Measures Addressing Delay And Cost Overrun Risks In Construction Projects

Introduction

Common causes of project failure, project abandonment, strained business relations, and lack of returns on investments include delays and cost overruns. Many construction projects, including the “Ajaokuta Steel Complex”, the “Bayelsa Tower Hotel”, the “Minna Five-star Hotel”, and the “Rivers Monorail Project”¹ have been ensnared by delays and cost overruns.

Cost Overruns occur when budgeted funds are insufficient to cover the actual expenditures on construction projects. Delays encompass obstacles or hurdles that disrupt the estimated timeline of the project. Some factors contributing to Delays and Cost Overruns in construction projects include poor contract management, inflation and market changes, fraudulent practices, design changes, inaccurate cost estimates, mistakes during construction, changes in weather conditions or site conditions, mistakes and discrepancies in contract documents, paucity of funds and materials² , and change of government.

The resultant effects are time overrun, total abandonment, and disputes. It is therefore imperative that contracting parties address delays and cost overruns in construction agreements from the outset. This article aims to address this situation by providing remedies that parties should negotiate before signing project construction agreements thereby giving the project viable options where delay or cost overruns become inevitable.

In the event that a construction project is plagued by delays and cost overruns, there are measures available to address the impact of these factors. The measures available to the parties are discussed below, although not exhaustive.

The measures in issue fall into four classes: steps before signing; (dis) incentive clauses; enforcement steps; and claims for money.

A. Steps Before Signing

1. Pre- Contractual Risk Assessment:
   
   Prior to the inception of a project, it is essential that the parties carry out an assessment of the risks attending it. A thorough risk assessment process involves identifying, analysing, and prioritizing potential risks that could lead to delays or cost overruns.³ By taking this proactive step, parties to a project can include techniques for risk management and mitigation in their project plans. This would help mitigate the effect of delays and cost overruns where these becomes inevitable during the life of the project.
   
   
2. Change Order Management and Contingency Planning
   
   Change orders are a common source of delays and cost overruns in construction projects, as they modify the existing construction contracts, affecting the costs and timelines of the project.⁴ A robust change order management process helps control unnecessary changes to the project scope and associated cost increases by providing clear procedures for requesting, evaluating, and approving changes, assessing the impact of proposed changes on the schedule and budget and the proper documentation of all changes. 
   
   Contingency planning involves setting aside resources (time and money) to deal with unforeseen circumstances⁵ . This helps absorb minor delays and cost overruns without significantly impacting the overall project⁶ . Effective contingency planning sets realistic contingency allowances based on risk assessment defining how and when contingency funds can be used, and regularly reviewing and adjusting contingency allowances as the project progresses.

B. (Dis)[I]ncentive Clauses

1. Cost-Plus Contracts with Guaranteed Maximum Price (GMP):⁷
   
   This is commonly used in construction and other projects where there is a need to manage costs and mitigate the risk of cost overruns. The GMP is the maximum amount that the employer or project owner will pay for a project. Cost-plus contracts, also known as cost-reimbursement contracts, are a type of contractual arrangement where the contractor is reimbursed for the actual costs incurred during the performance of the work.
   
   Cost-Plus Contracts with a Guaranteed Maximum Price (GMP) combine elements of both cost reimbursement and fixed-price contracts, offering a structured approach to managing costs while providing flexibility to address delays and cost overruns. That is, the contractor is reimbursed for the actual costs incurred during construction (including materials, labour, and overheads) plus a fee (typically a percentage of costs or a fixed amount)⁸ , which is the Guaranteed Maximum Price. This provides flexibility for changes in project scope or unforeseen conditions. Changes are typically handled through formal change orders, with adjustments made to the Guaranteed Maximum Price as necessary. This flexibility can help address delays caused by scope changes or unexpected challenges during construction.
   
   
2. Performance Incentive/Disincentive Clauses:
   
   These clauses motivate parties to fulfill their obligations on time and within the budget. Performance incentives are rewards for early completion or cost savings. Disincentives are penalties for delays. Although it is arguable that incentives are additional costs to projects, nonetheless, they do encourage the early completion of construction projects. 

C. Enforcement Steps:

1. Termination Clauses:
   
   Termination clauses outline the conditions under which a party may terminate the contract due to delays or cost overruns. While a severe remedy which should be used cautiously, termination clauses often provide for a “cure period” to allow the defaulting party to rectify the breach. These clauses often require notice, but upon termination the defaulting party may be liable for additional costs incurred by the non-defaulting party to complete the project.
   
   
2. Dispute Resolution Clauses:
   
   Dispute resolution mechanisms such as arbitration, mediation, or conciliation are commonly included in project contracts to resolve disputes arising from delays and cost overruns. These alternative methods are preferred for their efficiency and flexibility compared to traditional litigation. Some interesting considerations are:
   
   
   1. Expert Resolution: This is a voluntary alternative dispute resolution process that involves an expert in the field acting as a neutral third party to help parties resolve their dispute. A dispute may be referred to expert determination by means of a pre-existing agreement or on ad hoc basis⁹ . The Lagos Chamber of Commerce International Arbitration centre has rules for expert determination, but there is as as yet no significant Nigerian case law on it. This form of alternative dispute resolution is advantageous as it brings the specialized knowledge of a neutral party who will relate to the circumstances of the dispute between the parties. There is no Nigerian statute on expert resolution.
   2. Adjudication: In this process, an adjudicator evaluates the dispute between the parties and issues interim decisions to guide them until a final resolution is reached through arbitration or litigation, except where the parties agreed in their contract to accept the adjudicator's decision as final and binding for all purposes. Adjudication is particularly valuable in construction and engineering projects, where timely decisions are crucial to maintaining progress. In Nigeria, where there is currently no established legal framework for adjudication, contracting parties often include adjudication provisions from the International Federation of Consulting Engineers (FIDIC) Books in their agreements. This incorporation not only helps ensure a structured approach to resolving disputes but also provides a mechanism for addressing issues quickly and efficiently, minimizing delays and disruptions in project timelines. By utilizing FIDIC provisions, parties can benefit from a recognized and effective adjudication process, fostering better collaboration and understanding throughout the project lifecycle.
   3. Commercial arbitration: This structured process allows parties to resolve commercial disputes with the assistance of neutral arbitrators instead of through the court system. This type of dispute resolution involves commercial entities and is not limited to any specific class of contractual disputes. It addresses issues arising from a wide range of commercial transactions and relationships, including contractual disputes, partnership disagreements, and trade issues. The arbitration process is often tailored to meet the specific complexities of the business environment. Arbitration can take various forms, including institutional arbitration—where established organizations provide a framework and support services— and ad hoc arbitration, which allows parties to create their own rules. Institutional arbitration typically includes administrative assistance, enhancing efficiency, while ad hoc arbitration offers greater flexibility. Regardless of the method, arbitration emphasizes confidentiality, expertise, and the preservation of business relationships, making it the preferred choice for many commercial disputes. In Nigeria, this process is incorporated into agreements and governed by the Arbitration and Mediation Act, 2023, except the parties agree otherwise.
   4. Mediation: This is a dispute resolution process in which a neutral third party, known as a mediator, assists disputing parties in reaching a voluntary agreement. The process begins with an agreement to mediate, typically included in the contractual document, followed by the selection of a mediator with relevant expertise as specified by the parties. In the premediation phase, the mediator may meet individually with each party to understand their concerns well. During the mediation session, the mediator facilitates dialogue, promoting open communication and negotiation to explore potential solutions. A mediator has no power to impose any given outcome on the parties. If an agreement is reached, the mediator helps draft a binding document outlining the terms. Characterized by confidentiality, flexibility, and informality, mediation is increasingly favoured as an alternative to litigation for resolving commercial and civil disputes in Nigeria and is generally governed by the Arbitration and Mediation Act, 2023.

D. Claims for Money

1. Liquidated Damages:
   
   These are pre-determined sums that the contractor agrees to pay where there is a breach of contract or delay in achieving given milestones within the agreed timelines. It is monetary compensation paid to the project owner or Grantor of a concession affected by the delay by establishing a reasonable estimate of damages beforehand, thereby avoiding lengthy litigation over determining the extent of the actual losses. This remedy provides certainty for the parties by deterring delay and simplifying the process of recovering damages. The pre-determined amount is typically calculated per day/week of delay and must be a reasonable pre-estimate of the actual loss. Parties should ensure that this clause is carefully drafted for its enforceability by ensuring pre-determined estimates are not punitive but genuine and reasonable, as excessive amounts may be deemed unenforceable by the court upon review.
   
   
2. Indemnity Clauses:
   
   Indemnification clauses are contractual provisions used to allocate risk to a party whose actions have, or failure to act has, occasioned financial loss to the other party. The scope of the indemnity varies depending on the contract. As a remedy, indemnity clauses can be tailored to address cost overruns and delays by specifying the indemnity triggers, detailing the extent of the indemnity, and specifying the process, documentation, and money limitsfor notifying the indemnifying party of a claim.
   
   
3. Performance Bonds and guarantees:
   
   A performance bond is a class of surety bond issued by a bank or insurance company that provides compensation for the owner where there is a failure of satisfactory completion of a project by the contractor.¹⁰ In law, a breach by the contractor is not needed for liability under such a bond by the third party to be triggered. If the contractor fails to perform according to the terms of the contract, the bond provides financial compensation to the owner to cover the costs of completing the project or remedying deficiencies. The bond is typically paid by the bank on first demand by the employer or project owner for the failure of the contractor to complete the project. Thereafter the bank may go after the contractor to be reimbursed.¹¹
   
   Performance guarantees on the other hand are financial assurances issued by banks on behalf of a party ensuring that the contractors' obligations to complete the project are fulfilled according to the terms of the contract. A performance guarantee gives the employer or project owner the assurance that the project will be completed in accordance with the specifications and milestones agreed by the parties.¹² The guarantee presupposes a breach of contract by the Contractor and is capped to the financial liability of the contractor for cost overruns which do not exceed a certain threshold agreed by the parties. This helps protect the project owner from unexpected increases in project costs due to contractor inefficiencies or unforeseen circumstances.
   
   
4. Unliquidated Damages:
   
   Unliquidated damages refer to claims for losses that were not pre-determined in the contractual agreement between parties¹³. These damages may be pursued in court when the contract explicitly or implicitly excludes claims for liquidated damages.
   
   

CONCLUSION

In conclusion, delays and cost overruns remain significant challenges in construction projects, potentially leading to project failures, strained relationships, and financial losses. However, by incorporating well-crafted contractual clauses, project stakeholders can significantly mitigate these risks. While these remedies and preventive measures are not fool-proof, they are effective in mitigating delays and cost overruns to prevent project abandonment and endless litigation for damages. Ultimately, the key to successfully managing delays and cost overruns lies in a proactive approach that combines legal protections with sound project management practices. This holistic approach to strategy not only safeguards the interests of all parties involved but also contributes to the overall success and timely completion of construction projects.

Footnotes

1. https://punchng.com/10-abandoned-projects-in-nigeria-you-should-know-about/ accessed on September 10, 2024

2. https://www.researchgate.net/publication/343374474_Assessment_of_delay_and_costoverrun_in_federal_road_construction_project_in_Abuja accessed on August 29, 2024.

3. https://pecb.com/article/risk-assessment-in-project-management accessed on September 10, 2024.

4. https://www.projectmanager.com/blog/a-quick-guide-to-change-orders accessed on July 9, 2024.

5. https://www.flex.one/construction-resources/construction-contingency#:~:text=easy%20to%20use.- ,What%20Is%20Contingency%20in%20Construction%3F,arise%20during%20the%20construction%20process accessed September 10, 2024.

6 https://www.wrike.com/project-management-guide/faq/what-is-contingency-plan-in-project-management/ accessed September 10, 2024.

7. https://www.cliffordchance.com/content/dam/cliffordchance/briefings/2018/05/costplus-guaranteed-maximum-price-contracts.pdf accessed on September 3, 2024.

8. The parties agree on the maximum limit on the total amount that the employer or project owner will pay.

9 https://nigerianlawguru.com/wp-content/uploads/2024/06/ALTERNATIVE-DISPUTE-RESOLUTION.pdf accessed September 28,2024

10. https://www.investopedia.com/terms/p/performancebond.asp accessed on September 3, 2024.

11. https://bankguaranteefacts.com/ufaq/performance-guarantee-vs-performance-bond/ accessed on September 3, 2024.

12. https://civilsure.co.za/performanceguarantee/#:~:text=A%20Performance%20Guarantee%20is%20a,the%20contract%20you%20have%20undertaken accessed on September 3, 2024.

13. https://www.designingbuildings.co.uk/wiki/Liquidated_damages_in_construction_contracts accessed September 30, 2024.

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.