Reducing Risk of Claims on Construction Projects
The construction industry is notorious for claims but there are ways in which the risk of receiving one can be significantly reduced.
Formation of the Contract
Contracts allocate a balance of responsibility, risk and reward. When dealing with the contractual arrangements consideration should be given to the following:
- Letters of intent are contractually binding documents and it is therefore prudent to take legal advice when drafting or accepting them. Agreeing the terms of the contract can be a long process of negotiation. Letters of intent are often used to prevent delay to the start of project. It is generally intended that a formal contract will be entered into at some point in time future. Provided the terms of the building contract are eventually agreed there is usually no problem. However, disputes often crop up over the meaning of letters of intent where works have progressed under them and no formal contract has been agreed.
- When drafting and signing any contract document ensure that it is well drafted and easily understood. Be aware that if you do not understand part of it, this may also be the case for both the other party and a Judge.
- Give consideration to what is the most appropriate procurement method. For example, a design and build route may not be advisable if it is anticipated that there will be several changes during the construction process. The nature of design and build projects is such that changes tend to be disruptive to the contractor and cause a relatively high price for the employer.
- Allocating risks and responsibilities to the other party will reduce your burden. However, be aware that the other party is likely to price the risk and therefore the greater the risk you transfer you transfer, the greater the cost to you.
- The project team should be familiar with the details of the contract so that they are fully aware of their obligations.
- As the works progress, make certain that the procedural requirements under the contract are followed. Amongst other things this means issuing all necessary notices. Do not fall into the trap of thinking that such formalities are unnecessary simply because you have a trusting relationship with the other party.
Design Issues
- Establish what the level of design responsibility is. Architects and Engineers are generally expected to carry out their design ‘with reasonable skill and care’ but with design and build contractors there may an implied term imposing the much higher design responsibility of ‘fitness for purpose’. Some standard forms of contract expressly provide that the contractors design responsibility is the lesser standard of ‘reasonable skill and care’. Anyone with a design responsibility should also consider the terms of their Professional Indemnity Insurance which is not likely to provide cover for ‘fitness for purpose’.
- Entering into a contract and commencing construction based on a design that is incomplete can significantly increase the risk of problems arising. Such problems invariably lead to delays, disruption and therefore increased costs.
- Inappropriate and poor quality designs give rise to defects and alterations. This in turn creates costs and often claims.
Record Keeping
Max Abrahamson in his book ‘Engineering Law and the I.C.E. Contract wrote:
“A party to a dispute, particularly if there is arbitration, will learn three lessons (often too late): the importance of records, the importance of records and the importance of records.”
This theme of ‘records, records, records’ has been repeated many times but it is still an issue which companies seem to struggle with. More often than not claims for delay and/or disruption involve a very complex series of facts and the burden of proof invariably rests on the claimant. It is therefore the Contractor or Sub-Contractor who must keep the necessary records to evidence both the delay and the cause of delay.
Max Abrahamson continued:
“It is impossible to exaggerate the extent which lawyers can find unexpected grounds, often quite real, on which to cast doubt on evidence if it is not backed by meticulously established records. It must also be remembered that the arbitrator will know nothing about the history of the works, which must be reconstructed for him with all the complexities and nuances, from the records available”.
Examples of the type of records a contractor should keep include:
- Contract programme
- As built programme
- Progress photographs with dates when taken
- Video footage
- A copy of the agreed contract
- A full set of correspondence
- Variation orders and site instructions
- Minutes of meetings
- Drawings (including all amendments)
- Drawing registers
- Requests For Information (RFI’s) and responses thereto
- Daywork sheets
- Daily allocation sheets
- Site diaries
- Diaries and notebooks kept by individual project personnel
- Records of key telephone conversations
- Subcontractor information (including correspondence and accounts)
- Labour and Plant returns
- Schedule of Material deliveries
- Labour, Plant & Material cost information (including copy invoices)
- All other accounts information
- Details of head office staff involvement
The more records kept the better and one should remember it is not just a case of keeping these records up until practical completion of the project. The minimum period that records should be kept is six years and if the contract is signed as a deed or under seal records should be kept for the applicable limitation period.
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