Tuesday, June 21, 2005

Construction Claim & Dispute Resolution-2


Construction companies and projects in Malaysia have a track record for completing late and over-budget. Too many projects, particularly, in the public sector, had shown overrun in time and many claims and disputes are related to delay and/or disruption.

There seems to be a lack of know-how and knowledge of the method by which delays may be demonstrated to have occurred or by which the time element of such delays could be clearly related to their causes and the financial impact of such delays and/or disruptions. All too often the aggrieved contracting party who are preparing the time analysis do not understand the legal implications and requirements, and they leave it to their lawyers to handle their grievances, in the hope to receive a just compensation and award. Unfortunately, these lawyers may not really understand construction methodology and logical acceptable planning techniques, which are being used.

Typically, these contractors would make a number of complaints of many things, which were purported to have delayed or disrupted his works or programmes, such as the amount of variation works, the timing of instructions, changes to the scope of works, the delay or lack of information necessary for the implementation of the project.

Very little information about the facts of the delays could be produced and little explanation could be offered of how the relationship of the change which were alleged to have occurred were said to have affected the time or cost for performance of the works. The project architect or engineer would then analyze the claims submitted by the contractors and they would often perused them on a global basis without any systematic or logical analysis of time or the effects of the events on costs.

Delay and Acceleration Claim

Delays and acceleration issues in contract disputes are probably the most complex issues in contract claims. The complexity arises mainly due to the factual criteria of assessment of whether an issue is excusable or nonexcusable, whether the issue occurs in isolation or concurrently, or as a serial result of one or a combination of excusable or nonexcusable issues.

In the event of a delay, to establish an entitlement to time extension and delay damages, it must be substantiated that the delay impacted the contract completion date and that loss and expense had been incurred arising therof from the instructions which caused delay. The cause-and-effect relationship must be identified, quantified, and supported by contemporaneous documentation. Having established entitlement, alleged damages must be substantiated and supported by project records.


The rights for entitlement to extension of time and/or for loss and expenses incurred resulting directly or indirectly from the purported delay for reasons beyond the control of the contractor, is usually incorporated in the contract clauses pertaining to time extensions, variation, S.O. Instruction, and Loss and/or Expense. Contract must provide the power to the S.O. to extent time if the cause of the delay is attributable to actions or inactions beyond the control of the contractor. The variation clause also empower the S.O. to instruct changes which the contractor must comply and provides that any lawful instruction for change shall not vitiate the contract. The extension of time clause empower the S.O. to address the time extension by specifying that the contract time are to be adjusted as a result of changed instructions. A direct relationship must be established between the change instruction, the delay, and the contract completion date. If the relationship becomes difficult to establish or is nonexistent, a dispute may arise.

When analyzing delay, it is necessary to determine the cause of the delay, which would require it to be supported by contemporaneous documents. Delay issues are generally classified as follows:

  1. Excusable compensable delay – delay that is within the control of the owner and provides for a contract time extension and compensation to the contractor.

  2. Excusable non-compensable delay – delay that is beyond the control of the owner and the contractor. In this case, the contractor is entitled to time extension but not entitled to compensation (loss and/or expense).

  3. Non-excusable delay – delay that are within the control of the contractor (culpable delay due to the contractor’s own fault). Should the contract completion be exceeded, the owner will then impose the liquidated damages clause as provided in the contract.

Classifying delays are complex and difficult as delay may be such that the owner and contractor are each responsible for delaying different activities during the same or overlapping time periods, and both of these activities may be critical to the completion of the project as a whole.

Complexities in resolving delay entitlement are further increased when the serial effect of a delay is considered. For example, if work has been delayed by an excusable compensable delay and was rescheduled to a time where a strike occurs, the delay resulting from the strike could be argued as compensable. But if the same work was delayed by a non-excusable delay, the argument that the contractor is not entitled to a time extension would exist.

Entitlement analysis is usually based on the identification and quantification of excusable delay issues. But it must also be determined, however, whether a non-excusable delay is concurrent with the excusable delay or by itself impacted the contract completion date. Documenting and proving impacts to the contract completion date are critical to supporting entitlement to time extension and damages claims.

Generally, one of the primary requirements for entitlement is written notice. The notification requirement provides the notified party with the opportunity to review the condition and take action to resolve or mitigate its impact. In the absence of notification, project documentation may be the source to prove knowledge of the issue (that both parties are aware of the issues), thus waiving the written notification requirement.

Loss and/or Expense Claims

Claims for loss and/or expenses for delay and disruptions are often subject of disputes and therefore, it is necessary to understand the theories of damage recovery.

Owner’s damages regarding delay are usually specified and defined as Liquidated Ascertained Damages (LAD) in the contract agreement. It is normal practice in construction contracts that the owner and contractor agree to provisions fixing in advance at the time of contract, what sum will be payable by way of LAD in the event that the contractor could not complete by the stipulated time, and without excusable reasons. When the breach is committed, then the contractor is prima facie liable for the sum stated in the contract (appendix to the contract). The contract must have a completion date inserted to define a definite date to act as a starting point and a definite end date. If the completion date has passed due to the culpabaility of the owner for which no extension of time can be granted, the owner’s right to LAD will be lost.

Generally, if the contract documents stipulate LAD, owners cannot purport to seek recovery of unliquidated or other consequential damages or loss. Liquidated damages are defined as an agreed sum of monies, usually represented as a daily amount. The amount must represents the estimated cost to the owner of not having the contract completed on time. Liquidated damages must be shown to represent a genuine pre-estimate of the owner’s anticipated damages arising as a direct result of the delay in the project completion caused by the contractor’s failure in performance. It is important that the liquidated damages represent a reasonable attempt at estimating the real damages, or these damages may be interpreted as a penalty, which is not enforceable by the court. To be valid and enforceable, the estimate must be prepared at or before the time of contract award and must represent a fair and reasonable compensation. Liquidated damages will not be enforceable if it is proved that the owner did not suffer actual damages because of the delay (see: Selva Kumar v Thiagarajah). The same principle applies to liquidated damages that have been set too high. Clauses providing for actual damages to be paid to the owner require the owner to itemize and substantiate its claim for such damages. The itemization and substantiation includes providing records of the costs that were incurred as a result of the delay.


Contractors seeking recovery for delay damages may include impact costs such as loss of efficiency and extended general conditions. Efficiency losses are the result of work disruptions, rescheduling and stacking of trades, and performing work in unanticipated conditions. General condition costs claimed for the delay period include extended overheads and administrative expenses, site supervision, management, construction equipment, site office and site facilities, monthly operating costs and similar items.

To recover the costs of labor efficiency requires the contractor to establish the progress it expected to achieve with its use of anticipated resources, substantiate the cost required to achieve the actual progress, and prove that the increase in costs is related to a compensable delay issue. An effective approach to establishing the extent of efficiency losses is to show what productivity was realized on the project during periods of no disruptions or other impact. This is then compared with the productivity realized during the period of dispute.

To recover the damages due to extended general conditions, the contractor must substantiate the cost by itemizing the expenses expended during each delay period. If the period cannot be isolated, it may be necessary to determine the costs for general conditions for the project duration and use an average daily rate.

Similarly, the contractor is also entitled to seek recovery for its office overhead and administrative expenses. The theory is that the contractor was required to maintain its overhead expenses while not receiving expected contract revenue during the delay period.


Claims for acceleration costs is another complex issue and is generally classified into two type:
  1. Actual acceleration
  2. Constructive acceleration.

Actual acceleration is experience when the contractor is directed by the owner to complete the work earlier than the contract completion date. Constructive acceleration exists when:
  1. A delay existed that was excusable and warrants a time extension;
  2. The owner refused a time extension request;
  3. The contractor performs in an accelerated method as a result of the owner’s instruction;
  4. The contractor incurs additional costs as a result of accelerating its work.

The entitlement to acceleration costs is dependent upon which party was responsible for the project delay at the time acceleration was required or directed. If it is determined that the contract completion date will not be met, the owner may direct the contractor to accelerate its work and meet the contract completion date.

If the owner is responsible for the delay resulting in the completion date not being met, then the acceleration is viewed as compensable to the contractor. If, on the other hand, the contractor has caused culpable delay to the contract completion date, and the owner then directs the contractor to accelerate its work, the costs associated with the acceleration are against the contractor.

The owner may not order an acceleration of the progress of the works or require the contractor to put in extra or additional resources without the attendant risk of such additional costs, loss and/or expense to the contractor in so obeying the owner’s instruction to be borne by the owner [Sundra Rajoo p.213].

Costs of acceleration may include premium pay such as shift differential and overtime, additional resources applied (labour, material, machinery and equipments), loss of efficiency, additional overheads and administrative expenses. To assess the entitlement, a cause-and-effect analysis needs to be undertaken.

Claims for Delay or Disruption

Contractor ‘s claim for delay and disruption are commonly brought under these heads:
  1. Increased preliminaries
  2. Overheads
  3. Loss of profit
  4. Loss of productivity or uneconomic working
  5. Increase cost from inflation
  6. Interest for non-payment of money

It is not the function of the courts where there is a breach of contract knowingly…to put the plaintiff in a better financial position than if the contract had been properly performed.


No comments: