Avoiding Costly Missteps in Construction
by aarta alkarimi
“[E]xcept in the middle of a battlefield, nowhere must men coordinate the movement of other men and all materials in the midst of such chaos and with such limited certainty of present facts and future occurrences as in a huge construction project [...] Even the most painstaking planning frequently turns out to be mere conjecture and accommodation to changes must necessarily be of the rough, quick and ad hoc sort, analogous to ever-changing commands on the battlefield. ”
The consequences of poor planning, insufficient resources, and the lack of adaptable strategies can lead to mission failure. In this aspect, the judges hearing Blake Construction Co. vs. C. J. Coakley Co. were acutely aware that construction endeavors are inherently risky and litigating them can be very complicated.
With large construction contracts commonly running into the hundreds of millions of dollars, the stakes are high and the tolerance for errors is low. Mistakes can not only jeopardize projects but prove fatal to businesses as a whole.
Experience dealing with contentious construction-related matters has taught us that inconsistent modes of communication, incomplete documentation, and major assumptions with respect to the chain of authority remain commonplace in the construction sector.
Common missteps have led to arduous document reviews, large claims and counterclaims, and costly litigation that could have been mitigated - if not altogether avoided. This is further exasperated by the sums often in question and the low margins that many contractors operate with in a highly competitive and risky sector.
Much like a building itself, the procedural foundations laid down at the onset of a project greatly determine its future course.
In the midst of the pressures to show tangible progress in the field and other pressing considerations, procedures and paperwork tend to take a back seat to the sincere efforts of all parties to show results and “getting it built.” Other than the initial interest in the agreements leading to a contract, upper management passes much of what is to follow in terms of procedure to functionaries at the lower end of the organization chart.
Competitive pricing often leaves little money for highly skilled document management personnel, thereby relegating an important function to a team that is under-manned and often treated as a peripheral appendage the project team. The filling out of forms and adherence to communication protocols are often seen as distractions (even hindrances) by the “bricks and mortar” field engineers who are under the gun to show daily progress against optimistic targets.
However, the time pressures imposed by the project schedule and the motivations of the individual team members (the owner, the architect, the engineer and the contractor) to show progress are of little relevance to the auditor or claims analyst when justifications for certain actions — often performed many months or years back — are required. At such a juncture, past adherence to procedures and the presence of suitable documentation (or lack thereof) become glaringly self-evident.
With globalization, the construction sector faces the additional challenge of different methodologies, practices, and expectations - all being brought to a project by various organizations and individuals with differing work cultures and expectations (to say nothing of varying and often conflicting terminologies).
For example, it is now not unusual for a project in a major city in the developing world to have American architects, Australian structural engineers, British mechanical engineers, Canadian and local suppliers, German equipment manufacturers, and a South Korean general contractor. With this comes the natural differences in approach, priorities, interpretation (including the use and meanings attributed to words), prior experiences, and the understanding of roles, responsibilities, and liabilities.
In such increasingly common situations, the parties are assumed to be in agreement on many seemingly obvious principles due to a misinformed belief that everyone reads a contract document in the same way.
Anyone working on such a project (or any other project) would be well advised to adopt some simple procedures. While these may seem obvious - even elementary - the facts on the ground have repeatedly shown that these seemingly obvious procedural missteps remain as common as ever.
The Contract
One of the most glaring gaps seen in the administration of construction projects is the concerned parties’ lack of familiarity with contract provisions and scope documents.
Often only identified retrospectively by lawyers and claims consultants in the midst of disputes, such knowledge lapses are so fundamentally against good practice that there is often no satisfactory explanation for project team members not being adequately aware of the contracts they are administering.
The problem is more prevalent on the Owner’s side (and those of their design/engineering consultants) as their teams are not necessarily comprised of people with experience in administering construction contracts with a concerted focus on rights and obligations.
Often, external legal advice is sought at the outset (contract preparation) and then again only when issues arise (when projects are well underway or nearing completion). In the interim period, projects are administered by technically and logistically experienced people who view contracts primarily as a vehicle to confirm the appointment of a contractor and to retrospectively rely upon after a dispute has already arisen.
To address these potentially perilous and costly knowledge lapses:
All project team members must be provided access to the contract documents and be mandated to familiarize themselves with them. It is recommended that summary guidelines and matrices for key contractual provisions, notices periods, rights, obligations, milestones, and the like be developed and distributed to the team for handy reference.
Project teams should have dedicated staff suitably experienced in the administration of construction-oriented contracts. Such staff should be deployed to projects as technical staff would be (in other words, deployed proactively for day-to-day contract administration and dispute/claim avoidance).
Where the project is large, complex, or otherwise challenging, Owner’s should appoint suitably qualified Project Management Consultants.
E-Mails
The proper filing of contract documents, permits, drawings, specifications, reports, and letters (all meticulously and methodically filed on computer servers using a structured coding system of some sort) is obvious even to the uninitiated. The absence of such a system would be a conspicuous and utterly careless omission by all accounts. However, e-mails often seem to be viewed in a different light even though they transmit much the same information as hard-copy/“formal” correspondence and increasingly form the bulk of day-to-day communications between parties.
Unconsciously, e-mails are often treated like verbal communications rather than written ones even though they are most obviously the latter. The abundance of e-mails on any particular matter (given that they are quickly composed and are prone to more immediate or casual responses) could, together, form a “transcript" with a wealth of contextual information not often seen in more traditional letters.
Similarly, e-mails - hastily prepared and more casual/conversational in nature - are prone to greater occurrences of errors, vagueness, and misinterpretation.
For these reasons, among many others, e-mails should be attributed with much greater importance than they are given and, consequently, should be composed, organized, retained, and filed with the same care given to other more “official” communications.
In the construction sector, where the building site is the primary workplace and the conventional office environment is replaced with a temporary field office, the phased and limited duration of the construction schedule also means that many team members are mobilized and demobilized as needed and few are present from project inception through close out. As such, the lack of discipline in terms of electronic data retention and filing could mean that vital information can be lost easily (specially when much may be retained within the individual e-mail accounts of personnel).
The following are some common practices that undermine the proper retention of e-mail data:
E-mails are not consistently copied to a project specific inbox accessible only by an administrator.
E-mails are routinely deleted from individuals’ inboxes at their discretion when they are deemed to be no longer required.
Individuals demobilized from projects at the end of their particular assignments move on and so does access to their e-mails.
Old e-mails are routinely archived on an individual’s computer hard drive (instead of servers) to make space on memory restricted e-mail inboxes. The loss or damage to an individual's laptop of desktop can result in the loss of the archived e-mails (information stored on a local hard-drive is not often backed up on company servers).
Vital attachments are lost, corrupted, or not properly archived with their respective e-mails.
Large documents transmitted through e-mails using download links to third-party web-based file sharing services are lost with the expiry of download links.
Document numbering routinely used for formal letters, transmittals, etc. are virtually unused in e-mail correspondence making searches for information tedious.
These sloppy practices make later legal discovery torturous and expensive. Discovery is often hampered and prolonged by the two or more parallel sets of documentation seen at many construction projects:
Formally filed letters, notices, and submittals.
Disparate and scattered e-mails (we are now also seeing the use of text messaging to instruct or approve work - a communication mode we strongly advise against for work related matters).
To harness the convenience of e-mail systems while still maintaining the controls to preserve information properly, certain steps must be put in place:
Set up a project-dedicated company inbox with administrative access to which each employee must copy all business e-mails.
Use standardized or coded subject headings to ease searches of all related e-mails and train employees in their consistent use.
Locate and back up the e-mail server at an off-site location. Alternatively, use a dedicated data management system (project management software) to transmit all project related electronic communications between different entities. This requires the agreement of all parties to use a common platform for electronic communications.
Owner Instructions
Major problems continue to arise on job sites when the contractor feels obliged to take directions from both the owner-appointed project management consultants (PM) and the owner itself. If all parties are not in one room while instructions are issued, conflicting instructions can lead to schedule delays and extra costs. The contractor should study the existing contractual relationships and fully familiarize himself with the roles of various entities on the project and make it clear that all instructions must be issued through one source — the authorized management team.
Often, the owner will delegate many of its powers to the PM but specifically bar the PM from issuing instructions that are considered to affect time or cost. The ability to distinguish between the two forms of instructions is often in the eye of the beholder, however, the burden to make the distinction clear often lies with the contractor. As such, the contractor must always respond to instructions where an explicit acknowledgement of a change is not present, but is possibly merited, with a clear path of action (for example, the contractor notes that he is proceeding with the work while determining its cost and time impact or will only proceed with the work after determining so).
During construction, which can often last years, there will be instances when the PM or the owner will issue an instruction on site (such as a work stoppage or an on-site change to the work) but, for various reasons, it may not be possible to receive the instruction in writing in a timely manner.. In such circumstances, the contractor should respond in writing to the party that issued the verbal instruction as soon as possible to confirm the nature of the instruction, identify the instructing party and the date and time, and provide a reasonable level of preliminary substantiation. The contractor should also reserve his right to claim for time and cost, if it is applicable.
Baseline Schedules
The baseline schedule reflects thousands of activities that need to be updated on a regular basis and a new version is created each time an activity is added, deleted, or changed. This is a fundamental task in administering the schedule. However, when it is time to measure delays, disruptions, or acceleration, claim analysts often encounter gaps in the project schedule which make it very difficult to accurately reconstruct a full picture of what was supposed to take place versus what actually happened.
Also, schedules with complex interconnected activities often lose data or have it remain inadvertently hidden from parties who need to access it. In order to prevent loss of data, it is critical that the project team be careful not only to use the correct (common) version of the scheduling software, but also to ensure that the schedule data fully transmits from one user to another. We have seen several occasions where a project schedule has been transmitted to a claims consultant’s standalone personal computer, but due to various reasons the transmission of information has been partial without any of the parties realizing it. Situations like this can not only undermine the credibility and competency of the project team, but can also consume unnecessary time and money.
An example of the complex inter-relationships of a construction project schedule being thrown off by a seemingly simple issue is a recent instance in the United Arab Emirates where a schedule containing both regular 10-hour work days and 6-hour statutory summer-month work days was transmitted to an international delay consultant and imported into an 8-hour day database. The result of the import process was the lengthening of certain durations and the shortening of others, and plenty of confusion! To avoid such problems, the party creating the schedule must ensure that all related information and assumptions are clearly transmitted along with any schedule for proper interpolation by others.
Similarly, where sections of the project schedule are password protected or encrypted, a log or instructions to retrieve pertinent information should be carefully kept so the data can be accessed beyond the construction period by parties tasked with understanding these schedules retrospectively (often years later).
Attention to Notice Provisions
Timely written notices are required under construction contracts to preserve certain rights of the parties.
In fact, it is common for parties to agree that certain rights are lost unless a written notice is issued within a certain period of time stipulated by the contract. While in some jurisdictions, a late notice does not extinguish a contractor’s right to pursue and recover a claim based on its merit (as long as it is filed within statutory limitation requirements), other jurisdictions are strict about the language of the contract and what the contact language indicates the parties agreed to in order to recover potential damages.
In a globalized environment, assumptions as to what provisions local laws provide with regard to notices are often based on each party's previous experience in another jurisdiction. With multiple parties from different countries making up project teams on the large international projects, the perils of such assumptions - often made in good faith - become apparent as cost and schedule overruns materialize and put strain on each of the parties.
The contract manager should identify all notice provisions at the start of the project, pay close attention to the triggering event, and maintain a log of when a notice should be/was issued in writing.
Change Orders
The contractor and the owner should (at the start of the project) agree and settle on a format and substantiation requirements for changes and claims.
The construction contract probably addresses the procedure for issuing change orders, but contract clauses often do not get into details about the extent to which the owner expects a change order to be substantiated, the number of signatories required, and who the owner’s authorized signatories are. In instances where the contract’s change clause requires the contractor to carry out the owner’s instructions by executing the works and then getting paid at a later date, both the owner and the contractor must have settled on the extent and the itemized details with which the contractor should substantiate its price and schedule requirements for the additional works.
Government Approvals
In most conventional construction contracts, the contractor is responsible for securing the various government approvals required to proceed with work, for utilities to be connected, and the project to be issued certificates of occupancy and completion. While the principles are essentially the same in most jurisdictions, we have seen many instances where international contractors operating in new jurisdictions incorrectly assume that the procedures they are used to in their home territories still apply.
With a poor appreciation of local bureaucracies, contractors commit to schedules with insufficient durations for required approvals.
As we have seen in many instances, significant and unrecoverable delays resulting from over-ambitious planning have severely undermined an otherwise well-executed project and caused contractors to have liquidated damages applied for delays. While the task of securing approvals and permits can be subcontracted to experienced local entities, the main contractor must build schedules with as much real-world data relating to actual authorities’ approval durations, closely monitor the process, and weigh the potential impact of any delays on the project schedule as soon as possible.
Regular communication with the authorities is also essential to remain updated on regulations and codes as we often see new rules imposed with little notice and no allowances for grandfathering projects that are already under construction.
Dealing with Problems
The manner in which a company addresses a potentially contentious matter depends not only on its business strategy and company culture but also on the larger culture of the region in which it is operating.
In some regions, considerations such as family relationships and deference to certain notable or respected individuals often take precedence over some provisions stipulated in the contract. In all but the most contentious cases, the contractor should always be mindful of relationship preservation; particularly when it is a foreign entity.
At the risk of over generalizing, we have observed that contracting companies from the Far East are often cautious about addressing claims as and when they arise in order to avoid the perception of being overly claims oriented. They tend to document issues and present them by way of a formal dispute resolution at the end. On the other hand, European contractors generally file notices of claims as they arise so as to avoid the perception that claims are “conjured up” near the end to meet missed revenue targets.
While this is a sensitive issue and a matter of company strategy, if the contractor decides to defer notification of a claim, close attention must be paid to the claim-related deadlines (notice provisions and substantiations).
While progress photos are customarily included in a contractor’s monthly reports to the owner, the establishment of a disciplined routine for taking detailed photographs on a daily or weekly basis produces a useful photographic history of the project that can be used to settle disputes among various parties (between the contractor and one of his subcontractors, the owner and the contractor, and so on).
Well-taken photos that are date and time stamped can help settle delay disputes by showing which party may have been delayed or inhibiting the progress of others, determine the actual date when a task was started or completed, settle damage claims, or identify violations or the causes in cases of accidents and injuries.
As with all other project data, digital photographs should routinely be downloaded on to the main computer server, properly cataloged for ease of reference in the future and regularly backed up.
Retaining international counsel that operates with little or no knowledge of local law, even if the contract is governed by the laws of the jurisdiction where the international counsel is licensed, is not the best approach.
In some jurisdictions where projects have been financed through foreign investment, local law risks are mostly mitigated by the presence of bilateral investment treaties coupled with a governing law clause that selects a foreign jurisdiction’s laws. Nevertheless, there are always local law issues that apply to a project, and the risk of mistakes can be mitigated by getting input from a local lawyer during the bidding stage or at the early stages of contract negotiations. In such cases, the international and local counsels are not interchangeable but dual necessities.