GETTING VALUE IN CONSTRUCTION PROJECTS IN SRI LANKA

During my present visit to Sri Lanka, I had the privilege of travelling to Trincomalee and from there to most parts in the Eastern province. What I saw was an amazing transformation of the major infrastructure of Sri Lanka. The Colombo Galle highway from Kottawa and other massive road developments around the vicinity of the Sri Lanka parliament are signs, that Sri Lanka is proving that it has the will and resources to attract tourism and most importantly private investment.

I was informed that many of the road development and reconstruction is funded by foreign aid. There is absolutely nothing wrong with obtaining foreign aid but at the same time the government must encourage private finance initiatives (PFI’s) from within the country. Even developed countries like the United States 

CONSTRUCTION projects world over have the reputation of ending up over budget, beyond original completion periods and in most instances of questionable quality.

In every case those responsible seem to get off scot-free.  The contractor becomes a scapegoat and the owner ends up paying “through his nose”.  Time and again it has been pointed out that owners or sponsors do not get a fair deal from the team retained by them in the pursuit of their construction and procurement objectives.

Is there any justification for such an accusation?  This article examines the issues involved in a construction project and argues that by proper management and control of the whole project, including managing the team, it is possible for the owners, sponsors or funders to achieve value for their money when embarking on construction projects.

The Issues

The main issues involved are the control of time, cost and quality.  These are of paramount importance in every project, more so in construction projects as people who invest in them, be they individuals building a house for their own occupation, speculative builder, a firm building its office or factory or even government projects. They all expect the project to start its beneficial operation in accordance with their initial plans.     

Initial plans involving cost parameters, time limits and quality standards have been set to meet the returns expected on their investment based on their feasibility studies.  It is not unreasonable for the owners to expect this from the professionals they engage.

What happens if the project is delayed for any reason?

The contractor gets extension of time and prolongation costs or loss and expense if appropriate, the consultant continues as if nothing has happened but the owner pays out whatever costs resulting from the extension and suffers loss and expense himself which are not immediately recoverable.  The Public Works Department (PWD) conditions of contract lists 11 items which entitle the contractor for extension of time.

Four of these are beyond the control of any of the parties to the contract like force majeure; exceptionally inclement weather; loss or damage by fire, lightning, explosion, storm tempest, flood, ground subsidence, bursting or overflowing of water tanks, apparatus or pipes, aircraft and other aerial devices or articles dropped there from; riot and civil commotion and consequences of trade union disputes

These four can be fairly reasonably predicted by a risk analysis and assessment and adequate contingency provisions made to deal with any of these situation should they occur.

Therefore, the owner would not be taken unawares when dealing with such eventualities.  Three others come about by the owners relationship with other third parties viz, disputes with neighbouring owners; delay in possession of site, and delay on the part of owners direct employees engaged in work not forming part of the contract.

These are the owner’s responsibility and he has to suffer the consequences should such an event take place.  Historically, such occurrences have been very rare.  In any event the owner would know of such events taking place and would have made contingency measures to deal with them himself.

One cause for extension of time is the contractor’s inability to secure essential goods or materials, for reasons beyond his control and which he could no have reasonably foreseen at the time to tender.  This is a reasonable clauses but a rare occurrence.  It is my belief that with proper planning and phasing of the site operations such a temporary “glitch” could be overcome.

One other reason is delays caused by nominated subcontractors. Historically, it has been found that contractor’s tend to depend on this most of the time for their claims for extensions of time.

However, this is only a fraction of the whole and could be controlled by taking efficient steps and management to co-ordinate the work of nominated subcontractors with those of the contractor.  Two reasons that are given for granting of extension of time need full discussion as these are those that incur the owner not only in terms of delayment but also cost.

They are:

(a)  by reason of SO’s instruction issued under clause 5; and

(b)  by reason of the contractor not having received from the SO timely information.

Among the items described in the aforementioned clause 5 is “variations” which has been defined in clause 24(b) of the PWD form of contract as “alteration or modification of the design, quality or quantity of the works as shown upon the Contract Drawings, Bills of Quantities and /or Specification, and includes the addition, omission or substitution of any work, the alteration of the kind or standard or any of the materials or goods to be used in the works and the removal from the Site of any Work, materials or goods executed or brought thereon by the contractor for the purposes of the works other than the work, materials or goods which are not in accordance with this contract.”

This appears to give the SO a carte blanche licence to cover up any of his or other consultants’ deficiencies by the issue of an instruction under Clause 43 of the standard form of contract.

This happens all the time that architects, engineers and quantity surveyors overcome deficiencies in their work by cleverly disguising these as variations under clause 5 and the owner cannot do anything about it but suffer loss and expense himself.  The owner has no recourse to any recompense from those who are at fault and has to suffer the consequences.  The owner at this point is like the person who has caught the proverbial “tiger by the tail” not having any option but to put up with it.

Why should it be so?

Every standard consultancy agreement (memorandum of agreement) I have been able to see did not have any clause safeguarding the interest of the owner.  There is nothing in such agreements accountable for any of their deficiencies which cause loss and expense to the owner.

On the contrary there is adequate safeguard for the consultants from any breach from the owner. The unreasonableness of this has been pointed out time and again but professional organisations have skilfully managed to retain the status quo by claiming professional integrity of their members in dealing with clients.

If such is the case why, may I argue that there are large numbers of variations in construction projects not attributable to those initiated by owners?  Furthermore, there is no reason why projects should go beyond completion periods if proper planning, programming and controls are administered.  At the moment the system seems to be in favour of consultants but Sir Michael Latham who was commissioned by the British Government in association with the construction industry to review procurement and contractual agreements in United Kingdom in his report agreed (4.12) that “The system must be robust enough to meet the wishes of clients, not vice versa.” It has been found world over that designers have tendency to impose their exaggerated ideas on “lay” clients and over specify thereby making the project unnecessarily costly.

Latham points out that “a well designed building need not be to a high level of specification”.  It should however be effective for the purposes for which it is intended.  The survey conducted by Latham for his review found that clients expressed concern that they do not always get what they asked for from consultants.  This view is supported by a presentation by Dr. Bernard Rimmer of Slough Estates Plc. to a conference organised by Contract Journal and CASEC in Barbican London on Dec 15 1993 (from the Latham Report).

Latham points out that such criticism may be challenged by the industry as unfair, but if clients express such concerns the construction industry should seriously take note.  Every project needs to be managed.  It is otherwise unreasonable to expect them to proceed smoothly.

How could the owners achieve value for money?

Most parts of the developing world, Malaysia included, still persist in following the systems left behind by the British.  The PWD is one of them.  The British government having found the Department of Environment (DOE which is equivalent to the PWD) ineffective in providing value for money in government construction projects have sold the department to a private firm (Tarmac). Now they have to compete with other project management organisations for work.

In Sri Lanka the PWD has been fragmented and made accountable for any cost and time over-runs. New Zealand has also corporatised their PWD.  These governments have recognised that although the PWD have highly qualified, able and efficient professionals, the system within which they operate does not provide them with flexibility for innovation and to cut through the red tape in providing an efficient service.

Therefore, governments must gibe the lead and the only way to gibe these highly qualified and able professionals the opportunity to prove their worth is to make them compete with professional firms and practices in procuring work.

Recent speeches by the Prime Minister Datuk Seri Mahathir Mohammed and also by his Deputy and Finance Minister Datuk Seri Anwar Ibrahim appear to steer the civil service to break out from the shackles of complacency and face the reality of competition.

Latham in his report Constructing the Team (HMSO) says (4.1) “effective management of the design process is crucial for the success of the project”.  He suggests amongst other things that “it should involve a lead manager” and goes on to say, “The chosen procurement route will affect the design strategy and employment of consultants.  But it does not alter the need for all design to be co-ordinated”. This is one area which usually creates a lot of problems for the owner.

“The client should ensure that all consultants are appointed under mutually interlocking contracts which specifically define their duties and responsibilities and set time scales for their implementation.  The lead manager and /or design leader should then take responsibility for co-ordinating the work of all consultants” (Latham 4.5).

“The design leader must ensure that the client fully understands the design proposals and agrees that they meet its objectives. Unless tee owner is fully made aware of the understanding of his brief by the consultant, he is likely to be disappointed when he sees something different coming up.

Latham says that “it is rarely satisfactory for clients to be shown conceptual drawings, still less outline plans of rooms.  Good design will provide value for money in terms of both total cost and cost in use”(Latham 1.18) Sir Michael emphasised (1.13) it is greatly in the interests of such clients to have the best advice and robust guidelines which will assist them to obtain value for money”.  Under the present system, as I have argued in the previous paragraphs, there are no effective controls to protect the owners’ interests.  Effective controls come from effective management.  To put into place an effective management. plan Latham says that “clients will have a vital role to play in ensuring the implementation of best practice and they will also have most to gain from it.”

By. Dr. M. Haris Z Deen
(Email: deenmohamed835@gmail.com)

(Many thanks for Dr. Haris Deen for providing us with this valuable article)

Scottish Court Offers Clear Directions on Extension of Time Evaluation

The Appeal Court ratification of the decision in City Inn v Shepherd Construction [2010] provides clear and concise guidelines for evaluating EOT claims. This will be of interest to all quantity surveyors having to deal with EOT claims.

Introduction

The recent case of City Inn v Shepherd Construction has put a ‘damper’ on the reliance by Architects, Engineers and Planners on set rules of critical path analysis and concurrency in their attempts to defeat Contractors’ claims for extensions of time. By far this appears to be first case that has dealt with such issues and advocated a common sense approach to dealing with delays to a construction operation. In the case under discussion, decided Lord Drummond Young, detailed critical path analysis was rejected instead a sensible approach which is more practical in the assessment of delay events was favoured. Also the manner of “apportionment” of delay between the parties where there was no “dominant cause” of delay was also rejected by Lord Drummond Young. This therefore raises a serious question in apportioning delay due to concurrency in the evaluation of extension of time claims from contractors. Perhaps a deeper examination of the facts of the City Inn v Shepherd case might shed some light on these issues.

 The Facts

The disputed between City Inn, the Employer and Shepherd Construction, the Contractor is in respect of delay in completion of a hotel for City Inn in Bristol, England. The contract was based on an amended JCT standard form of building contract (with quantities), 1980. The contractor had been awarded 9 weeks extension of time (4 weeks by the architect and 5 weeks by the adjudicator). The Employer, City Inn disputed the decisions of the architect and adjudicator and challenged these decisions and sought various orders including a declaration of disentitlement of any extension of time. The Contractor Shepherd counterclaimed for 11 weeks extension of time and associated loss and expense.

The evidence produced at the trial indicated that there were qualifying events and also delays caused by the contractor concurrently with some qualifying events which all contributed towards the delay in completion of the project.

The Court of First Instance Decision

The case in the Court of First Instance was heard by Lord Drummond Young who concluded that the task of the decision maker under clause 25 of the contract was to make a “judgment” and, ultimately, arrive at a “fair and reasonable” decision on an extension of time. Where there was concurrency (that is, the relevant event and the contractor risk-event existing at the same time), irrespective of when the events began (or ended), in the absence of one event being “dominant”, achieving a fair and reasonable outcome may involve an apportionment exercise and that the “but for” test of causation did not apply in the context of clause 25. On the basis of this analysis Lord Drummond Young agreed with the architect and adjudicator and held that the contractor was entitled to an extension of time and that the 9 weeks extension of time granted was fair and reasonable.

The employer, City Inn appealed and the appeal was heard by three judges who all rejected City Inn’s appeal and set out five propositions for a proper approach to the application of clause 25 as follows:

1. Before any claim for an extension of time can succeed, it must be shown that the relevant event is likely to delay or has delayed the works.
2. Whether the relevant event actually causes delay is “an issue of fact which is to be resolved, not by the application of philosophical principles of causation, but rather by the application of principles of common sense”.
3. The decision maker can decide the question of causation (that is, whether the event has caused delay to completion) by the use of whatever evidence he considers appropriate. If demonstrated to be sound, this may take the form of a critical path analysis, but the absence of such an analysis does not mean the claim will necessarily fail.
4. If a dominant cause can be identified in respect of the delay, effect will be given to that by leaving out of account any cause or causes that are not material. If the dominant cause is not a relevant event, the claim will fail.
5. Where there are two causes operating to cause delay, neither of which is dominant, and only one of which is a relevant event, a contractor’s claim for an extension of time will not necessarily fail. Rather, it is for the decision maker “approaching the issue in a fair and reasonable way, to apportion the delay in completion of the works… as between the relevant event and the other event.”

All three judges agreed that a critical path analysis was not essential to carry out the exercise (although it may be relevant). All three judges also disagreed with HHJ Seymour QC’s comments in Royal Brompton Hospital NHS Trust v Hammond & Others (No 7) 2001 76 Con LR 148 to the effect that a relevant event falls to be disregarded if a pre-existing contractor default would nonetheless have caused delay.

How does this decision affect future claims for extension of time?

Before arriving at any conclusion it is essential to understand the approach of the learned judges all of whom appear to place emphasis on the need for a “fair and reasonable” decision on extensions of time. Lord Osborne expressed dissatisfaction at the various attempts (by architects, engineers and planners) at classification of “concurrent delay” or “concurrent delaying events” when he stated that:

“It may not be of importance to identify whether some delaying event or events was concurrent with another, in any of the possible narrow senses described, but rather to consider the effect upon the completion date of relevant events and events not relevant events. For that reason, discussion of whether or not there is true concurrency, in my opinion, does not assist in the essential process to be followed under clause 25.” 

The Appeal Court decision is also a rejection of the insistence by planners that a critical path analysis is essential to demonstrate an extension of time entitlement. However, the court recognised that there is some value in critical path analysis, but it is for the decision maker to decide if such evidence is of assistance. A claim will not necessarily fail in the absence of such evidence. 

How does the decision maker (architect, engineer or planner) apportion delay in the event of concurrency?

A majority of the court supported Lord Drummond Young’s apportionment exercise in the event of concurrency where no cause is dominant, although Lord Osborne does emphasise that it is “open” to the architect to apportion as part of approaching the issue in a fair and reasonable way; he is not compelled to do so.

In my view this is not the end to the question, the question of concurrency, causation and apportionment will continue to dominate the EOT scene. The Shepherd case is based on the JCT 80 form of contract and does not necessarily apply to other forms where clear statements are contained for dealing with extension of time. It must also be pointed out that the rejection of “critical path” analysis in the Shepherd case should not be taken as a precedent where the production of a programme in such format is the requirement in a contract. In the Shepherd case it was found that it was not possible to accurately recreate the critical path. This therefore certainly does not give any licence for contractors to deviate from any contractual requirement for providing electronically generated programmes in critical path format.

As to the application of concurrency in the apportionment of delay, the decision makers must take into account the event of dominant delay and apply a common sense judgement on arriving at a fair and reasonable conclusion. If the dominant delay is attributable to the employer, then the contractor’s delay will not matter (even if concurrent with the qualifying delay) common sense dictates that the contractor will be entitled for an extension of time because it was the dominant event that caused the eventual delay irrespective of the concurrent delay.

References:

CHOAT, R; “Pulling Out all the stops”- RICS Construction Journal (Nov. – Dec. 2010).   

By. Dr. M. Haris Z Deen

(Many thanks for Dr. Haris Deen for providing us with this valuable article)

GUARANTIES AND WARRANTIES QS’S NIGHTMARE OR DILEMMA

I have frequently been asked by Quantity Surveyors and Engineers alike, very senior people as well as students to explain the difference between Guaranties and Warranties. This becomes even more confusing to some when lecturers speak about collateral warranties in respect of construction contracts.

Guaranties and Warranties have immense significance in the interpretation and administration of contracts. Both have the same meaning but in different contexts. In respect of a construction contract this can best be demonstrated by a diagram as follows:

  

The above diagram suggests that the contractor provides a Guaranty to the owner and the sub-contractors and suppliers give guaranties to the contractor respectively while warranties are obtained from manufacturers of plant, materials and goods they supply for incorporation in the works. The ultimate producer of the construction facility is the contractor and he guarantees to the owner that he has constructed the facility to the details and dimensions shown on the drawings and using the materials and workmanship as required by the contract specifications and also that his sub-contractors have done the same. He will also guarantee that the materials that he has procured from his suppliers have been guaranteed by his suppliers as being of the respective kinds as specified in the contract specifications.

A Warranty on the other hand (as far as our discussion is concerned) is a written guaranty given by the manufacturer to the contractor or sub-contractor whoever the purchaser is (through the vendor, the manufacturer’s vendor). This in fact is an agreement assuming responsibility for the proper functioning of the product and that the product is fit for purpose. It is a promise or assurance given in writing that attests to the quality of a product or service or a pledge that something will be performed in a specified manner.

So what is the difference? Most of my students and also practicing quantity surveyors often ask me this question, mainly at the time a project is completed and being taken over.

Defining Guaranty seems simple but if a Warranty is also a guaranty why should it be identified differently? Looking at the diagram I have given above, it would appear that the contractor, by virtue of the contract, guarantees to the owner that he will do whatever he has contracted to do using the specified materials and best workmanship to produce the final end product to the satisfaction of the owner. Similarly, the sub-contractors, by virtue of their contract with the contractor have guaranteed to the contractor that they will likewise deliver their part of the works in the same manner. Insofar as the supplier is concerned, he can guarantee only that the materials, plant and goods supplied by him is of the brand and type ordered by the contractor and at the time he supplied them the manufacturer has warranted (guaranteed in writing) that the materials, plant and goods are of the specification that is written down.

Guaranties provide additional rights which could be a useful back-up in case of a complaint. Therefore, one must make sure that a manufacturer’s guarantee given in the form of a warranty is written in clear and unambiguous terms and bears the vendor’s stamp of authenticity. It is good practice to read the small print contained in a warranty in order to ensure that the product that is being bought is manufactured as specified and meets to owner’s requirements. It is also essential to ensure that the vendor supplies the buyer with the manufacturer’s registration card duly filled for the buyer to return this card to the manufacturer. This will serve as proof of purchase on the date the materials, plant or goods were purchased. This warranty is effective only when the buyer returns the registration card to the manufacturer to the address stated in the card.

For some plant or equipment like air conditioners, chillers, generators, heat exchangers and the like the manufacturers provide warranties extended beyond the normal defects liability period. Besides, even in the case of the normal one year warranty this might extend beyond the defects liability period depending on the date of purchase, or vice versa. This is a serious dilemma for the quantity surveyor who is administering the contract. To whom does he turn to when a breakdown happens?

In the same vein is the legal requirement in most countries for decennial liability guarantees from contractors. In most Middle Eastern countries the contractor and the designer is jointly and severally liable for stated defects including subsidence for ten years from the date of completion. A ten year guarantee of this nature is worthless if the contractor and the designer both go out of business during this period. In the United Kingdom and all European, American and North American countries, this is underwritten by insurance companies, thereby transferring the risk to insurance. In the UK there is the National House Building Council (NHBC) insurance for its members.

While the owner is protected from the contractor’s guarantee by the provisions of the contract for the duration of the defects liability period and any manufacturer’s warranty granted to the contractor during that period, what happens after the contractor is relieved from his obligations on the issue of the final certificate by the owner? As established in the case of Donoghue v Stevenson [1932] All ER Rep 1, the neighbor principle adduced by Lord Atkins will apply and the owner will have no remedy as he has no contract with the supplier. How, therefore can the quantity surveyor advise the owner to overcome this difficulty?

According to the United Kingdom law, liability arises where the defect becomes evident to the consumer within two years of delivery of the goods, unless the defect was or should have been apparent to the consumer at the time of the sale. Any defect apparent within six months of delivery is presumed to have existed at the time of delivery unless proof to the contrary is furnished or this is incompatible with the nature of the goods or the defect. The Sale and Supply of Goods to Consumers Regulation 2002 (UK) requires that when a guaranty is given free of charge with a product, it must be made available in writing and the terms of the guaranty should be set out in plain language which can be easily understood.

But whatever the law says considering the decision in Donoghue v Stevenson cited above, it will not be worth the paper that is written on for the owner, because he did not buy the goods as such he has no contract with the manufacturer and his claim will be too remote thus not meeting the requirements of the neighbor principle.

The difficulty in a construction contract arises when the facility is taken over and the operations and maintenance of the facility is thereafter transferred to the owner’s staff. How can the owner protect himself from a litigious situation arising out of this?

Prior to 1980 owners were able to obtain damages against negligent contractors and consultants through the courts without the need to demonstrate that they had any contractual rights. In fact they have no contractual rights in respect of a third party warranty. This all changed with the 1988 decision in the case of D&F Estates v Church Commissioners in 1988 where it was held that owners and occupiers of buildings needed a contractual remedy in order to pursue claims for certain types of losses. Thus the era of collateral warranties was born.

A collateral warranty is a contract which gives a third party (the owner) collateral to rights in an existing contract entered into by two separate parties (the contractor and the manufacturer or contractor and the sub-contractor or even the contractor and any consultant).  Collateral warranties bring about a concentration of interests between those giving such collateral warranties and those receiving them. It is however not as simple as it sounds. The collateral warranty must be executed as a deed to be effective. The reason being no consideration has passed between the owner and the manufacturer and a contract executed any other way will not be valid. There are several standard forms available. One such form is the one published by the British Property Federation and are designed to limit the warrantor’s obligations.

Collateral warranties must be considered at the very outset of a construction project. It is essential to include in the construction contract and consultants’ appointments the necessary provisions to protect the owner from any adverse effect on the marketability and value of the project.

The owner may require warranties from sub-contractors and consultants, particularly from those with design responsibility. Warranties from the contractor and design consultants are of prime importance. Sometimes it might be required to obtain such warranties from other consultants and sub-contractors alike depending on the extent of their involvement in the project execution.

Whatever the form of warranty selected the words therein must be very carefully formulated to include the correct warranties and the period. Sometimes the warranty underwritten by insurance in which case the terms of the insurance must be meticulously inspected for exclusions or other adverse conditions set by the insurers.

The collateral warranty guarantees a clear right for the owner to take action against the third parties who provide these warranties which he would otherwise be denied.

It would by now be clear that there is no difference between a guaranty and a warranty except that a warranty is a written guaranty.

M. Haris Z Deen

PhD, MBA, BSc., LLB (Hons) FRICS, ACIArb (retd), MAACE

Email: haris@harisdeen.com

Many thanks for Dr. Haris Z Deen for providing us with this valuable article.