risk for such events has changed and contracting and procurement methods related thereto will need to be reviewed and reasonably appraised, placing the risk with the party best placed to manage that risk to ensure that the recovery of the oil and gas sector can be sustainably maintained.

About the Authors

Charles Wilsoncroft is a Partner of HKA with over 20 years’ experience in the construction industry. He is a Chartered Civil Engineer who has gained broad experience working for a main contractor, a public-sector client organisation. During his career, he has been involved in all manner of procurement, contract training, project management, contract management, and contract administration, including dispute resolution, expert witness provision, and final account settlement, and regularly advises clients in respect of such. In addition to working in the construction and engineering sectors, Charles has worked extensively in the Process industries.

Caryn Fuller is a Partner of HKA with over twenty years of professional experience in engineering, construction, project management, project controls management, and construction claims analysis. Caryn is a project/program leader with a proven track record in leading high-profile, large-scale global construction initiatives with a focus on cost control, scheduling, and reporting.

If you require any further information, please contact:

Charles Wilsoncroft – Europe – charleswilsoncroft@hka.com
Caryn Fuller – Americas – carynfuller@hka.com

The importance of maintaining records in construction projects is often misunderstood, since in many cases records are used primarily as a claims tool. However, this contradicts the actual purpose of maintaining records which is the management and control of the works. In an ideal world, records would assist the parties in avoiding disputes and costly legal procedures. This is one of the reasons why most contract forms set out specific requirements for contemporaneous records to be maintained throughout the course of the project.

However, construction disputes are common and often the parties turn to experts to untangle the project’s “conundrums”. When it comes to time related disputes, good record keeping acts as an insurance policy. Reliable and consistent contemporaneous records will serve as important tools to identify the cause of delays.

On the other hand, poor records will have the opposite results. It is not unusual for the contractors to issue unsubstantiated EOT and/or disruption claims, without providing enough evidence in relation to the causes of delay. In these specific cases, the rejection of the EOT claim from the contract administrator is the only way forward.

There are various records which can be used as evidence for time related disputes. Monthly progress reports, daily diaries, emails and revised programmes are only some that should be maintained during the project. Even though the majority of contractors and consultants/clients have record keeping systems in place, the records that delay experts are often provided with are insufficient. This is not only the case in smaller projects, where there are greater challenges to justify large costs to manage contracts, but even in medium and large projects the documents provided also commonly lack detail and consistency.

Armed with insufficient evidence, delay analysts face difficult challenges in identifying the reasons behind project delays. This is often the case in disruption disputes where detailed, daily data is required to prove the loss of productivity due to a client’s instruction.

It is also very common that due to the lack of detailed records, delay analysts are required to spend significant amounts of time processing the received data, which unavoidably increases the cost. By way of example, one of the first steps of delay analysis is often the preparation of a high level as-built programme of the project.  Whilst this sounds a relatively simple process, it is often difficult to accumulate detailed as-built records that will assist in the preparation of a reliable as-built programme. This can mean it is necessary to make reasoned assumptions in respect of as-built dates that could impact on the conclusion of the analysis.

In order to mitigate this risk, both parties should maintain quality as-built progress records. The records should be as detailed as possible, clear and represent the actual progress of the project and the activities at the time they are issued. The progress data should also be accompanied by photographs which evidence the recorded progress. Photographs are ideal records if they are date-stamped and taken regularly, and if it is clear what they demonstrate.

Moreover, it would be useful if progress records were distributed and agreed/signed between the parties to represent a true record of progress as the project develops. It would also be ideal if there was a contractual provision in this regard, since this would help the parties to agree on the project’s factual matrix at an early stage. The above would be very useful in cases of termination or in cases where disputes carry on for many years after the completion of the project.

Any delay event should also be clearly recorded in the contemporaneous documents such as: monthly progress reports, weekly updates, minutes of meetings, letters and programme updates. Furthermore, there should be a detailed schedule containing all the necessary information in relation to each delay event (i.e. date of occurrence, area impacted, impact and time period of the event). This would be helpful, in the case of a time dispute arising, in identifying whether or not a specific event affected the project’s overall completion date. Similarly, as before, the event schedule should be distributed between the parties and ideally be agreed.

The continuity of records throughout the project’s duration should also be ensured. Very often, gaps in the contractor’s/consultant’s records are observed; for example where progress updates are not completed regularly, minutes of meetings and programme revisions are not issued and photographs are taken infrequently. This discontinuity of records is commonly observed in the last months of projects and affects the delay analyst’s ability to identify the causes of delay. Finally, the progress records should be as consistent as possible. The progress reports, the programme updates, the minutes of meetings and other documents should ideally be presented in the same format throughout the project. This will reduce the processing time required with records for the purposes of a delay analysis, and therefore the cost, should a time dispute arise.

As far as the progress records are concerned, there should be an agreed policy in place of how the achieved progress of the activities/project is measured. Today, it is not unusual for the contractor to measure the actual progress of the works differently from the engineer/consultant. This causes confusion, extra effort and subsequently extra cost when performing a delay analysis, since assumptions need to be made for the actual progress of the works.

To summarise, keeping reliable and consistent records throughout the project is necessary for the proper management of the works. Also, a mutually agreed record keeping policy would be beneficial, not only throughout the construction phase, but also in the event that a time dispute arises. Having the factual matrix of the project agreed would save great time and cost and, in a way, simplifies the dispute process.

If you require any further information, please contact Haris Katostaras at hariskatostaras@hka.com.