Tips For Construction Contractors to Avoid Costly Missteps
By Aarta Alkarimi
Experience dealing with contentious construction-related matters has taught that inconsistent modes of communication, incomplete documentation and major assumptions with respect to the chain of authority are commonplace in the construction sector. With the volume of work on major projects running in to the hundreds of millions or billions of dollars, common missteps have led to arduous document reviews, large claims and counterclaims that could have been mitigated in many cases.
Much like a building itself, the procedural foundations laid down at the onset of a project determine its future course.
Construction is the closest endeavor to the battlefield –- they share similar concerns of terrain, weather conditions, materials, supplies, manpower, equipment, budgets, temporary accommodations, safety and time.
In the midst of such pressing considerations, procedures and paperwork tend to take a back seat to the sincere efforts of all parties to show results and “get it built.” Other than the initial interest in the agreements leading to a contract, upper management passes much of what is to follow in terms of procedure to functionaries at the lower end of the organization chart.
Competitive pricing often leaves little money for a document management team, thereby relegating an important function to a team that is under-manned and often left on the periphery of the project team. The filling out of forms and adherence to communication protocols are often seen as distractions by the “bricks and mortar” field engineers who are under the gun to show daily progress.
However, the time pressures imposed by the project schedule and the motivations of the individual team members (the owner, the architect, the engineer and the contractor) to show tangible progress are of little relevance to the auditor or claims analyst when justifications for certain actions — often performed many months or years back — are required. At such a juncture, adherence to procedures and the presence of documentation (or lack thereof) become all important.
With globalization, the construction sector faces the additional challenge of different methodologies, practices and expectations being brought to the project by its various players. For example, it is now not unusual for a major project in developing countries to have working on it American architects, Australian structural engineers, British mechanical engineers, Canadian and Chinese suppliers, German equipment manufacturers and a South Korean general contractor. With this come the natural differences in approach, priorities, interpretation, prior experiences and the understanding of responsibilities.
In such increasingly common situations, the parties are assumed to be in agreement on many seemingly obvious principles due to a misinformed belief that everyone understands the essentials in the same way.
Anyone working on such a project would be well advised to adopt some simple procedures.
The proper filing of contract documents, permits, drawings, specifications, reports and letters (all meticulously filed in binders and filing cabinets using a structured file numbering system of some sort) is obvious even to the uninitiated. The absence of such a system would be a glaring and utterly careless omission by all accounts. However, e-mails often seem to be viewed in a different light even though they transmit much the same information as hard-copy correspondence and increasingly form the bulk of day-to-day communications between parties.
Unconsciously, e-mails are often treated more like verbal communication than the written form even though they are most obviously the latter. The abundance of e-mails on any particular matter (given that they are quickly composed and are prone to more immediate responses) could form a ‘transcript’ with a wealth of contextual information not often seen in more traditional hard-copy letters. For this reason, among many others, e-mails should be viewed with much greater importance than they are given and consequently retained and filed with the same care given to paper-based communications.
In the construction sector, where the building site is the primary workplace and the conventional office environment is replaced with a temporary field office, the phased and limited duration of the construction schedule also means that many team members are mobilized and demobilized as needed and few are present from project inception through close out. As such, the lack of discipline in terms of electronic data retention and filing could mean that vital information can be lost easily.
The following are some common practices that undermine the proper retention of e-mail data. E-mails are not copied to a project specific inbox only accessible by an administrator. They are routinely deleted from individuals’ inboxes at their discretion when they are deemed to be no longer required. Individuals demobilized from projects at the end of their particular assignments move on and so does access do their e-mails. Old e-mails are routinely archived on the individual’s computer hard drive to make space on memory restricted e-mail inboxes and the loss or damage of hardware can result in the loss of the archived e-mails. Document numbering routinely used for hard-copy letters, transmittals, etc. are virtually unused in e-mail correspondence making searches for information tedious.
These sloppy practices make later legal discovery into torture. Discovery is often hampered and prolonged by the two parallel sets of documentation seen at many construction projects: the formally filed hard copies and the disparate and scattered e-mails.
To harness the convenience of e-mail systems while still maintaining the controls to preserve information properly, certain steps must be put in place. Set up a project-dedicated company inbox with administrative access to which each employee must copy all business e-mails. Use standardized or coded subject headings to ease searches of all related e-mails and train employees in their use.
Locate and back up the e-mail server at an off-site location. Alternatively, use a dedicated data management system (project management software) to transmit all project related electronic communications between different entities. This requires the agreement of all parties to use a common platform for electronic communications.
Major problems continue to arise on job sites when the contractor feels obliged to take directions from both the owner’s project manager and the owner itself. If all parties are not in one room while instructions are issued, conflicting instructions can lead to schedule delays and extra costs. The contractor should study the existing contractual relationships and fully familiarize himself with the role of various entities on the job site and make it clear that all instructions must be issued through one source — the authorized management team.
Often, the owner will delegate to the project manager the power to issue instructions on its behalf, but at the same time bar the project manager from issuing instructions that are considered to affect time or cost. The ability to distinguish between the two forms of instructions is often in the eye of the beholder, but the burden to make the distinction clear often lies with the contractor. As such, the contractor must always respond to instructions where an explicit acknowledgement of a change is not present but possibly merited with a clear path of action (for example, the contractor notes that he is proceeding with the work while determining its cost and time impact or will only proceed with the work after determining so).
During construction, which can often last years, there will be instances when the project manager or the owner will issue an instruction on site (such as a work stoppage or an on-site change to the work) but, for various reasons, it may not be possible to receive the instruction in writing in a timely manner, if at all. In such circumstances, the contractor should respond in writing to the party that issued the verbal instruction as soon as possible to confirm the nature of the instruction, identify the instructing party, the date and time, and provide proper substantiation. The contractor should also note its right to claim for time and cost, if it is applicable.
The baseline schedule reflects thousands of activities that need to be updated on a regular basis and a new version saved each time an activity is added, deleted or changed from the scope. This is a fundamental task in administering the schedule. However, when it is time to measure delays, disruptions or acceleration, claim analysts often encounter gaps in the project schedule, making it very difficult to reconstruct accurately a full picture of what was supposed to take place versus what actually happened.
Also, schedules with complex interconnected activities often lose data or have it remain inadvertently hidden from parties who need to access it. In order to prevent loss of data, it is critical that the project team be careful not only to use the correct software version of the scheduling program, but also to ensure that the schedule data fully transmits from one user to another. We have seen several occasions where a project schedule has been transmitted to a claims consultant’s standalone personal computer, but due to various reasons the transmission of information has been partial without any of the parties realizing it. Situations like this can not only undermine the credibility and competency of the project team, but can also consume unnecessary time and money.
An example of the complex inter-relationships of a construction project schedule being thrown off by a seemingly simple issue is a recent instance in the United Arab Emirates where a schedule containing both regular 10-hour work days and six-hour statutory summer-month hot-weather work days was transmitted to an international delay consultant and imported into an eight-hour day database. The result of the import process was the lengthening of certain durations and the shortening of others and plenty of confusion. To avoid such problems, the party creating the schedule must ensure that all related information and assumptions are clearly transmitted along with any schedule for proper interpolation by others.
Similarly, where sections of the project schedule are password protected or encrypted, a log of how to identify the information should be closely kept so the data can be accessed beyond the construction period by appropriate parties.
Attention to Notice Provisions
Timely written notices are required under construction contracts to preserve certain rights of the parties.
In fact, it is common for parties to agree that certain rights are lost unless a written notice is issued within a certain period of time stipulated by the contract. While in some jurisdictions, a late notice does not extinguish a contractor’s right to pursue and recover a claim based on its merit as long as it is filed within the statutory limitation requirements, other jurisdictions are strict about the language of the contract and what the contact language indicates the parties agreed to in order to recover potential damages.
The contract manager should identify all notice provisions at the start of the project, pay close attention to the triggering events and make a log of when a notice should be issued in writing.
The contractor and the owner should also agree and settle on a format and substantiation requirements for change or variation orders at the start of the project.
The construction contract probably addresses the procedure for issuing change orders, but contract clauses often do not get into enough detail about the extent to which the owner expects a change order to be substantiated, the number of signatories required and who the owner’s authorized signatories are. In instances where the contract’s change order clause requires the contractor to carry out the owner’s instructions by executing the works and getting paid at a later date, both the owner and the contractor must have settled on the extent and the itemized details with which the contractor should substantiate its price and schedule requirements for the additional works.
In most conventional construction contracts, the contractor is responsible for securing the various government approvals to proceed with work, for utilities to be connected and the project to be issued certificates of occupancy and completion. While the principles are essentially the same in most jurisdictions, we have seen many instances where international contractors operating in new jurisdictions incorrectly assume that the procedures they are used to in their home territories still apply.
With a poor appreciation of local bureaucracies, contractors commit to schedules with insufficient durations for required approvals.
As we have seen in many instances, significant and unrecoverable delays resulting from over-ambitious planning have severely undermined an otherwise well-executed project and caused contractors to have liquidated damages applied for delays. While the task of securing approvals and permits can be subcontracted to experienced local entities, the main contractor must build schedules with as much real world data relating to actual authorities’ approval durations, closely monitor the process and weigh the potential impact of any delays on the project schedule as soon as possible.
Regular communication with the authorities is also essential to remain updated on regulations and codes as we often see new rules imposed with little notice and no allowances grandfathering projects that are already under construction.
Dealing with Problems
The manner in which a company addresses a potentially-contentious matter depends not only on its business strategy and company culture, but also on the larger culture of the region in which it is operating.
In some regions, considerations such as family relationships and deference to certain notable or respected individuals often take precedence over some provisions stipulated in the
contract. In all but the most contentious cases, the contractor should always be mindful of relationship preservation, particularly when it is with a foreign entity.
At the risk of over generalizing, we have observed that contracting companies from the Far East are often cautious about addressing claims as they arise to avoid the perception of being overly claims oriented. They tend to document issues and present them by way of a formal dispute resolution at the end. On the other hand, European contractors file notices of claims as they arise so as to avoid the perception that claims are conjured up near the end to meet missed revenue targets.
While this is a sensitive issue and a matter of company strategy, if the contractor decides to defer a claim, close attention must be paid to the claim-related deadlines, notice provisions and documentation of the claim as it arises and not at a later date.
While progress photos are customarily included in a contractor’s monthly reports to the owner, the establishment of a disciplined routine for taking detailed photographs on a daily or weekly basis produces a useful photographic history of the project that can be used to settle disputes among various parties (among subcontractors, among the contractor and one of his subcontractors, the owner and the contractor, and so on). Well-taken photos that are date and time stamped can help settle delay disputes by showing which party may have been delayed or inhibiting the progress of others, determine the actual date when a task was started or completed, settle damage claims, or identify violations or the cause in cases of accidents and injuries.
As with all other project data, digital photographs should routinely be downloaded on to the main computer server, properly cataloged for ease of reference in the future and regularly backed up.
Retaining international counsel that operates with little or no knowledge of local law, even if the contract is governed by the laws of the jurisdiction where the international counsel is licensed, is not the best approach.
In some jurisdictions where projects have been financed through foreign investment, local law risks are mostly mitigated by the presence of bilateral investment treaties, coupled with a governing law clause that selects a foreign jurisdiction’s laws. Nevertheless, there are always local law issues that apply to a project, and the risk of mistakes can be mitigated by getting input from a local lawyer. The international and local counsels are not interchangeable but dual necessities.