Using construction contracts to achieve dispute prevention requires the use of some inventive concepts. These include:
A. Equitable risk sharing
B. Innovative project award and delivery systems
C. Economic price adjustment
D. Constructability analysis.
Implementing some or all of these concepts is often viewed by owners as additional project cost. However, the benefits that owners obtain from these concepts often far exceed the cost. Important questions that arise on every project that should be addressed by the project participants include:
(a) Are we employing the appropriate project delivery system?
(b) With many project participants, how do you keep misunderstandings to a minimum?
(c) How should project risks be allocated?
A. Equitable Risk Sharing
As a guiding principle of risk allocation, the parties involved should seek a multi-beneficial distribution of risk. Equitable risk allocation is based on having fair project contracts understood by everyone. As a means of promoting the equitable distribution of construction risks, the following contract ideas are being put forward. Some of these ideas may seem extreme to some, depending upon one's position in the construction process. It is not suggested that these ideas represent a panacea for the construction industry. They are put forward for consideration and implementation if they are appropriate to a particular project situation.
B. Innovative Project Award And Delivery Mechanisms
1. Negotiated Cooperative Process. A new bidding method for earthwork and tunnelling projects is suggested, which divides the contract award into three steps as follows:
(a) The selection of contractors. The owner and the consultant qualify interested contractors.
(b) Joint decisions. The selected contractors meet with the owner and the consultant to jointly decide on the best type of equipment to be employed on the project. This is important in pricing earthwork and tunnelling jobs. In addition, other possible issues critical to the execution of the project are also discussed, including geotechnical reports which are reviewed and jointly interpreted.
(c) Awarding the contract. Each contractor presents a bid based upon the criteria agreed upon in the previous steps of the process. The owner then awards the contract.
The benefit to the three-step bidding system described above is that it provides a more balanced distribution of project risk, since some of the equipment and other uncertainties are reduced. The joint decision aspect allows for significant savings during submittals and start-up for all parties. It limits problems associated with equipment, productivity and schedule sequencing during construction.
C. Economic Price Adjustment
This concept allows for controlled price escalation during the life of a project. Fixed price contracts are the most prone to claims. This is particularly the case for complex design projects which have a construction duration in excess of two or three years. In this context, contracts would set a limit on the price escalation to be carried by the contractor, in the absence of clear and exclusive default by the contractor, leaving anything above that amount to the owner. This way, if costs increase significantly during the life of the project, the contract contains a formula and the conditions for compensating the contractor, potentially eliminating or reducing the need for claims.
D. Constructability Analysis
This is often referred to as "value engineering." This is a way of reducing disagreements and disputes based upon contract ambiguities. This analysis is performed during the planning, design and procurement phases, and can mitigate problems and claims during construction. Analysis is often performed by a contractor's representative who liaises with the project consultant, or by an independent construction expert consultant engaged by the owner to interact with the project consultant.
This process can identify errors, omissions and impractical design details which, if later uncovered by the contractor or supplier, would result in additional cost, delays to the project and possible litigation.
Future articles in this series will discuss incentive programs, cost and schedule controls, as-built schedules, forward-price change orders, impact claim deadlines on change order cost quotations and construction contract negotiation training.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
