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Managing risk: exploring the contrasting approaches of FIDIC 1999 and NEC3

Student: Christos Ellinas Supervisor: Dr Alex Copping

Department of Architecture and Civil Engineering The University of Bath 2011

AR40223 MEng dissertation

Acknowledgments
The Author would like to thank the Department of Architecture and Civil Engineering, along with the University of Bath, for their contribution in providing challenges and food for thought for four consecutive years. Special note should go to Dr Alex Copping, of whom his critical judgment, clarity of thought and faith to the Author played a pivotal role in framing such a vast topic and paved a path towards the objective. Dr Jason Le Measurers brief contribution is also kindly greeted. A sincere thank you is also due to Lois Builders Ltd, Alpha Project Managers Ltd and LEKTON Ltd for their involvement the warm spirited participation of the participants is greatly appreciated. Last but not least, the contribution of family and friends is greatly embraced.

The young man could open either door he pleased. If he opened one, there came out of it a hungry tiger which would immediately tear him to pieces. But if he opened the other door, there came forth from it a lady, the most suitable to his year So I leave it to you, which door to open ? The first man refused to take the chance. He lived safe and dies chaste. The second man hired risk assessment consultant...He completed checklists and assessed his risk averseness. Finally, sensing that in a few more years he would be in no condition to enjoy the lady anyway, he open the optimum door. And was eaten by a low probability tiger. The third man took a course in tiger taming. He opened a door at random and was eaten by the lady
Witches, Floods, and Wonder Drugs: Historical Perspectives on Risk Management, by William C. Clark, 1979

Table of Contents
Acknowledgments ........................................................................................................................................ 2 Table of Contents ......................................................................................................................................... 3 Table of Figures ........................................................................................................................................... 5 List of Tables ................................................................................................................................................ 5 Abstract ........................................................................................................................................................ 6 Introduction .................................................................................................................................................. 7 Literature Review ......................................................................................................................................... 8 1.1 - Layout of Literature Review ............................................................................................................ 8 1.2 - Recurring themes in the industry ..................................................................................................... 9 1.3 - Project success ................................................................................................................................. 9 1.4 - General Parameters ........................................................................................................................ 10 1.4.1 - Risk and Uncertainty ............................................................................................................... 10 1.4.2 - Communication ....................................................................................................................... 11 1.4.3 - Human Behaviour and Project Management .......................................................................... 11 2 - Problem Formulation ........................................................................................................................ 12 3 - Have traditional contracts allowed Failure to flourish ? ................................................................... 12 3.1. Issues Introduced by the use of contracts ................................................................................. 12 3.2. Issues ignored by Contracts ...................................................................................................... 15 4 - Summary and Scope of Research...................................................................................................... 16 Interview Sessions ...................................................................................................................................... 17 1 - Approach and Methodology ............................................................................................................. 17 2 Origin ............................................................................................................................................... 17 3 - Contractual Approach and Rigidity .................................................................................................. 18 4 - Use and Purpose of Contract ............................................................................................................. 19 5 Amendments..................................................................................................................................... 19 6 - Verbal Evaluation and Clarity........................................................................................................... 20 7 - Trust .................................................................................................................................................. 22 8 - Organisational Culture ...................................................................................................................... 22 8.1 - Academic Background ............................................................................................................... 22 8.2 - Experience and its impact on perception ................................................................................... 23 8.3 - Points of view and their impact on perception ........................................................................... 23 9 - Legally-binding obligation for trust .................................................................................................. 24 10 - Employers awareness and inherent risk in Industry ...................................................................... 24 11 - Market Conditions........................................................................................................................... 25 3

12 - Final model ..................................................................................................................................... 26 Comparative analysis of NEC3 and FIDIC 1999 ....................................................................................... 27 1 - Comparative analysis of the drafting approach ................................................................................. 27 1.1. - Dont judge a book by its colour ............................................................................................... 27 1.2 - Layout Comparison .................................................................................................................... 27 1.3 - Structure of risk clause ............................................................................................................... 28 1.4 - Definitions.................................................................................................................................. 29 1.5 - Language .................................................................................................................................... 29 2 - Interaction of law .............................................................................................................................. 30 2.1 - Intro ............................................................................................................................................ 30 2.2 - Local law jurisdiction and the impact on what is intended ........................................................ 30 2.3. - Doctrine of good faith ............................................................................................................... 31 2.4. - Prevention doctrine and time bars ............................................................................................. 31 Force majeure and doctrine of frustration .......................................................................................... 32 3 - Engineer versus Project Manager ..................................................................................................... 33 4 - Operation of a contract ...................................................................................................................... 34 4.1 - Claim resolution mechanism ...................................................................................................... 34 4.2 - Unforeseen Ground Conditions.................................................................................................. 35 4.3 - Site Information ......................................................................................................................... 36 4.4 - Risk allocation of Unforeseen Ground Conditions .................................................................... 38 4.5 - Indemnification .......................................................................................................................... 39 4.6. - Proactive vs. Reactive ............................................................................................................... 40 4.7. - Claims ....................................................................................................................................... 40 4.8 - Layout of claim resolution mechanism ...................................................................................... 43 4.9 - Critical test ................................................................................................................................. 45 4.10 - Incorporation of Time bars....................................................................................................... 47 Results and Discussion ............................................................................................................................... 52 1.Analysis ............................................................................................................................................... 52 2.Limitations .......................................................................................................................................... 54 3.Further recommendations .................................................................................................................... 54 References .................................................................................................................................................. 55 Appendix .................................................................................................................................................... 57 1. Interviewees Information ................................................................................................................... 57 2.Brief Law Introduction ........................................................................................................................ 57

Table of Figures
FIGURE 1: CONTRACTUAL RISK REGIME ................................................................................................................................... 7 FIGURE 2: OVERALL RESEARCH APPROACH .............................................................................................................................. 7 FIGURE 3: BALANCE BETWEEN CURRENT BUSINESS CLIMATE AND GENERAL SUCCESS CRITERIA ............................................................ 8 FIGURE 4:OVERVIEW LAYOUT OF THE LITERATURE REVIEW APPROACH .......................................................................................... 8 FIGURE 5: THE BOOMERANG EFFECT OF UNFAIR RISK ALLOCATION ............................................................................................... 9 FIGURE 6: THE EFFECT OF TIME ON COST AND EFFICIENCY OF A SOLUTION (MIGILINSKAS & USTINOVICIUS, 2008) ............................... 9 FIGURE 7: BASIC RESPONSE LOOP WHEN DEALING WITH UNCERTAINTY (MASURIER, 2002) ............................................................ 13 FIGURE 8: THE OUTCOME OF A RISK REDUCTION MEETING IS AN EMERGENT PROPERTY, DIRECTLY RELATED TO THE ORGANISATIONAL CULTURE ................................................................................................................................................................ 18 FIGURE 9: PERCEPTION OF THE CONTRACT WAS IDENTIFIED AS AN EMERGENT PROPERTY RELATED TO THE INPUTS SHOWN .................... 20 FIGURE 10: MODEL ILLUSTRATING THE IDENTIFIED INTERACTIONS THAT AFFECT RISK, AS PERCEIVED BY THE INTERVIEWEES ................... 26 FIGURE 11: NATURAL FLOW OF RISK .................................................................................................................................... 28 FIGURE 12: LAW REGIME................................................................................................................................................... 30 FIGURE 13: FAIR RISK ALLOCATION PARAMETERS .................................................................................................................... 38 FIGURE 14: GENERAL PROJECT OUTCOME FROM RISK MANIFESTATION (ZAGHOUL & HARTMAN, 2003) ......................................... 38 FIGURE 15: THE COMPONENTS OF THE INHERENT RISK ATTACHED WITH FORECASTING ................................................................... 41 FIGURE 16: CLAIM RESOLUTION MECHANISM AS PRESCRIBED BY NEC3 ...................................................................................... 49 FIGURE 17: CLAIM RESOLUTION MECHANISM AS PRESCRIBED BY NEC3 (CONTINUING) .................................................................. 50 FIGURE 18: CLAIM RESOLUTION MECHANISM AS PRESCRIBED BY FIDIC....................................................................................... 51 FIGURE 19: RISK INHERENTLY FOUND WITHIN EACH CONTRACT DUE TO ITS DRAFTING DRAFTING RISK ............................................. 52 FIGURE 20: ORGANISATIONAL RISK ON EMPLOYER ................................................................................................................. 52 FIGURE 21: ORGANISATIONAL RISK ON CONTRACTOR ............................................................................................................ 53 FIGURE 22: INDIVIDUAL RISK ON EMPLOYER ......................................................................................................................... 53 FIGURE 23: INDIVIDUAL RISK ON CONTRACTOR...................................................................................................................... 53

List of Tables
TABLE 1: RISK PERCEPTION OF THE FREQUENTLY USED DISCLAIMER CLAUSES UNDER LOW AND HIGH TRUST RELATIONSHIPS HIGHER IS WORSE (ZAGHOUL & HARTMAN, 2002) ...................................................................................................................... 15 TABLE 2: COMPARISON OF THE GENERAL AGENCY OBLIGATIONS BY THE P.M./ENGINEER ............................................................... 34 TABLE 3: RELATIVE INTERVIEWEE DATA ................................................................................................................................ 57

Abstract
The Engineer, inspired by the law of economy and led by mathematical calculations, puts in accord with the law of the Universe. (Corbusier, 1931) The main emphasis of this research is the former duty of honoring the law of economy. For any law to apply, a suitable context first needs to be at place, thus the term civil is attached to the aforementioned notion of the engineer, enlisting the Construction Industry as its domain. The welfare of this Industry is key in safeguarding a prosperous modern society, of which the Industry is a rather significant contributor. The Industry is also regularly used to control the gears of that very economy it can act as a medium of injecting cash back to a market plagued by recession through the tendering of public works, in an attempt to elevate both the economic and social image of that society. A healthy Construction Industry is of the utmost importance numerous exemplifications of such are found throughout the course of history, from the Parthenon to the Channel tunnel; acting as testaments of prosperity and ingenuity. Certainty is key in achieving economy and efficiency however it directly contradicts the very nature of this Industry. As opposed to other industries, a construction product is a unique creation and a collaboration of a multitude of disciplines, of which conflict of interest is rather frequent. The period of its construction is long, increasing its susceptibility to unfortunate events it further spans over seasonal changes and thus increasingly prone to Acts of God. Conclusively it appears that [only] one law of nature [is] paramount in international construction: Murphys Law (Bruner, 1986). It can, thus, be concluded that in general, a construction project is simply an adaptation mechanism to risk and uncertainty. Risk is traditionally allocated and mitigated through construction contracts. Admittedly, risk is also found within the very use of these mitigation tools coined as contractual risk. The following research will attempt to assess and quantity the aforementioned risk. In order to tackle this issue, a twofold approach was adopted. Firstly, contractual risk was separated in two components; the underlying risk through the use of the prescribed mechanisms within it and the incorporated method used to illustrate of what is intended more specifically, the drafting approach. On those two aspects, a comparative analysis of two prominent contractual suites, NEC3 and FIDIC 1999, Red Book (hereafter FIDIC), was undertaken through their underlying claim resolution mechanism; the most frequently used mechanism within a construction contract. In parallel, it was also acknowledged that the first component of contractual risk the inherent risk in the operation of the claim resolution mechanism - is a dynamic property rather than an absolute quality, directly proportionate to external interactions. Thus, interview sessions where setup in an attempt to identify and asses a number of pragmatic interactions acknowledging the gap between academia and reality. The final result illustrates the diversity and complexity of the notion examined mainly due to the multitude of interactions sourcing from objective, subjective, emotional and cultural conditions. Nevertheless, definite results were drawn regarding the contractual risk attached to the drafting approach of the examined contracts. NEC3 is identified as contributing to a significant reduction of contractual risk a probable outcome of its relatively young age. Considering the big picture, both the desktop analysis and the interview sessions have established a significant conclusion. The incorporated contract should not only be an accurate reflection of the needs of the Project; it should also be compatible with the characteristics of the bound Parties. Both NEC3 and FIDIC have different areas of focus, resulting in respective weaknesses which need to be identified prior to being bound by them. Each Party should acknowledge the areas stressed more by the adopted form and allocate resources in order to minimise the likelihood of risk materialising on those very aspects. Radar graphs were devised and are presented in order to provide such guidance to the Reader.
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Introduction
The construction industry is principal in shaping the welfare of any society it is founded on numerous elaborate and multidisciplinary interactions of great proportions. These very characteristics are also responsible for its rather peculiar nature, bound within the realms of heightened risk. This risk is rather hard to quantify and asses, mainly because its nature and extend may change; new risks may emerge; existing risks may change in importance or be reallocated and any such changes can aggravate or ease other relevant risks. This multiplicity tends to cloud both their identification and assessment. In combination with the highly competitive climate within the industry, complimented with adversarial and antagonistic relationships, Project success seems rather unattainable. From an economic standpoint, the Construction Industry acts as the principal medium of injecting cash flow to the economy in a time of need though the tendering of public works. It is at such critical situations where the effectiveness of mitigating against risk manifestation becomes of the highest importance. Contracts are the preferred medium of risk C o n t r a c t u a l R i s k allocation within the industry itself largely External controlled by its underlying prescribed Operation of Sources mechanisms along with stated obligations and mechanism rights of which the participating Parties are bound to follow failure of performance will Perceived Draftmanship lead to breach of contract and strict liability will risk approach apply. After risk is allocated, an attempt to mitigate against it will follow through the Figure 1: Contractual risk regime introduction of the aforementioned mechanisms. Their operation is usually defined by four basic methods avoidance, reduction, shifting or by issuing assumptions. Regardless of the nature of its operation, it can be deduced that risk also lies within the operation of these very mechanisms called contractual risk, see Figure 1. This risk can be separated in two; risk found within the operation of such a mechanism and risk attached to the enlisted medium to express what is intended the latter being the adopted draftmanship of the contractual approach. External interactions upon the contract can further affect contractual risk these interactions are rather dubious in their definition, rather complex and multidimensional on their impact, thus extremely difficult to account for.
Introduction

Literature Review
2 1

Interviews

Theoretical comparison of NEC3 and FIDIC

Discussion
Figure 2: Overall research approach

In order to coherently address the problem, a twodimensional approach has been adopted, stemming from issues originally identified through the literature review. The implemented methodology can be apportioned in two distinctive paths. Firstly, an attempt to identify the contractual risk (1) in its pure form was undertaken through the comparative analysis of two standard forms NEC3 and FIDIC. In parallel, a second path was paved through an attempt to identify interactions (2) that could potentially influence its purity, establishing it as a dynamic property of the contract itself rather than an absolutely static quality thus uniquely specified under each agreements. These interactions were identified through interview sessions in an attempt to introduce a pragmatic point of view rather than a purely theoretical one.
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Literature Review
The Construction Industry has become increasingly Project Current adversarial, damaging the national economy in terms of Success Challenges resources, cash flow and jobs. The industry is of high Criteria importance (about 10% of the UKs GDP, with an estimated value of over 100 billion GBP) and a presence of around 300 000 companies. (Department for Business Innovation & Skills, 2011) It has also been shown that a construction company has the second highest possibilities to fail; it is a risky business indeed. (Wong & Thomas, 2010) This impressive statistics gives rise to a very important question; how can failure continue at large in an era of continuous technological development and innovation and the widespread Figure 3: Balance between current presence of modern management techniques? The answer lies business climate and general success in the present financial reality of the Industry; Projects are criteria becoming increasing complex with tighter budgets and time restraints. The cumulative effect of these factors seems to have caused working relationships to deteriorate to adversarial and antagonistic through the evolvement of contradictory objectives between the Employer and the Contractor. The primary variable that relates these current challenges with achieving success is Risk; it has a dramatic effect on time, cost and quality and thus adequate mitigation against it is crucial - Figure 3.

1.1 - Layout of Literature Review


Communic ation (1.4.2)

Project Success
(1.3)
Risk & Uncertainty (1.4.1) Human Behaviour & Project Manageme nt (1.4.3)

The chosen variable of this research is Risk

Risk has been traditionally mitigated through Contracts

Do Contracts help or hinder the success of a Project through the way they manage risk?

Induced by the Document itself (3.1.1)

Induced by the Inherent Procedures (3.1.2)

Issues introduced by the use of Contracts (3.1)

Clarity

Complication

Translation Requirement

Approach to Risk

Risk Allocation

Verbal Evaluation

Issues Ignored by Contracts (3.2)


Importance of Trust (3.2.1) Figure 4:Overview layout of the literature review approach Human Behavior (3.2.2)

1.2 - Recurring themes in the industry


Risk can be defined as principal variable; however further parameters are present, including the controversy between clarity and fairness, the interaction between trust and human behaviour, the hidden uncertainty in risk transfer along with establishment of goal alignment and communication between the Parties. A very important reason on why Individual Risk is shifted to General success rates have decreased in the Contractor by the Owner Industry can be found in the aggressive Organizational Risk is introduced due to defence followed by the vast majority the intensive management requirements of Employers in relation to the to manage that Risk contractual approach. Currently, common practise tends to push risk Organizational Risk manifests in Individual Risk with an inherent latency down the chain of command, from the Employer to the Contractor and from there to the Sub-Contractors. However, This delay results in low efficiency and high cost solutions Risk tends to obey the same conservation law that matter seems to Figure 5: The boomerang effect of unfair risk allocation so happily follow; Risk may appear to be eliminated from the Party that transfers it but this is far from true the case. This eliminated risk is converted to Organisational Risk, induced by the increased management requirements that arise from this transfer process see Figure 5. This Organisational Risk will manifest to a latent Individual Risk and hinder the ability to adequately account for it. As shown in Figure 6, the effectiveness of a solution along with the cost of implementation decreases and increases respectively. Thus, by adopting an aggressive defence strategy through a reactive Contract can result in decreased efficiency and result in failure.

1.3 - Project success


Ngueyn, L. et al (2004) states that a construction project can be generally considered as being successful if it has been completed on time, on budget and has achieved the design specifications. These three points have been traditionally been considered in order to judge the success of a Project. However, if we would extend this generalization to a more accurate description, we would try to define a set of success factors, of whom their completion would promote good practice.

Figure 6: The effect of time on Cost and Efficiency of a solution (Migilinskas & Ustinovicius, 2008)

A more systematic understanding can be established by adopting the following definition, given by the Performance Evaluation and Professional Developments System (2004). A success factor is any knowledge, skill, trait, motive, attitude, value or other personal characteristic that is
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essential to perform the job or role that differentiates solid from superior performance. Based on this concept, Chan and Kumaraskwamy (1997) have identified five common causes that hinder on-time delivery; these are poor site management, unforeseen ground conditions, delays in decision-making, and client variations in the design and necessary variations in the design. In a more recent publication (Chan et al., 2010), five critical success factors have been formulated: Willingness to share resources between relevant parties Clarity in definition of responsibilities Win-win attitude Regular monitoring Formation and communication a conflict resolution strategies

Approaching the issue of success through an economic point of view, Branconi and Loch (2004) have suggested eight factors that require the most attention: Adequate, complete and constituent description of the scope of the Works Consistent cost estimates with reasonable profit margin Ensuring adequate cash flow to the Contractor Consistent definition of important milestone in the schedule along with realistic timeframes Performance Guarantees Warranties Precisely defined liability of the Parties regarding damages Securities regarding performance and payments (e.g. deposits, bonds etc.)

It is rather clear how both approaches either in General Terms or using Success Factors can be greatly controlled by the Contract. However, it is rather surprising, even from a common sense standpoint, that relative academic literature has chosen to ignore this significant link. (Chan et al., 2010)

1.4 - General Parameters


In order to qualitatively appreciate the significance of a Contract, we must first identify the parameters that actively contribute to failure, based on the previous definition of success. 1.4.1 - Risk and Uncertainty Uncertainty and Risk is something that most of us face every day; it is not just a matter of the stuntmen. A distinction between Risk and Uncertainty first needs to be established in order to enable a coherent approach. Uncertainty is based on randomness without any probabilistic distribution; thus it is immeasurable and consequently, uninsurable. On the other hand, risk is defined by probabilistic randomness; it can be defined, qualitative quantified and insured. (Xu, 2011) This may appear as an accurate definition of risk when a relatively simple situations is examined e.g. crossing a frequent road will have a set risk based on the possibility of being hit and the consequences of the impact. Unfortunately, the situation in the Construction Industry is much more complex. The nature and the extend of a risk may change, new risks may emerge, existing risks may change in importance or be re-allocated and any of these changes can aggravate or ease any relevant risks. (Rahman & Kumaraswamy, 2002) This complicated, multiordered relationship makes risk in the construction industry a very difficult thing to identify and evaluate.
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1.4.2 - Communication For our approach to be realistic, the dynamic nature of risk needs to be carefully monitored and accounted for. As they change and grow, the Projects success factors will respectively adopt and evolve. In order to enable the relative Parties to keep up with the pace of this transformation, exchange of information is vital. This process needs to be as clear, accurate and efficient as possible. Parties need to ensure that they are aware of the present issues and be clear on potential actions that need to be undertaken in order to mitigate against unpleasant situations and thus, achieve Success. The need for well-timed and effective communication of materialised risks originates from the very nature of the Industry. Unfortunate actualities such as customisation and individuality of every construction Project; fluctuations in material demand along with small-batch production; force majeure events and unknown geological conditions greatly contribute to an overall uncertainty a profound reality compared to other industries such as manufacturing. These parameters can be categorised with respect to their source; the Complexity of the Project itself and the Stability of the Market Demand. Both of these groups originate from the basic and fundamental issue of Lack of Information. Cong XU (2011) states that this lack can reach up to 85% during the design stages and usually remains around 15%, even after the relevant Parties have been committed to the Project. This fact is a mere representation of the highly complex nature of a Construction Project; it can be characterised as an adaptation mechanism to uncertainty. 1.4.3 - Human Behaviour and Project Management By extending the previously mentioned example of a man crossing a road; probabilistic distribution can give us an indication of the result. However, the behaviour of the individual will always be unpredictable; a dynamic uncertainty in its own right. By using an equivalent analogy, we can now understand the complexity of this issue considering the Construction Industry. A construction Project is defined by the involvement of numerous individuals, of whom their action shape the outcome. Besides the obvious distinctions that can be made for each individual (work experience, academic background etc.) it is impossible to distinguish, identify and categorise how a person will behave under a crisis; thus the dynamic nature of the problem. To make matters even more complicated, an individual or a Team can equally fail or succeed under a similar task. The example of the Heathrow Express tunnel collapse can clearly illustrate this mindboggling fact. The team used a construction approach that was highly intensive on monitoring requirements (thus great Organisational Risk) and failed, resulting in a collapse. After the event, the same team used a different method which is based on a same approach as the previous and achieved a remarkable recovery, completing the Project remarkably well under the set circumstances. (Masurier, 2002) It is debatable whether the team has indeed become wiser; it may be due to the mere reality of uniting after a failure in order to overcome failure establishing goal alignment. The most suitable regime under which nourishment of such a desirable behaviour can be achieved is Project Management. By establishing the important effect that human behaviour plays on the outcome of a Project, an adequate approach needs to be devised in order to introduce suitable promotion. Approaches such as economic transparency between relevant Parties, common offices and joint cultural events can promote a Team Spirit and Goal Alignment; providing some control over the impact on the success factors and thus bringing the Project closer to success. The example of a joint venture between Cleveland Clffs Inc.(CCI) and Lurgi Metallurgie(LM) is highly representative on this aspect. (Branconi & Loch, 2004). The Project at hand was deemed as a high-risk, resulting in extremely high warranty fees, exceeding the limit of liability that could be
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undertaken by LM, due to its relatively small size. This issue was foreseen and tackled prior in advance by establishing LM as a shareholder of CCI a clear act of relief by the latter. This rather bold move made by them resulted in motivating LM to seek ways to overcome the difficulties, even after the limit of liability was lowered and resulted in reduced overall success a win for all and a clear illustration of the crucial role of goal alignment. However, it should be noted that due to the vastness of the topic, Project Management will only be considered partially as a component of Risk. After all, the way a Project is managed is directly linked to Organisational Risk, which will sequentially manifest in latent Individual Risk with a final impact on cost, time and quality.

2 - Problem Formulation
All three topics mentioned above seem to have some relationship with Risk either directly or indirectly. Thus, the next logical step would be to look into the methodology at which Risk has been dealt with. Contractual agreements are generally used in the Industry as the main risk mitigation mechanisms. They are essentially used as vehicles to allocate risk and responsibilities to the appropriate Party. Now that this linear connection between project success, risk and contract has been established; we can formulate the main research question: Do Contracts help or hinder the success of a Project through the way they manage risk? In order to answer this question, the nature of a Project and its success has first been established. Current reality implies that the way Risk has been traditionally tackled is flawed, hindering the construction Industry in reaching its full potential. Following the establishment of the context, the underlying reasons behind this failure needs to be identified. Sequentially , a twofold approach will be adopted through a comparative discursive analysis, routed in both academic and industrially based research. The mediums used will be standard contractual forms specifically, NEC3 and FIDIC along with interview sessions of strategically chosen professionals. This collaboration of perspectives between academia and industry will further act as the backbone of the research approach.

3 - Have traditional contracts allowed Failure to flourish ?


Firstly, we need to examine the reasons of why contracts seem to fail to control Risk in its various derivative and forms. This evaluation will divide its focus in risks induced by the document itself, section 3.1, and through its operation, section 3.2. 3.1. Issues Introduced by the use of contracts 3.1.1 - Risk induced by the draftmanship of the Contract In order to evaluate the inherent risk found in the document itself, we must first establish its source. It originates from that same property that makes the Contract of such a high importance in the Construction Industry; its legal property. Law traditionally interprets each word literary, thus early draftsmen adopted large word counts with the intend that it would lower the chances of the document being misinterpreted. Burrows (2002) cites an extreme example of a 1299 word sentence in a construction contract without any punctuation. This effect has snowballed over the years, resulting in legal documents that are highly comprehensive but no longer comprehensible by their own users. This action further contradicts the very nature of the Industry that is meant to serve; how can a rigid and comprehensive approach deal with an Industry that is dominated by Lack of Information, Risk and Uncertainty ? By introducing such vast amounts of legal jargon, it has restricted the relevant Parties to utilise the contract to its full extend, which is probably the main reason why the contract is rarely used
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besides finger-pointing purposes. Wallace (1986) comments that their obscurities and poor draftmanship create many anomalies, if not downright absurdities and injustices and that the draftmanship tends to be clothed in a legalistic, poor quality jargon, ideally suited to conceal and obscure practical intentions and consequences. Bunni (1986) has carried a study on how comprehensible the FIDIC suite is a family of contracts specifically designed for international use due to its accurate drafting - producing mindboggling results. The survey concluded that theoretically, 86% of the contract can only be understood by 4% of the global population- the equivalent of an IQ of 130. Can we really afford not to understand a legally-binding document that controls the Project and its participants to an extend that it can lead to either great success or even cause bankruptcy to the relevant Parties ? The issue of ambiguity and clarity pushes the users of the actual documents to seek lawyers in order to interpret the contractual agreements and receive appropriate advices. This line of action carries its own risk since by introducing a second participant, you introduce further risks such as vital information being lost, ignored or distorted. Furthermore, it will unavoidably inhibit effective decision making in the early stages of the Project due to the time wasted in the translation process leading to increased costs and decreased efficiency of solutions, with reference to Figure 6. The interaction between all three aforementioned issues can become critical if ignored. During the tendering process, a potential Contractor has unreasonable time pressure and relatively limited in-house legal expertise compared to the Employer. Due to the high competiveness of the industry, and in combinations with the contractual risk described above, it can lead to serious underestimation of the risk, and sequentially, of risk premiums. This may well be taken into advantage by the Employer for achieving lower, legally-bound overall prices. This possibility is has increased likelihood of manifestation since the largest proportion of construction contracts is prepared by it; Zaghour and Hartman (2003) cite that 74% of construction contracts in the USA and Canada are prepared by the Employer. Although, this line of action seems to serve the Employer, impending risk materialisation can push the Contractor in an aggressive behaviour. Compromise of the product quality though cost savings is to be expected, concluding in deteriorated and antagonistic relationship with numerous disputes; harming the Project. 3.1.2 - Risk induced by the inherent processes We first need to establish the approach used by the Contract regarding to Risk and Uncertainty. Later, the mechanism of these approaches the Risk Allocation Process and Verbal Evaluation process respectively - will be discussed. Approach to Risk In general, Risk Managements can be undertaken using three main methods: identification, measurement and mitigation. In general, contractual agreements use the later method; they assume worst case scenario and then mitigate against it; after all Construction is a risky business and in gambling, the house always wins. Four fundamental approaches are used through a contract: avoidance, reduction, transferring and assumption. (Xu, 2011) However, this generic approach is far from efficient. By considering the risk related to the undermining geological Figure 7: Basic response loop when conditions; two clear strategies can be followed. The contract dealing with uncertainty (Masurier, 2002) may specify worst case conditions and mitigate against them by using a high Factor of Safety. This will result in a high possibility of success though not foolproof although it will sacrifice
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efficiency, cost, sustainability and time. The other alternative is to specify average conditions and allow the Contractor to use the Observational Method. This approach provides alterations to the design depending on the actual conditions encountered; its a simple action-reaction approach, not dissimilar to driving a vehicle see Figure 7. Great Organizational Risk is induced since monitoring and assessing become of vital importance, exemplified by the aforementioned failure of Heathrow Express see section1.4.3. However, if properly administrated, it can lead to significantly heightened success and efficiency. This difference is found in the underlying ethos of each contract being either reactive or pro-active. Risk Allocation Risk allocation is the main mechanism utilized by any contract in mitigating against risk. This topic will be approached an economic standpoint - finance is a common denominator and driving force between current challenges and achieving success. Firstly, we need to consider the profit margin of a Contractor; IMCA (2006) suggests that a reasonable percentage is 5% of the Projects value. Zaghoul & Hartman (2002) have showed through a survey of the Construction Industry in Canada that the value of the disclaimer clauses varies from 8% - 20% of the Projects value without even considering hidden costs such as increased potential for claims. The significance of fair risk allocation can now be established; it will determine the ability of the entrepreneur (i.e. the Contractor) to manage the received risk and obtain an acceptable profit or go bankrupt. Literature suggests that this allocation must be based on the capacity of the entrepreneur to monitor and control the risk. Moreover, it must be able to absorb any damages under its potential manifestation. Nonetheless, it is this Writers opinion that profit margin should also play an important role in the selection. Since the materialisation of risk and thus the value of the disclaimer clauses is higher than the actual profit margin of the Contractor, inappropriate risk allocation can lead to substantial economic losses, to an extend that it may induce bankruptcy. This will initiate an antagonistic and aggressive relationship where the Contractor tries relentlessly and rather innovatively to squeeze money out of the Employer in order to compensate for its losses; unavoidably leading to an adversarial relationship with compromised Communications. Moving along the Projects timeline, this potential lack of information, due to the deteriorated communication line, can further damage the Project, by allowing a larger number of uncertainties to materialize and thus increase the possibility of failure a vicious circle is thus established. A note on the relationship between clarity and risk allocation should be made. Is a fair contract better than a clear contract ? It can be argued that a clear contract, which is not fair, can achieve a considerable risk reduction; the Contractor can accurately identify the risks present earlier and more accurately. Thus, it can proceed with caution, paying attention to include correctly priced risk premiums during the tender. This attitude can also encourage innovation by forcing the Contractor to find innovative ways to manage the risk and thus increase his profitability establishing goal alignment between Employer and Contractor. Nonetheless, if the risk allocation is clearly unfair, it will initiate a boomerang effect by showing a clear lack of trust between the two parties. Potentially, it can compromise all three factors of success, while rapidly deteriorating the lines of communication aggravating the relationships even on the long-term. Uncertainty It is this Writers opinion that the best approach in solving the uncertainty issue is to incorporate a contractual agreement that provides the bound Parties with a Real Option. Cong XU (2011) defines a real option as ..a right without an obligation to take specific actions depending on how uncertain conditions evolve. The great significance of this definitions will be illustrated through an example. Assuming that an excavation is to take place, usual practice will dictate the
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involvement of a Contractor with the lowest current price and then negotiate later any future changes if the unexpected conditions are faced, with any related price increase, delays and potential excuses for disputes that may arise. This reactive and rigid approach does not provide any real options on the line of action if this uncertainty materializes; it ensures that the Employer will receive low market prices but most definitely receive future market prices. A more flexible approach would be the following. The Employer can receive the same low current market prices and provide an additional fee for the right to extend the contract on agreed prices if unexpected conditions are faced. If future prices increase, then the contract is extended; if not, then the contract is not extended and the Employer receives future market prices. Subsequently, the possibility of delays and disputes due to re-negotiations is kept to a minimum. Verbal Evaluation of Uncertainty By assuming that a Construction Project is indeed an adaptation mechanism we can divide the possible problems that obstruct its function in structured and non-structured problems. Structured problems are usually problems that relate to the purpose of the design and are thus tackled during the design stage. However, non-structured problems are defined as unique decision problems with an uncertainty of the outcome of the solutions. An example of a non-structured problem is the ability for the relevant Party to recognise errors during the construction phase on time; this problem cannot be expressed quantitatevely. (Ustinovichius et al., 2006) Current approach is to use verbal evaluations. For our example, words such as reasonably fast or determined such as an experienced contractor would have been used. This terminology is rather vague and usually acts as a starting point of disputes however is used abundantly in contracts. 3.2. Issues ignored by Contracts The main issue that has been traditionally ignored, at least up to recently1, is the fact that Project Management is Risk Management. Due to the vastness of the issue, this approach will concentrate in some rather contemporary issues that have surfaced in recent years; the impact of Trust, section 3.2.1, and the inherent uncertainty in human behaviour, section 3.2.1. 3.2.1 - The effect of Trust Risk allocations is achieved through Table 1: Risk perception of the frequently used disclaimer clauses under Low disclaimer clauses. A disclaimer and High Trust Relationships higher is worse (Zaghoul & Hartman, 2002) clause is responsible for transferring an Employers liability to a Contractors responsibility usually escorted by a risk premium. It has been previously cited that Risk Premiums carry from 8% to 20% of the Projects value; thus their control is of the essence. The risk nature of the Contractor which depends on the project size, complexity and market conditions along with his perception of the disclaimer clause will regulate the size of this premium. Assuming that the first factor cannot be altered, we will focus on the later. This perception is dependent on the clarity of the clause and on the quality of the business relationship between the relevant parties. The most significant parameter of this relationship is trust or its absence. Hartman (2000) has divided Trust in three components; competence trust, Can you do the job ?; integrity Trust, Will you take care of my interests? and intuitive trust, Does this relationship feel right?. Although it has been argued, that the
1

NEC, released in 1993, is the first contract suite that has acknowledged this significance and has included procedures to promote correct Management

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Industry generally uses intuitive trust and then post-rationalizes thorough competence and integrity trust. (Zaghoul & Hartman, 2002).Regardless of the actual nature of Trust, its presence and impact on perception can be qualitatively evaluated - see Table 1. The implied complication of this chain-relationship is that a high trust relationship will result in the perception of the risk associated with a disclaimer clause as being low; resulting in reduction in the values of Risk Premium and thus achieving a reduction on the Projects costs. (Zaghoul & Hartman, 2003). This relationship should be promoted and nourished through various mechanisms ideally introduced in the contractual agreement, taking advantage if its legally-binding nature in order to result in cost reductions, where necessary. However, great care should be taken when dealing with prominent and serious risks. It is this Writers opinion that this approach can well lead to a boomerang effect depending, on whether the relevant risk actually materializes. A promoted low-risk perception of a disclaimer clause may lead to an insufficient risk premium which will hinder the Contractors ability to absorb the effect; opening the Pandoras Box of antagonistic and adversarial relationships of which this Industry is so famous of. A lower perception of Risk may help in establishing lower prices but, it does not lower the significance of the Risk itself. 3.2.2 - Uncertainty related to an Individuals actions during a Crisis The Significance of human behaviour as a dynamic uncertainty has already been established. The identification of the problem currently ignored by the vast majority of the contracts originates from the fact that currently, contracts are used only to resolve differences. Since this differences occur when risks and uncertainties materialize, a logical step is to try and control the actions of the relevant personnel during a crisis, thus ensuring good practise is followed when in need. Loose requirements and timeframes that are promoted by some contracts fall into the established work timeframe of the Individual; making the prescribed procedure obsolete. This is mainly based on the ability of the Individual to reach to the goal using his own preferred methodology, by taking advantage of the loose timeframe and requirements. (Loosemore, 1994) In order to improve this, a limited amount of discomfort can be promoted upon an individual to push him/her out of their comfort zone during a crisis. Although this may seem as a rather bold move since it can potentially increase Organisational Risk if the prescribed mechanisms are accurately expressed and sufficiently complete; this approach may be invaluable in increasing the likelihood of the individual in following a set procedure.

4 - Summary and Scope of Research


The constituents of Project success, along with the factors limiting it have been set, in order to provide a suitable background. This background acts as the cornerstone of the basic assumption contracts may not always encourage success but may potentially hinder it. This limitation originates from failing to acknowledge and account for two major factors that can affect a contracts efficiency. Firstly, issues arise from the profound failure to acknowledge and tackle significant aspects, section 3.2, exemplified by the lack of reference and mitigation on the potential impact of trust and human behaviour. The second issue lies within the very use of the contract, section 3.1, this will be the main focus of the research. This issue has been separated in two distinctive parts; risk induced by the document itself drafting risk and risk found within its underlying procedures operational risk. Furthermore, indication of dynamic response from the very notion of contractual risk has been evident throughout the Writers research. This issue appears to be a product of the multiple interactions found within the Industry. Operational and Contractual risk have been assessed though a comparative analysis of NEC3 and FIDIC while the nature and impact of the aforementioned interaction was assessed through interviews sessions in order to introduce a pragmatic perspective on a rather theoretical topic.

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Interview Sessions
1 - Approach and Methodology
This chapter consists of a discursive analysis from data collected through interview sessions of professionals, strategically chosen due to their relevance in the examined aspect. This approach will introduce a pragmatic take on the now established pallet of risks found within the Industry. It is emphasized that due to the nominal sample of interviewees, conclusions are not conclusive but rather partially reflecting the truism behind this multiplex problem. They are purposefully aimed in achieving a degree of completion to the research and to add a touch of pragmatism on a theoretical background; giving greater gravity on limited-numbered opinions would be somewhat illogical. The personified gearwheels behind a contractual mechanism during the entirety of the construction process where identified and recruited though established industrial relationships a further attempt was made to include representation from all relevant Parties. In order to gain some perspective from both Parties, a Project Manager from both Contractor and Employer were drafted. The importance of the people who deal with the practical problems was also acknowledged by enlisting a Site Engineer, while the specialized opinion of a Contract Director was also acquired. Finally, the spectrum was extended through the inclusion of the critical and impartial perspective of Arbitrator - the Reader is advised to refer to the Appendix, section 1, for further details on the participants a sample of the consent form provided can be found on the provided compact disk. The aim of the sessions is to extract the individuals opinion regarding the interaction of risk and construction contracts as pure as possible with little interference by the Interviewer. Thus, a technique suitable for endorsing a discussion between the Interviewer and the Interviewee rather than a monologue was promoted using a qualitative, semi-structured interviewing approach with a strong emphasis on open ended questions in order to allow the Interviewee to fully express his ideas and opinions. Whenever significant issues where identified, further probing was exercised in order to identify the underlying theme of the expressed issues. See relevant file provided in the compact disc for the backbone table which provided the thematic structure of each session. The following discursive analysis trails a thematic division of the emergent topics through a linear sequence, constructed in retrospect of the sessions. This linear structure is regarded to be a simplification, due to the inability to illustrate the actual multidimensional interaction found within the dynamic interplay and the emergent properties of the aforementioned components. Links between various topics and/or opinions will be drawn while progressing along this linear path. Finally, Figure 10 is a graphical representation of the identified interactions based on the data gathered by the interviews - illustrating the evident multiplicity and complexity of the examined notion.

2 Origin
An interesting historic point made by Mr Brown will serve as the origin point of this exploration and decomposition of the underlying model of the Industrys perspective on the interaction of risk and contractual agreements. Mr Brown points out that the approach of a Contract is not necessarily dependent on current practice but rather on the historic origin of the drafting body behind it. He reasons that current practice has changed significantly over the past years increased complexity, globalization, limited funding and specialization are all major influences that have pushed construction and procurements methods to evolve. Sadly, this evolutions is poorly reflected on the underlying fundamentals of the construction contracts. When asked to
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indicate a potential reason behind this apparent lack of reality with the rather static contractual approaches; he smiles and clearly backs up the current approach through an example - of which the Writer considers to be an unmistakable reflection of the present situation He brings up the example of FIDIC and states that if the next version adopted a completely different approach in tune with current practice - his first reaction will be to compare the new version with the existing. I would then find the weak spots that have been improved, go back to project currently using the older version and start claiming . In retrospect, this is a rather expected approach and probably a main reason on why ICE chose to introduce the radically changes under a new contractual umbrella - NEC3 rather than including them in a revised version under their original contract. The opinion pushed forward by Mr Brown seems to be at hand with numerous flawed aspects of traditional contracts namely the underlying ethos, the inherent rigidity in structure and the inherently ambiguous use of verbal evaluation. The aforementioned factors are largely residual from the fact that in their majority, with the obvious exception of NEC3, constriction contracts are drafted by lawyers rather than engineers, the later having a much better grasp of the requirements of a construction contract and the issues found in their administration.

3 - Contractual Approach and Rigidity


The general ethos behind NEC3 emerges at the early stages of the discussion with Mr Blue when discussing about contractual approaches and the difference between reactive and proactive exemplified though the practice of risk reduction meetings. Mr Blue advocates that this feature can be considered as being unclear on its effect. He admittedly acknowledges the underlying ethos and aim, of which he clearly cites is as a strong step forward. Nevertheless, he questions the suitability of the Contract being the correct medium in promoting pro-activeness. Further probing, he reasons that the Industry is rather slow paced and that aspects such as regional, individual as well as organisational culture need to be better understood and used to form the basis of a true proactive approach the Interviewer suggests management techniques as a possible promoting agent, of which the Interviewee agrees. In retrospect, the Writer tends to agree on the suggested fundamentals, though argues that the contract can serve as fundament in establishing a pro-active framework in flourishing this highly sought out behaviour due to its legally-binding nature. An important weakness from the Employers perspective also arises through the discussion, of which Mr Blue states that it can well serve as the starting point of a claim marathon and promote opportunistic behaviours. Further elaborating, he states that the Contractor is expected to have correctly identified and priced the majority of anticipated risks borne by him; thus, a risk reduction meeting essentially pushes the ball to the Employer. By dictating to the latter to admit potential risks, it will give the Contractor the opportunity to seek those exact risks and financially abuse them. On a relevant note, a quote made by Mr Red seems to fit the glove - Unless the mentality of the Industry and the people in it changes, I think NEC3
Risk Reduction Meeting Professionalism Admittance of risk in meeting Traditional Organisational Culture Team Organisational Culture Risk Prevention

Identification of Risk Knowledge of Industry

Trust

Claim Marathon

Figure 8: The outcome of a risk reduction meeting is an emergent property, directly related to the organisational culture

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will be poorly received. Evidence of supporting this traditional approach are found under general comments made by both Mr Orange and Mr White; both advocate the current use of the Contract as being nothing more than a dispute resolution tool indeed, erecting walls between the Parties seems to be much easier and surprisingly acceptable than constructing bridges. The effectiveness of a pro-active approach, exemplified by the aforementioned risk reduction meetings . can be considered as an emergent property to which secondary interactions qualitatively affect it see Figure 8. This example can be seen on a broader scope by examining the concept of rigidity in the inherent rigidity of the approach. The Writer approaches this apparent hesitation of adopting flexibility by questioning of whether the opinions of the Interviewees are pure reflections of an objective truth or if they have been moulded through their friction with current practice which considers rigidity as an appropriate reaction to uncertainty an opinion strongly reflected by Mr Blue. He further cites rigidity as a vital precedence for increased certainty of the result by ensuring a steady construction rate, avoiding costly pauses.

4 - Use and Purpose of Contract


The purpose of a contract is identified by both Mr White and Mr Orange to serve as a common platform between the Employer and the Contractor; drawing a definite line between obligations, rights and demands. Mr Orange suggests that a contract deals with procedural rather than practical issues, illustrating the current perception for contracts and perhaps justifying the reactive approaches currently adopted by their majority. An exemplification of the lack of practicality in current use was encountered during the initial stages of the discussion with Mr White when the topic of use of contracts was first touched upon, the Interviewee fetched the relevant copy from a drawer, in place with numerous other pieces of paperwork. When the Interviewer bounces the anecdotal observation commonly found in academia that a Contract in a successful project is always kept in the drawer, he smiles and cites that through experience, you tend to learn the mechanisms by heart. Mr Orange also cites continuous education though seminars, in which contract experts express their perceived understanding on critical clauses, of which we adopt as a precedent condition for correct usage of a contract. In retrospect, the two aforementioned statements embrace appropriate administrative use via their precedent role continuing education and experience also seem to influence Organisational Culture - see section 8. The number of potential pitfalls lying within these conditions are rather severe, since for both to be valid, the considered contract needs to be in its pure, unaltered form. However, as Mr Brown highlights, amendments are as common as fish in the sea. Amendments can radically change both the ethos of the contract along with the fundamentals of the mechanism. Thus, any confidence in use, gained by experience and knowledge of standard forms, may indeed boomerang by leading individuals in assuming known territory ahead while that is clearly not the case indeed a dangerous assumption in an Industry defined by uncertainty and currently characterised by an antagonistic and adversarial culture.

5 Amendments
Inherently, a contractual agreement holds immense power due to its unique legally-binding property. However, when combined with the ability to be fundamentally tampered and potentially abused through amendments by the Employer, who arguably has a lesser understanding of the nature of the Works, will inevitably lead to unrealistic expectations with potentially devastating consequences a topic which, unsurprisingly, underlines the largest portion of the session with Mr Brown. His frustration about the issue can be summarised by his final concluding comment on the topic - Dont mind my pessimistic views, throughout my experience I have dealt only with fools strongly indicating the relevance of human behaviour, an issue examined briefly later on. During the initial stages of the discussion, he promotes a
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rather valid opinion that standard forms are not contracts in their true sense - they are merely generic templates and should be approached as such. He reasons that any inherent balance within the mechanisms can potentially be lost through amendments and concludes that it would be beneficial to the Project if standard forms became mandatory rather than simple guides. When the Interviewee challenges the flexibility of the proposal based on the broad scope of the nature of the construction projects, he argues that a larger variety of standard forms, taking into account the most plausible situations, would be a potential solution nevertheless concludes that the ability to amend at free will is hazardous. A point to note here is the confidence of which Mr Brown criticizes the topic, arising from his expertise in the area. On the other hand, both Mr Orange, Mr White and Mr Blue have illustrated a tendency in following rather than challenging the prescribed procedures; focusing on the construction process itself rather than the theoretical background holding them together. Based on this observation, the Writer believes that forming a suitable contract is of the utmost importance. Since the individuals responsible for the construction process do not question the theoretical background of the mechanisms epitomized by the comments of Mr Orange, White and Blue - the risk attached with having an unfair and non-representative contract will potentially lead in disputes and further fuel the antagonistic culture of this Industry. People involved with the practical side of the construction process simply seek to get the job done within the set restriction and standards thus, providing them with the most suitable set of mechanisms in order to achieve it is of crucial importance.
Perception of contract Clarity
Apropriate Contract Use

Experience Education Perceived Knowledge

Inapropriate Contract Use

Depends on correct perception of Power and Risk allocation


Trust

Amendments

Affects

Understanding the nature of Industry

Figure 9: Perception of the contract was identified as an emergent property related to the inputs shown

When Mr Brown is asked to identify the cause of the issue , a three-fold explanation - resting on the interaction of trust, power allocation and lack of understanding of the industry by the Employer - is presented, see Figure 9. He elaborates that the combination of lack of knowledge by the Employer and of lack of trust heightens his fear of being deceived results in ridiculous amounts of amendments. In retrospect, the Writer suggests that the indicated approach though noble in origin is completely reactive; emphasis is given in eliminating a basic freedom. The Writer believes that emphasis should be given to the other contributors of appropriate contract use such as the ones indicated in Figure 9.

6 - Verbal Evaluation and Clarity


Amendments can admittedly affect the clarity of the contract and vice versa; complicated contracts will have an increased likelihood of being incompatible with an amendment, creating loopholes through the absence of coherent terminology and conclude in disputes. Furthermore, the emphasis in being comprehensive rather than comprehensible diminishes clarity. When
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combined with the lack of trust and ability to amend, the consequences can be significant. This tendency of being comprehensive as much as possible, though amendments, was exemplified by Mr Brown by citing a case in which the Particular Conditions included what kind of meat would the workers have for barbeques and the negotiations of that term was a complete nightmare they demanded pork but the Project was based in a Muslim country. An issue brought up by the majority of the Interviewees is an example of an ambiguous concepts hindering the proper operation of the contract by sacrificing clarity. Specifically, the requirement of the Engineer to act impartial though being remunerated by the Employer an issue present in FIDIC Red Book 4th edition. The particulars of the issue bears of limited significance since under both examined contracts, the issue has been acknowledged and successfully tackled. Nonetheless, the Writer believes that it represents the manifestation of a frequently overlooked topic in academia but eminent in all five session the issue of power allocation. The combination of excessive power and lack of trust see section 5 - can have far-reaching consequences. Specifically, Mr White dismisses the importance of fairness in risk allocation, stipulating that since the Contractor enters a contract on its free will, it ought to have appreciated its risks and price them accordingly in essence, the principle of strict liability - implying that an unfair risk allocation would simply elevate the price and circle back to the Employer. He identifies the imbalance of power as the most crucial element of the contract especially from a construction point of view. He further cites an example of which the Engineer was assessing the quality of a wall and concluded in its inadequacy an opinion not shared by the Contractor leading to its demolition. The interesting angle however comes in the Engineers demand to be reconstructed in a different location to further accommodate for a recent design change. One is left to wonder if the Engineer had a secret agenda of moving the wall on the first place, and simply used his absolute power on matters of quality assessment to achieve the variation without the a cost and time impact on the Employer. Mr Brown also seems to agree on the importance of power allocation through his frequent reference to the contract as a being a playground for power games in which his job is ensuring that I always [have] the upper hand. The Interviewer sought to obtain the opinion of the Interviewees regarding a representative example of verbal evaluation commonly encountered in both FIDIC 1999 and NEC3; specifically the meaning behind experienced contractor and reasonable time. Surprisingly, the majority of the respondents seemed to have an understanding of the first concept by citing examples of which a Contractor is expected to act as an experienced contractor. Most of the examples revolved around narrow scoped situations e.g. recognising a design error in a situation where a slab is obviously inadequate regarding its reinforcement under the specified loading conditions. Mr Blue correctly pointed out that this is indeed a rather black and white approach and cannot adequately respond to the full spectrum of issues. Mr White introduced a fresh perspective on the issue by suggesting that use of the term experienced contractor essentially pushes further risk to the Contractor, since no self-respecting Contractor will admit default for not responding as expected especially in an industry where good reputation is key in long term success. In retrospect, this is an aspect that has not been encountered in academia. The Writer stipulates that the aforementioned issue is the second fundamental flaw besides vagueness in the use of this term. It does not only reside in its unquantifiable nature but also in the considerable resistance expected to be faced when the reputation of a Contractor becomes a matter of concern in such a highly competitive Industry. On the issue of reasonable time, strongest criticism came from Mr Red, who argued that this vague and unquantifiable term is responsible for numerous disputes. He concluded that this term should be removed and replaced with a defined value given in table. Though the argument appears to be valid, the Interviewer challenged the suggestion and its application in limiting the potential of accelerated works
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adopted after the Contract has been signed. In response, Mr Red concluded that it is a fair compromise between clarity and practicality; leading in increased certainty on what is intended, a quality seldom encountered but always sought for in the Industry. Clarity drives the perception of risk. Furthermore, it has a significant impact on trust, one of the main factors controlling Organisational Culture see section 8.

7 - Trust
Earlier on, Mr Brown has identified a link between clarity and lack of understanding of the Industry by the Employer which leads to a lack of trust and concludes to inappropriate risk and power allocation - mainly through amendments. This uniform lack of trust is exemplified by Mr Browns usual practice during the initial stages of a contract negotiation. The Employer would submit the contract and state that the conditions are based on a standard form. Following the submission, Mr Brown would compare it word by word with the original form that I bought on my own from the official website in order to confirm it. He cites numerous cases where both clauses and wording where reworded to satisfy the Employers insecurities This example illustrates obvious signs of lack of trust by both the Employer it doesnt state that it has reworded a number of clauses, hoping the Contractor will not realise and the Contractor- it meticulously compares the contract to satisfy its mistrust on the accuracy of the Employers statements. Adopting the Employers point of view, Mr Blue considers that the greatest risk that the Employer inevitably receives is the inability to ensure that both his representative and the designer act to on for his best interest on under their best of their capabilities again an issue of lack of trust. The Writer highlights trust as the most important ingredient its lack by the Employer, combined with the inability to control, the increased power, the ability to amend and the unawareness of the potential pitfalls inevitably results in weakened Organisational Culture and reduced chances for success.

8 - Organisational Culture
8.1 - Academic Background A further parameter that significantly affects the quality of the Organisational Culture is the level of professionalism illustrated by the individuals composing the organisation qualitative quantifiable by academic background and experience. The diversity of the academic background in people involved in the industry was first acknowledged by Mr Blue , noting the presence of people with PhDs to people who only know how to use a hammer and the potential effect that it may have in their understanding of the scope of the work. Mr Orange further elaborated on the issue by stipulating that frequent participation in educational seminars is also important. He notes that the potential combination of excess power by a person who lacks appropriate knowledge citing examples of Architects who had the impression of absolute power was given to them in issues that it was not can give rise to tensions and result in hindered relationships, damaging the Project. Mr Blue complimented this approach by noticing that a way to avoid issues like this is the underlying ethos of the individual; of which he recognised professional memberships such as ICE as the way forward. It is rather interesting that only Interviewees with a background of participation in similar bodies identified this relationship, though most of them have similar educational background. An accurate description of the required ethos was given by Mr White - a professional Contractor honours the clauses of the contract, regardless of being correct or wrong.

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8.2 - Experience and its impact on perception A clear role of the significance of experience over educational background was also observed in the difference in opinion between Mr Orange and Mr Red when the risk allocation of unforeseen ground conditions was introduced. Mr Red approaches the issue from a theoretical standpoint and states that the Contractor is not expected to have done a full geological survey before tendering, but it is also not expected to submit a tendering offer without a price on groundrelated matters. Thus, the Contractor should undertake a visual inspection and obtain relevant data when available, but the risk should be borne on its entirety by the Employer a completely compatible opinion as the one promoted by NEC3. It is a theoretically sound approach since the Employer is better in control the likelihood of the materialisation of the risk more time with the site, thus greater ability to do extensive testing. On the other hand, Mr Orange states that it is fair to push the risk to the Contractor since it has more experience in dealing with the issue and assumes that this risk will be priced in the tendering offer an approach which lies in close terms with FIDICs approach. The Writer notes that Mr Oranges approach relies on the fact that the encountered conditions will not be vastly different from what is expected and thus can be controlled within a reasonably deviation from the original cost and time schedule. This approach seems to omit the importance of fair risk allocation and adopts a reactive approach in simply dealing with the issue a hand. The origin of his opinion potentially lies in the nature of his experience. As a site engineer, reactive approaches in overcoming encountered difficulties are common practice in order to avoid potential stops of the construction process which are highly costly. On the other hand, Mr Red is trained to question the theoretical soundness of a risk allocation clause rather than dealing with its implication. The difference of opinion illustrates that regardless of their similar background education both civil engineers different points of view result in different interpretations of facts and thus, can serve as origins of disputes. 8.3 - Points of view and their impact on perception With reference to the issue of impartiality of the Engineer under FIDIC 4th ed., both Mr Orange and Mr White agree that it is expected of him to produce a biased opinion regardless of the impartiality requirement since he is being remunerated by the Employer. On the other hand, Mr Blue stipulated that in fact, the contrary may be the case due to a potential interference of the Market. Further elaborating, he stipulates that the likelihood of the Engineer coming across the same Employer in the Industry is rather limited. On the other hand, it is highly probable to come across the same Contractor of which this likelihood is a clear function of the Market size thus, the Engineer may be biased towards the Contractor in order to be in good terms with it.. Indeed this is an equally valid point though it can be regarded as rather far-fetched when compared with the initial point. The Writer concludes that although the former issue, found in FIDIC 4th ed. has been acknowledged by both FIDIC 1999 and NEC3, none of them has attempted to tackle the later issue as identified by Mr Blue. An underlying theme emerges from the last two paragraphs. It appears that both factual and distinctive matter seem to be judged according to the individuals sector of work experience and the side of which he resides upon either the Employer or the Engineer regardless of the background education. This observation signifies the increased role of emotional input rather than the pure rational expected in dealing with such matters the latter being the cornerstone of drafting any construction contract, clearly reflected though their structure. The Writer envisages that on extension, contracts that focus in defining absolute objectives are doomed to conclude in an adversarial culture - conversely, contracts that attempt to mould the organisational culture have a higher prospective of success.

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9 - Legally-binding obligation for trust


A bold move by the NEC3 is to use the Contract as an input to achieve Trust, see cl.10.1, creating a legally-binding dynamic interplay which is extremely interested; regarding both its means of interpretation and practicality both issues emerged during the sessions. Mr Red provides a clear insight regarding the aim of the clause, envisioning it as a precedent conditions on the contractual agreement as a whole justifying its position as the very first clause that any obligation and/or action is done solely for the benefit of the Project. He admits that the underlying ethos being promoted is extremely important. However, he argues that this demand is naive due to the lack of trust in the society as a whole and in extension, to the Industry. The Interviewer suggests the example of the Olympic Velodrome in London 2 as proof of the contrary and queries whether this could be common practice in the foreseeable future. Mr Red laughed and noted that this is a one off example referred to you by academia, however reality is that each Party will seek to take advantage of the other in order to increase its pro fit. The rest of the Interviewees argued that the clause is indefinable due to the inability to quantifiable measure trust, resulting in the inability to form a definite line distinguishing trust and mistrust. A point to note here is that none of the Interviewees criticized the enforceability of the clause itself; a topic highly debatable in academia. It may be that the presumption of whatever lies within the contract exists; a rather expected approach due to the general lack of knowledge of its users on relevant legal background. The criticism on the enforceability of this clause lies in the ambiguous wording which suggests that the conditions is rather optional rather than binding; however the Writer argues that this is not an ambiguity by negligence of appropriate drafting but rather intentional. The result of the inclusion of such a condition is that the Parties will consider it as a precedent term judging their performance on that aspect; thus they will act towards satisfying it as shown by the perception of the Interviewees benefiting the Project. On the other hand, if disputes arise, it immediately means that usual practise has been exercised and thus cl.10.1 has been breached. The Writer doubts that a Party will proceed to any form of tribunal based only on a breach of cl.10.1 due to the uncertainty of its intention, stemming from the absence of a relevant court ruling - no Party will proceed to an expensive and lengthy procedure unless they are confident rightly or wrongly - about a positive outcome.

10 - Employers awareness and inherent risk in Industry


The apparent lack of knowledge and awareness regarding the very nature of the Industry in which the Employer invests upon, was acknowledged all the Interviewees; indicating that it may well serve as the origin of a snowballing effect with a final result of diminished success. Mr Blue introduced the lack of certainty in the Construction Industry by drawing a comparative line with the manufacturing industry. He cites when Nokia makes phone, there is no need for a contingency fee, it knows that all of them will be exactly the same in comparison to the Construction industry where contingency percentages are usual practise. No attempt was made by the Interviewee to identify the reason; this statement simply served as a precedent condition in the discussion and appeared to be common knowledge shared between all the Interviewees. He then adopts an Employers perspective as expected and states that the Employer lacks the ability to control the Contractor, which give rise to the need to enlist qualified representatives. No recognition was made by him regarding the potential implication of this action, by inducing increased manifestation of Organisational Risk resulting in delays in taking crucial decisions
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During its construction, the Contractor had installed timber panels by hand though he was obliged to do so through machinery - in order to achieve better quality, absorbing the extra costs from the increased labour.

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however, a relation with mistrust was established, see section 7. Commenting upon the issue of the Employers unawareness, Mr Red states that approaching this issue immediately implies that the Employer at least knows what it wants; which is rarely the case. He continuous to explore this issue further and concludes to the importance of lack of information, emphasizing on the importance of eliminating it as much as possible through the design process. However, he does acknowledge situations that hinder the production of sufficient designs and serve in enlarging this information gap. Dynamic uncertainties, exemplified though the construction of the largest hospital in Nicosia, Cyprus, was used as an example. He cites that during the initial stages of the design, an MRI had dimension of 3m3m8m; information of vital importance for the design a hospital. However, towards the end of a lengthy and complex design process, the dimension of the MRI had shrank to 2m2m6m, resulting in numerous design revisions and concluding in time and cost related claims, accompanied by public criticism and outcry. Mr Brown seems to acknowledge both points suggested, though no further elaboration was undertaken. After drawing a similar comparison with the manufacturing Industry, Mr Orange links this lack of knowledge to the current use of contracts by stating that this interaction leads to an egocentric Employer with a demand of receiving a Project as specified, regardless and irrational use of amendments see section 7. A question set by Mr Brown to the Interviewer clearly reflects this If you were tendering your own house and a wall wasnt as specified, would you care why? The answer is no, you would simply demand it to be reconstructed. The Writer considers this multidimensional interaction to be vital in achieving an appropriate balance of risk allocation nevertheless, it is suggested that further educating the Employer on the potential risks of the Industry can have a severe impact in the long term. By appreciating the increased possibility that he may not receive the Project exactly as specified precisely due to these uncertainties his desire to invest in the Industry may diminish.

11 - Market Conditions
Mr White has suggested that the Contractor may tender a Project simply for reasons of prestige citing the example of the project that the is currently involved. This aforementioned project is currently the tallest concrete building in Nicosia, Cyprus, incorporating a variety of construction innovations used for the first time in the local industry. Regardless of the inherent risk resulting from this innovation, the contractual agreement adopted a target cost approach, allocating the majority of risks to the Contractor. Regardless, the inclusion of such a prestigious project in a companys portfolio is an important step in elevating its reputation which seems to be the main reason behind the acceptance of this contract. In recognition of the relevance of the present economic situation; Mr Red examines this topic and stipulates that it pushes Contractors to submit unrealistically low offers which will later seek to inflate by eagerly trying to identify potential omissions in the Employers offer in order to devise cost claims further damaging the established Organisational Culture. However, the capacity of a Contractor to follow this path depends on the market size since, as suggested by Mr Blue previously, reputation is of utmost importance. It further illustrates how current practice of accepting the lowest tendering offer may not always be a wise choice. This is where lack of understanding of the industry by the Employer may again come into play; by his inability to quantify between a realistic and unrealistic offer, he may endanger the success of the Project by hiring an adversarial Contractor who simply seeks to go through a difficult economic period via cost claims.

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12 - Final model
This multidimensional analysis of the various underlying issue and interactions identified by the Interviewees essentially serves as a prelude to the extraction of the model see Figure 10. Two central milestones directly affecting the perceived model are Clarity and Organisational Culture. These components have emergent properties, defined by a multitude of interaction the ones identified throughout the interviews are reflected in the model. The residual risk borne by a Party is defined by the two main internal output in the form of risk and power allocation. External inputs that further affect the borne risk have also been identified by the Interviewees; these are the Employers unawareness of the uncertain nature of the Industr y along with the effect resulting from the interaction with the Market Conditions.
D e f i n e s Experience Organisational Culture

Background Education Professionalism

Trust

NEC3 cl.10.1

Contract

Market Risk Allocation Power Allocation Lack of awareness and understanding of the Industry by the Employer C o n t r o l s

Clarity
Amendments

Use of Contract

Purpose of Contract

Ambiguity /Verbal Evaluation

Contractual Approach

Rigidity

Historic Origin of Contract

Figure 10: Model illustrating the identified interactions that affect Risk, as perceived by the Interviewees

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Comparative analysis of NEC3 and FIDIC 1999


1 - Comparative analysis of the drafting approach
Clarity is crucial in encouraging an objective assessment of foreseeable risks while limiting emotional inputs as much as possible, though some of them, such as trust, are direct derivatives of clarity see Literature Review . It has further been identified that disputes mainly arise from the fact that a Party has received a risk that was not aware of, thus its presence was not reflected in the tender price and can potentially conclude to a loss. Achieving clarity through the various mediums at hand (such as terminology, structure, coherent flow etc.) will surely reduce the frequency of disputes through correctly delivering what is meant and expected by each Party. Unfortunately the need for clarity directly contradicts the nature of law; this is mainly due to the fact that law interprets words rather than the underlying meaning or intentions of their conglomerations in the form of sentences and paragraphs. Thus, it bears to reason that a larger amount of words will lead to a greater certainty of the contract being interpreted as intended in case of a tribunal. In an attempt to satisfy this, traditional contracts resulted in being highly comprehensive sacrificing the necessity of being comprehensible by their own users. Considering the uncertain nature of Industry, the inability to achieve completeness, and in combination with the lack of understanding of the contract inevitable through the complex terminology led to increased disputes rather than to minimize them. Keeping in touch with the current reality of the Industry, both contracts have also acknowledged the increased frequency at which the contracts are being amended along with the apparent risk of altering the underlying principles though them see Interviews. Both contracts try to tackle this issue, though adopting different means of achieving it. 1.1. - Dont judge a book by its colour Both academia and industry seem to refer to the FIDIC contracts by their cover colour rather than their title indeed it is easier to refer to a Red Book rather that the Building and Engineering works designed by the employer contract. The emergence of the new 1999 versions adopting the same colour scheme enhanced the cloud of confusion already induced by the radical redrafting failure to reflect the extensive rework on the exact property that enabled their distinction is rather surprising. The pre-1999 editions where allocated various colours according to the nature of the intended Project the Red Book was the contract responsible for Civil Engineering works. However, the 1999 suite divides the contracts based on the Party responsible for delivering the design the 1999 Red Book is aimed for Projects of which the Employer is responsible for it. The Writer has come across to numerous examples of articles that simply refer to the Red Book without any further definite distinction an educated guess based on the publication date of the article was often the only way to provide some clarity. Similar confusion was also faced during some interviews. 1.2 - Layout Comparison FIDIC consists of two main document the General and the Particular Conditions. The General Conditions is the 20-clause document representing the general ethos, principles and mechanisms of the contract while the Particular Conditions are aimed to account for the individual requirement of each Project. This is a rather standard approach adopted by the large majority of the construction contracts across the Industry. Peter L. Booen (2000), one of the principal draftsman of FIDIC, has acknowledged the risk that comes through amending the contract through the added contractual risk from incompatibility along with toying with the rather balanced risk allocation. In order to tackle this, FIDIC has incorporate more text in the General Conditions, in order to reduce the need for additional amendments in the Particular Conditions;
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advocating the principle of clause removal is preferred over the re-drafting of new ones. However, this approach has an inevitable impact the increased word count compromises the clarity of the backbone of the contractual suite, the General Conditions, diminishing its comprehensibility. This issue is heightened by the relatively small number of main clauses and increased number of sub-clauses introducing further complexity. Thus, although the intention is clear and applauded, the end results is a complicatedly structured document with excessive use of legalistic language, leading to the onerous process of identifying and removing the potentially unnecessary clauses. Failure to do so, will inevitably lead to an inaccurate reflection of the Project requirements through an ineffective contract a highly burdensome consequence. NEC3 has taken a very bold step in attempting to redefine the way a construction contract should be structured. In recognition of the eminent risk attached to abuse of the amendment right, along with the increased need for flexibility, a modular approach has been adopted. In addition, the inclusion of flow charts should be applauded since it will encourage the site engineer to take the contract out of the drawer and up to the notice board. Further elaborating on the modular layout, the procurement method is first chosen, on which the main clauses of the contract are added clause which are non-amendable in order to form an equivalency of the General Conditions under FIDIC. Afterwards, obligatory and secondary clauses are provided, complimented by the ability to introduce further amendments if a specific need is not covered. The adoption of ad-hoc properties in certain clauses significantly contributes in the production of a tailored contract, accurately reflecting the requirements of the Project and effectively reducing the need for amendments. This is a significant move in reducing contractual risk while, at the same time, increasing clarity since the Employer is urged to identify its requirements and add the pre-written clauses at will, rather than seek to remove the unnecessary parts, a far more onerous process. The construction of the contract is concluded by choosing the dispute resolution option of which one option takes into account the specific requirement of the Housing Grants, Construction and Regeneration act in the UK, thus reducing the potential of incompatibility with certain local law jurisdictions. However note that this exact benefit can become its own enemy when the contract is prepared by an Employer with little knowledge of either the Projects requirements or the Industry a rather common phenomena, see Interviews - which may conclude to a contract with wrongly chosen additions, leading to increased risk. Contractual risk under NEC3 can be regarded as an emerging property of which is qualitative nature directly depends on the competency of the Party drafting it indeed, it may either be a strength or weakness. 1.3 - Structure of risk clause In order to assess the rationale of the relevant clauses structure, the natural flow of risk first needs to be acknowledged see Figure 11. Resolution
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Risk

Responsibility
Through Risk Allocation

Liability
Who is liable for the fault ?

Indemnity/Insurance
Who is responsible for providing remedy ?

Figure 11: Natural flow of risk

Clause 18 of FIDIC is key in resolving risks; however its structure adds further complication and hiders clarity to the already elaborate overall drafting. It does nothing to emphasize the natural flow or risk a critical issue in order to enable a coherent understanding of the underlying principles, which will later prove critical in ensuring compatibility with potential amendments. The clause starts with approaching the issue of indemnification, then somehow reverses to

responsibilities, then backtracks to the general issue of Risk and concludes in liability. It may be that the drafters wish to highlight the topic of indemnification, since it may be the most significant outcome of the risk flow and then try to provide the background. However, in an Industry where risk has a central role, the emphasis upon it should not be diluted by attempting to present the result without the underlying logical progression. By presenting such an irrational structure, contractual risk is further enhanced since potential amendments will be difficult to sit within an incoherent context such as the one presented. This irregular presentation is highly unorthodox and doomed to cause confusion, delays and increased risks. On the other hand NEC3 is rather intelligently structured with a clear underlying logic. The only issue at hand is the peculiar choice of introducing the risk allocation clause,cl.80, after the liability and indemnification test, cl.60, contradicting the natural risk flow of thus the aforementioned issues do apply, though to a much limited extend due to the increased clarity and simplicity in language when compared with FIDIC. 1.4 - Definitions The two suites adopt a different system in referring to definitions. FIDIC uses the rather standard approach of capitalised words as words being defined in cl.1. On the other hand, NEC3 enhances this approach by introducing capitalised words, which serve the same purpose as in FIDIC, and words in italic. The latter are terms identified in the Contract Data. Special note should be given to FIDIC regarding its precarious omission in providing a definition of what contemporary records are. This omission can have long-fetching implications on the perceived obligations of the Contractor, resulting in increased contractual risk. The bound Parties would be strongly advised to introduce a clear and distinctive definition in order to introduce some certainty in the intention of the text. Note that the deficiency of the drafting inevitably lead to the dangerous road of amendments once walked would be rather difficult to get off. Contemporary records play an important role in the claim resolution mechanisms their quality and/or adequacy being pivotal in the outcome of this mechanisms, subject to the Engineers judgement. Currently, the only guidance present, and enforceable under common law, is the definition given by Judge Sanders (Robert Akenhead QC, 2003) as being original or primary documents, or copies thereof, produced or prepared at or about the time giving rise to a claim, whether by the Contractor or the Employer emphasizing that their strength lies in their time relevance to the trigger event that lead to the claim. Increased use of cross referencing within FIDIC leads its user to the onerous process of back and forth referencing in order to attain the pieces and accurately construct the relevant envisaged mechanism, concluding to increased contractual risk due to the high probability of missing a vital link of the mechanism- see Figure 18 for an exemplification of the numerous clauses required to construct the claim resolution mechanism. Conversely, NEC3 achieves simplicity and clarity and thus, reduced contractual risk - by almost eliminating cross referencing in its entirety, facilitating the perception of the underlying ethos and mechanisms. 1.5 - Language The difference of language represents the underlying focus of the two contracts; FIDIC adopts a complicated language, numerous legalistic phrases and extremely long sentences all bound by an elaborate use of past perfect tense. This choice is evidently derived from the property of the document being a legal document, drafted by lawyers and aimed to be interpreted in full only in a case of dispute by a tribunal through established interpretations of its adopted legal terminology. On the other hand, NEC3, eliminates the use of legalistic terminology almost to its entirety - phrases with double emphasis such as null and void and to promise, agree and
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covenant are completely absent. The same cannot be said about FIDIC. Furthermore, elaborate construction of sentences and refined use of punctuation is obsolete and replaced in its entirety by the use of bullet points and tables forms characterised by inherent clarity. The underlying purpose of this approach is to increase the perception of the users of what is intended and of what is expected of them, substantially reducing the likelihood of a dispute to arise. The Writer concludes that the inclusion of a comprehensive and legalistic language will most probably lead to a confusion between the Parties regarding their perception of what is intended. However, it will ultimately provide a definite answer under a tribunal examination due to its compatibility with current law practice. This certainty is further enhanced by the extensive case history which contributes in providing established meanings and definite interpretation of standard legalistic phrases found in FIDIC. Evidently, NEC3s approach lies in the other extreme of the spectrum. The incorporation of simple English in the present tense without any legalistic nonsense improves the perception of the user on its obligations by promoting actual understanding rather than to presume meanings derived out of standard legalistic terminology. This very absence will, however, serve as a major flaw in a situation where a tribunal is called to decide upon a dispute. The bold shift in language will inevitably lead to legally unexplored territories (Hugh Clamp, 2007), concluding in increased uncertainty of the outcome of a tribunal, compared with the legalistic stronghold of FIDIC. Conclusively, under litigation, comprehensive documents with legalistic phraseology will always have a benefit in their resolution when compared to simplistically drafted, contemporary forms. Finally, it rather boils down to the adopted organisational culture found of the involved Parties and whether they are aiming in avoiding a conflict of which NEC3 will be a more sensible choice or whether certainty on the outcome is needed if the need of a tribunal arises in this case FIDIC is the obvious choice. The Writer presumes that the latter will be of greater appeal within Employers under the current, economically-driven Industry, a conclusion which seems to be at hand with the interview sessions. However, as always, prevention is better than cure.

2 - Interaction of law
2.1 - Intro This section will serve as an introductory overview on the frequently omitted, mostly by engineers, aspect of risk emerging from the interaction between contractual Contractor Employer and local law jurisdiction. The Writer will adopt a systemic and analytical approach, in which a Contractual Law construction contract is considered as an open system in which this risk becomes an emergent property, directly Local Law Jurisdiction proportionate to the aforementioned interaction. Issues deemed to be of heightened importance will be Figure 12: Law regime examined, raising the awareness of the Reader on their fundamental interactions and their impact on risk. If basic law background is beyond the sphere of the Reader, a brief introduction on vital concepts is found in the Appendix, section 2. 2.2 - Local law jurisdiction and the impact on what is intended A fundamental differences, which can potentially acts as an origin of risk, is the fundamental difference on how a tribunal reaches a decision under civil and under common law jurisdictions. Under the latter, the vast case history of FIDIC is an invaluable benefit, since aspects of contractual uncertainty can potentially be clarified. On the other hand, NEC3 has a very limited history of case studies thus, the impact of contractual uncertainty is increased due to the lack of
30

reference in obtaining an official interpretation. On the other hand, under a civil law regime, the Writer considers NEC3 to have a greater certainty in reaching a fair outcome under a court of law, due to the relative ease in extracting what was intended, made possible by the simplistic drafting approach. In contrast, FIDIC is rather complex in both structure and terminology, hindering the extraction of what is intended. Note that NEC3 has somewhat acknowledged the risk bound by this interaction and has introduced some mitigating measures through the inclusion of cl.12.2 stating that this contract is governed by the law of the contract theoretically eliminating any potential interference. Combined with the simplicity in language and structure, NEC3 seems to have acknowledged its lack of certainty under a common law tribunal, due to the lack of precedence, and attempts to promote clarity in the intention of the words rather than being based on legal interpretations of its terms. Nevertheless, the efficiency of cl.12.2 is challenged3 due to the absence on precedence in its issue, cycling back to the issue - though the intention of limiting the interaction is clearly there. On the other hand, the complicated drafting of FIDIC effectively ensures some interaction with the local law in order to attain clarity on what is intended through precedence rather the form itself. The Writer concludes that FIDIC has a clear advantage when a case reaches arbitration while the balance tilts towards NEC3 when the likelihood of extracting of what is intended without the need of a tribunal to provide a clear analysis of the terminology is considered. In a sense, this is a representation of pro-active rather than reactive an attempt to avoid the involvement of a tribunal is clearly illustrated. 2.3. - Doctrine of good faith The doctrine of good faith is found only under a civil law jurisdiction the Writer considers the interaction of it with a construction contract to be crucial, thus it will be introduced and qualitatively assessed. Glover (2008) defines the doctrine as being a principle of fundamental justice that if a promisor is himself the cause of the failure of performance, either of an obligation due to him or of a condition upon which his own liability depends, he cannot take advantage of the failure. On one hand, FIDIC includes no provision of which this principles in included (Lloyd, 2008) thus, the Parties will be completely reliant on the nature of the local law in order benefit from this important principle. On the other hand, NEC3 distils and adopts the underlying ethos of the doctrine and introduces it in its first clause, cl.10.1. The Writer points out that the potential pitfall of a terminology clash between cl.10.1 and a relevant civil law documentation of the doctrine is avoided due to the relatively simplistic drafting of the former. The importance of omitting such an important inclusion is exemplified though the following. Assuming the condition of a UK based, consider a Contractor who is in the process of preparing a substantial claim and sequentially reaches the process of gathering evidence to back it up within the set time bar. A crafty Employer may then delay to provide vital information, leading the Contractor to fail to honour the set time bar. If the Contractor had used FIDIC, its claim would have been immediately frustrated either the contractual or the local law regime would provide any provision for good faith. On the other hand, if NEC3 was used, this slight delay would have been waived due to the inclusion of the underlying ethos,cl.10.1, regardless of whether the local law jurisdiction having provisions for it. 2.4. - Prevention doctrine and time bars The doctrine of prevention exists only in common law and the underlying principle stipulates that a Party cannot profit from its own mistake. By further acknowledging the pragmatic fact of
3

See the case of Milburn Services Ltd v. United Trading Group (UK) Ltd (1995)

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liquidated damages being potentially claimed by the Employer in case that the Contractor fails to complete the Project in time, and considering its interaction with the aforementioned doctrine, a potential source of contractual risk is identified; exemplified as follows. After the manifestation of a risk, the Contractor envisages a delay in its schedule and thus submits a time extension. In the process of collecting evidence, the Employer may delay to submit relevant data, hindering the Contractors ability to provide an accurate evaluation within the time bar. Sequentially, the right for indemnification is lost. This time that has not been remedied to the Contractor may prove crucial in delaying the construction and eventually lead to a delay of completion at this point the Employer will be able to claim for liquidated damages and thus will essentially have taken advantage of its own default though its failure to timely provide information. The aforementioned example applies under both FIDIC and NEC3, due to the bar conditions that should be satisfied in order to obtain indemnification. Under a common law jurisdiction, the possibility of a Party being able to shield itself from malpractice of the other Party exits; however, this option will not be at hand under a civil law jurisdiction and thus, should be carefully considered and acknowledged in potential amendments. The Writer concludes that relevant provisions should be at place in both NEC3 and FIDIC if the aim of little interference with local law is to be achieved. Force majeure and doctrine of frustration Both approaches aim to provide regimes in which the non-performance of a promise is excused; protecting the relevant Party from the implications of standards of strict liability found in any construction contract. The latter dictates that it is irrelevant on why a Party has not been able to fulfil its obligations, since it entered the contract freely and has willingly acknowledged the presence of risk a fundamental requirement in order for the Parties to be able to plan ahead. Utilisation of the doctrine of frustration occurs whenever the law recognises that without the default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract is found under civil law jurisdictions. On the other hand, a force majeure event results in illegality or impossibility (either commercial or absolute) of what is required means of overcoming it cannot be found. (Glover, 2008) It is a defined concept of the common law jurisdiction. Their difference can be reflected upon the impact that the closure of the Suez Channel in the 1950s had on shipping-route contracts. English courts interpreted the situation as a force majeure event and denied their termination since impossibility was not an issue the obligation could still be honoured by using a route via the Cape of Good Hope route, though the performance of the contract would have become much more onerous. On the other hand, if the frustration doctrine was adopted civil law jurisdiction the ship contracts would have been terminated since, in essence, the original contract has become irrelevant on what is now expected to be done. Concept of frustration is based on the concept of a radical change of events resulting in the complete change of the contractual agreement while force majeure is based on the concept of impossibility or illegality. The main aim of FIDIC and NEC3 is international construction, which inevitably creates the requirement of inclusion of a clause that addresses these eminent risks. The draftsmen had to choose between two clear paths in an attempt to successfully tackle this issue either provide a newly tailored approach avoiding any potential clash with local law or simply adopt established principles under a disclaimer clause. FIDIC has chosen the later, evident by the inclusion of cl.19. Through the adopted terminology, there is a real risk of the definitions to overlap and/or contradict the definition of a force majeure with the one provided by the local
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law, concluding to the Parties getting into a muddle and contradictory situation (Bunni, 2001). It may have been a safer approach to avoid this terminology and express them as they really are; exceptional risks which demand a different approach than the common risks endured by a Project. This is the approach adopted by NEC3 the definition of a force majeure event has become wider acknowledging the rigidly in the traditional definition and minimising the probability of an economic imbalance eventuating through the materialisation of this exceptional risk and has been renamed as a prevention event, see cl.60.1(19). This approach ensures the presence of a force majeure-alike clause which will apply without any issue of interaction between the local law due to the alternative terminology used. Nevertheless, it should be mentioned that the wider scope has been highly criticized (Glover, 2007) and that it can result in substantial claims of events that would have not qualify under usual practice. Finally, a difference in the structure of the documents themselves is identified. The approach by NEC is to use cl.60.1(19) to define what a prevention event is and then by reference to the compensation event clause, indemnification is secured. On the other hand, FIDIC chooses to introduce a mechanism within the clause that defines the critical test no cross referencing is used. It is the Writers opinion that the both approaches are valid; cross referencing within NEC3 is not a significant issue due to its inherent clarity. In contrast, due to the complicated form of the text within FIDIC, it is much easier to include the whole mechanism under one clause an approach which has been adopted.

3 - Engineer versus Project Manager


Both contracts utilize an administrative authority NEC3 referrers to it as the Project Manager (hereafter P.M.) and FIDIC as the Engineer. This third party has a variety of highly important duties including assessment, certification and communication. The potential capacity for discussion is rather vast since its duties and obligations are not restricted to the contractual agreement common law, statute and tort can all serve as domains of which risks can arise through the actions/inactions of this party. This brief introduction will not serve as an extensive analysis of this issue but rather concentrate in introducing to the Reader some basic similarities and differences under the two contractual regimes see Table 2 This Party can be regarded as having two key functions a decisions making and an agency role. Under the former, it is expected to act impartially4 while under the latter, it is expected to act for the Employers best interest. In order to address any issues that may arise through the two conflicting roles, both FIDIC and NEC3 have clearly listing it under the Employers personnel, drawing a definite line between expected impartiality. Previous contracts where vague on this requirement and disputes inevitably arose between its requirements for impartiality and the fact that it was paid by the Employer an issue highlighted numerous times during the Interviews. However, when this Party act as a certifier, Lord Salmon established the need for impartiality and fairness5 - though an issue now seems to rise regarding the fact that it is still remunerated by the Employer, though required to be impartial. This is the main reason why NEC3 tries to limit the P.M.s input in the claim resolution mechanism. Sadly, FIDIC fails to adopts this principles and concludes to increased risk of manipulations from the Engineer in enabling it to have a significant amount of authority in its operation and significantly affect its outcome.

4 5

Refer to the case Costain v. Bechtel, 2005 Refer to the case of Sutcliffe v. Thakrah, 1974, AC 727

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Table 2: Comparison of the general agency obligations by the P.M./Engineer

NEC No restriction on who or what can be a P.M., thus it can be a non-engineer or a firm. Requirement to always communicate in a form which can be read, copied and recorded (thus excludes oral communication) cl.13.1. Reduces the potential of organisational risk manifesting due to the presence of hard evidence. No restriction to delegate his authority to third parties, potential source of Organisational Risk since authority may be split in many individuals, resulting in delays and distortion of facts. The Employer may wish to put some restriction Notification to the Contractor is required prior to any power delegation cl.14.2

FIDIC Named individual, required to be ..suitably qualified engineer(s) - see cl.3.1. Most of the provisions that are being exchanges are required to be in writing (cl.1.3). However, cl.3.3 states that Whenever practicable, their instructions shall be given in writing thus it is more elastic on this aspect recognising that informal instruction can also be given. However, it can potentially result in difficulties to prove a claim due to the potential lack of evidence. Cl.3.2. states that it can delegate his authority to third parties, a potential source of Organisational Risk since authority may be split to many individuals. However, cl.3.5 stipulates that the approval of both Parties is required for the Engineer to delegate its obligation for making a fair determination. Notification to both the Employer and the Contractor is required prior to any power delegation cl.3.2

A final point should be made regarding its decision making role more specifically on the obligation of the P.M./Engineer to notify the Parties. Under NEC3, the PM is required to notify on any matters which may hinder the construction process in the means of cost and delays as soon as it becomes aware. This is a very general and ambiguous requirement since it introduces a rather uncertain awareness test with no further factual specifics the Writer considers that claims could well manifest due to their. A similar requirement is made under FIDIC, cl.3.5. However, it also provides a specific provision in the form pre-agreed, listed items to be found under the particular conditions and requiring mutual consent minimizing Organisational risk. Overall, it appears that NEC3 has slightly less inherent risk within the definition of this Party however, the similarities under the approach are rather staggering.

4 - Operation of a contract
4.1 - Claim resolution mechanism Jaeger and Hok (2010) stated that Claims are nothing more than the crystallization of an anticipated, not yet specified, part of the contract price and that claim mechanisms are an attempt to crystalize the final contract price and time thus, they play an important part in the contractual risk attached within the choice of a contract. That aspect of the two prominent contractual suites regarding international construction NEC3 and FIDIC - was analysed and compared though a thorough analysis of their claim resolution mechanism. In order to identify the operation of each mechanism, a systemic and systematic approach was used in order to identify the vital parameters parameters uses to construct the claim resolution model of each contract as illustrated in Figure 16, Figure 17 and Figure 18.

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The underlying milestones within each suite is listed below. Notice that no great deviation is noted regarding their nature the same cannot be said about the mechanisms devised to achieve them: Under NEC3 1. Early Warning is given 2. Risk Manifests 3. Contractor notifies that it considers the event as a compensation event 4. P.M. confirms or declines 5. If its confirmed, Contractor submits quotation on forecasted implications both in cost and time (Completion or Progress) 6. Engineer may request several quotations as a result from risk reduction meetings 7. Indemnification, in the form the P.M. has approved, is provided Under FIDIC Red Book 1999 1. Risk Manifests 2. Contractor notifies that it considers an entitlement of cost and/or time (only Completion) extension 3. Contractor quantifies his forecasted implications 4. Engineer considers the impact of the quality of information provided on the assessment of the claim 5. Engineer evaluates any conditions that may have minimised the overall impact of the Risk 6. Indemnification, in the form the Engineer has approved, is provided

The aforementioned line of actions is rather generic and strictly for the purpose of noting the fundamentals though note the underlying difference of emphasis between the two; NEC3 revolves around an event while FIDIC revolves around the right of indemnification. A systemic and systematic depiction of the vital components along with their dynamic interactions throughout the entirety of the claim resolution mechanism is illustrated in Figure 16, Figure 17 and Figure 18. A discussion and comparison of the two suites will follow, throughout a risk management perspective, highlighting the path one needs to follow in order to obtain indemnification under the materialisation of a risk. 4.2 - Unforeseen Ground Conditions After an industry survey in North America, Zaghoul and Hartman (2002) deduced that the four most commonly found disclaimer clauses in construction contracts are the following: Uncertainty of work conditions Delaying events Indemnification Sufficiency of contract documents

Thus, in order to assess the contractual risk within the aforementioned contracts though a realistic framework, the example of unforeseen ground conditions was chosen, of which its emergence and resolution touches upon all four. The very nature of this risk along with its high frequency of emergence - mainly lies in the uncertainty in which the baseline design conditions are established. It can be argued that establishing the nature of the subsurface conditions is rather uncertain since its derivation is highly dependent on the rationale and assumptions made by the individual performing the study. The basic assumption behind the derivation of the baseline design conditions is that the limited representations of the actual conditions (e.g. trial pits and borehole records) are accurate exemplifications of a uniform condition, enabling their rationalization and extrapolation;
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subsequently followed by interpretation and presentation as a form of a uniform truth. To make matters worse, no standard is used to quantify the quality of the data obtained; the Owner may have equally chosen a site investigator of good reputation, provided correct supervision and full cooperation on information exchange with him or it could have easily adopted the contrary. It is the Writers opinion that this should be limited by the contract since the pragmatic clash of interest within an economically driven Industry can compromise the integrity regarding quality and accuracy of these pin-pointed data, further diminishing the process of extrapolation. Either case, the inevitable conclusion is an increased likelihood of unforeseen ground conditions to be encountered and, thus, related claims to arise. An example of a Contractor encountering ground mines during the excavation of a harbor basin due to poor site investigation by the Employer (Bunni, 2003) may seem unfit in the realm of any serious industry sadly it is not. 4.3 - Site Information Lack of information has been identified as a major issue throughout the research its relevance on the chosen theoretical background of unforeseen ground conditions is reflected by considering the interaction of the site information within the claim resolution framework. 4.3.1 - Time obtained Considering the impact of time, the relationship between the receipt of Site Information and the actual encounter of the conditions is crucial; Lloyd (2008) ponders that whoever decides disputes arising under any construction contract must have the ability to stand in the shoes of those who were there at the time and see things as they were then perceived. This principle is acknowledged and implemented by both contracts through the assumption that the baseline conditions, of which the encountered conditions are judged upon, are obtained pre-tender rather than post-tender. 4.3.2 - Responsibility of providing Site Information Under NEC3, cl.60.2, the Contractor is expected to have examined the following: 1. 2. 3. 4. The Site Information given to the Contract by the Employer Publicly available information referred to in the Site Information Information obtained by a visual Inspection carried by the Contractor Obligation to obtain relevant information use of experienced Contractor

The only explicit obligation for the Contractor is to undertake a visual inspection somewhat expected and to review any relevant information that are publically available and referred to by the Employer. Thus, the Employer appears to be the sole bearer of the risk inherent in the compilation of the Site Information. Under FIDIC cl.4.10, the Employer is also required to provide all relevant information about the subsurface conditions however it is a continuous obligation, increasing the apparent risk borne by the Employer. Nevertheless, the Writer questions the pragmatism behind its applicability, since it is rather anticipated that the Employers involvement in this matter will gradually if not instantly diminish once the construction process has commenced. The obligations of the Contractor regarding the Site Information are similar with NEC3: 1. Information provided by the Employer 2. Information obtained by visual inspection 3. Obligation to obtain all necessary information no use of experienced Contractor

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The first difference arises through the comparison of point 3 and 4 of NEC3 with point 3 of FIDIC. The latter is rather vague and of a wider spectrum, imposing a much larger responsibility on information collection allocated on the Contractor. The Writer suggests that this burden is unfairly borne by the Contractor since the Employer has a much higher capacity to absorb this risk. The Site is under its possession and thus has more time to collect the necessary information of which the majority has already be obtained through preliminary feasibility studies that crystalized the viability of the Project. Further notice the inclusion of verbal evaluation under NEC3 to describe the expected quality of the collected information NEC uses experienced at point 4 while FIDIC does not. This choice of words pushes fairly - higher responsibility on the Contractor regarding the quality of the collected information. The second important issue which emerges is the perceived nature of the supplied data. Under FIDIC, the Employer is required to provide all relevant information; NEC3 simply requires the provision of raw data. The former requirement dictates insensible standard expectations from the Employer. Although, admittedly, the Employer has minimal expertise of the Industry, it is expected to distinguish, of what may be in vast amounts, only the relevant information for tender and then make it available to the Contractor. This lack of knowledge of the Industry will prove to be a primal incentive in further allocating the responsibility to a third Party. The reflection of this power allocation to a third Party will surely create insecurities to the Employer as shown by the Interviews of whether this third party is acting to the best of its capabilities to represent the Employers benefits. Moving further along the timeline, and considering the outcome, potential pitfall are identified either way. The Employer may provide excessive information to the Contractor, and throughout the precondition that all is relevant, the Contractors ability to identify and correctly assess the underlying risks within them, under the tight timeframe it has to submit the tender, will be diminished. Sequentially, the likelihood of a non-representative tender to be submitted is heightened and thus, the emergence of disputes arising is dramatically increased. On the other hand, it may be that the Employer submits less of what is required, circling back to an insufficiently compiled tender response, concluding to an increased likelihood of risk manifestation. In contrast, NEC3 sets up a clear and rather fair obligation, the Employer is liable in providing raw information no duty of interpretation is allocated to it. 4.3.3 - Individuality over the whole FIDIC, cl.4.10, introduces a liability cap - flexing the obligation of the Contractor to obtain all information required for the construction by stipulating to the extend which was practicable (taking into account of cost and time). In its effort to provide a balancing act on its strict liability, it has undermined the potential of success for the Project. Stemming from the introduced financial and time cap, it implies that an international Contractor will benefit from a looser liability test if the issue of adequate information collection by it is challenged. Absence of detailed tests is thus promoted, which will inevitably lead in crucial facts being missed, concluding to a lower priced response to the tender thus, highly probable to be chosen by the Employer. Thus, the likelihood of encountering unexpected ground conditions that deviate from the Site Information is heightened and similarly the likelihood for claims for which the aforementioned liability cap will serve the international Contractor. Dilutions of the importance of precise Site Information is thus observed, within the context of international construction, and rather focuses in comforting a Party rather than achieving success. NEC3 seems to follow a similar ethos by punishing a Party rather than focusing on the Project, inevitably leading to the potential pitfall of a claim marathon exemplified by the adoptions of the contra proferentem doctrine. In case of an inconsistency in the Site Information a clear liability of the Employer the Contractor may use cl.60.3 instead of 60.2, assuming the most
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favorable conditions in doing the Work during its tender response. The underlying principle is to push liability to the Party responsible in providing the Site Information essentially punishing the Employer for its inefficiency to produce adequate Site Information. Sequentially, a claim under cl.60.1(12) is to be expected. Sadly, both contracts show an increased focus in including clauses that tend to serve an individuals rights either the Contractor or the Employer but deviate from the a constructive approach acting for the benefit of the Project as a whole . 4.4 - Risk allocation of Unforeseen Ground Conditions 4.4.1.- Fairness Under both contractual regimes, liability due to unforeseen ground conditions is borne by the Employer. In order to examine if this is a indeed a fair and reasonable risk allocation; one must first consider the nature of the risk at hand, along with the foreseeable economic consequences induced by this allocation. By examining the issue of fairness, the Writer will first acknowledge the basic principles behind fair risk allocation illustrated in Figure 13 and best summarized by Abrahamson (1984) as: 1. The Party who can best control it, assuming no misconduct and/or lack of care ; 2. Ability to mitigate against the risk from manifesting ; 3. Ability to absorb the impact of the risk with the least damage upon the Party

Ablity to ABSORB the effect(3) Ability to MITIGATE (2) Ability to CONTROL (1)

Figure 13: Fair risk allocation parameters

In the example of unforeseen ground conditions, one can establish that neither Party can control its materialisation. However, the Party most able to mitigate against its materialisation is the Employer it has much more time with the site and can thus do as many examinations and to as much detail as it considers to be fit. Furthermore, under most cases, the Employer will admittedly have a larger capacity to absorb the consequences the Writer further suggests that since the Employer willingly enter the construction industry and will have the greatest economic benefit in the long run, it is only fair to be liable for remedying this risk. 4.4.2. - Economic Viability An economic standpoint should also be examined in order to assess the truism behind this this obligation of indemnification borne by the Employer since it can have a major impact on the economic viability of the Project. Current practice demonstrates the logical tendency for the Employer to be liable for this risk, along with the decision to exclude this remedy form the tender offer and rather provide it in a reactive manner as soon as the risk does emerge. The other potential approach is to push the liability burden on to the Contractor of whom it

Figure 14: General Project Outcome from Risk Manifestation (Zaghoul & Hartman, 2003)

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can be argued that it has increased incentive to pursue a novel resolution to increase its profit margin immediately concluding a definite higher tender price reflected by the attached risk premiums of which the Employer will pay regardless of the Risk manifesting. This underlying economic reality indicates that in any case, a Party loses regardless see Figure 14. Decisions and results will then be judged in retrospect of completion, with the benefit of hindsight, eventuating to the emergence of various opportunities to claim in order to recover some of its potential loss. Thus, the Writer argues that although fairness in risk allocation is principal, it may well be a trivial issue in an economically driven industry and in extension, society as confirmed by the Interviewees. 4.5 - Indemnification 4.5.1. - Medium to establish indemnification The right for indemnification is traditionally earned through satisfying a set of critical tests relevant to the issue at hand. Subsequently, crystallisation of the remedy is obtained by setting the claim resolution mechanism into motion; the relevant mechanism under NEC3 is found under cl.60 and respectively cl.20 for FIDIC. Note that both mechanisms deal with establishing a remedy for the Contractor a more linear procedure is prescribed by both contract in case of the contrary. This possibility is not further examined since the focus of this research is the contractual risk under the most frequently encountered situation. 4.5.2.- Burden of Approval A significant difference can be found between the two contracts regarding the principle of establishing the validity of a claim NEC3 allocates the burden of disapproving a claim to the Engineer while FIDIC allocates the burden of approval to the Contractor. This distinction should be of utmost significance when choosing either form the Writer considers it to be a clear allocation of Organisational Risk, inherently bounding the process of gathering evidence to (dis)approve a claim. 4.5.3.- Interaction of indemnification and time A fundamental difference is routed to the underlying ethos of the two contracts, having a direct impact on the right to be indemnified, is identified in the approach of the interaction between time and the construction process. The Society of Construction Law (2004) has acknowledged that the time component and its disruption can be distinguished in two components, with respect to its influence on the construction process. It can either affect the completion date thus, a delay - or it can induce a delay to progress thus, a disruption. Following this logical path, NEC3 provides a comprehensive coverage by allowing a Contractor to claim when the manifestation of a risk affects either the Completion Date or a Key Date (a date of which a set state needs to be reached). Controversially, FIDIC has traditionally adopted a rather limited view of this interaction by providing indemnification under issues affecting only the Completion Date. The Writer condemns this chosen path as being short-sighted and not appropriately pragmatic with potentially far-stretching consequences. Consider a situation where the manifestation of a risk hinders the ability to progress. In order to mitigate the effect, the Contractor will allocate increased resources to lessen its impact on the schedule. Unsurprisingly, assuming a finite capacity of resources, the Contractors ability to honor the agreed Completion Date will then diminish. Sequentially, the Contractor will try to compensate this lost time by compromising parameters such as quality in an attempt to honor the Completion Date and avoid liquefied damages. Note that the aforementioned implication from FIDICs approach may not be immediately apparent to the Contractor during tender thus it will have received a risk that has not acknowledged, increasing the likelihood of a dispute to arise further along the construction process.
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4.5.4.- Aim of indemnification Under NEC3, the Contractor should purposefully remain at exactly the same position before the risk materialised thus it is remunerated in terms of both time and cost including projected profit - as established by the interaction of cl.11.2(8) and 63.1. However, FIDIC, stipulates that cost, profit and time extension are different parameters and proceeds in weaving an elaborate web of interlinked provisions around the entirety of the contract in an atempt to define the rights of indemnification regarding the aforementioned parameters see relevant file in the provided compact disc. The Writer considers this approach as harming the Project the potential implications that may arise when toying with its economic expectations should not be challenged without expecting adversarial relationships to eventuate. The underlying ethos of FIDIC appears to be of compromise between the parties opposing the ethos of NEC, which clearly favours the Contractor. The Employer loses absolute time (though extension on relative time is given on the Contractor) and the Contractor loses his profit (though remunerated for his cost). The underlying logic still appears to be valid though the Writer points out that the potential implications are indeed great. Under FIDIC, the Contractors profit percentage drops, potentially inducing a claim marathon or a cost reduction plan resulting to decreased quality. Conclusively, the Writer believes that although both approaches seem to have a strong base in reason, economic reality dictates that NEC3 will potentially serve the Project better, though on the Employers expense. 4.6. - Proactive vs. Reactive Another aspect of the underlying philosophy of NEC3 is the ability of the Contractor to request indemnification for risks that it considers as being eminent a rather bold move when compared with the traditional reactive approach. In theory, this is a highly desirable approach since it will promote identification and curement of potential risks before their implications swell and their solution demands heightened cost and time, see Figure 6. Pushed back to a realistic context, the approach appears to be rather fragile at hand with the Interviews. Under cl.60.1, the Contractor can propose a forecasted risk to be assessed as a compensation event then, the Employer receives the responsibility to evaluate the validity of the forecasted implications if any. The Contractor is unmistakably more skillful, experienced and with a higher degree of involvement to the Project, thus evidently more skillful to assess this likelihood. The Writer questions the validity of this contradictory power allocation and stipulates that the benefits of this pro-active approach will be lost in the presence of a prudent Employer by enabling it to frustrate the forecasted risk on the grounds of being unlikely to materialize. It is recognized that the underlying purpose of this power allocation is to protect the Employer from potential manipulation by the Contractor, however the means used to achieve this protection are rather questionable. The interaction of trust between the parties, along with the Organisational Culture defining them, will also play a crucial role is establishing whether the forecast is sound or whether the Contractor is playing dirty the Writer suggest that the solution of this specious provision lies within these fundamentals. On the other hand, under FIDIC, the Contractor is only allowed to file claims regarding risks that have already manifested which has its own implications that lie within a reactive approach such as reduced efficiency and increased costs of treating the risks. However, on the aspect of power allocation, it is sound with less potential implications. 4.7. - Claims 4.7.1. - Risk inherent in the preparation of a claim Raybould (2009) elaborates that assessment and forecasting are the foundations of being properly compensated for change. The quality of assessment largely lies upon the approach and structure of the claim resolution mechanism while forecasting inevitably intervenes in the notion of the claim itself. Claims are essentially quotations based on forecast estimates on the potential
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implication that a risk manifestation will have on the time and cost component of the construction. Its inherent uncertainty, arising from the fact that it depends on the clarity and precision that one perceives the future, can render the claim resolution process ineffective. 4.7.2 - The nature of a claim Before probing to the specifics of the claim resolution mechanisms, the actual risk found in the preparation process of a claim needs to be introduced. Any attempt to reduce this risk will be clearly beneficial to both Parties and the Project since the claim will be more realistic and thus, have an increased likelihood of being accepted. In order to appreciate the significance of the risk attached in forecast, its components are first identified and briefly described in order to assess the underlying logic behind its allocation.
1. Actual cost of work already done 2. Forecast cost of work not yet done 3. Contingency Percentage

5.3.1.- Cost Component (NEC3 cl.63.1, FIDIC cl.4.12)

5.3.2. - Forecast time delay (NEC3 cl.63.3, FIDIC cl.8.4)

Magnitude of Claim

Figure 15: The components of the inherent risk attached with forecasting

Cost 1. Precise definition of costs by appropriate resource allocation in the task to maintain complete and accurate records is key. The prerequisite of an unshakable organisational structure along with excellent working relationships and communication links between and within the Parties are key. 2. Forecast cost of work not yet done is characterised by uncertainty at best it can be an educated guess, stemming from appropriate assumptions enabled through experience. Lack of information must be kept to a minimum. Appropriate communication and trust will further reduce this uncertainty. 3. It is based on the confidence related to the grasp of potential risks that may manifest in actually attempting the suggested solution it will mainly be controlled by market conditions and the attitude of the Contractor towards risk itself, being either prudent or a risk taker. Delay Component Lost time cannot be retrieved, when is lost, it is lost for good - thus no absolute mitigation can be applied. Existence of updated schedules is the single biggest factor that can affect the accuracy of a forecast, along with the expected uncertainty involved in forecasting the future. Note that the accuracy of the schedule itself is achieved though the combination of minimum lack of information and sufficient communication link both within and between the Parties, along with adequate resource allocation, maintaining a healthy evolvement along with the construction process.

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4.7.3 - Assessing the nature of the risk lying within a claim Through assessment, one can easily deduce the reasoning behind the risk in preparing an accurate claim is borne by the Contractor under both regimes. With reference to Figure 13, it is the Party with the best control over its components. The quantitative nature of the claim will always be a reflection of the risk the Contractor is willing to take a balance between the its commercial benefits, the potential exploitation of the Employer and the validity of its assumptions. NEC3 attempts to limit the inherent uncertainty underlying the validity and accuracy of any assumption; recognising its major impact on the magnitude of the claim itself, and thus, its acceptance. Exemplification of this ethos is found through enabling the P.M. to receive the risk of producing the assumptions and then actively work in their reduction through two possible routes - one within the principal claim resolution mechanism and one as a complimentary option. The former method, described under cl.64.3, starts by allowing the P.M. to dismiss the assumptions introduced by the Contractor in its submitted quotation. The P.M. is then required to introduce its own assumptions thus receiving the risk of forecast and prepare a new quotation. Note that its quotation, as all quotations, once accepted it cannot be revisited - even after the assumptions are proven to be wrong. A more ingenious approach is introduced under cl.61.1 though not perfect since it is defined by great Organisational Risk thus, should be regarded as a complimentary approach used in the assessment of highly uncertain situations. It allows the P.M. to stipulate assumptions, of which the Contractor is called to base its quotation upon. In case that they are later proven to be wrong, then cl.60.1.(17) qualifies this failure as a compensation event and the Contractor will be indemnified. This approach significantly reduces the uncertainty inherent in the very notion of forecasting - however, it should be pointed out that two iterations of the lengthy and complicated resolution mechanism are required inducing significant Organisational Risk, see Figure 16 and Figure 17. The Writer notes that the move to push the risk of forecast on to the Employer cannot be considered as fair the Contractor is vastly more qualified. The aforementioned option can be considered as a mere acknowledgement of the significance of power allocation. In essence, it effectively give the Employer the ability to amend a quotation potentially limiting the likelihood of the Contractor taking advantage of the situation. FIDIC provide 42 days (cl.20.1) for the Contractor to provide a particular claim incorporating specific details regarding the magnitude of the claim of which the risk of forecast is attached. An attempt of the NEC3 to further reduce this risk is to introduce 56 days (cl.61.3) theoretically granting more time for the Contractor to prepare, and thus, increase the accuracy of the forecast. Nevertheless, the pragmatic importance of this alteration is rather hard to quantify. Theoretically, it has a valid standpoint, though it can be argued that a larger timeframe can allow the involved individuals to act outside of the prescribed procedures in order to try and resolve the issue thus, this relevant luxury of time may potentially have no benefit. Notice that the aforementioned timeframes initiate at different points in the construction process. These are absolute points at which each Contract acknowledges that a risk has manifested. The differences in awareness of the risk manifestation are assessed and compared regarding the inherent risk under each choice in Section 4.10.

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4.8 - Layout of claim resolution mechanism 4.8.1 - Proactive vs. Reactive A notable difference between the two contacts which is reflected on the mechanisms themselves - is the reactive approach followed by FIDIC, compared with the pro-active approach followed by NEC3. This is evident through the inclusion of the Early Warning scheme more specifically, the Risk Reduction meetings, see Figure 16 which can produce alternative quotations before the risk has actually materialised This approach has the potential of providing solutions with heightened effectiveness and reduced costs in their implementation, with reference to Figure 6. However, there is a major issue regarding the applicability of this system as an adequate risk identification tool. According to cl.63.5, there is no direct implication on the assessment of a quotation if the Contractor has not attempted to act proactively though it would be against the fundamentals of the contract itself, as stated by cl.10.1 and its requirement of mutual trust and teamwork. The Writer suggests that the exclusion of a penalty when failure to follow the Early Warning scheme is at hand is a clear acknowledgment of the point put forward Mr Blue, who has indeed suggested that the Industry only accepts gradual changes with a rather long learning curve. Proactive behaviour requires a radical shift from current practice in terms of organisational culture implying a breach of contractor by failure to predict a risk would greatly reduce the potential usage of the NEC3 , or at least this feature. On the other hand, FIDIC has no direct input in reducing the potential of risk manifestation it merely provides a framework in which Parties react to the emergence of a situation and move on to a set of procedures in a search for curement of the risk. Despite this apparent lack, Tolson (2009) points out that the mere presence of the Dispute Adjudication Board on site can potentially act as a management tool by intimidation and thus promote the Contractor to follow the procedures by the letter though, note that clear prevention mechanisms are absent. 4.8.2 - Impact of Terminology FIDIC and NEC3 operate in different terms regarding the terminology used within the claim resolution mechanism arguably a descendant from their different contractual approach. The former uses the traditional approach of claims being filed and tested through the critical test to assess their validity. NEC3 presents a rather more logical approach by introducing the concept of compensation events. Compensation events are defined in cl.62.2 as being proposed changes to the price and delays that will hinder either progress or completion. Once a notified event has been classified as a compensation event, though critical tests, a quotation is submitted by the Contractor regarding the projected implications. Note that there is a possibility of a notified event to be considered as a compensation event, if the P.M. fails to provide a timely evaluation see section 4.10.2. The adopted terminology within the claim resolution mechanism is a further example of the different dogmas adopted by each suite. FIDIC emphasizes on the notion of the claim, promoting the Contractor to seek for potential claims that may grand extensions. On the other hand, NEC3 promoted the identification of an event, reflecting its emphasis in prevention rather than cure. The later approach is considered by the Writer as much more effective since it will unavoidably promote the identification of potential risks that still have not manifested, promoting early curement. On the other hand, FIDIC simply encourage the Contractor to seek for the effect of a risk rather than its origin.

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4.8.3 - Interaction of Engineer/P.M. A significant difference is found in the way each contract deals with a potential input of the Engineer/P.M. in the claim resolution mechanism. Note that under both contracts, the Engineer/P.M. is clearly listed as the Engineers employee for a detailed comparison see section 3. NEC3 adopts a logical approach by successfully limiting the input of the P.M. to the bare minimum. The Contractor appears to have the absolute control of the mechanism as long as it follows the prescribed procedures. The only situation where input is required from the Engineer is in order to set a fall-back mechanism in motion in case that the Contractor fails to honour the time bar or to provide reasonable assumptions in its quotation - see cl.64.1. On the other hand, FIDIC provides more freedom to the Engineer, resulting to a greater influence upon the outcome of the claim resolution mechanism the Writer questions the validity of this choice. The first point to note is the ability to disapprove an extension based on the inadequacy of information provided a rather intriguing choice, since the Engineer is also expected to monitor this record keeping process and demand further recording if it considers it of being inadequate. One is left to wonder on why this conditions does not act as a precedence on the right of the Engineer to disapprove a claim based on this very inadequacy. Secondly, The Engineer has the ability to review whether other physical conditions have counterbalanced at the impact of the risk manifestation as discussed in 4.9.3. The aforementioned right will inevitably interact with the absence of the obligation for the Engineer to act impartially since cl.3.5 does not apply enabling the Employer to potentially take advantage of a risk that was admittedly best controlled by it contradicting the doctrine of prevention. The Writer concludes that NEC3 has approached the admittance of the inability of the Engineer/P.M. to act impartially in a more rational ways compared with FIDIC, eliminating a significant amount of contractual risk along the way. 4.8.4 - Paperwork and Ambiguity Despite of the rather simplistic drafting approach of NEC3, when compared with FIDIC, the layout of its claim resolution mechanism is rather elaborate and extremely rigorous. It appears to cover all probable outcomes with definite answers through the incorporation of numerous fallback mechanisms. The same cannot be said about FIDIC, which adopts a simplistic though tedious approach with inherent ambiguity and increased potential for contractual and/or organisational risk manifestation. The latter is due to the intense load exerted on both communication and record keeping in order to satisfy the paperwork requirements of the claim resolution mechanism at least three claims are required in order to notify the manifestation of a risk. Furthermore, a rather peculiar demand introduced by FIDIC is the obligation of the Contractor to submit further monthly interim claims in case that the effects of the risk are continuous. The Writer perceives this to be an redundant burden which hinders the indemnification process through the introduction of a further restriction with no apparent benefit to either Party or the Project. Furthermore, no definite fall out mechanism is provided on the rather probable event of the Engineer failing to evaluate and asses a claim within the prescribed timeframe the Writer had to fall back to the amended version of FIDIC, used by the Multilateral Development Bank, to conclude that the claim becomes automatically rejected. Hereafter, the Writer questions the fundamentals behind this approach - it appears that the Contractor will have to proceed through a further layer of mechanisms to compensate for a default failure of the Engineer thus, the Employer - to follow the Contract , resulting in further delays, costs and increased potential of organisational risk manifesting along the way. In case of a similar breach,
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NEC3 follows a clear and rational path and indemnifies the Contractor. However, NEC3 is not without ambiguities the presence of notified events that are considered as compensation events is a clear example of this. This distinction arises from the need to provide a fall-back mechanism for resolving the failure of the P.M. to provide an assessment of the notified event a failure which is again considered as an Employers default. The ambiguity of the underlying fundamental stems from the right of the Employer to dispute whether the notified event which is considered as a compensation event should grant the Contractor any extension. The Writer presumes that this conditions is a mere taste of reality in order to prevent notified event that would have not normally qualified for compensation but where treated as such due to the inability of the P.M. to respond. Nevertheless, it is fundamentally ambiguous since it enables the Employer to dispute a default of its own representative the P.M. to follow the Contract. 4.8.5 - Relationship of cost and time and its impact on the layout Another fundamental difference can be identified in the perceived significance and sequential interaction of cost and time. FIDIC acknowledges the fact that, on one hand, cost can always be adjusted in absolute terms while time can never be recovered in absolute terms, only in relative when it is lost, it is lost for good. Thus, FIDIC introduces a critical test for assessing the validity of a claim regarding its cost component and a further critical test for assessing the right of time extension though it utilizes a rather ambiguously structured way. The critical test in the case of unforeseen ground conditions is found in cl.4.12 while the critical test for time is found in cl.8.4 resulting in unnecessary complication to the user of the contract. On the other hand, NEC3 uses the regime set up by cl.60 to introduce a critical test for a notified event to qualify as a compensation event. As soon as it does, the Contractor is entitled of compensation of both cost and time a simplistic approach with no appreciation on the finite, unidirectional nature of time. The drafting approach is however seminal as it enlists the inherent clarity found in the incorporation of bullet points to provide a clear layout. Overall, FIDICs approach appears to be fundamentally purer- it is highly probable that a claim for extension of cost may also be entitled for an extension of time, however it not a granted an assumption made by NEC3. The latter seems to have oversimplified things by introducing a regime in which any compensation event is entitled of both time and cost extension. On a final note, the Writer cites Einsteins famous quote that everything should be made as simple as possible, but not simpler, a concept that has seemingly alluded both suites. 4.9 - Critical test Before probing further to what makes each claim resolution mechanisms tick, the distinctive nature of the two should be pointed out. NEC3 uses a factual and a probabilistic test in order to promote a notified event to a compensation event and thus grant any indemnification. On the other hand, FIDIC adopts a factual test and a foreseeability test. The first point to note is that both include a factual test to establish whether the quantifiable conditions are satisfied no surprise there. However, issues emerge from the difference in using either a probabilistic or foreseeability test. A further similarity is the shared vagueness in accurate definitions due to the unavoidable - use of verbal evaluation. 4.9.1 Responsibility -Foreseeability and Probability FIDICs foreseeability test states that indemnification can be granted only if an experienced contractor could not have foreseen the risk at the time of tender a definite allocation of responsibility to the Contractor. However, NEC3, somewhat relieves the Contractor by approaching the nature of the event itself the Contractor can be indemnified only if the event was perceived, at the time of tender, by an experienced contractor to have a small chance of
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occurring. It is anticipated that the use of probability has been adopted with a hope to remove some of the inherent vagueness borne by the use of verbal evaluation by introducing a quantifiable term. Two issues are worth pointing out here. Firstly, the theory of possibility only applies under the law of large numbers exemplified by the throw of a dice. Thrown an infinite amount of times, each number has a possibility of 1 in 6 as being the outcome. However, experiments suggest that when thrown a nominal amount of times, the possibility for each term reduces to approximately 1/100, defying the aforementioned theory (Bunni, 2003) see reference for additional reasoning. Unforeseen ground conditions cannot be defined through the law of large numbers since each Project is found on a different site and has a different set of requirements and parameters making the Project unique, thus any use of probability is rather irrational. Ignorance to account for the low number of occurrence can be catastrophic. Secondly, the implication of using a probabilistic test is to induce the illusion that a scientific approach and its inherent safety and impartiality has been adopted; this is clearly not the case, significantly diluting the significance of responsibility along the way. On the other hand, FIDICs approach is purer and is considered by the Writer as appropriate. It is a matter of fact that the Contractor enter the Contract at its own free will and bears the responsibility to act in the agreed standards. NEC3 leaves a window of doubt of whether the Contractor is entirely at fault, since it introduces the combination of likelihood and the inability of the contractor to account for it FIDIC simply takes into account the latter. 4.9.2 - Ambiguity from completeness Another point worth mentioning is that NEC3 presumes that if the Contractor did not account for the event, it has also not taken any reasonable measures against it. Thus the Contractor simply needs to prove that the event had very small chances in materializing. On the other hand, cl. 4.12 of FIDIC is more onerous the Contractor is expected to illustrate that it could not foresee the manifestation of the risk, along with the fact that it did not take any adequate measures against it. This condition seems to be present in order to eliminate the slight possibility that mitigating measures intended for another risk did not help in mitigating against the examined risk - a rather unlikely event but nevertheless, a valid approach. The Writer points out the elaborate and rather complicated drafting incorporated to account for this unlikely event a clear exemplification of its underlying drafting approach which sacrifices comprehensibility for completeness. 4.9.3 - Factual Test The factual test for unforeseen ground conditions in NEC3 is found under cl.60.1(12) - the conditions are: Within the site (Yes) and Not weather conditions (Yes)

The respective test set by FIDIC is found in the interaction between cl.4.12 and cl.8.4: Is it a physical condition ? (Yes) and o Natural Physical Condition or o Man-made or physical obstruction or o Pollutant Is it within the Site ? (Yes) and Is it a climatic condition ? (No) and Is it found under the enlisted items in cl.8.4(a) (e) ? (Yes)

FIDIC further introduces the option for the Engineer to reduce the magnitude of the potential claim by deducing whether physical conditions existed and where found in similar parts of the
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works which lead to decreased expenses by the Contractor and that were foreseen by it at the time of tender. The Writer considers this sub-clause as highly unfair to the Contractor. The only way that the Contractor could have foreseen the presence of more favourable conditions than the ones indicated by the Employer at the time of tender is if it had more or better information than the Employer information that the Employer ought to have gathered though a pre-tender feasibility study. In essence, the aforementioned sub-clause acts as a relief of the default of the Employer regarding the risk of adequate information collection. The use of this sub-clause can be a potential pitfall which can well induce hindered relationships and disputes of whether the favourable conditions that where known but not disclosed by the Contractor during pre-tender or merely a product of luck. A final difference lies within the wording of each clause. A wider spectrum of events may be approved under NEC3. On the other hand, FIDIC provides a much narrower spectrum by defining the included terms further. The Writer concludes that this increased refinements qualifies FIDIC in being used under situations of great excavations such as tunnels, where a definite cap in the validity of a claim regarding unforeseen ground conditions is essential. 4.10 - Incorporation of Time bars 4.10.1 - Impact on claims and indemnification Both contracts incorporate an extensive use of time bars throughout the claim resolutions mechanisms, acting as precedent conditions for the right to obtain indemnification. Failure to honour a set time bar will result to the Contractors right for indemnification to be waived. The Writer considers this extensive incorporation as a significant step forward in promoting claim resolution during the construction process a principle that can significantly aid in identifying and resolving disputes avoiding the emergence of global claims, the latter being characterised by clouding of facts though the potential loss of evidence during the construction. Global Claims are further complimented by expected criticism on the suitability of the chosen measures in mitigating the impact of a risk since, in retrospect, the benefit of hindsight serves in the emergence of numerous faster and cheaper means of achieving a similar result. The unavoidable result would be extensive legal actions and a complete breakdown of relationships with a damaging effect on the reputation of the Industry itself; resulting in reduced investment and depreciating the value of its participants. Cycling back to the use of time bars, both contracts require strong communication links between and within the Parties collapse of this link would undoubtedly result in delayed exchange of information, increasing the likelihood of a time bar not being satisfied. Note that, FIDIC demands a rather unreasonable amount of claim to justify an event see 4.8.4 increasing the likelihood of the Contractor failing a set time bar. 4.10.2 - Ambiguity in their use Both regimes advocate the starting point of the time bar to be a point in time where risk has manifested, though the present different approaches in way this pint should be perceived, potentially acting as a source of dispute. NEC3 uses a factual condition to state the identification of a compensation event and thus initiate the time bar precedence while FIDIC adopts an awareness condition. (Lloyd, 2008) The difference may appear to be insignificant at first, however failure of the Parties to grasp the impact on the difficulty in substantiating a claim can potentially lead in an adversarial climate fuelling further disputes. On one hand, NEC3 cl.61.3, the time bar is activated as soon as the Contractor is becoming aware of the event; implying actual knowledge of its manifestation. However, this knowledge does not revolve around the establishment of a compensation event but rather an event that may qualify for a compensation event. Although this approach has been characterised as being
47

ambiguous (Eggleston, 2006) the Writer notes that it will largely serve the Project by promoting the Contractor to seek potential events that may be classified as compensation events and thus grand it extensions endorsing prevention rather than reaction. Unfortunately, under certain cases, this peculiar approach will unavoidable impose unfair and unrealistic time restriction on the Contractor, as shown by the following example. If a weather forecast predicts a tycoon, it can well serve act as a potential compensation event, thus the time bar begins and the Contractor has 8 weeks (cl.61.3) to submit a quotation. However, the Contractor will not be able to predict the impact that that the tycoon may have on the construction it can potentially steer away from the area or pass right through it; either way 56 days can potentially be insufficient for the Contractor to reach to any definite conclusion on its submitted claim regarding the implications of this manifestation, imposing a large risk on the Contractor. On the other hand, FIDIC, using the definition of Unforeseeable in cl.1.1.6.8, addresses the issue of identifying the manifestation of a risk, and thus initiation of the time bar, from an awareness point of view. The underlying issue is that the precise point is defined using verbal evaluation in the ambiguous form of an experienced contractor which, when combined with the tighter timeframe, when compared with NEC3, can cloud the initiation point of the time bar. Sequentially, the Writer envisages potential disputes arising of whether the Contractor has missed the time bar and, thus, waived its right to claim; thus FIDIC can be regarded as having a great potential of being misinterpreted due to the use of an indefinite term to identify the risk manifestation point, however has increased security in the applicability of the time bar. Overall, the Writer considers NEC3 to have a greater potential of being misused and conclude to a dispute as signified by the Interviewees, the issue of experienced contractor used in FIDIC is surprisingly not as ambiguous as one may think. Thus, NEC3s can potentially serve the Project but also has increased likelihood of hindering it when compared with FIDIC. 4.10.3 - Interaction of time bars and awareness issue A basic ambiguity which needs to be addressed in this volatile topic is the significance of who needs to know, under NEC3, or be aware, under FIDIC, of the manifestation is it the knowledge by the site engineer adequate or must it reach the senior positions of a Party ? The Writer would argue that in theory, it seems reasonable for the answer to lie in the later admittedly, senior management defines the operation and direction of an Organisation, thus they can be rightly regarded as an extension of its awareness and/or knowledge. Realistically, this approach is significantly flawed - inducing unreasonable amounts of Organisational risk on the Party, combined with foreseeable delays. The example of junior engineers being aware of problems before the senior engineers during the construction of the Big Dig and the implications of poor communication between them (Raphael Lewis, 2003) illustrates the importance of clarity regarding the issue of awareness. Regardless of the answer, this fundamentally ambiguous issue needs to be clearly resolved and understood between both Parties since it can act as the origin for a plethora of disputes to follow.

48

Figures of the claim resolution mechanisms


Inconsistent

Site Informat ion (cl.60.2)

Likely to encounter problems


Consistent Contractor tenders under cl.60.3

Contractor tenders under cl.60.2

Not Likely to encounter problems

Discovery or Possibility of Unforeseen Ground Conditions by Experienced Contractor

Critical Test
Event classified as a Notified Event

cl.60.1 (12)

Factual Test

cl.60.1 (12)

Probability Test

Gives Early Warning (cl.16.1)

Eight-week time bar precedent for indemnification(cl.61.3)

Contractor must notify the PM within 8 weeks of discovery

Risk Reduction Meetings (cl.16.2) and Risk Register (cl.16.4)

PM Instructs Contractor to issue quotation

Notified Event treated as Compensation Event (cl.62.6)


Compensation Event

See page 49 for final resolution

PM issues any relevant assumptions (cl.61.6)

Notification Submitted within time bar P.M. decides within one week whether Notified Event is Compensation Event

Alternative Quotations (cl.62.1)

Within the week Fails to honor extension

P.M. Fails to notify

Point in time defining work done with work to be done (cl.63.1)

P.M. has another week to reply

Contractor notifies PM of the delay (cl.61.4)

Figure 16: Claim resolution mechanism as prescribed by NEC3

49

P.M. requests a revised quotation stating his reasons (cl.62.4) Three-week precedent time bar (cl.62.3) Two-week timereced time bar (cl.62.3)

Disapproves with reasoning (cl.62.3)

Contractor prepares price and time quotation

P.M. receives quotation

P.M. decides (cl.62.3)

Failure to satisfy time bar or to correctly assess the event

Accepts quotation P.M. makes his own assessment (cl.64.1) within three weeks (cl.64.3) P.M.s quotation is treated as accepted (cl.64.4)

P.M. fails to decide within two weeks

Contractor notifies P.M. of the delay (cl.62.6)

Honors Extension

Contractor notifies P.M. of the delay (cl.62.6)

P.M. receives a time extension of two weeks (cl.62.6)

Fails to honor extension, original quotation accepted (cl.62.6)

P.M. receives a time extension of two weeks (cl.62.6)

Figure 17: Claim resolution mechanism as prescribed by NEC3 (continuing)

Honors Extension

Implementation (cl.65.1)

P.M. fails to decide within two weeks

50

Yes

No extension
Yes

Contemporary Records

Information request by Engineer

Has information supply prevented decision ?

No

Has information supply prejudiced decision ?

Records relevant information


Contractor tenders, constructi on follows

Inadequate Information Engineer request further recording

No
Engineer may review whether other physical conditions in similar parts of the works were more favorable than could have been reasonably foreseen at the time of tender to counterbalance some/all of the implications of the manifested Risk (cl.4.12)

Discovery of Unforeseen Ground Conditions by Experienced Contractor

Gives notice of event materializing (cl.4.12) no time restriction

Engineer
Files claim within 28 days of discovery (cl.20.1)

Critical Test for Time Site Information (cl.4.10)


cl.8.4

Enlisted items

Files particular claim within 42 days of discovery (cl.20.1)


cl.4.1 2

Engineer has 42 days st since 1 claim (cl.20.1) to reach to a fair and impartial decision (cl.3.5) - at least regarding the principle of the claim Approves/ Disapproves Informs both Parties on his decision(cl.3.5) with reasoning

Factual Test

cl.4.1 2

Foreseeability Test

Critical Test for Cost


Figure 18: Claim resolution mechanism as prescribed by FIDIC

Files final claim within 28 days of the effects finish (cl.20.1)

51

Results and Discussion A construction contract has inherent risk a derivative of a staggering number of components and interaction. Initially, the present risks where identified in the Literature Review. Then, two parallel roads where paved in order to evaluate the issue at hand from two perspective; firstly from Industrys point of view Interview Sessions and secondly, from the comparative analysis two prominent contract see Comparative analysis. Finally, graphs where constructed in order to provide some qualitative insight on the inherent characteristic of both FIDIC and NEC3 in an attempt to introduce some clarity on this highly complex issues. Note that the labels within the graphs refer to the relative topic within the Comparative analysis section. The sum of the referred risk is represented by the area of the graph. 1.Analysis Currently, academia seems to be promoting NEC3 as a knight with a shining armour 1.2, Flexibility called in to save the industry however, 6 1.2, the analysis illustrates that this armour is 1.5, Avoid Ammendm far from being bulletproof. On that aspect, Tribunal 4 ents the pot of gold is neither found in the end 1.5, 2 of FIDICs rainbow suite, though its 1.3 Adequate widespread use may tempt an Employer to under 0 blindly adopt it. It is the conclusion of this research that a contract should not be 1.5, 1.4, Clarity limited to simply reflecting the Language requirements of the Project but also be 1.4,Inadeq 1.4, tailored on the qualities of its bound uate FIDIC References Parties with a special emphasis on compiling NEC emotional aspects which appear to be defining the Organisational Culture, trust Figure 19: Risk inherently found within each contract due to its being the pivotal link. There is no better drafting drafting risk contract in terms of risk allocation, this should be understood by the potential users tempted to categorise contracts black and white approaches are certainly not the way that such a complex issue should be approached; the choice must originate from the qualities of the Parties bound by it and then be tailored to the Projects 4.3.2, requirements. However, the Writer Responsi concludes that indeed there can be an bility improvement in certain aspects that 5 4.3.2, directly control the contractual risk. By 4.8.3 Interpeta 4 assessing the drafting quality of each tion 3 contact an important consistent of 2 contractual risk one can reduce the risk 1 4.7.3 4.4 borne by a Party by elevating its 0 perception on its obligations and thus reduce the possibility of disputes to arise 4.6 Figure 19 illustrates the result. It is 4.5.2 P.M./Engi concluded that the contemporary drafting neer FIDIC approach of NEC3 can well serve in 4.6 4.5.4 NEC3 reducing a large part of contractual it.
Figure 20: Organisational risk on Employer

52

Approaching contractual risk as a whole, this research concludes that both contracts seem to focus on different areas resulting in strong and weak point within both NEC3 and FIDIC. The Writer emphasises that the user must acknowledge the underlying weakness found within its organisation and sequentially choose a form that stresses them as little as possible. For example, if a bureaucratic Employer is involved e.g. the Government - its reaction to risk materialisation would be rather slow, due to its complex organisational structure and the time required for information to travel within it. Thus, adopting FIDIC would

4.3.2, Responsi bility 6 4.8.3 4 2 0 4.6 P.M./En gineer 4.6 4.5.4

4.3.2, Interpet ation 4.4

4.7.3

4.5.2 FIDIC NEC3

probably be a safer path due to the reduced Figure 22: Individual Risk on Employer imposed organisational risk see Figure 20. Another significant factors is the amount of risk each Party is willing to receive. A prudent Employer, such as the aforementioned, would most probably choose a contract that allocates as little risk as possible to it. Conversely, an Employer with a confident understanding of the Industry and of a fast reacting nature within its organisational should most certainly attempt to receive higher amounts of risk, thus driving the price of the Project down. Under the former, FIDIC is suitable while under the later, NEC3 is more appropriate see Figure 22 On a similar aspect, the Contactor should also appreciate the risks that it receives once entered a contract. Evidently, the Contractor has much less influence on the chosen form of the contract It is Figure 21: Organisational Risk on Contractor thus of crucial importance to identify the areas stressed by the selected form, specifically on the prospect of organisational risk, Figure 22, and the aspect of individual risk, see Figure 23. This acknowledgment will guide the Contractor in improving the highly stressed areas, essentially reducing the likelihood in which risk would materialise and thus elevate the likelihood of achieving Project success. Finally, it should be noticed that NEC3 has a stong tendency to translate individual risk into organisational risk, whch needs to be approapraitely aknwoledged and tackled by the Party receiving it. Furthemore, there is a slght, but rather clear, tendency to push less riks on the Contractor and more to the Employer when compared to FIDIC.

Figure 23: Individual Risk on Contractor

53

2.Limitations The Writer acknowledges the complexity and multiplicity of the approached issue variables are rather large in number and complexity and, in combination with the limited time and length provided, strict boundaries had to be at place. Further critical aspects have not been touched upon, of which can potentially highlight or void the results and conclusion of this research. Such components are the impact of the insurance provisions included within each contract, the mechanism used in tackling the manifestation of force majeure events along with the full scope of the influence of the P.M./Engineer. Furthermore, the frequent encounter of variations and the rather infrequent situation of termination have not been considered both can have a significant impact on the underlying contractual risk and thus, in guiding a sensible form choice. Finally, analysis of the fall back procedure of the claim resolution mechanism under NEC3, through an Adjudicator, and under FIDIC, though the DAB, have also been omitted nevertheless their importance on the affecting contractual risk is acknowledged. 3.Further recommendations By dilution, the Interview Section seems to highlight the increased importance that the interactions can have on the components. These components have a tendency to be characterised by emergent rather than absolute properties, thus careful identification of the involved interactions is of crucial importance the ones that have dominated this research is trust and culture, along with the further external inputs of the market and the nature of the Industry itself. As with every construction Project, the unique culture either being individual, organisational or cultural defining its participants is crucial. The Writer advocates that current practice of contracts seems to focus on defining and limiting the nature of the components themselves though clearly assuming that they have characteristic properties, failing to acknowledge emergent properties that tend to define the properties of the considered components. The constituents of the contract are themselves, soft systems in which emergent properties are dominant. A crucial example of this is interaction between the size of the prescribed time bar and the involved individual. Current approaches only identify the interaction between the length of the time bar and the accuracy of the forecast defining the required claim. However, the Writer argues that is a rather narrow scope. The likelihood of the individual in following the prescribed procedure is an emergent property, dynamically interacting with the magnitude of the set time bar a shorter time bar will provide excess pressure on the individual, ensuring that he/she would most probably follow the prescribed procedure. A lengthier time bar will be perceived as a looser term and the individual may attempt to decide the claim by his/her own preferred method rather than the prescribed procedure sequentially leading to increased risk materialisation under a crisis situation. Conclusively, the Writer strongly feels that a more holistic approach should be incorporated in the derivation of contractual agreements. The systems approach of which some concept and ideas have been utilised in this research acknowledges not only the importance of the components but also identifies that their interactions can potentially dictate their properties. Thus, it may be that such a holistic approach should serve as the basis of forming a new suite of contract. The lack of sophistication in the current methods, combined with the rather tedious and narrow scoped approaches which serve as the basis of derivation of both NEC3 and FIDIC tend to provide only slight improvements in the vital issue of risk management. Prevention is always better than cure

54

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Appendix
1. Interviewees Information
Table 3: Relative Interviewee data

Alias
Mr Orange Mr White

Employer
Contractor Contractor

Job Title
Site Engineer Project Manager Project Manager

Experience
10 yrs. in Cyprus 10 yrs. in Greece 20 yrs. in Cyprus 2 yrs. in the UK 2 yrs. In Dubai 12 yrs. in Cyprus 2.5 yrs. in Qatar 2.5 yrs. in Libya 4 yrs. in Dubai 9 yrs. in Cyprus 6 yrs. in United Arab Emirates 6 yrs. in Oman 8 yrs. in Botswana 10 yrs. in Cyprus

Academic background
Civil Engineering (BEng) Architecture (MArch. equivalent) Civil Engineer (BEng), Structural Engineer (MSc) Business Administration (MBA) Civil Engineering (BEng) Quantity Surveyor (BEng) Civil Engineering (BEng equivalent) Business Administration (MSc) Construction Law and Arbitration (MSc)

Mr Blue

Employer

Mr Brown

Contractor

Director of Contracts

Mr Red

Neutral

Adjudicator, Arbitrator

2.Brief Law Introduction


Civil Law Its conceptual origins are found in the Roman Republic, though its codification and the familiar formation of the legal framework is routed in the fourteenth century. (James G. Apple, n.d.) Civil law is bounded by the use of legal ideas and codes referred as statutes and legislations -of which all citizens can have access to. It is a static framework and thus inherently rigid - it can only be amended by the Parliament, or the respective equivalent. It is the most widely used jurisdiction system used throughout the EU with the exception of the U.K. Its proceedings are explicitly inquisitorial, unbound by precedence every case is unique and its judged purely by its extracting its first principles and comparing them with the central legal codes and ideas. Common Law The fundamentals of common law originate from England in 1066 (Radford University, 2012). Common law is an evolving system revolving around the judge the latter is responsible for the its gradual development though the continuous restatement of legal doctrines. Opposing to civil law, its most important feature is the principal position of precedence if a similar dispute arose in a past case, the court is bound to distil the principle behind it and apply it to the new case. If the presented case is unprecedented, interpretation of statutes and legislation will be adopted in order to derive a ruling not dissimilar to civil law, beside its binding effect on similar cases to follow. It is mainly used in English speaking countries the most significant being the U.K. and the US. Under common law, the proceedings follow an adversarial system bound by precedent case law. Finally, Lengeling (2008) summarises the most significant difference as being that in civil law it is doctrine including the codifiers reports about the legislative process that has priority over jurisprudence while in common law it is the opposite way around.
57