engineering related delay types and liability

ENGINEERING RELATED DELAY TYPES AND LIABILITY: A CASE STUDY ABDULAZIZ A. BUBSHAIT, John C. Mosley, Jr. and Khaled Hamza Department of Construction Engineering & Management, King Fahd University of Petroleum & Minerals, Dhahran, Saudi Arabia

Abstract It would be rare for a commercial, industrial, or public works construction contract not to contain a defined performance period. Without a known start and completion date the project owner/employer would not know when the facility would be ready for use, and the contractor would not be able to forecast resource allocation. This uncertainty represents many risks to both contracting parties. Nevertheless, time overruns are a frequent phenomenon globally. The objective of the paper is to present a case study regarding the effect of engineering related delays on the construction schedule. The paper discusses types of engineering delays, including design development, workshop drawing, and change delays. The case study demonstrates the importance of resolving construction claims as early as possible in the project life.

Keywords: contractual risk, construction claims, liquidated damages, time at large, construction dispute, Saudi Arabia construction industry.

INTRODUCTION/BACKGROUND A contract is a relationship between buyer and seller defined by an agreement about their respective rights, responsibilities, and risk allocation. If a company cannot provide a specific good or service themselves, this risk is mitigated by contracting it to another party. For example, most owners do not have the inhouse expertise or experience to provide engineering design for a facility they would like to construct. Therefore, the design activity is contracted to an engineering firm who acts as the engineer of record and through this process, the design risk is transferred to the engineering contractor. The same holds true for the construction function as well. In the traditional project delivery system of design-bid-build the owner holds two contracts. One with the designer (architect-engineer) and one with the construction contractor. Typically, a design contractor is paid through a cost reimbursable or unit price type contract. Therefore, the owner maintains total control of the design development. As such the owner implicitly warrants to the 1

construction contractor the design is sufficient. If there are any design defects, which could not be reasonably ascertained during the bidding process, the construction contractor may be entitled to additional compensation. By contrast a design-build, sometimes referred to as engineer, procure, and construct (EPC), project delivery system combines both risks under one contract, and is the subject of this paper. By transferring both design and construction risks to the contractor, the owner also transfers control over these functions. Owners accustomed to executing design-bid-build delivery systems tend to continue the mind set of total control, feeling entitled to make changes freely while not realizing the transfer of control, which occurred contractually. Published studies conclude one of the advantages of a design-build delivery system is a reduction in contractor-initiated change requests stemming from gaps in the design. Thus, translating into a reduction in potential contractual disputes. In fact, many owners choose to the design-build delivery system to avoid disputes. It would be rare for a commercial, industrial, or public works construction contract, not to contain a defined performance period. Without a known start and completion date the project owner/employer would not know when the facility would be ready for use, and the contractor would not be able to forecast resource allocation. This uncertainty represents many risks to both contracting parties. Nevertheless, time overruns are a frequent phenomenon globally and often driven by delays and disruptions to the project process. A 2015 study found that out of 93 projects executed by international contractors in Saudi Arabia, an average time overrun of 48.8% was experienced. Out of 197 contracts executed by Saudi owned companies, the average time overrun experienced was 43.9%. Seventy percent of Saudi public works projects are estimated to experience time overages. While 40% of Indian projects experience on average 55%-time overruns and UAE projects experienced 50% schedule growth. The notion of time at large comes into play when an owner/employer caused delay occurs, and there is no express provision for an extension of time within the contract, the original contract completion date falls away and the principle of time at large applies. The contractor’s obligation is then to complete the project within a reasonable time under the circumstances. Time at large describes a situation where no time or date for completion of a construction project is fixed. It is a term often

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used in the situation where liquidated damages may be applied. Time may be made at large in situations where: •

The time for performance has been fixed under the contract, but has ceased to apply either by agreement or by an act of prevention (including instructed additional work) or breach of contract by the principal with no corresponding entitlement to an extension of time.

•

No time or date is fixed by the terms of the contract by which the work must be completed.

•

The failure to properly exercise the extension of time procedures in the contract or the inoperability of the specified extension of time procedures.

The prevention principle has been long-stablished under English law and is akin to the time at large theory, whereby a party may not enforce a contractual obligation against the other party, where it has prevented the other party from performing that obligation. The prevention principle is closely aligned to the principle that no party may benefit from its own breach of contract. Should the contract extension of time provision fail to cover the owner’s fault or delay event, usually the right to liquidated damages is lost. In other words, if the owner prevents the contractor’s performance of a critical activity by wrongfully delaying him, the owner may lose his right to assess liquidated damages for that delay event. It should be noted disruption may cause delays and delays may cause disruption, however, the two are very different in nature. Disruption describes loss of labor productivity and delay describes late performance. Productivity is a measure of output per unit combined with labor hourly rate defines labor cost. If productivity is impaired, project labor cost will increase. Contractors, sub-contractors, and owners all recognize the importance of time on construction projects. As a general rule, these parties will incur additional costs or lose income if the project is late.

A construction claim may be defined as a demand asserted by one party on another party relating to the services or products specified in the contract. Many factors give rise to construction claims. The most 3

frequently cited causes in the neighboring countries of to be Saudi Arabia, Gulf Cooperative Council (GCC), Egypt, Lebanon, Jordan, Iraq, India, and Pakistan tend to be construction delays, contract completion delays, material and equipment delivery, adverse weather, owner directed changes, poor site management, differing site conditions, poor planning, government changes and bureaucracy, lowest bidder, delayed payments, owner’s lack of experience, local and global economic conditions, labor availability and low productivity, poorly defined scope of work, slow decision making, inadequate bid preparation time, and lack of cooperation among project stake holders. This diverse array of causes in not unique to the GCC and neighboring countries, but likewise exists globally.

As construction projects become larger and more complex, construction claims and disputes are becoming more frequent and complex in nature as well. With cash flow being the life blood of any contractor, and although there are many delay factors, the most prevalent in construction claims is non-payment for work performed. Should the owner fail to make timely payment, the contractor generally has the right to suspend performance and seek compensation for delays. Some contracts allow the contractor to terminate the contract or continue with work and seek damages.

By definition liquidated damages represent a genuine pre-estimate of the loss the owner is likely to suffer as a result of the contractor’s failure to complete the project on time, as well as relieving the owner from the burden of proving his losses. The risk to the owner is understating and defining, which may be difficult or practically impossible, their actual losses before the contract is executed. Therefore, owners rely on liquidated damages to recover a reasonable estimate of the damages they will incur if the project is delayed by the contractor. Liquidated damage provisions benefit contractors as well, by limiting their liability for late completion and indicate at bid time the extent of his risk. If the contractor believes he cannot complete the project within the performance period, he has the opportunity to build into his price proposal his estimated liability for liquidated damages.

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The objective of the paper is to present a case study regarding the effect of engineering related delays on the construction schedule. The paper discusses the types of engineering delays, including design development, workshop drawing, and change delays. The case study demonstrates the importance of resolving construction claims as early as possible. PROJECT DELAYS Delays frequently occur in construction projects and are a main contributor to contractual disputes. Multiple owner directed changes usually delay a project by disrupting the design and construction process. The universally accepted definition of a critical path, is the longest continuous chain of activities through a project network, from start to finish, that establishes the minimum overall project duration. A delay to progress of any activity on the critical path will result in a corresponding delay to the project completion date, referred to as a critical delay. Once a project completion date is delayed, it usually proves next to impossible to fully recover the lost time through schedule acceleration, often resulting in an extension of time claim. Even if an extension of time is granted, it is frequently less than what was requested, leading to constructive acceleration for the remaining time.

Construction delays are typically categorized according to their type, being; engineering-related, construction-related, financial/economic, management, code-related, and acts of nature. The following discussion focuses on design development, workshop drawings, and change delays.

Engineering-Related Delays Various decisions and actions made during the design phases cause the high percentage of claims regarding building codes, specifications, and other design elements. Preparation of the specifications is another service provided by the engineer that can create potential risk. If the specifications are poorly written, contain errors, omissions, or are unedited from past projects, the engineer is exposed to claims arising in the future. Engineering related delays often impact construction progress, especially the fast track projects where construction activities overlap design. 5

One author who studied the factors affecting engineering phase delays of large projects, reports the delay extension was more severe in small projects. The most important causes included: compressed project schedule, overcommitted engineers, adding extra scope of work to that already agreed upon, insufficient data collection or poor site survey, and unavailability of existing drawings and information. Design Development Delays Design development is an early stage of the project where the owner provides the design-build contractor with a front-end engineering design (FEED), sometimes referred to as front-end-loading (FEL), often bridging the gap between conceptual and detailed design. The FEED consists of high level schematics, diagrams, and layouts forming the general framework to build the project. The design-builder then develops a detailed design or detailed engineering based on the FEED. A poorly defined FEED by way of incomplete, inadequate, or defective, documents often stemming from an abbreviated preparation time, tends to introduce ambiguities leading to disagreements in interpretation. Usually if there are two reasonable interpretations of an ambiguous contract term the risk belongs to the party drafting the ambiguity (contra proferentem), as he has total control of writing the contract documents and should have exercised greater care to eliminate ambiguities. Unless the non-drafting party knew or should have known of the ambiguity this rule will apply. Ambiguities are either patent (obvious) or latent (hidden). A bidder generally is obligated to seek clarification of obvious inconsistencies that appear in the bid documents. Remaining silent may be considered a breach of good faith and the rule against the drafter not apply. The contractual vehicle used by the contractor to seek clarification after contract award is a request for information (RFI) or clarification. A large number of RFIs not only suggests a low-quality FEED or an inexperienced design contractor, but delays design development resulting from owner response time. When the owner orders an unreasonable amount of changed or extra work, the contractor may be entitled to recover delay damages for the cumulative effect of all the changes. The clarification may lead to change in design further delaying progress. Many contracts define

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a time period the owner has to respond to questions or approve submittals. Failing to respond in the prescribed time frame is a breach of agreement also known as constructive suspension of work. Should the contract not specifically define a response time an implied time frame will apply as defined by a reasonable person. Similarly, a large number of change orders implies a poorly defined scope of work. It stands to reason that submitting a response to a request for information or directed change at the beginning of the project would have less impact than submitting them at advance project stage, since the changes in design tend to lead to construction changes based on the new information leading to larger schedule and cost impacts. A 2005 study revealed several factors contributing to design delays, including: mistakes and discrepancies in design documents, delays producing design documents, unclear and inadequate details in drawings, complexity of project design, insufficient data collection and survey before design, misunderstanding of owner’s requirements by the design engineer, inexperience of the design team, and nonuse of advanced engineering design software. Work Shop Drawing Delays A shop drawing is a drawing or set of drawings produced by the contractor, supplier, manufacturer, subcontractor, or fabricator. Shop drawings are typically required for prefabricated components such as elevators, structural steel, trusses, pre-cast concrete, concrete reinforcing steel, windows, appliances, cabinets, air handling units, and millwork and follow the design development stage. Installation and coordination shop drawings such as sheet metal ductwork, piping, plumbing, fire protection, and electrical. Shop drawings are produced by contractors and suppliers, under their contract with the owner or prime contractor. The shop drawing is the manufacturer’s or the contractor’s drawn version of information shown in the construction documents. Shop drawings normally show more detail than the construction documents, and are drawn to explain the fabrication and/or installation of the items to the manufacturer’s production crew or 7

contractor's installation crews. The style of the shop drawing is usually very different from that of the architect or engineer’s drawing. Shop drawings are produced based on the project design documents consisting of owner/engineer drawings, and remain the responsibility of the contractor regardless of project delivery system. The owner may be found responsible for a delay in shop drawing preparation, resulting from an incomplete owner provided design during the bid stage leading to contractor entitlement to an excusablecompensable delay. Claims related to shop drawings have a large portion of engineering based delay, and defining the liability is a complicated process since it has many inputs and considerations.

Change Delays Change is any addition, deletion, or revision to the general scope of a contract, and may require adjustment to the contract price or duration of a design or construction project. Virtually every construction project experiences change. Data shows directed changes are considered one of the largest reasons for construction project delays, increasing as the project life increases. Changes may be directed by the owner, requested by the contractor or initiated by a third party, such as a local authority’s action or inaction, utility relocation, adjacent contractors, or permit acquisition. Constructive change results from the informal actions or inactions by the owner that are not acknowledged by the owner to be a change in the scope of work, but require extra work by the contractor. An informal work directive occurs any time an owner directs the contractor, either verbally or in writing, but without following the contract change order provision, to perform work beyond the original scope of work. Constructive change typically falls into one of four categories: 1. An informal extra work order. 2. The drawings or specifications are defective requiring the contractor to expend extra effort. 3. The owner misinterprets the contract for example; the contractor’s work meets the contract requirement, but is erroneously rejected or an unreasonably high standard of performance is required. 4. The owner denies the contractor a justified time extension, requiring 8

compliance with the original project completion schedule, forcing the contractor to accelerate performance. The change request has the potential to cause delays in one or more activities, or might cause a total delay for the project if the affected activities are on the critical path. The following discussion is about a recent construction dispute case. THE CASE The project under study was an extension to an existing electrical power plant. The contract type was lump sum awarded to an EPC contractor. Engineer, procure and construct contracts are commonly used to accomplish construction works by the private sector on large-scale and complex infrastructure projects including power, oil, and gas, transportation, water, and telecommunications. Under an EPC contract the contractor is obligated to deliver a complete facility, for a guaranteed price by a guaranteed date, which performs to a specified level fit for purpose. Failure to comply with any requirements usually results in the contractor incurring monetary liabilities in the form of liquidate or actual damages.

The subject power plant was put in operation 11 months beyond the contractual completion date, due to several delays and disruptions. Beginning with engineering and continuing late into construction, the contractor experienced several unforeseeable delay events beyond its control. With each delay the contractor’s request for equitable adjustment, inclusive of a time extension and financial compensation, was met with inaction or rejection by the owner. The contractor complained, that the owner frequently ordered changes verbally. In response, based on a goodwill expectation that the owner would execute formal change orders, the contractor completed the additional work. Equipment arrangement, civil work, and interface design are three early engineering activities adversely impacted by prolonged equipment approval cycles, coupled with additional out of scope requirements. After a 7-month submittal cycle, the owner reverted back to the original design, placing delivery of major equipment on hold during this time to the detriment of install, test, and inspect critical 9

activities. An engineering delay materialized late in the course of construction. During an inspection, the owner directed design changes, which more appropriately would have been decided during the design phase. Furthermore, the consequence of an erroneous site boundary location, contained in the bid documents, resulted in the water outfall channel redesigned and relocated after construction was complete. To make matters worse, construction was delayed by unusually adverse weather conditions. After many failed attempts to resolve their disagreements, the contractor raised a formal claim against the owner, requesting relief from the liquidated damages, and demanded compensation for extra resources used to accelerate progress, in an effort to achieve the baseline completion date. By using the time impact analysis technique, the contractor successfully persuaded the owner of the impracticability of achieving the original project milestone date. Subsequently, the owner was granted a time extension, and the contractor successfully delivered the project on time, based on the revised completion date. Discussion This study presents a case where the contractor experienced delays caused by the owner’s directed engineering changes, design changes during construction, as well as acts of nature. In circumstances where a contractor is delayed by an unforeseeable event not under its control, the contractor is entitled to an extension of time, and compensation termed excusable and compensable delay. Failure to grant a time extension for an excusable delay may void the liquidated damages clause and set time at large. This means the contractor is only obliged to complete the scope of work within a reasonable time, until a new completion date is established. The contractor attempted to mitigate the schedule impact resulting from multiple delays, by constructively accelerating performance through additional resources, and schedule logic reconfiguration, which in turn disrupted its labor productivity.

A contractor’s performance is often affected by the owner’s action or inaction. Every contract imposes upon each party a duty of good faith and fair dealing, in its performance and enforcement. One way an owner may 10

be found in breach of its implied obligation to good faith and fair dealing is failing to cooperate and not hinder performance. Failure to cooperate may be found in a number of ways based on the owner’s unreasonable conduct, such as failing to respond to a contractor’s requests for information, delays in inspection, failing to issue timely orders, late delivery of materials and equipment, or untimely review of technical shop drawings. One common situation where the owner may be found to fail to cooperate is in solving a problem the contractor encounters during project execution. Another example is improper contract administration, by setting an unreasonably short performance period. In this case the owner neglected to respond to numerous change requests, not only breaching its obligation to cooperate, but constructively suspended the work as evidenced by reverting back to the original design after a 7-month critical delay. An implied warranty exists for owner-furnished design data. The basis being if the contractor complies with the data, a satisfactory product will result. In this case the contractor relied on an erroneous site boundary location data, as defined in the bid documents. Delivery of defective design data is therefore a breach of the implied warranty, releasing the contractor from liability for unsatisfactory results. Such as the redesign and relocation of the water outfall channel or resulting construction delays. The logic effectively converts an owner breach of its implied warranty of the data into a constructive change, thereby substituting the recovery of compensation as a change order, versus breach of contract damages.

In this particular case, unusually adverse weather conditions affected labor productivity, leading to a critical delay by causing a total site closure. Generally, delays that are not the fault of the contractor are excusable and the contractor entitled to a time extension. Excusable delays may or may not entitle the contractor to financial compensation. Normally delays that arise for reasons beyond the control of the owner are noncompensable. Thus, unusually adverse weather conditions, as well as other acts of nature, are termed excusable noncompensable delays, because they are beyond the control of both the owner and contractor. The mere fact 11

weather is harsh or destructive is not sufficient to recover damages, if the contractor reasonably should have anticipated that type of weather at the time and place it occurred.

Both parties may be adversely affected by contractual claims and the costs run high in terms of money, working relationship, reputation, and successful project completion. The cost of defending a construction defect case in court has been estimated to be between 3 to 5 times greater than the amount ultimately paid in settlement. This amount of money spent on resolving disputes can mean the difference between a profitable project and a losing one. For this reason, it behooves both the owner and contactor to seek resolution at the earliest stages of a disagreement, and not postpone them to project closeout. Conclusion Construction is full of uncertainty and risk. There are two things for certain in construction contracting. There will be changes and there will be disagreements. Even a well written construction contract usually addresses most foreseeable situations, but it cannot cover all possible issues that may arise during project execution. Thus, when those unforeseen situations arise, the contract may not have a clear unambiguous answer. It would best serve both the owner and contractor well to first avoid claims by drafting a clear and concise scope of work, develop a fair and equitable risk distribution, understand and apply proper rules of contract interpretation and administration, include a dispute resolution provision, and grant time extensions when deserved. The contracting party’s intentions are best demonstrated by their conduct during contract performance. Unintended consequences or parties may unknowingly become contractually obligated based on their conduct. Secondly when the inevitable dispute arises, it is always better solved at the earliest possible opportunity to avoid cost in terms of money, time, working relationship, and reputation.

Acknowledgement The authors thank the King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia, for support of this research. 12

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