The cost of a delayed project management decision

In the first quarter of 2017, I bumped into Arnold, an acquaintance of mine. He had just returned from a site meeting where he is a member of a Dispute Adjudication Board (DAB). It had been a while since we last met and I was certain that he had a new experience to share with The Builders’ Garage.

“Cyrus, I hope you are not close to a dispute on any of your projects?” He cheekily inquired. “Definitely not, Arnold, I try not to get to that point”, I responded. “You look healthy and in perfect shape. Have you taken an extended leave from your day job?” I probed. “Not really, I am more disciplined with what I eat nowadays.

Oh! You have become vegetarian! “Never,” he replied.

Cyrus, do you have some time to listen to what I have to share with you? He asked. Three weeks ago, I bumped into an old friend who had just taken an early retirement. Previously, he was working with a roads authority in one of the major cities in Australia.

During our chat, he lamented how his organisation was suffering the after-effects of delayed decisions on three of their road projects. I would like to share with you what happened, the challenges that arose and the lessons learnt.

Hold on, Arnold, let me find my notebook.

Case one – The rehabilitation of a dual carriageway

A 60-kilometer dual carriageway (with an emergency lane on either side of each carriageway) was scheduled for rehabilitation works. The construction works were packaged as a standard FIDIC Red Book construction contract. Since this stretch of road was scheduled for rehabilitation works, the roads authority did not see the need to carry out the usual periodic maintenance on it.

The construction contract was signed three to four years late. Physical construction works were planned to last two years with another year to cater for monitoring of defects that may arise during the operation of the carriageway. As a result of the delay in contract signature, the condition of the road deteriorated to the extent that the minor rehabilitation works earlier planned were not feasible anymore. The potholes on the road had increased and many sections of the pavement had completely failed.

During the mobilisation period (prior to commencement of physical construction works), the contractor wrote to the supervising consultant proposing an alternative technical solution. He also informed the consultant that there were errors in his design and that he could not access certain construction sites because the project-affected persons had not yet been duly compensated. The supervising engineer acknowledged that the original technical solution was not feasible anymore, but he and the employer delayed to approve the contractor’s proposed technical solution. In response to this, the contractor started making claims, stating that he was unable to access site and could not proceed with the construction works because of a poor design. The engineer finally agreed to support the contractor’s alternative technical solution on condition that the contractor produces a detailed design and withdraws all his claims.

When this matter reached the employer, it took them another six months to approve the new technical solution. All the while, the contractor was fully mobilised on site but he could not work. The new technical solution would inevitably involve an extension of time (an increase in the duration of physical construction works) and in this case, the costs associated with the extension of time were to be borne by the employer.

When this matter reached the employer, it took them another six months to approve the new technical solution. All the while, the contractor was fully mobilised on site but he could not work. The new technical solution would inevitably involve an extension of time (an increase in the duration of physical construction works) and in this case, the costs associated with the extension of time were to be borne by the employer

The employer applied for a budget re-allocation from their line ministry to enable them pay for the costs associated with the extension of time. Fortunately, funds became available through the budget re-allocation and the project was a success.

Case two – Winter road maintenance for a local government

For various reasons, the supervising engineer on another road project agreed to an extension of time. On this project, the contractor was required to carry out winter maintenance on a stretch of road. The project was financed 50% by the local government and another 50% by a development bank.

At the time my acquaintance was about to retire, the original 18 months’ construction period had elapsed and all the financing from the development bank was exhausted. Acting in good faith, and to protect his relationship with the local government, the contractor proceeded to secure external financing to sustain the construction works during the extended construction period, on condition that the employer would eventually refund him through a variation order.

As a result of the extended construction period, the supervising engineer proposed a variation to the contractor’s contract but the employer declined to approve the variation.

As a result of the extended construction period, the supervising engineer proposed a variation to the contractor’s contract but the employer declined to approve the variation

Why? I asked.

The government within the project area had changed and the new office bearers stubbornly refused to approve of the variation order even though it was justified.

What happened next? Surely, common sense had to prevail. Not so?

Winter arrived and the contractor refused to work because the new office bearers had rejected his contract variation order. Hence disaster struck. Six months into this disaster, the minister of transport dismissed the director of the roads authority for not doing the winter maintenance. At the same time, the maintenance director (the director’s subordinate) was elevated. The situation became unbearable to the point that the roads authority decided to carry out the winter maintenance by themselves. The roads authority failed and the army was called in to rescue the situation.

Winter arrived and the contractor refused to work because the new office bearers had rejected his contract variation order. Hence disaster struck

While all this was going on, the contractor ran bankrupt because he had failed to pay back the loan from the financial institution. During the same period, his contract with the employer was terminated.

The supervising engineer was smart. Prior to things getting too crazy, he demobilised from the construction site when the funds from the development bank were exhausted.

Case three – An employer loses an arbitration case to a contractor

The bridges for a 20-kilometer motorway project were designed to rest on simple strip foundations. During the preliminary construction activities, a detailed geotechnical study carried out by the contractor revealed that the strip foundations would not adequately support the traffic load envisaged so he (the contractor for this project) proposed to use piles.

The supervising engineer supported the contractor’s alternative technical solution and proceeded to negotiate a price for concrete piling works with the contractor because there was no price for concrete piling works in the existing works contract.

The employer was promptly notified but it took them close to 12 months to make a final decision. The contractor requested to terminate the contract after approximately 40% of the earth works for the project had been completed. The employer disputed the contract termination.

The employer was promptly notified but it took them close to 12 months to make a final decision. The contractor requested to terminate the contract after approximately 40% of the earth works for the project had been completed. The employer disputed the contract termination

Unfortunately, the contract parties proceeded to arbitration. During the arbitration, the employer (citing a protracted legal process) decided to re-tender the construction works. The contractor (exercising his full legal rights) wrote to the employer stating that he could not re-tender the works until a decision was reached on the dispute. The re-tender process was blocked for about three years.

At arbitration, the contractor won approximately AUD 25m for a contract valued at AUD 65m. In addition, based on the nature of the arbitration proceedings, the contractor also obtained authority from the local courts to freeze and take all the amounts due to him from the employer’s bank accounts. Instead, he opted to leave the country.

Overall, the project was delayed for about three to four years. Interestingly, after the re-tender, the new contractor who was eventually selected to complete the remaining scope of works including the concrete piling works, priced the piling works almost similar to the previous  contractor who had terminated the contract because the employer had delayed to make a quick decision.

Lessons learnt

I can now understand why my friend took an early retirement, but from my own experience, this is what I learnt from his experience

1. In case you are a contractor, do not try to do too many favours for your employer – In case two, the contractor went too far to try and keep (maintain) good relations with the employer. He eventually ran bankrupt because he was not paid the costs due to him for the extended period of works.

2. Dispute Adjudication Boards are not a perfect science – In case three, I suspect that there was a Dispute Adjudication Board which was contracted to assist the contract parties avoid disputes even though the contract parties proceeded to arbitration. The contractor eventually emerged the victor but at the expense of his future relations with the contractor. In my opinion, his move to leave the country was a smart one.

3. You should always know when to jump ship – To avoid problems of their own, the consultant (in case two) demobilised from the site as soon as the opportunity presented itself. Sometimes you do not want to be associated with a project that failed.

4. Detailed geotechnical studies are extremely important – To this day (even after too many ghost stories have been told), I have interfaced with a number of entities that still go ahead and sign construction contracts without a thorough knowledge of the ground conditions on which their infrastructure will be built. The Builders’ Garage recently published a very exciting article about the importance of carrying out a detailed geotechnical study, which I highly recommend.

5. Extension of project time comes at a cost – There are costs to be borne when the time that was originally planned for physical construction works is extended. The supervising consultant will require more funds to keep his staff on site and at the same time, the contractor needs to be paid extra costs associated with keeping the construction site alive and active.

6. Inexperience/ignorance is expensive – In case three, the contractor (after the arbitration proceedings were ruled in his favour) walked away with AUD 25m. Can you imagine how much new infrastructure such money can build?

   Cyrus, such colossal sums of money that are lost because of someone’s incompetence or outright negligence should not go unpunished. The project manager(s) should have been sent to jail for causing financial loss to government. I think some (like my friend) opted to retire.

7. Bad designs are not uncommon – This is not the first time I was hearing of a situation where a contractor was proposing an alternative technical solution because the designed option could not perform its required function. The consulting industry is full of masqueraders who produce bad designs, somehow get paid for them and then get paid again to do a re-design. In part two of your article, your choice of a consultant or contractor could make or break your project, you share some very interesting lessons which should educate a number of project managers on how to manage such situations.

Thank you, Arnold.

You are welcome.

By the way, I have just been informed that a dispute has emerged between the contract parties who are constructing a hydropower dam in Ethiopia, so I will be heading there next. When I am back from Ethiopia, I will let you know what transpired.

Thanks once again. We will be right here when you return.

©. The Builders’ Garage 2017. Permission to use this article or quotations from it is granted subject to appropriate credit being given to thebuildersgarage.com as the source.

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