Why is it important to understand your contract (from a claims perspective)?

Did you know that there are 11 clauses in the FIDIC Red Book form of contract that allow the Employer to claim money from the Contractor and 16 clauses that allow the Contractor to claim either time, money or both from the Employer?

No? Well, to be honest, neither did I until I sat down and counted them when writing a book on the subject…and I have been dealing with the FIDIC contracts in detail and extensively for around 15 years!

This just goes to show that if an ‘expert’ such as myself is sometimes surprised by things, then less familiar users will almost definitely fail to appreciate all the nuances of what are very complicated contracts.

In the current market, money is tight in the construction industry. Employers are seeking the best possible prices for their projects and this often means that projects are let to less contractually aware contractors. Some of these contractors are not only unaware of their contractual obligations and rights, but are not really capable of delivering the projects that they have been awarded. Employers are also more risk-adverse and seek to shift risk that they are best equipped to deal with onto the Contractor, who then may be faced by rising project costs for which he may not be compensated.

So, what does this all mean in this fiercely competitive market place? In a nutshell, both parties to a construction contract are very aware of the bottom line. Employer’s want the project delivered at the lowest possible cost, so they attempt to avoid any requests for additional payment from their contractors. Contractor’s need to make a profit and pay their overheads, so they need to ensure that they receive payment for what they are entitled.

When things change or go wrong on a project, the bottom lines are always affected. If a contractor feels that he is entitled to an extension of time or additional payment, he has to firstly submit formal notices and then follow up with detailed particulars of the claim, including the basis and the amount of the claim. These things also have to be carried out within prescribed time frames, otherwise the contractor may waive his rights to an award.

When a claim is submitted to the Engineer, he must respond to the claim, attempt to reach agreement and if agreement is not reached, proceed with a formal determination. If he does not carry out these obligations, he will place the Employer in breach of contract and the Contractor would then be entitled to compensation for the effects of that breach.

If things cannot be agreed at this stage, and very often they cannot, the next step is to proceed with a dispute adjudication, arbitration or even litigation. Most people are aware that such procedures are long, drawn-out affairs and very costly, but do you know just how costly? Typical costs of arbitration are between US$ 150,000 and US$ 200,000 per day of arbitration, making a 10-day arbitration cost the parties around US$ 2-million. The arbitrators, lawyers, experts, claims consultants and delay analysists involved in dealing with the dispute do very nicely out of this situation but what has happened to the bottom line for the Employer and the Contractor in such a situation?

Given that poorly expressed claims and unjust responses to claims are one of the main causes of construction industry disputes, isn’t it better to know exactly what the contract has to say about such matters and what it all means? If you don’t, your bottom line will undoubtedly be affected.

Gain clarity and understand the FIDIC forms of contract and their application. Our Understanding Claims Under the FIDIC Contract e-course can give you confidence in managing your claims.

Contact nina.hewitt@hewittconsultancy.com with your questions or for assistance with registration.