FOREWORD 10 EARLY WARNING SIGNS

SPOTTING THE RISKS IN CONSTRUCTION

AND ENGINEERING PROJECTS

THERE IS A WELL-KNOWN
SAYING IN MEDICINE –
‘PREVENTION IS BETTER
THAN CURE’…
…In our experience, the same principle applies to
large-scale construction projects and the disputes
they give rise to.
Given the sheer scale and complexity of construction projects that our clients bring Beyond this introductory set of warning signs, we offer
to fruition, problems – such as managing delay and disruption, change control, practical 60-minute training ‘clinics’, where our team explain
performance disagreements and financial issues – are perhaps inevitable and they how to treat early warning signs before they deteriorate
rarely emerge out of the blue. But, if you know what to look for, many of those problems into formal proceedings – and how to prevent them from
are identifiable, or even correctable before they deteriorate into formal proceedings. happening in the first place. The content is tailored around
Construction problems spotted earlier are, on the whole, far less traumatic to cure. the warning signs that you would like to cover and your
industry sector.
In this report, our global team of specialist construction disputes lawyers take an x-ray
of large-scale construction projects, revealing the most common early warning signs If you have any questions after reading this report, please
of a likely dispute between owners and contractors, or within the supply chain. get in touch. We would be delighted to organise an ‘early
The early warning signs we examine in this report are based on our experience of warning sign clinic’ with you and your team, or have an
repetitive issues seen while resolving many construction disputes, for over 750 clients informal meeting (we promise not to bring stethoscopes).
in over 40 countries, across a multitude of sectors.

The early warning signs are by no means exhaustive – we all know there are many
niche or less predictable problems that can arise – but the intent here is to provide Richard Davies
a quick early diagnosis reminder for the most common construction ailments. Partner, Abu Dhabi
+971 (0)2 652 0330
richard.davies@bclplaw.com

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CONTENTS 10 EARLY WARNING SIGNS

CONTENTS
06-09
LOW TENDER BIDS:
30-33
MAKE THE SIX-FIGURE FEE WORTH IT:
TOO GOOD TO BE TRUE? DUST OFF YOUR CONTRACT!

10-13
ACCELERATED PROJECT DELIVERY:
34-37
AMBIGUOUS CONTRACTS:
FAST, FASTER…TOO FAST? BEWARE THESE SIX PROVISIONS

14-17
THE SCOPE OF WORK:
38-41
PROJECT MANAGER:
HOW IT CAN MAKE OR BREAK YOUR PROJECT IT’S A DIFFICULT JOB, BUT SOMEONE’S GOT TO DO IT

18-21
DESIGN FLAWS:
42-45
TERMINATION OF CONTRACT:
WHAT GOES WRONG BETWEEN DESK AND DIGGER WHEN RELATIONSHIPS TOTALLY BREAK DOWN

22-25
CONTRACT PROGRAMMES:
46-47
OUR TEAM
UNREALISTIC, OUT-OF-DATE AND OPEN TO DEBATE

26-29
THEY WANT TO BE PAID HOW MUCH?!
© Bryan Cave Leighton Paisner. This document provides a general summary only and is not intended to be comprehensive. Specific legal
advice should always be sought in relation to the facts of a given situation.

4/ /5
LOW TENDER BIDS: TOO GOOD TO BE TRUE? 10 EARLY WARNING SIGNS

When purchasers invi Imagine three consultants are appointed to advise on the
te
tenders, isn’t it good results of a tender…
news if ...one of the bids is a lot lower than the others. How do the
one bid is significantly
lower consultants respond?
than the others? Cha
rles Lilley 1. The first is jubilant, exclaiming, “Look at the immense saving
and Alex Ottaway re
veal why a the purchaser can make!” He thinks the contract should be
bargain contract pric awarded to this tenderer.
e could
actually be a sign of
2. The second is more circumspect, warning, “You get what you
inexperience, or even pay for.” She thinks the tenderer may well cut corners and do
a litigious
contractor. a poor job.

3. The third – who we think takes the correct approach

– considers the detail of the bid, and compares it with
the others. He asks questions like, “Has the tenderer made
incorrect assumptions?”, “Has it misunderstood the
complexity of what is required?” and, “Has it legitimately
found an ingenious way to save costs?”.

When it all goes wrong: Low bids hitting the rocks

We recently encountered an example of what can go
wrong when a purchaser accepts a low bid without properly
scrutinising it and engaging in clarification meetings with the
relevant tenderer.

The project involved coastal protection works comprising a

series of offshore rock reefs. The marine site conditions meant
that there would be a lot of downtime. As the site was tidal, if
the tide was too low, crane barges and other vessels could
not access the site.

6/ 6/ /7
LOW TENDER BIDS: TOO GOOD TO BE TRUE? 10 EARLY WARNING SIGNS

Some of these difficulties could have

been avoided had the purchaser REAL-WORLD WARNING SIGNS
properly scrutinised and understood
the erroneous assumptions on which
the low bid was based.

However, severe storms, winds and very large waves were Beware: If it looks too good to be true, it probably is 1. Tenderer bids for 2. Bid based 3. Programme and 4. Contractor was 5. Purchaser received
common in this area. Therefore, even during those opportunity Problems can originate from the very beginning of the process, marine project on incorrect bid price significantly in significant works late and
windows when the tide was high, bad weather would likely which is why it is prudent to ensure that proper tender evaluation in harsh tidal assumption that shorter and cheaper delay and incurred unnecessary
cause additional downtime. procedures are in place. conditions. work could be than other bids. issued a series time, inconvenience
carried out at of unmeritorious and expense
One tenderer totally failed to appreciate the downtime The low bid in our coastal protection example was a product all times. claims. defending claims.
involved in doing the work. It was a civil engineering company of the contractor failing to appreciate the downtime that is
accustomed to working on land, and its bid was based on the required when working in water, and location-specific risks.
incorrect assumption that work could be carried out at all However, we have encountered other situations in which
times. Unsurprisingly, its programme was far more optimistic contractors deliberately underprice bids in order to win the work,
than any other tenderer, and its bid price was significantly adopting a claims-focused approach in order to recover some
cheaper. The purchaser was attracted by the low price and of their costs.
accepted the bid. The successful tenderer (the contractor)
learnt about harsh marine conditions the hard way, and When a purchaser comes across a low bid, it would be well
was in significant delay. advised to ensure its commercial team scrutinises the bid closely
and engages in clarification meetings with the relevant tenderer Alex Ottaway Charles Lilley
From the contractor’s perspective, the job went from being before deciding whether to accept it. The purchaser would then Senior Associate, London Partner, Abu Dhabi
profitable to loss-making. The contractor sought to recover be faced with a commercial decision: whether to continue +44 (0)20 3400 2614 +971 (0)2 652 0302
its losses by making claims based on adverse weather and exploring the possibility of awarding the contract to that alex.ottaway@bclplaw.com charles.lilley@bclplaw.com
physical conditions, even though it had no such entitlement tenderer, or award the contract to someone else.
contractually. Although the weather and physical conditions
were harsh, they were not unusual for that marine area.

The works were delivered late. The purchaser spent additional

time and expense dealing with the contractor’s persistent
and unmeritorious claims, even though the risks had been
successfully passed to the contractor, with a consequential Problems can originate from the
impact on the efficient delivery of the project. very beginning of the process,
Some of these difficulties could have been avoided had the which is why it is prudent to ensure
purchaser properly scrutinised and understood the erroneous
assumptions on which the low bid was based.
that proper tender evaluation
procedures are in place.
What can tenderers do?
We are seeing a promising trend for tenders – increasingly,
tenderers are resorting to independent internal
committees to review proposed bids before they are
submitted. The independent reviewers may spot issues
that those engrossed in the detail of the bid may have
missed, or assumptions that should be tested. The delivery
team should also be involved at bid stage and work closely
with the estimators, which in our experience does not happen
very often. These review procedures may minimise the risk
of the tenderer getting burnt, like the contractor in the
marine project.

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ACCELERATED PROJECT DELIVERY: FAST, FASTER…TOO FAST? 10 EARLY WARNING SIGNS

In the construction industry, time is money

but haste makes waste. Steven Becker
and Steve Gurr look at accelerated project
delivery techniques – and how they can
lead to unexpected costs and delay.

The need for speed: Rise of accelerated project delivery

Until the mid-20th century, the design-bid-build project
delivery method or traditional contracting (also known as
‘DBB’ or ‘design-tender’) predominated. Traditional DBB
projects proceeded in a linear, methodical and relatively
slow manner, with one project phase (e.g. design) being
completed before commencement of the next phases
(e.g. bidding and construction).

Today, under pressure from shareholders, executives and other

stakeholders who crave instant gratification, project owners
face demands for ever-faster project completion. Working on
projects in over 40 countries, we have seen:

Design professionals accepting compressed times for

performance, often reluctantly, to secure employment
on project teams.

Contractors competing on the basis of schedule duration,

with hopes of distinguishing themselves from the
competition. Interestingly, in the current UK market the
pressure is the other way, with contractors unwilling to
commit to a firm price – even for design and build projects
– until the design is relatively well advanced.

Project team members asked to commit to project

durations in competitive environments, with incomplete
information, and without the benefit of candid
conversations allowing certainty as to the implications
of aggressive schedules.

Notwithstanding increased risks, the predominating

combination of market factors has led to the increased
popularity of accelerated delivery techniques.

10/ /11
ACCELERATED PROJECT DELIVERY: FAST, FASTER…TOO FAST?
Life in the fast lane: Accelerated delivery techniques
Accelerated delivery techniques include construction delivery
methods in which the design, bidding or construction phases
overlap, as well as contract clauses aimed at expediting project
completion. For example, no-excuse incentive clauses, whereby
the contractor is offered a monetary incentive for early
completion on or before a ‘drop-dead date’ that cannot be
adjusted for any reason.
The construction management (CM) method involves hiring a
construction manager shortly after commencement of design
services, thereby combining the ‘design’ and ‘bid’ phases of the
DBB or traditional contracting method. Project completion is
further accelerated when, during the design phase, the
construction manager provides time-saving input concerning
constructability of proposed designs, scheduling, and
availability of selected materials throughout the design phase.
When CM was first exported from the US in the 1980s, it was
promoted as the ultimate ‘fast-track’ construction method,
with construction on early works packages able to progress in
parallel with the design of services and finishes. For example, in
the UK it was successfully used on various high-profile London
projects. However, there is a key difference between US and UK
practice in relation to CM. In the US, the construction manager
takes delivery risk in time and cost terms, whereas in the UK the
CM ‘contractor’ is generally engaged solely on a fee basis,
taking minimal risk, with the employer retaining control over the
design development process. Sophisticated UK developers
understand and embrace this approach to risk allocation,
recognising that it both allows and forces them to retain
control over the design development process and to play
an active role in risk management. In return, if all goes well
they pay a lower outturn cost, since they aren’t charged
a premium for the transfer of risk.
Under the design-build method (‘DB’ or ‘D&B’) as adopted in
the US, the design professionals and construction team are
selected and hired simultaneously, under a single contract
with the owner, thereby streamlining the procurement process.
DB commonly allows the DB team to commence construction
while they complete final designs, producing additional
time-saving opportunities.
Modular or off-site construction is on the increase, particularly
in the UK, and is seen as a means to address labour shortages
and the increasing cost of materials. Speed of construction
and reduced time on site are, among other things, often
cited as key benefits of modular construction. However,
some commentators have questioned whether it simply
moves delays from site to the factory. So, whilst it may
ultimately transform the way the industry works, it is still
too early to tell.
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10 EARLY WARNING SIGNS
“Ready, fire, aim!”: Stretching the limits of accelerated delivery
‘Fast-track’ is a term used to describe projects on which
construction starts before project designs are complete, THREE EARLY WARNING SIGNS YOUR
or nearly complete. For instance, on a fast-track project,
foundation and steel construction might start before a
PROJECT IS BREAKING SPEED LIMITS
building layout is fixed.
A risk inherent to fast-track projects is that early completion
of construction may conflict with subsequent design decisions.
If the planned size of a building is changed after foundations
have been poured, the foundations might need to be
demolished and rebuilt, and site utilities might need to be
relocated, all resulting in delay and additional cost that does
not enhance project value. TIMELINES 'FIXED' PRICES CONSTRUCTION
Risks to stakeholders increase when ‘fixed prices’ or ‘guaranteed
Project timelines that require Agreements on purportedly ‘fixed’ Proposals to substantially commence
maximum prices’ are based on the incomplete designs that
commencement of construction or ‘maximum’ prices based on designs construction before an agreement on
exist when a fast-track construction commences. In the context
before key design elements are that may progress in a manner price has been reached, resulting in the
of DB projects, this risk might be acceptable if the project owner
largely complete. conflicting with the owner’s original contractor becoming ‘embedded’ and
is prepared to relinquish control over design completion to the
design requirements. the owner losing its bargaining position
design-builder once the price has been established. The UK
in price negotiations.
concept of novation seeks to give the owner the best of both
worlds. It allows the owner to maintain control of design
development at an early stage, while ultimately transferring
design responsibility to the contractor. However, novation does
slow down the process, as it contemplates the contractor
being brought in at a later stage, once the design has been
developed, and not (as in the US) alongside the professional
team on ‘day one’.
Risks to the owner associated with prices based on incomplete
designs are far greater on traditional DBB and, in the US, CM
projects because the project owner holds separate contracts
with the design team and the construction manager/
contractor. Each time the project owner’s design team submits
design iterations to the construction manager/contractor, there
is potential for disagreement over whether the new designs
include ‘changes’ that warrant increases in price or time.
With respect to such projects, there is a direct relationship
between the certainty of a fixed price or a guaranteed
maximum price and the completeness of the designs on
which the price is based. Steven Becker Steve Gurr
Partner, Kansas City Partner, Denver
+1 816 374 3379 +1 303 866 0520
sbbecker@bclplaw.com steve.gurr@bclplaw.com
A risk inherent to fast-track
projects is that early completion
of construction may conflict with
subsequent design decisions.
/13
THE SCOPE OF WORK: HOW IT CAN MAKE OR BREAK YOUR PROJECT 10 EARLY WARNING SIGNS

The ‘scope of work’ should keep your

project from straying too far from the
original agreement. Glenn Haley and Barry
Wong explain how a loose definition can
lead to miscommunication, additional work,
extra expense and even formal disputes.
Why the scope of work exists
No two construction projects are exactly alike – the site, design
and conditions will always be different. This uniqueness is
reflected in the scope of work, which describes the work to
be performed under a particular contract. It is the most
fundamental building block for effective project management,
defining what a contractor is going to deliver.

Although a scope of work is a useful way to agree broad

project requirements for both purchaser and contractor during
the negotiation stage, changes to the scope of work often lead
to disputes. Disagreements about delay, disruption, defects
and termination often centre on the question of whether an
item of work is within the original contract scope, or whether it
changes the scope. In our experience, many disputes could be
avoided if there was an accurate and comprehensive scope
of work in the first place. Careful negotiation on the scope of
work should ensure all parties are on the same page from the
very beginning.

14/ /15
THE SCOPE OF WORK: HOW IT CAN MAKE OR BREAK YOUR PROJECT
Early warning signs at negotiation stage
During the negotiation stage of the construction contract, it is
crucial to ask whether the scope of work is clearly defined,
accurate, and whether it identifies the basic components of the
project, which the purchaser wants the contractor to deliver.
Careful consideration should be given to drafting the scope of
work. Complex projects may warrant an extensive description,
encompassing a set timetable with significant milestones;
simpler projects may only require a broad description of the
work. Many projects will set out ‘exclusions’ from the scope.
These exclusions need to be drafted tightly and clearly so as not
to undermine detailed and carefully-considered drafting
elsewhere in the contract documents.
Difficulty in agreeing the scope of work often indicates that the
parties understand the project differently. When a change to
the scope then occurs, it often leads to a dispute about the
interpretation of the original scope.
Indicators of an inadequate scope of work may include
excessive use of vague language to the effect of “…including
but not limited to”, “…for example”, “…such as”, “…work must
be accomplished to the satisfaction of the engineer or the
architect”, or “…work includes any other items necessary to
provide a complete, usable building even if not shown or
specified in the tender documents”.
A poorly defined scope of work will likely result in many claims for
change orders (or variations), and consequent claims for delay
and disruption.
The contractor must always be alert
to changes and file written notice of
them in a timely fashion.
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10 EARLY WARNING SIGNS
Early warning signs at construction stage A LOOSE SCOPE OF WORK
While it is best practice to have all changes to the scope of work
put in writing before any work begins on the changes, this is THE EARLY WARNING SIGNS AT A GLANCE
rarely achieved in practice.
Construction contracts invariably provide mechanisms for
changing the scope of work after the contract has been
awarded. Usually, the purchaser, project manager or contract
administrator instructs reasonable change orders which may
give rise to additions or deductions from the contract sum.
NEGOTIATION STAGE CONSTRUCTION STAGE
On the flipside, the contractor may submit a written notice of
change with cost proposals for the extra work which it considers Difficulty agreeing the scope of work. Excessive requests to change scope of work.
falls outside of its scope. Construction contracts typically require
that these change orders must be authorised in writing, and the Poorly defined scope of work. Contractors requesting spurious or questionable changes.
contractor is only entitled to additional compensation for extra
Excessively vague and ambiguous language. Contractors submitting cost proposals for abnormally
work after this written authorisation is obtained.
high-value changes.
Poorly or unclearly drafted ‘exclusions’ to scope.
However, in practice contractors often find themselves
Scope creep.
performing extra work to move the project forward after the Errors and omissions.
contract administrator has either refused to issue a change,
or has only given a verbal instruction, with an assurance that Impractical/impossible requirements – suggesting
the written authorisation will follow. This failure to address who poor design.
is responsible for the scope change often leads to disputes.
Frequently, disputes become polarised between the employer’s
team, arguing the change of scope is actually design
development which is the contractor’s responsibility under a
D&B contract; and the contractor, which strenuously argues it’s
a change to the underlying scope of work.
Project managers should be on the lookout for an excessive
number of change orders from purchasers, or requests for
changes or clarifications from contractors. The contractor must Glenn Haley Barry Wong
always be alert to changes and file written notice of them in a Partner, Hong Kong Associate, Hong Kong
timely fashion. If there are signs of an excessive number of +852 3143 8450 +852 3143 8419
changes, the change management systems and procedures glenn.haley@bclplaw.com barry.wong@bclplaw.com
must be followed to ensure that adequate and efficient cost
and time estimates are prepared and submitted.
Watch out for ‘scope creep’
If changes to the scope of work are not controlled, it may lead to
‘scope creep’. For example, if there is a verbal request from the
purchaser to carry out a small piece of work with no assessment
of whether this is covered in the existing scope, it can pass
without much of an impact. However, repeat change orders will
accumulate, or ‘creep’, and eventually become significant
change orders, resulting in more work done for the same fees.
This is one of the main reasons for programme overruns and
exceeding budgets.
The only constant in construction is change
Changes can significantly impact a project’s cost and schedule.
It is imperative that these are addressed early to avoid disputes
over who’s responsible for changes to the scope of work.
/17
DESIGN FLAWS: WHAT GOES WRONG BETWEEN DESK AND DIGGER 10 EARLY WARNING SIGNS

What looks great on paper can cause delay and expense on site. Glenn Haley and
Carolina Carlstedt look at how to diagnose poor design issues early – and avoid delays,
inconvenience and arguments over who’s responsible.

What causes design problems?

Issues often arise when designers are under pressure.
They might have to produce drawings in a tight timespan,
be subject to pressure or excessive instructions from the
client developer, or be pushed to create designs without the
necessary field experience. Design defects often only become
apparent on site, and disputes can arise as a result of a poor
or defective design being executed in the field. Contractors
may be faced with a design fraught with errors, omissions and
impractical requirements. Very often, this results in requests for
change orders (or variations) and a delay to completion.
What causes poor design?
An otherwise experienced designer may lack ‘field’ experience,
or might have been pushed into proceeding with a preliminary or
incomplete design by a client. For example, we have experience
of a case where a designer with limited field experience prepared
a complex computer-generated model for a pipework system
destined for a liquefied natural gas (LNG) plant in the North Sea.
The computer-generated model showed a minimal number
of clashes, but in real-life, on-site conditions, the design proved
unworkable and led to substantial delays. In the design office,
the model did not appear to throw up any red flags but, in
practice, it was simply not possible for the welders to execute
the design because of limited access, spatial constraints and
an unnecessarily convoluted design. Instead, they were forced
to relocate equipment and reroute the pipework in order to
rectify the errors, simplify the system and complete the work.
This resulted in more than six months of delay to the
completion of the project.
Poor design can also be caused by a lack of coordination
between designers, which leads to disputes over interface
design. We had a case in the UK where the M&E systems
could not be spatially coordinated because the floor-to-
ceiling heights were incorrect. The designers had failed to
communicate and coordinate with the M&E subcontractor
and instead made a series of assumptions that were flawed.

An otherwise experienced designer may lack ‘field’ experience, or might

have been pushed into proceeding with a preliminary or incomplete
design by a client.

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DESIGN FLAWS: WHAT GOES WRONG BETWEEN DESK AND DIGGER 10 EARLY WARNING SIGNS

The fast-track to conflict Make use of contractual documents

Designers are often under a great deal of pressure to complete It is important that design responsibilities are clearly set out in
a design quickly, so that bidding or construction can commence the contractual documents, and that parties adhere to these REAL-WORLD WARNING SIGNS
as soon as possible. This temptation to try to ‘fast-track’ design obligations. For example, if a contractor is faced with a design
often leads to a flawed design, as ‘fast-track’ means a design that lacks key details and is told that these will be, “resolved
has not gone through the usual quality control processes. In this through the drawing submittal process”, the contractor should
situation, there are often inconsistencies between the design follow the relevant contractual processes to ensure the designer
and the contractual documents, and an increased likelihood rectifies the omissions (rather than trying to resolve them on site).
of problems and disputes.
In such a scenario, it’s also imperative that the contractor
’Fast-track’ designs can also cause issues during the drawing satisfies the contractual notice provisions. If the final design
submittal process. Contractors are often under an obligation constitutes a change to the work, or the omissions/defects
to submit shop drawings, which have to be reviewed and cause delays to the progress of the work, the contractor should
approved by the owner before works can proceed. If designs provide the owner with a notice that complies with the contract.
are flawed, this can be an arduous task for the contractor and The contractor should also capture and document all time and
the owner, and lead to delays while parties argue over the cost impacts for future claims. 1. Pipework system 2. Designer with limited 3. Computer in design 4. Design proved 5. Project was
scope of the original design, and who is responsible for its prepared for field experience office showed a unworkable – welders delayed by
development or errors in the base design. However, in our experience, a contractor can be its own LNG plant in the created complex minimal number had to relocate more than
worst enemy. It wants to be seen as being helpful and North Sea. computer-generated of clashes. equipment and six months.
non-confrontational and, in effect, does part of the designer’s model. reroute pipework.
job for them. Correcting errors through the shop drawings or
detailed design process, rather than insisting that the designer
resolves them, leads to arguments over whether the contractor
in effect accepted responsibility for the problem and lost the
right to claim time and money for the extra work.
This temptation to try to ‘fast- Diagnosing design issues: The warning signs
track’ design often leads to a Glenn Haley Carolina Carlstedt
Contractors issuing a large number of requests for Partner, Hong Kong Senior Associate, Hong Kong
flawed design. information (RFIs) or claims notices. +852 3143 8450 +852 3143 8461
glenn.haley@bclplaw.com carolina.carlstedt@bclplaw.com
Designers correcting design deficiencies in responses
to RFIs.

Designers’ response times slowing down, both for RFIs

and revisions of drawings or specifications.

Larger than usual number of enquiries from supervising

and government bodies.

Core design issues resolved through the shop drawing

process or on site.

Arguments over whether design changes are ‘changes’ or

design development.

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CONTRACT PROGRAMMES: UNREALISTIC, OUT-OF-DATE AND OPEN TO
O DEBATE
The contractual programme is a vital
management tool, and any problems
with it are a big red flag that trouble lies
ahead. Charles Lilley and Melissa Moriarty
reveal the warning signs that should put
you on high alert.
Is the contractor’s tendered programme realistic?
We recently advised on a highly complex process plant where
the EPC contractor had committed to a 24-month delivery
schedule. The plant was planning to deploy state-of-the-art
technology on a scale rarely attempted before. The programme
duration put forward by the next closest bidder was 36 months,
so perhaps it should have been no surprise when delays
occurred. The result was a dispute over seven-figure damages.
This is just one example of a problem we see time and time
again – parties putting forward programmes that are
unrealistic.
Given fierce competition amongst contractors to win contracts,
and pressure on owners to achieve the earliest possible return
on investment, it is highly probable that contractors will include
‘ambitious’ schedules in their bids. However, significant
programming differences between competing bids and
unrealistic completion deadlines from owners are among
the most common telltale signs we see of future defaults
and conflict.
Is there an approved contract programme?
Many contracts (e.g. FIDIC Red and Yellow Books/NEC) oblige
the contractor to submit a detailed programme for approval
shortly after contract commencement. Programmes submitted
at the tender stage generally sketch out planned activities and
duration at a very high level to demonstrate some science
behind the tendered completion date. But turning that into a
detailed programme can sometimes be problematic. Although
some contracts include sanctions for failure to submit a detailed
22/
10 EARLY WARNING SIGNS
programme (for example, withholding payment), these are rarely
applied. The issue is not always the contractor’s failure to submit
a detailed contract programme, but can be the refusal of the
owner’s team to approve it. If shortly after project
commencement there is no detailed programme in place
(for whatever reason), this is another warning sign that your
project could be heading for trouble.
Not agreeing the programme is sometimes adopted as a
deliberate tactic by parties who think that it will improve their
position. They may hope to avoid liability for prolongation costs
whilst maintaining an entitlement to delay liquidated damages,
or to secure an extension of time and entitlement to additional
costs. Needless to say, this is not good practice. ‘Flexibility’ can
quickly turn into uncertainty when trying to assess the impact of
subsequent events. In our experience, this rarely results in a
strong strategic position.
Do interface points protect against delay?
All projects have certain interface points which will become
important programming milestones in the execution of the
project. For example, the interface between different package
contractors, the staged release of parts of the site by the owner,
the provision of offtake facilities, or the supply of fuel for start-up
and commissioning of a plant.
Experienced contractors organise their planned sequence of
works to create dependency opportunities. These can provide
protection against delay of their own making. For example, in
scheduling and then providing update reports, a contractor
might seek to show that an owner-responsible interface is on
the critical path.
An owner might portray a delayed interface as being
non-critical, given other problems for which the contractor is
responsible. Some legal systems have struggled to deal
consistently and coherently with what happens to the parties’
entitlements when two delays happen at the same time – and
contracts often contain ill-conceived drafting, which tries to tip
the outcome more clearly in one party’s favour.
/23
CONTRACT PROGRAMMES: UNREALISTIC, OUT-OF-DATE AND OPEN TO DEBATE 10 EARLY WARNING
W SIGNS

When things get difficult, we often

find programme updates are either
skipped altogether, or become
outlandish works of fiction.

Is the programme being properly updated? REAL-WORLD

REAL-W
REAL -WORLD
ORLD WARNING SIGNS
SIGN S
Most forms of contract also require contractors to submit
regular programme updates, which are intended to act
as an active management tool. When properly done, this
should enable parties to predict the impact of events such
as change orders (or variations) on future progress and to
implement appropriate remedial action. Under some forms
of contract, such as NEC4, operation of the extension of
time mechanism depends entirely on the existence of an
accurate, up-to-date programme which can be used to
assess the impact of compensation events.

When things get difficult, we often find programme updates 1. Process plant 2. EPC contractor 3. Programme put 4. Delays and dispute 5. Unrealistic
are either skipped altogether, or become outlandish works planned to deploy committed to forward by over damages programme
of fiction. Whilst contractors can be guilty of this behaviour, state-of-the-art unrealistic closest bidder. followed. should have
owners can also be to blame by rejecting responsibility for tech. programme. been questioned.
programme impacts as a matter of policy.

What are the early warning signs?

You would be surprised at how frequently we advise on Melissa Moriarty Charles Lilley
disputes where the root problem is unrealistic contract Principal Knowledge Development Lawyer, London Partner, Abu Dhabi
programmes, exacerbated by failures to update them. +44 (0)20 3400 4633 +971 (0)2 652 0302
Look out for the following telltale signs that future melissa.moriarty@bclplaw.com charles.lilley@bclplaw.com
disagreements are likely:

Contractor’s failure to submit a contract programme

before works commence.
Insufficient detail within the contract programme.
Lack of credibility relating to the proposed schedule
of works.
Owner’s failure to engage in agreeing programme of
works (with interface points).
Misalignment between parties on their approach
to programming issues.
Scarcity of regular programme updates.
Insufficient probing of programme updates.

24/ /25
THEY WANT TO BE PAID HOW MUCH?! 10 EARLY WARNING SIGNS

An incurable disagreement
We have recently seen a resurgence in old-fashioned large
final account claims, with significant change order (or variation)
accounts as well as loss and expense and prolongation claims
being in dispute. On one live hospital project worth over £100
million, the contractor is applying for increasingly larger
sums every month and the amounts being certified are
getting smaller.

The purchaser isn’t engaging constructively regarding

responsibility for the causes of delay, but instead is just
attacking the methodology of the delay analysis. To make
matters worse, the contractor hasn’t been very disciplined
in serving notices, despite the contract containing onerous
condition precedent provisions. And if those issues weren’t
enough, there are rumours that the purchaser’s funding is
being squeezed. As the project reaches completion, the
Decisive action parties are tens of millions apart. Relations are so strained
can prevent dis
over how much agreements and positions so entrenched that the dispute is almost
money a contr certainly heading for the courts.
owed, and how actor thinks it is
much a purcha
should pay. Ca ser thinks it It’s a familiar enough scenario, but how can it be avoided?
roline Pope an
Dupay flag the d Ric
warning signs th hard
immediate acti at require
on.

26/ /27
THEY WANT TO BE PAID HOW MUCH?!
The big red flag: Arguments over money
The contractual payment mechanism is perhaps the best early
indicator that all is not well on a project. A growing disconnect
between applications for payment and sums certified is likely to
lead to one or more claims at some point, so the sooner there is
scrutiny of the underlying cause of this disparity the better.
The best way to review this situation is to bring together the
commercial project-delivery teams and identify the key factors
behind the rising costs. More often than not, these professionals
do not work closely enough, which makes it hard to get the full
picture. By working together to build an accurate understanding
of cost escalation, it may be possible to take proactive steps to
resolve or manage a problem, rather than allowing it to drift
without decisive action.
Questions to ask when costs are rising
When a contractor’s payment applications are analysed,
it often becomes clear that the resourcing schedules or
programmes have not been followed. At this point, key
questions to ask include:
Was the original bid (and particularly the planned
resourcing) adequate?
Is the contractor slipping behind the programme?
Is the contractor failing to lock its supply chain into back-to-
back provisions, pricing and scope, leading to escalating
but invalid claims for payment?
Is there poor supply chain management and control?
Does the progress being reported reflect reality?
If not, why not?
Very often, one or two ‘claims-type’ issues or events become the
dominant focus, and proliferating change orders (or variations)
are overlooked. This can be short-sighted, as large sums of
money are routinely tied up in disputed change items, which
are left on the back burner. If significant non-agreed sums for
change orders start appearing on applications for payment,
ask yourself:
Why is there a proliferation of change orders?
Is the validity of the change being disputed?
Is it a change, or is it design development?
Is the purchaser’s team falling behind with issuing formal
change orders, resulting in uncertainty as to the validity
of changes?
Is there a difference in opinion over how to value
the change?
Is there a lack of clarity over the scope of provisional sums?
28/
10 EARLY WARNING SIGNS
Reasons behind under-certification
Issues are not always down to poor management on the
contractor’s part. If there is genuine and persistent under- REAL-WORLD WARNING SIGNS
certification by the purchaser’s team, it may be a sign that:
The project manager (or contract administrator) isn’t
effectively administrating the contract.
The designers are not acknowledging inadequacies or
errors in their base design — and not issuing change orders
as a result.
There are inconsistencies in the contract.
There is an unrealistic programme or tender price.
1. Hospital project 2. Contractor applying 3. Contractor 4. Parties are tens 5. Positions are so
The purchaser is struggling to obtain sufficient project
worth over £100 million. for increasingly larger undisciplined in of millions apart. entrenched that
funding, has operational problems or needs refinancing.
sums, while amounts serving notices. the dispute is almost
The importance of a proper and timely notice being certified get certainly heading
When considering payment, the dangers of failing to adhere smaller. for the courts.
to the strict letter of the contract should never be overlooked.
Tribunals are increasingly holding that notices are a condition
precedent to an entitlement to time and money, so contractors
should always give proper and timely notices.
However, year after year, we experience contractors failing to
give the right notices. This provides the purchaser with an easy
excuse to reject the claim and to refuse to engage on its merits.
In the UK, project managers still fail to issue valid pay less notices,
with insufficient detail or serve outside the contractual time
limits, thereby preventing the purchaser from withholding
payment until the next certificate. Caroline Pope Richard Dupay
Partner, London Senior Associate, Dubai
Don’t delay taking action +44 (0)20 3400 4318 +971 (0)2 652 0329
The sooner a potential problem is picked up, the greater the caroline.pope@bclplaw.com richard.dupay@bclplaw.com
chance of it being resolved.
As lawyers, we understand the need to ‘follow the money’ when
bringing or defending claims for clients – i.e. identifying where
there are significant sums of money in dispute, and then
following investigation into why that is the case.
The same approach should be applied to projects — as soon
as the payment/application delta starts to increase, decisive
action must be taken to address the causes and prevent issues
developing into claims.
So remember, there was a reason a lot of time, effort and
money was put into negotiating the contract. Good contract
administration of the payment process by both the purchaser
and contractor is one which uses and acknowledges the
contract, rather than allowing it to gather dust, or prop
open the site’s office door.
/29
MAKE THE SIX-FIGURE FEE WORTH IT: DUST OFF YOUR CONTRACT! 10 EARLY WARNING SIGNS

A loose grasp of agreed contractual terms

is all too common in construction projects,
and can land contracting parties in major
disputes. Alexandra Clough and Jennifer
Varley look at the telltale signs that a party
is failing to consult the contract, and how
this can increase risk and conflict.
What are the risks?
We often see clients spend significant sums on negotiating a
contract — tens or hundreds of thousands of pounds — only to
leave it ‘gathering dust’. The parties then carry on without
reference to the agreed terms until a dispute arises, when the
contract is hauled out of a long forgotten folder and lawyers are
called back in to sort out the mess.

Using (or not using) a contract in this way is a risky approach.

If a job goes well, there may not be a problem. However, the
contract is there to set out the allocation of risk and responsibility
between the parties. It also provides a framework for how the
parties should behave in particular situations. Things can get
difficult if this framework is not followed.

Sometimes, the team are upfront and tell you that they have
made a conscious decision “not to get contractual”. This can
be code for having no idea what the contract says!

30/ /31
MAKE THE SIX-FIGURE FEE WORTH IT: DUST OFF YOUR CONTRACT!
Who is responsible?
If the project faces any setbacks, proceeding without reference
to the contract terms is ill-advised. It can mean that you
inadvertently take responsibility for a risk properly borne by
another, or you do something (or fail to do something) which
undermines your contractual rights. For example, it is not
uncommon for the contract to stipulate that a contractor has
to give notice in order to claim an extension of time or additional
monies. Failing to serve notice within that period could mean
that the contractor is not entitled to an extension of time, even
where it is clear that an event causing a delay is the
responsibility of the employer.
Running a project without reference to the contract terms is
certainly an early warning sign that the team is not necessarily
running the job appropriately. A lack of discipline in
understanding and using the contract may be indicative of
other causes for concern, such as a lack of record keeping,
a lack of an up-to-date programme or up-to-date costs
information and a general lack of control.
Using (or not using) a contract in this
way is a risky approach.
32/
10 EARLY WARNING SIGNS
How can you tell if your team is not referring to the
contract terms?
There are some key warning signs that parties to a contract TOP WARNING SIGNS THAT YOUR
are failing to consult the agreed terms. Sometimes, the team are
upfront and tell you that they have made a conscious decision
CONTRACT IS ‘GATHERING DUST’
“not to get contractual”. This can be code for having no idea
what the contract says!
Another giveaway is when a party, if asked for a copy of the
contract, is unable to produce a copy in reasonable time.
Very often, when we ask for a copy of the contract it takes an
extended period for one to be tracked down – so it’s obviously
not being used by that party.
You would expect the key stakeholders to have a pretty good
grasp of the terms of the contract and their clause numbers.
However, alarm bells ring when the team talks in general terms
or uses common construction terminology not used in the 1. Team says “let’s not get contractual”. 2. Contracting parties take a long time 3. Use of different terminology to
particular contract. to produce a copy of the contract. that used in the contract.
Contracts also set out requirements for contractual notices,
correspondence and processes. These should be followed even
if a project is running smoothly. Signs that the contract is not
being used include the project team being unable to produce
these documents, or producing lots of correspondence or
notices which do not resemble the contract’s allocation of risk
or processes.
Make the most of your legal investment
Filing your contract away in a soon to be forgotten folder 4. Not issuing contract notices 5. Correspondence and notices 6. Not following processes set out
and/or failing to follow its agreed terms is a risky practice. or correspondence. with no reference to allocation within the contract.
Using your contract as an ongoing framework for project of risk within the contract.
responsibilities and behaviours will ensure you not only make
the most of the legal investment, but crucially, take measures
to reduce the likelihood of a dispute.
Jennifer Varley Alexandra Clough
Senior Associate, London Senior Associate, London
+44 (0)20 3400 2255 +44 (0)20 3400 4341
jennifer.varley@bclplaw.com alexandra.clough@bclplaw.com
/33
AMBIGUOUS CONTRACTS: BEWARE THESE SIX PROVISIONS 10 EARLY WARNING SIGNS

There will always be parties who

are prepared to take advantage
of ambiguities.

A great deal of disputes centre on different

interpretations of the same contract – and
ambiguities are rife when agreements
are reached under tight time constraints.
Richard Davies and Sara Paradisi explain
six key provisions that can cause problems.
The perils of imprecise drafting
Where there is doubt over the meaning of contractual provisions,
most legal systems require objective interpretation rather than
what was actually meant by the particular parties involved.
That’s why careful drafting is crucial – there will always be
parties who are prepared to take advantage of ambiguities.

Construction contracts are often based on tried-and-tested

standard forms, so look out for drafting errors in the party-drafted
amendments, or schedules and appendices, which are often not
drafted or checked by lawyers.

34/ /35
AMBIGUOUS CONTRACTS: BEWARE THESE SIX PROVISIONS 10 EARLY WARNING SIGNS

Six key drafting faux pas to look out for

We often encounter the following issues that can lead to disputes
or, at the very least, unpredictability:
REAL-WORLD WARNING SIGNS

1 2
Vague phrases
For example, “best efforts”, “reasonable
endeavours”, “all reasonable efforts” and
“best endeavours”. If these phrases are
frequent, there is a strong argument
that the parties intended them to be
understood differently in each instance.
They are rarely defined.
3
Automatic use of boilerplate clauses Supplemental agreements
Entire agreement clauses, variation It is tempting to ‘wrap things up’ when
clauses, exclusive remedies clauses and the situation changes or there has been
1. Multi-million dollar 2. Subcontract didn’t 3. Subcontract didn’t 4. Completion of 5. Contractor lost out
limitation of liability clauses – these all significant time or cost overruns. Parties
have their place when the parties want to ‘clear the air’ and allow the plant constructed include a clear allow the contractor construction on $1 million in delay
deliberately intend to place parameters project to complete. However, most in the Caribbean. completion date. to extend completion was delayed for liquidated damages.
around the contract, their obligations construction contracts already contain date as a result of its many months.
and their liabilities. However, such clauses the mechanisms for making interim own delays.
can lead to unintended results. For adjustments to scope, price and time
example, have the parties really thought without (potentially) surrendering one’s
about what losses they will incur and/or rights going forward. Formal side
what sums they can and can’t recover agreements need to be approached
from the other in case of a breach? with great caution, explicitly state what
Does the boilerplate exclusion clause is being amended and make sure the
get them there? amendments are consistent with the
contract as a whole. It can come as a
nasty shock later if a party intended to
revisit something.

Richard Davies Sara Paradisi

Partner, Abu Dhabi Senior Associate, Singapore
+971 (0)2 652 0330 +65 6571 6617

4 5 6 richard.davies@bclplaw.com sara.paradisi@bclplaw.com

Notice requirements No operable mechanism to adjust Unclear dispute resolution provisions

It is common for contracts to require a
party to give timely notice of claims. Most
standard form contracts provide some
mechanism to regulate the giving of such
notices and the likely consequences
that will arise if notices are not given as
stipulated in the contract. However,
bespoke contracts frequently do not
express the consequences clearly
enough (particularly when they are
severe), which they should for them to
be enforced.
completion date, or no completion date
We recently advised on a petrochemical
plant in the Kingdom of Saudi Arabia,
where the contract, in addition to not
specifying a clear completion date, did
not entitle the purchaser to extend the
completion date as a result of delays
caused by its own acts. This proved fatal
to the purchaser’s claim for delay
liquidated damages – it lost $40,000 for
every day the project was delayed –
and the project was delayed for months.
Stepped or tiered dispute resolution
clauses are often attractive at the
drafting stage because the parties see
the benefit of having every opportunity
to resolve disagreements without formal
proceedings. However, this can backfire
as the tiers of dispute resolution forums
can be manipulated to cause delay.
Often a party is not clear what, if any, the
consequences would be of jumping a
step or what the appropriate final
dispute resolution mechanism is.

Don’t wait until it’s too late

It can be particularly useful to have a fresh pair of eyes look at the contract once it is
executed but before the works are too advanced, in order to flush these issues out.
Finding out after the event that the project team’s assumptions about what was
agreed were unreliable, is too late.

36/ /37
PROJECT MANAGER: IT’S A DIFFICULT JOB, BUT SOMEONE’S GOT TO DO IT 10 EARLY WARNING SIGNS

Project managers, or contract administrators, have to walk

a fine line between being an agent of the employer and
acting as impartial arbiter of contractor claims. James
Clarke and Marcus Birch explain why it’s a tricky position,
and which two personality types you should be wary of.
The top complaints about project managers
1. Not coordinating with the contractor and the design team.

2. Poor management of the programme and failing to report progress and

delay accurately.

3. Not effectively operating the contractual mechanisms for the assessment

of the contractor’s claims for time and/or money.

It would be naive to think that a dispute couldn’t possibly arise if a contract was
administered perfectly. However, most would agree that fewer disputes would reach
a formal resolution process if contracts were better managed.

Problems of contract administration are often symptomatic of deeper-rooted tensions

in the underlying role of the project manager, the individuals who perform that role, and
the parties’ relationship with them.

So, what are the early warning signs that a contract is not being administered correctly,
and how should they be dealt with?

There is an inherent conflict of interest in the role

of the project manager.

38/ /39
PROJECT MANAGER: IT’S A DIFFICULT JOB, BUT SOMEONE’S GOT TO DO IT
The invidious position of the project manager
There is an inherent conflict of interest in the role of the project
manager. They are an agent of the employer on the one hand,
and the impartial arbiter of contractor claims on the other.
In practice, these competing duties can lead to project
managers becoming an antagonising factor in a dispute.
Two polarised characterisations of project managers are
as follows:
The first is the stubborn defender of the purchaser’s
interests. This type of project manager might zealously
defend all contractor claims irrespective of merit, or commit
to maintain their employer’s expectations of delivering the
project for the original price and duration no matter what.
This attracts complaints from the contractor that the project
manager is in the employer’s pocket and lacks impartiality.
At the other extreme, albeit rarer, is the project manager who
always follows the path of least resistance, saying “yes” to
everything. Disputes with the contractor are avoided at all
costs. This tends to lead the contractor into viewing the project
manager as a pushover, leading to an alarmed employer
as the final bill increases, and delays mount.
These are admittedly the extremes. However, a project
manager has to tread a fine line in order to guide the parties
away from disputes.
A stubborn defender?
If the project manager is a stubborn defender, it is likely that
sums certified as due to the contractor will remain static, and
the discrepancy between the amount claimed and the amount
certified will increase as the project manager routinely strips
claims bare. The variation account in particular may be
disputed as the contractor’s claims for change, arising perhaps
from a poorly coordinated design team, are routinely rejected
or valued at nil. There may be an increase in contractor delay
notices, which the project manager dismisses as disputed risk
events, or events with no practical impact on the programme.
Faced with this hardening position, the contractor may
disengage from a project, reducing resources or deploying its
‘B’ or ‘C’ teams. Correspondence may replace face-to-face
engagement and become more assertive and emotive in tone,
with challenges over workmanship and non-conforming work
meeting the contractor’s requests for a certificate of
completion. Positions become entrenched, making
resolution harder.
40/
10 EARLY WARNING SIGNS
Or a pushover?
On the other hand, a project manager who is overly generous
will give the impression of being a mere ‘post-box’ between TWO EXTREME TYPES
the contractor and the design team. They will disengage from
project correspondence and meeting minutes, accepting
OF PROJECT MANAGER
change and delay-related claims without challenge.
‘On-account’ assessments are made, deferring proper scrutiny.
A pushover project manager will often, in the early stage of
works, certify applications for payment which are front-loaded
relative to reported progress. By the time final account
negotiations begin, they are left with little room for manoeuvre
given the overly generous starting point and inflated contractor THE STUBBORN DEFENDER THE PUSHOVER
claims. In addition, the project manager may not follow Defends the contractor’s claims Agrees to everything the
contractual mechanisms, fearing that issuing notices might
irrespective of merit. contractor asks for, leading
prompt a dispute. The contractor is therefore not held to
account for failing to issue notices in respect of events for to increased cost and delay.
which it claims additional entitlements. Progress reports lack
the detail required to enable the employer to defend the
contractor’s claims. Always stripping back contractor claims to static sum. Disengaging from project correspondence and minutes.
Such a project manager may be pressurised into certifying early Routinely rejecting or valuing at nil claims for Accepting change orders and delay-related claims
completion of works, despite outstanding or defective works. change orders. without challenge.
Alternatively, they may resist calls to properly assess the
contractor’s liability for delay and enforce the employer’s Increase in delay notices by contractor. Front-loaded payment claims leading to difficulties
entitlement to liquidated damages. agreeing final account.
Contractor withdrawing resources or deploying B teams.
Prevention is better than cure Not following contractual mechanisms to challenge
In either of the above scenarios, disputes are more likely to arise Arguments over mitigation/acceleration. the contractor.
and escalate. Both approaches encourage contractors to
Argumentative correspondence over work quality. Issuing early completion certificates despite
advance more aggressive claims – either in response to an
outstanding issues.
overly-hard line by the project manager, or opportunistically Disputes over whether work is complete.
when seemingly faced with an open door to push against. It is
Resisting enforcing purchaser’s right to
not suggested that such behaviours on their own cause
liquidated damages.
disputes, but they certainly can fuel them. Active engagement
by both the employer and the contractor is key to preventing
this behaviour.
The project manager’s role, with the conflicting duties that come
with it, remains a valuable tool for managing the contractual
and commercial relationship between the employer and
James Clarke Marcus Birch
contractor. Criticism is often levelled against the “administration
Partner, Singapore Associate Director, London
of the contract”, but it is all too easy to direct it solely at the
+65 6571 6624 +44 (0)20 3400 4605
project manager. In fact, it is for all parties to administer, and
james.clarke@bclplaw.com marcus.birch@bclplaw.com
ensure good administration of the contract, in order that issues
that inevitably arise are dealt with efficiently and
contemporaneously under the contract.
/41
TERMINATION OF CONTRACT: WHEN RELATIONSHIPS TOTALLY BREAK DOWN
Some projects are so beset with problems
that despite heeding early warning signs,
the relationship between purchasers and
contractors totally breaks down. Caroline
Pope and Bob Maynard outline the key
considerations and risks for purchasers
if they decide to terminate.
Warning signs that a contract is heading for termination
The issue of termination usually arises well into projects, usually
in the fourth quartile. Typical warning signs include:
Very significant delays.
Doubts about whether the contractor is putting in
enough effort.
Disagreements over responsibility for key matters,
such as testing and takeover criteria.
Reductions in workforce.
Entrenching of positions on contract interpretation.
External developments that reduce the purchaser’s
motivation to proceed.
42/
10 EARLY WARNING SIGNS
Do you have grounds to terminate?
Most engineering and construction contracts allow parties
to terminate the contract if one party is in default, if it becomes
insolvent, or after a period of non-payment/suspension.
Many also allow the purchaser to terminate for any reason
(known as ‘termination for convenience’).
Unless the contractor abandons or suspends the works, the
most common grounds for termination by a purchaser are for
‘default’ or ‘convenience’.
However, when a contract goes wrong, purchasers rarely want
to terminate for convenience. This is because they blame the
contractor for not delivering the project and expect it to pick up
the bill for an alternative contractor to finish the job.
That leaves only one palatable option for the purchaser –
termination for default. The purchaser commonly argues that
the contractor has failed in its contractual obligations (there are
various contractual grounds of failure), serves a default notice or
notice to correct, and terminates if the contractor does not
rectify that failing. Examples include the contractor failing to
proceed in accordance with clause 8 without reasonable cause
(FIDIC 2017 Silver Book), substantially failing to comply with its
obligations (NEC3) or failing to proceed regularly or diligently
with the works (IChemE).
Delay in itself does not mean that
the contractor is failing to fulfil its
contractual obligations.
/43
TERMINATION OF CONTRACT: WHEN RELATIONSHIPS TOTALLY BREAK DOWN
Is the contractor obliged to proceed?
Delay in itself does not mean that the contractor is failing to fulfil
its contractual obligations.
The contractor is obliged to proceed continuously, industriously
and efficiently with appropriate physical resources (labour,
materials and plant) in progressing the works steadily towards
completion [Faulkner v London Borough of Newham (1994)].
But an impasse between purchaser and contractor often
comes down to a dispute over risk allocation, or the cause
of delayed progress.
Whether the breach is serious enough to justify termination will
usually be judged objectively depending on the terms and
duration of the contract, the nature of the breach and, to a
lesser extent, the consequences (both legal and commercial)
of the breach.
Therefore, the purchaser will need to be satisfied that the
contractor’s performance meets the criteria to justify
termination, and that contractual termination mechanisms are
carefully and precisely followed.
While terminations are project-specific, in our experience,
certain points can be drawn out.
Key questions to ask yourself before issuing a default notice
How will the contractor respond to the notice?
Is the default notice correct?
Are those implementing the process aware of the
contractual termination timeline?
Do they understand that it takes time to implement the
contractual termination mechanisms?
Practical steps you can take when issuing a default notice
Monitor and carefully record what the contractor does and
does not do to rectify the notified default. Record progress
before and during the rectification period, to ensure there is
a baseline against which to measure any performance
improvements after the default notice has been served.
Ask whether your team has the skills and experience to
optimise the plant while you find an alternative contractor
(this could involve a lengthy tender process). Take
independent advice (engineering/architectural/
programming) on why the scheme proved hard to deliver.
This will help to satisfy you, your legal advisers and
ultimately a tribunal (if the termination is contested),
that the contractor was in default.
44/
10 EARLY WARNING SIGNS
Practical steps to take before issuing a termination notice
Arrange to secure the site before the contractor
demobilises to ensure materials and plant are not removed
during the rectification period.
WARNING SIGNS A CONTRACT
Ensure your operations team is ready and able to take
IS HEADING FOR TERMINATION
over operations on termination, without causing any
service interruption.
Be ready to secure and insure the site and works !!??
on termination. !?!?
?!?
What if you get it wrong?
Wrongful termination brings the risk of reputational damage
and potential financial consequences.
1. Slow progress. 2. Significant delays. 3. Doubts about the 4. Disagreement
contractor working about responsibility
If a tribunal finds that the purchaser has terminated incorrectly,
hard enough. for key matters.
the contractor becomes entitled to be paid the proper value
for its work up to the date of the termination (which it is due
irrespective of the termination) and its loss of profit on the
incomplete element of the project, (which it would need to
prove). This is far from straightforward, as the projects that
contractors struggle to deliver are often the very ones where the
contractor has made major cost or technical miscalculations. It
also assumes there is no effective exclusion of claims for loss of
profit in the contract.
5. Reductions in workforce. 6. Entrenched positions on 7. Reduced motivation
The contractor could also have claims for additional contract interpretation. for project to proceed.
demobilisation costs, as well as any costs it was already
committed to paying, for example to its supply chain.
Wrongful termination would also prevent the purchaser from
recovering the extra over cost of engaging an alternative
contractor, and its loss of income for any extended period of
delay to completion. It would also give rise to a risk of the project Bob Maynard Caroline Pope
being delayed even longer than if the defaulting contractor had Partner, London Partner, London
been kept on, whilst the purchaser tenders for, selects and +44 (0)20 3400 4009 +44 (0)20 3400 4318
appoints an alternative contractor. And can a new contractor bob.maynard@bclplaw.com caroline.pope@bclplaw.com
be found who is willing to underwrite the existing design and
workmanship?
These risks must be weighed against the project’s delayed
income stream, and against the contractor’s entitlement if the
purchaser had exercised its right to terminate at will.
To terminate or not to terminate? Morton’s fork
Purchasers consider terminating a project for a variety of
commercial reasons – from having reached the cap on
liquidated damages, to a relationship breakdown at site and
executive levels; combined with regulatory pressure to complete
the scheme on time to avoid fines or prosecutions. For a
contractor, the reputational impact of having a major contract
terminated can be significant, particularly as it must disclose
any terminations at pre-qualification for future projects.
The grounds to terminate are rarely black and white, so the risk is
substantial. Decision makers are rarely prepared to take the risk
of serving ‘termination for default’, fearing that their termination
will be held to be wrongful by a tribunal, but don’t want to let the
contractor off the hook by ‘terminating for convenience’.
The party seeking to terminate has to balance the commercial
reasons for terminating against that risk; a cost-benefit analysis
is essential.
/45
OUR TEAM 10 EARLY WARNING SIGNS

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To find out how we can help you keep control of BAHAMAS EGYPT IRAN LEBANON RUSSIA UNITED ARAB
EMIRATES
your project, simply call or email. BAHRAIN FRANCE IRAQ MACAU SAUDI ARABIA
UNITED KINGDOM
BANGLADESH GERMANY INDIA MALAYSIA SINGAPORE
Richard Davies UNITED STATES
BULGARIA GIBRALTAR JORDAN MOROCCO SPAIN
Partner, Abu Dhabi OF AMERICA
+971 (0)2 652 0330 CAMBODIA GREECE KAZAKHSTAN OMAN TURKEY
VIETNAM
richard.davies@bclplaw.com
YEMEN

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around the world.
Responsiveness: ten out of ten (and
I don’t give ‘tens’ away)…excellent.
Joint Managing Director,
mechanical and electrical
services contractor

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