Training On Construction Contract Administration and Claims (Makalle) Presenter: Yoseph Kidane

1. Training On Construction Contract Administration and Claims (Makalle) Presenter: Yoseph Kidane 24 May 2018

2. Outline • Contract Administration • Definition • Roles and Responsibilities • Time • Payment • Risk Management • Construction Claims • Definition • Types of Claims/ Basis of Claims • Monitoring Delay and Disruption Claims • Formulation and Presentation of Claims • Response to Claims • Avoidance, Resolution and Settlement of Claims • Disputes

3. 1. Contract Administration 1.1 Definition of “Contract” • An agreement made between two or more parties (A Constructor and an Owner, in the case of Construction) • Comprises of various Documents (the Agreement, Letter of Acceptance, Conditions of Contracts, Technical Specifications, Drawings, Bill of Quantities, Contract forms, and other documents as necessary) • The documents are expected to be consistent with each other.

4. 1. Contract Admin…..Cont’d 1.2 RolesandResponsibilities 1.2.1 Employer’s Obligation • Primary Obligation is to pay for the works executed • Equally important obligation is to grant obstruction free possession of site and Access thereto. • To appoint a competent and qualified Engineer for the works contract administration • A general implied duty not to hinder the contractor’s effort to complete the work • To supply the necessary instructions, information, plans and drawings.

5. 1.2 Roles and ……Cont’d 1.2.1 Employer’s Obligation • Issue timely decisions on technical and contractual issues that requires its consent • Re-appointing a new Engineer; if the former persistently neglect his duties and responsibilities

6. 1.2 Roles and ……Cont’d 1.2.2 Contractor’s Obligation • Primarily the contractor’s obligation is to complete. • To complete on Time • To pay damages • Not to harm third parties • To comply with applicable laws and liability • Implied Obligation to minimize adverse effects of delay • To cooperate and Notify

7. 1.2 Roles and ……Cont’d 1.2.3 Engineer’s Role as an Agent • Establish qualified and competent site and head office staffs • Closely follow up of Employer’s Obligation • Routinely advise the Employer on cost update, obstruction status • Inspect, sampling and testing • Obtain prior consent of the employer where required • Issue taking over and Defect Liability certificates • Implement quick decision-making process

8. 1.2 Roles and ……Cont’d 1.2.4 Engineer’s Role as an Impartial Body • Determine Extension of time and financial compensation in consultation with both parties • Prepare and Issue Engineer’s Instruction and Variation Order • Prepare and certify interim payments

9. 1. Contract Admin…..Cont’d 1.3 Time 1.3.1 Commencement of Works • Possession of Site • Securities, Bonds/Guarantees, Insurance 1.3.2 Progress of Works • Work Programme • Monitoring of Progress/ Suspension/Termination 1.3.3 Completion of Works • Taking Over • Obligation of Contractor after completion/ Defect Liability Period

10. 1. Contract Admin…..Cont’d 1.3 Time 1.3.1 Commencement of Works • Engineer to Issue Notice to Commence to the Contractor • Failure by the Contractor to commence with due expedition • Failure by the Employer/Engineer to issue a Notice to Commence • Possession of Site and Access thereto • Article 40(3) of the Constitution: Land is a common property of the nations, nationalities and Peoples of Ethiopia and shall not be subject to sale or to other means of exchange • Clients are in the best position to handle land issues • Failure to give possession of site and access • Definition of Possession of Site and Access • Why Spoil Area expropriated by contractors?

11. 1. Contract Admin…..Cont’d • Bonds and Guarantees • A Bond is an undertaking to pay a sum of money. Bonds are from Insurance Company while Guarantee is from Bank • Basically there are two types of Bonds • Conditional Bond and Unconditional Bond • Conditional bonds require sufficient proof of the contractor’s failure to meet the stated conditions. • Unconditional Bonds does not require proof of contractor’s non performance. Paid on demand.

12. 1. Bonds and Guarantee…..Cont’d • The usual bonds are Bid Bond, Performance Bond, Advance Payment Bond, Retention Bond. • Bid Bond: to secure the bid/tender submitted by the bidder until the bid validity period expires. Local firms sometimes are allowed to deliver conditional bonds. • Performance Bond: It is to secure the performance of the contractor during the contract period. Like Bid Bond, conditional bonds could be issued by local firms. • Advance Payment Bond: This is to secure the amount paid to the contractor as interest free that shall be against an Unconditional Bond • Retention Money Bond: ditto like Advance Payment Bond

13. 1. Bonds and Guarantee…..Cont’d Insurance • Normally contractors to take out Insurance for the works, motor vehicles and third parties • Employer must approve the insurer for all insurance; and also the terms of the policies • Works must be insured in the joint names of the Employer and Contractor • Engineer to check the insurance covers all Employer’s interest and recommend for approval • Points to check when examining Insurance Policies • Amount of Cover: check if it covers all works, plant and materials and other things on site

14. Insurance…..Cont’d • Excesses/ Deductibles : require guarantee for high excesses. • Exceptions • Period of Insurance • Termination of Policy • Cross Liabilities: in the case of joint policies, check that one party claim for damages caused by another. • Motor Vehicles: all vehicles of the contractor and Engineer. • Definition of site; should not exclude quarries • Omnibus Policies : contractor might have taken out insurance for all works undertaken by him

15. 1. Contract Admin…..Cont’d 1.3.2 Progress of Works • Development of realistic Work Programme • Revision of Work Programme • Slow Progress of Works Things to consider when developing realistic work Programme • analyzing definition of all activities laid out in the project scope management, • identifying activity sequencing, • estimating the number of work periods that will be needed to complete individual activities, • analyzing activity durations and resource requirements and • finally ensure the contractor’s work schedule meets all the above requirements. • Helping to control changes to the project schedule

16. 1. Contract Admin…..Cont’d 1.3.2 Progress of Works • Development of realistic Work Programme • Revision of Work Programme • Delay/Slow Progress of Works/ Things to consider when developing realistic work Programme • analyzing definition of all activities laid out in the project scope management, • identifying activity sequencing, • estimating the number of work periods that will be needed to complete individual activities, • analyzing activity durations and resource requirements and • finally ensure the contractor’s work schedule meets all the above requirements. • Helping to control changes to the project schedule

17. 1.3.2 Progress of Works…..Cont’d Delay/ Slow Progress of Works Is an adverse impact on timing in relation to what was intended. Major Categories of Delay • Delay to Progress: Delay in a particular activity; • Delay to Completion Date: Delay to the Contract Completion date; • Delay to the Date for Completion: Delay to the completion date intended by the contractor; Types of Delays • Excusable and Compensable Delay: A delay for which the Client is entirely responsible; like possession of site. • Excusable but Non-Compensable Delay: A delay beyond the control of both parties; like Adverse Weather, Earthquake. It is also termed as Delay due to Neutral Event

18. Delay…..Cont’d • Inexcusable/Culpable Delay: A delay for which the Contractor is entirely responsible; like delay due to poor progress • Concurrent Delay: at-least two events occurring at the same time of which one of them is Employer related delay while the other is Contractor’s own delay; • Parallel Delay: at-least two events occurring at the same time but unlike Concurrent Delay, here the responsible party for the events are either the Employer or the Contractor; not both

19. 1.3.2 Progress of Works…..Cont’d Suspension Is a stoppage of work on any or all activities in all or part of the works for a certain duration. Major Causes of Suspension • Delay in Payment; • Design Revision; • Availability of Obstructions. Effects of Suspension • Reduction of Rate of Progress • Stoppage of work • Termination of Contract

20. 1.3.2 Progress of Works…..Cont’d Termination Termination of a contract is defined as bringing the contract to an end regardless of the status of the project. Defaults by Contractor • persistently and flagrantly neglecting to carry out his obligations under the contract • becomes insolvent, involuntary bankruptcy, liquidation or dissolution • notwithstanding that the other party has committed no fault, when the contract has become useless to the public service or unsuitable for its requirements - Ethiopian Civil Code Article 3180

21. Termination…..Cont’d Defaults by the Employer • failing to pay the contractor entitle him to suspend and later terminate the contract. • outright refusal to give possession in the first place • Delay in giving possession of site and omission of the work together may entitle the contractor to terminate • wrongful ejection of the contractor from the site • where an intervention by the employer has its effect to upset the general economy of the contract - Ethiopian Civil Code Article 3182 –

22. 1. Contract Admin…..Cont’d 1.3.3 Completion of Works • Taking Over • Substantial Completion/ Provisional Taking Over • Final Taking Over • Obligation of Contractor after completion Defect Liability Period • Patent and Latent Defects • Commencement of the DLP • Contractor’s payment during the DLP • Failure by the contractor to remedy any defects • Termination during DLP

23. 1. Contract Admin…..Cont’d 1.4 Payment • Advance/ Interim/Final Payments • Variation/ Valuation • Fluctuation • Retention Money • Provisional Sum and Prime Cost Item • Liquidated Damages and Penalty

24. 1.4 Payment…..Cont’d 1.4.1- The main and critical obligation of the Employer is paying the Contractor what is to be due. • Advance Payment: What makes it different from Down Payment? Is it Interest Free for the Employer; in case of delay? • Interim Payment Certificates: Could be termed as temporary certification that could be corrected/modified. It is a sum of monthly statements if the amount of the previous month is less than the minimum. • Statement at Completion: payment for the whole outstanding payments of works after substantial completion. Half of the retention money would also be released. • Final Payment: Covers all eligible payments until the completion of the DLP. Any claim/dispute should be settled before the final payment. Letter of Discharge.

25. 1.4 Payment…..Cont’d 1.4.2 Variation Any changes to contracts from what has been anticipated at the making of the contracts could be regarded as variation. Causes of Variations: Variations could arise either from the insufficiency of the original design, change in mind by the client, as a result of mitigation measures, etc. Which Variations do require Order? Except for quantity decrease or increase of certain items of the work Absence of Variation Clause: contractors would be entitled to negotiate a new rate for that piece of work of variation Scope of Variations : Within the general scope of the contract and that does not go to the root of contract.

26. 1.4 Payment…..Cont’d Valuations of Variations • Similar to Contract: for varied work similar to an item in the contract. In this case the Bill rate will be used. • Substituted Work: for varied work similar to an item in the contract but with different characteristics; like sub-base placing at Junctions. • Change of Circumstances: for varied work due to change in circumstances; like working seasons (from Summer to Winter), working in difficult social and environmental situation than anticipated. • Major Change in Quantity: Occurrence of appreciable quantity variations (increase or decrease) that affect the OH element of the bill rate. • Entirely new type of work: This is a varied work with a completely new items. In this case as far as practicable the tender rate will be used as a base for building a new rate.

27. 1.4 Payment…..Cont’d 1.4.3 Fluctuations • Fluctuation is the rise or fall of the prices of construction inputs; like material, labour and/or equipment during the course of construction. • In longer time contracts, the risk is allocated mostly to Clients using a prescribed formula. Base/Current indices or prices. • Any change in legislation after the contract could be considered to adjust the price of the contract by reimbursing the contractor with an equal amount • What if the price of an input that has not been identified as adjustable material increases substantially?

28. 1.4 Payment…..Cont’d 1.4.4 Retention Money • The main purpose of retaining a certain percentage of the certified sum from each IPC is for the employer to guarantee for the rectification by the contractor of any defects observed during the performance of the contract but completed and certified section and during the defect liability period. • Could be replaced by an Unconditional Bank Guarantee. • Performance Bond could not be used alternately for rectification of defects.

29. 1.4 Payment…..Cont’d 1.4.5 Provisional Sum and Prime Cost Sum • Provisional Sum • are used for work that has not been finalized or for costs unknown at the time the contract is prepared. • Does not necessarily imply any obligation on the part of the employer to spend them. • The contract administrator must issue instructions to spend these sums. • Prime Cost Sum • For works by specialized firms like, nominated sub-contractors that usually have been selected prior to the main contractor. • the contractor has no control over the pricing of this work, • Prime cost is taken to mean that the contractor will be fully reimbursed for any valid expenditure.

30. 1.4 Payment…..Cont’d 1.4.5 Liquidated Damages and Penalty • Liquidated Damages – a genuine covenanted pre-estimate of loss. • Claimed without proof of loss • There is no bar to limit a genuine pre-estimate loss in non-commercial projects. • When to challenge the Employer on the excessive amount of LD? • How it is calculated? – usually the maximum to be recovered between one third and two-third of the Contract Period • Penalties– to force the contractor to complete in terrorem. • It is intended to penalize the defaulted party • Can excessive liquidated damage amount be considered as penalty? • Does the court interfere in the commercial bargains struck by the parties?

31. 1. Contract Admin…..Cont’d 1.5 Risk Management Risk is an uncertain event or condition that, if it occurs, has an effect on at least one project objective Stages of Risks • Plan Risk Management • Risk Identification • Risk Analysis (Qualitative and Quantitatively) • Risk Response (Retention, Avoiding, Transfer and Mitigation) • Monitor and Control Risks

32. 1.5 Risk Management...Cont’d Four ways of Tackling Risks in the Construction Industry • The Umbrella Approach: Allow every possible eventuality • The Ostrich Approach: Assume everything will be alright • The Intuitive Approach: Trusting once intuition and gut feel • The Brutal Force Approach: focus on uncontrollable risks and try to force to be controlled- cannot. 1.6 Quality Assurance and Quality Control

33. 2. Construction Claims 2.1 Definition • Claims in construction contracts are a mere request for contractual remedies mainly by the contractor. • These Remedies could be either Monetary compensation for damage or time required to complete the remaining works. • Why practitioners in the construction industry, mainly Employers and Consultants, are frightened of the term “Claim”? • Could it be avoided? • Could it be minimized?

34. 2. Construction Claims 2.2 Basis of Claims • Contractual Claims – Based on the terms and conditions in the contract • Claims for Breach of Contract - Based on the general law of the contract • Extra-Contractual Claims – Due to negligence • Quantum Meruit Claims - a reimbursement claims for the work executed through a reasonable sum • Ex-Gratia Claims– Payment without obligation

35. 2. Construction Claims 2.3 Types of Claims 2.3.1 Extension of Time Claims 2.3.2 Financial Claim • Disruption Cost • Prolongation Cost

36. 2.3 Types of Claims…. Cont’d 2.3.1 Extension of Time Claims • Purpose of Extension of Time Provision • To preserve the Employer’s right for Liquidated Damages • To retain a defined time for completion • To give the contractor relief from his strict duty to complete on time in respect of delays due to neutral events • Time for granting of Extension of Time • Contractor’s opportunity to re-programme • Constructive acceleration – due to failure to give EOT within a reasonable time

37. 2.3.1 Extension of Time …. Cont’d • Time at large • Time would be set at large mean the contractor would be forced to complete the works within a reasonable period of time and the Employer could no longer rely on the application of Liquidated Damage. • The only remedy for the Employer is to justify the unreasonableness of the Contractor’s time for completion of the works and solicit un-liquidated damages/ General damages. • Time would be set at large where • Where there is no Completion date under the contract • Where there is no power for the employer to extend time • Where there is no Contract • Where the provision for extension of time have not been properly administered; have been misapplied, or have not been utilized

38. 2.3.1 EOT Claims…. Cont’d • Relevant Events • Force Majeure • Adverse Weather • Possession of Site and Access • Late issue of drawings • Variation and extra works • Civil Commotion, Strikes • Unforeseen Physical Conditions • Causation and Concurrency • Rules for EOT • EOT when in culpable delay

39. 2.3.1 EOT Claims…. Cont’d • Programme, Method Statement • Delay Analysis For the extension of time to be granted to the contractor, a three-part chain of causation has to be proved first: • An Employer’s Risk Event must occur; • The event must cause a delay to progress; and • The delay to Progress must have a knock-on-effect on the completion date. • Methods of Delay Analysis • Measured Mile Technique (affected by disruptive events Vs Unaffected of the same operation) • As-Planned Vs As-Built windows analysis

40. 2.3.1 EOT Claims…. Cont’d In any claim for an extension of time, it is good practice to include the following: • a description of the cause of delay and the contractual provision which is being relied upon for the extension; • the date when the delay commenced and the period of delay (giving details of intermittent effects, if appropriate); • the date of notice of delay, specifying the reference of the relevant document; • a summary of records and particulars relied upon (with copies included in an appendix); • a narrative of the events and effects on progress;

41. 2.3.1 EOT Claims…. Cont’d • a diagrammatic illustration showing the status of the programme, • progress and current completion date prior to the commencement of the delay; • a diagrammatic illustration showing the effects of the delay on progress and the completion date (including subsequent delays which may have reduced the float in the programme); • a statement requesting an extension of time for the delay to completion for the period shown on the submitted illustrations.

42. 2.3.1 EOT Claims…. Cont’d EOT Claim Presentation/ Contents • Introduction: contract particulars (like, Names of the parties; description of the works, Basic Contract Data, etc.) • Summary of facts(summary of applications for EOT; EOT awarded; summary of claims submitted; final account and claims assessed (if any); amount of latest certificate and retention; payments received; liquidated damages deducted (if applicable), etc.). • Basis of claim(Contract provisions relied upon; Civil law provisions; contractual analysis and explanation of the basis of the claim) • Details of claim (Full details of every matter, Key dates, events, causes and effects, etc.) • Evaluation of claim(calculate, step by step, with explanations and reasons for the methods • Statement of claim claimant's alleged entitlements and relief sought

43. 2.3 Types of Claims…. Cont’d 2.3.2 Financial Claim • Disruption Cost • Changes of sequence of works/ or out-of-sequence of works • Working on piecemeal basis mainly due to late removal of obstructions, late issue of drawings, etc. • Delay to individual activities that affect or disrupt other activities that share similar resources. • Disruption is loss of productivity, disturbances, hindrances or interruption of progress which in other words mean that it is the difference between an intentions and reality as to productivity

44. 2.3.2 Financial Claims…. Cont’d • Prolongation Cost • Prolongation is the continuous existence of the parties on the project site for a longer period of time beyond the original time for completion. • prolongation cost is the actual cost contractors incurred as a result of remaining on the project site for extended period beyond the time for completion. • prolongation cost primarily comprise the contractor’s extended use of time related resources, notably its site overheads, head office overheads and other financial charges like bonding, insurance, etc.

45. 2. Construction Claims …. Cont’d 2.4 Monitoring Delay and Disruption Claims: Prevention • Contracts administration • Possession of site: commencement • Pre-commencement meeting • Regular progress meetings • Instructions and drawing issues • Site instructions: verbal instructions • Programme and progress • Notice: records and particulars • Delays after the contract completion date • Minimizing exposure to claims: prevention

46. 2. Construction Claims …. Cont’d 2.7 Avoidance, Resolution and Settlement of Claims 2.7.1 Claim Avoidance The three most important lessons in construction contracts are: • The importance of Records • The importance of Records; and • The importance of Records i) Records • Types of Records • The Tender, • Preliminaries, • Measured or Specified Work, • Specification and Drawings,

47. Types of Records ... Cont’d • Master Work Programme, • Updated or amended Programmes, • Variation Orders, • Notices and Warnings, • Extension of Time Granted, • Cost Records, • Correspondences, • Records of Site Meetings, • A resource allocation sheet, • Site Diaries and • Photographs.

48. i) Records ... Cont’d • Contemporaneous Records are the sources for evaluating, supporting and successfully defending the issues of cause and effect in a delaying and/or disrupting events. These records shall be kept to ensure that they are: • Contemporaneous with the event • Made by or based on information from persons with knowledge of the event; and • Sufficiently detailed to permit a third person to reconstruct project activities solely from them

49. 2.8 Disputes Resolution Mechanism 2.8.1 Amicable Settlement • Contracting parties discusses their differences around the table and mostly the Engineer act as a mediator. • The Engineer during this time will guide the parties to focus their point of discussion on their differences and summarizes their points of agreements. • the speedy and cheapest dispute resolution technique • Could be conducted at any time; while the case is in adjudication, Arbitration, Litigation, etc. 2.8.2 Adjudication • Like Arbitration Tribunal, it could be a one man (DRE) or three persons panel (DRB). • The DRE can only see one case at a time and cannot see the same case again. • The adjudicator’s decision; whilst binding, is only so until the original dispute is finally determined by other means.

50. 2.8 Disputes.. Cont’d 2.8.3. Mediation and Conciliation • Both are a dispute resolution processes that may or may not result in dispute being resolved. • Both must be absolutely independent of the parties to the contract • Both must talk with each party separately without disclosing any information discussed with the other party. • Establish a common platform for the parties and shall bring the disputed parties for an open discussion upon his guidance. • The only substantive difference between them is the conciliator make a recommendation at the end of the process.