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
(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
(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
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
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.
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Russell v. Township of Georgian Bay provides a useful reminder of the fact that while municipal officials sometimes appear to hold all of the cards in disputes with home owners, that is not always the case.
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