MARKET TALK: Rebalancing the construction risk
Project clients and contractors will benefit from increased collaboration and more balanced contracts
|Q&A with Asel el-Housan, founder and head of commercial and contracts at AEH Consultancy|
What are the biggest opportunities to improve GCC construction?
In this region, construction employers often try to pass on most of the project’s risk to the contractors. This creates an unbalanced contract where contractors are forced into a ‘take it or leave it’ situation and the employer will always find a contractor that has failed to assess the risk and submitted a low-price bid.
Contractors cannot and will not survive the delay in payments without being able to slow down the rate of progress or stop the works. The liquidated damages shall be capped, and the variations and claims are to be assessed in a timely manner.
The worst position for an employer is to be in a partnership with a contractor that has nothing to lose. The contractor should be allowed to make money to ensure the successful completion of the project.
Unfortunately, in this market, you find employers that go to the cheapest contractor regardless of whether the project price is right or wrong.
How should construction change to readdress this imbalance?
The most important factor is to keep the project in cash positive status by releasing the payments on time. Payment terms should not be prolonged, in order to ensure that the contractor can execute the job successfully. Design issues should be taken into consideration because of their severe impact on the project’s progress.
Projects often begin while the design is still under development. You can start some phases (such as enabling and piling) before the full design has been completed, but you cannot develop the design while the project is under construction. We also frequently face an uncoordinated design, which leads to delays, and numerous claims and variations.
Do you think building information modelling (BIM) is an important potential catalyst for change?
With BIM coming on board in the design stage, I believe most of the design coordination issues will be resolved. This will directly impact the project’s cost and timely completion.
It is just the start for BIM, and it will open many doors for a big improvement in construction methods, such as the use of 3D printing. Project sensoring will directly affect the planning and allocation of project resources. This will increase workforce safety and productivity.
Will we see the increased use of arbitration to resolve disputes?
With the new arbitration law introduced in the UAE in June 2018, Dubai will become a more arbitration-friendly place. Arbitration will be accepted more as we can expect a rising demand for it. This will increase the use of arbitration as an alternative dispute resolution method. In addition, I would like to see adjudication become part of the construction dispute resolution regime, with the adjudicator’s decision recognisable and enforceable by the courts. This would allow disputes to be sorted out swiftly, and bring more fairness and balance to contracts.
What are the barriers to change in the construction industry?
Employers have to change their mindset. They need to adapt a more open approach to partnership with the contractor, such as sharing a risk register where all parties contribute to assessing, monitoring and managing the risks. The contractor should be selected based on qualifications, not only on price. Project completion should be the target at all times, with all parties pushing to complete the work on time and within budget.
While the employer must build a partnership relationship with the contractor, and ensure timely payments, variations and claims, the contractor should also take responsibility for reading, negotiating and administering contracts properly.
How significant are the amendments made by Fidic to their new contracts?
The fact that 90-95 per cent of contracts in this market are Fidic, or based on a Fidic form of contract, means people are familiar with their clauses and content.
The original Fidic books are balanced and fairly allocate risks to the parties. The books are written by engineers for engineers, so are not only easy to understand but also share the same mindset.
In December 2017, Fidic launched a new edition of the rainbow books: the Red Book for Construction Works; the Yellow Book for Plant and Design Build; and the Silver Book for EPC Turnkey Projects.
They took a more advanced approach to project management in terms of the Quality Management System and the Compliance Verification System.
To change the viewpoint that the claim is a dispute, two separate clauses are now provided for claims and dispute resolution. In the 1999 edition, Fidic introduced the employer’s claim principal, where the employer is required to submit a claim that is evaluated, determined, then certified by the engineer. This change eliminated the employer’s power to make any deduction from the certified amounts.
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A further improvement in the 2017 edition is the provision of one procedure for the employer’s and the contractor’s claims with the same time bar. The engineer has a time bar for agreement or to issue its determination of the variations and claims.
What are the key issues to consider when negotiating a Fidic contract?
It is essential to understand the deviations from the original Fidic books. You must negotiate your risks, such as payment terms.
An important aspect to take into consideration is the bank guarantees – they should not be open- ended, unconditional or on demand. You should understand the consequences should a risk eventuate.
What are the consequences if you do not get paid? What are the consequences of not having determination of your variations or claims? You should ensure you will get an on-account payment even if the claim or variation is not determined or agreed. What are the caps of the contractor’s liabilities? The dispute resolution mechanism, effectiveness and efficiency should be reviewed.