insights sYSTECH
EDITION 1
SHARING OUR Global expertise & Local knowledge Systech I N T E R N A T I O N A L
Systech I N T E R N A T I O N A L
Welcome to Systech Insights We are delighted to welcome you to the first edition of Systech Insights in which we share our expertise and opinions on a range of topical issues. The articles have been written by staff located across the regions in which we operate and they demonstrate our breadth of experience in a range of services and sectors. Systech International has been established for over 20 years and, in this time, we have become the world’s leading provider of consultancy services to contracting organisations, supporting them in the delivery of projects on time and to budget. Our integrated approach allows us to offer high quality multidisciplinary managed services from a single business, avoiding the abortive work and communication problems that often arise when using multi-party advisors. Innovation is also very important to us and our services uniquely include visual communications and apps. We hope you enjoy the read and we, and the contributors, would be delighted to receive your feedback.
Stephen and Mark Stephen Rayment and Mark Woodward-Smith Group Managing Directors
insights sYSTECH
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Two Wrongs Don’t Make a Right... Nigel Oliver — Regional Director USA
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Innovations in Winning Work and Resolving Disputes
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Earned Value Management
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A Legal Minefield? Adjudication Down Under
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A Contract Manager Abroad
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Legal Services for the Modern Age
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An Introduction to Period Analysis
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Construction the New Generation of Nuclear Power Plants
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Global Claims: a Necessary Evil?
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Project Record Collection goes Mobile
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TOP TIPS: NEC Success
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Leigh Gibbs — Managing Director Visualisation
Ricardo Delarue — Country Manager Brazil
David Finlayson — Director of WA and NT Australia
Eric Webb — Regional Director Korea
Rebecca Redhead — Director Legal Services
Jeff Perry — Director of Disputes
Gavin Maxwell-Hart — Olkiluoto Nuclear Project 3, Head of Contract Management
Scott Park — Director Abu Dhabi
Geoff Ansell — Director of Global Marketing and Training
Richard Morris — Director Expert Services
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Nigel Oliver
Regional Director, USA
Two wrongs don’t make a right...
N
o one likes a project that has been delayed. For the contractor, delay typically means extended costs associated with being on the project longer than envisaged. For the owner, it means the loss of use of the facility that is being constructed, with a resulting loss of income.
OIL REFINERY, TEXAS, USA
Most modern construction contracts contain clauses which attempt to incentivise both parties to reach a common goal in an agreed timely fashion. One such weapon is that of liquidated damages. In construction contracts, liquidated damage clauses prescribe in advance the compensation the owner will accrue if the contractor fails to perform. The advantage of such a clause for the owner is that he knows the amount he will be entitled to in the event of delay. Correspondingly for the contractor, he knows in advance what the financial risk may be should the works be delayed. By providing some certainty to both parties, such a provision avoids the expense which would otherwise be incurred in proving or disproving the actual amount of damages in court or through arbitration. Whether such a contractual provision is
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an enforceable liquidated damages provision or an unenforceable penalty is a question of law. In most common law jurisdictions, when determining whether a liquidated damages clause is enforceable, courts will examine the following:
Whether the harm caused by the prospective breach of the contract is impossible or difficult to estimate; and Whether the amount of liquidated damages called for is a reasonable and genuine pre-estimate of the probable loss. Typically, if either element is found to be lacking, the liquidated damages clause is unenforceable. In the United States, some owners have attempted to address these factors by drafting the liquidated damage provision to specifically state that it is not intended to be a penalty. To the extent that the provision has been negotiated, this language may be of some assistance to the owner in attempting to prove the parties' intent. It should be emphasised, however, that such language is not binding on the court. In providing such a clause, both the contractor and owner have expressly stipulated in the contract the amount of damage to be recovered in the event of delay caused by the contractor, regardless of what the actual damages subsequently incurred by the owner may be. Thus an owner could conceivably recover far greater compensation than it has ultimately incurred. It should be noted that, while such a position is true in English
or do they? law, some international jurisdictions allow for a reduction in liquidated damages where it can be shown they are excessive in comparison to the actual loss suffered. In most construction contracts the mechanism by which a contractor can avoid its liability to liquidated damages for delay is extension of time. Contracts also go on to state which areas of activity either party will be responsible and at risk for. Most contracts include for a contractor’s entitlement to an extension of time for delays caused by the owner. For example, the FIDIC Conditions of Contract state that the contractor may be entitled to an extension of time if there is “any delay, impediment or prevention caused by or attributable to the Employer, the Employers Personnel, or the Employers other Contractors on site”. It is becoming increasingly common in construction contracts that a prerequisite for invoking the extension of time clause is that the contractor must give notice.
An example of this is Clause 20.1 of the FIDIC Contract which states: “If the Contractor considers himself to be entitled to any Extension of the Time for Completion and/or any additional payment, under any Clause of these Conditions or otherwise in connection with the Contract, the Contractor shall give notice …. The notice shall be given as soon as practicable, and not later than 28 days after the Contractor became aware, or should have become aware, of the event or circumstance. If the Contractor fails to give notice of a claim within such period of 28 days, the Time for Completion shall not be extended, the Contractor shall not be entitled to additional payment, and the Employer shall be discharged from all liability in connection with the claim.” The wording of Clause 20.1 leaves no doubt as to the consequences of a lack of timely notice. The right to an extension of time and/or to additional payment is forfeited. However, what happens when the delay has been caused by the owner? Do two failures, one by the owner in hindering the contractor’s performance, and one by the contractor in failing to give notice of said delaying event, give the owner an entitlement to recover liquidated damages in circumstances where it has clearly delayed the works? Do two wrongs make a right? ◉
▶ The idea that two wrongs make
a right may sound inequitable. This proposition has been the cause of much debate and conflicting court decisions and these will be explored in the second part of this two-part article, in edition 2 of SYSTECH INSIGHTS. nigel.oliver@systech-int.com
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Leigh Gibbs
Managing Director, Visualisation
Innovations in Winning Work and Resolving Disputes
O
K, before anyone points it out, I realise the irony of a piece about the virtues of multimedia visualisations over the written word being communicated via the written word; if it were possible in any other way, then believe me, I would do it.
I see two major areas where visualisation can be used in the construction process: at the beginning when you are selling the dream and at the end when things have not gone to plan. Our in-house visualisations team, working in conjunction with our construction professionals, is developing an excellent track record in both areas.
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Winning Work
The conclusion of a tender process will often see three or four contractors given a final chance to impress the panel at an interview. This is the time to roll out the big guns - traditionally your best speaker and key members of the team armed with a PowerPoint presentation. Until a year or so ago we would have supplied a short video presentation to complement this process. PowerPoint is fine if you are introducing your site team but what about traffic management, the benefits of various phasing options or that special off-site prefabrication process that is going save a fortune and is key to you winning the job? This is where we step in and help explain these issues as quickly and clearly as possible using multimedia. As technology marches on, so do the techniques that we use to win work for our clients. Each job is different and so is the approach we take. We develop custom iPad applications that cover all aspects of the job from profiles for the site team to interactive models showing the construction phasing. The proof of the pudding is in the eating and on major bids our success rate is over 50%.
Dispute Resolution
The resolution of a construction dispute often involves claims for delay and disruption that require extensive expert input and the expenditure of significant sums. One of the common ways an expert will identify the delaying or disrupting activities will be through a graphical representation of the as-built and as-planned critical path networks. This is a very complex process that needs to take account of the vast number and relationship of the activities as well as issues relating to concurrency, re-sequencing, mitigation and acceleration. Animation can assist because it has the flexibility to vividly demonstrate the effects of each of these aspects of a construction project. That being said, care must be taken to ensure that the quality of the information provided to the animators is of sufficient quality to produce reliable results, so as to avoid the garbage in, garbage out syndrome. An example of a case in which the trial judge criticised one expert’s over-reliance on the flawed output of a computer program can be seen in Skanska Construction UK Ltd v Egger (Barony) Ltd
(2004) EWHC1748(TCC). A critical question is admissibility. There is no reason that you cannot use an animation in court to assist your case. It has been suggested that a party’s objection to an animation’s admissibility is likely to be akin to an objection to a part of a pleading that a party says it cannot respond to. We mitigate any problems by ensuring that our animations are based on contemporary records and project information which is available to the other party. In mediation there are no issues regarding admissibility and a party using an animation has an opportunity to clearly and unambiguously state its case in the most favourable light. Indeed we have successfully supported a number of contractors in this way. However, by far and away the most popular use of visualisation in construction disputes is before formal dispute resolution measures have been instigated. This is often at the stage when the dispute has been escalated off-site and it is being dealt with by senior management at head office. A carefully crafted video delivered to the CEO of the other party can do wonders. It is not confrontational and offers a persuasive case which acts as a catalyst to get the parties talking and agree a settlement. In addition to multimedia presentations, we are now seeing the adoption of tablets as a communication tool. A plethora of claim information can be stored on these tablets and accessed on demand and in any order. For an expert witness this is the stuff dreams are made of. A suitably programmed tablet can hold and display everything that is necessary to support an opinion, and we regularly combine video, documents, photographs with interactive models to help explain complex issues in a compelling and easy to understand way.
The Way Forward
The advances in technology are making multimedia presentations both affordable and accessible. This, combined with a greater acceptance of electronic technology in the construction industry is making the use of these techniques far more prevalent, providing a cost effective way of communicating complex issues. This is the future, ignore it at your peril.◉
▶ leigh.gibbs@systech-int.com
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Ricardo Delarue Country Manager, Brazil
Earned Value Management For evaluating the overall productivity of a project
FPSO CIDADE DE ILHABELA, BRAZIL
The productivity of labour and equipment is one of the major risk factors in the success or failure of a project. 6
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The Baseline Schedule
In implementing EVM, the first challenge is 250,000 the creation of the Baseline Schedule on which the ‘planned labour units’ (normal200,000 ly expressed in hours) and ‘quantities to be executed per activity’ are included for every 150,000 activity of the Work Breakdown Structure (WBS). 100,000 For example – Activity 001: ‘installation of secondary cable trays’ has a planned 50,000 labour unit of 0.80 hour/m. This means that the plan is to spend 48 minutes (60 minutes 0 x 0.80) for the installation of every metre of secondary cable tray. The same planned labour unit and quantity evaluation is made for all the activities of the WBS so that the ‘total planned hours’ to be spent on the project can be identified. Obviously, it is mandatory to align these hours the moment that the contractor is chosen. The Planned S Curve
Once the baseline schedule is defined, and the planned quantities and labour units inserted for each activity, it is possible to create a Planned S Curve, using the formula below: Planned Hours (PH) = Planned Quantities x Planned Labour Units
Going back to the example, let’s consider that the planned quantity was 5,000m of secondary cable trays, so we would have: Planned Hours (PH) = 5,000m x 0.80 hours/m = 4,000 planned hours
Doing the same exercise for all the activities of the project, and cumulating the working hours on a monthly basis using the planning software, it is possible to create an S Curve for the Planned Hours (PH). Graph 1 is an example of an S Curve forecasting almost 250,000 working hours for an entire project. Usually, on a monthly basis the actual progress (or quantities executed per activity) is recorded/ monitored. In EVM the actual progress is measured by the ‘Earned Hours’ and it is a measure of the quantities installed multiplied by the Planned Labour Units. Using EVM, the simple formula for calculating the progress (EH) using this recorded data is therefore as follows: Earned Hours (EH) = Actual Quantities Executed x Planned Labour Units
Continuing with our example, let’s say that the production of ‘secondary cable trays’ during the first month of the project was 400m. Our progress
GRAPH 1: THE PLANNED S CURVE
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2
3
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6 MONTHS
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(Earned Hours) would be: Earned Hours (EH) = 400m x 0.80 hour/m = 320 hours
Making the same calculations across all activities in the Schedule for the month we would have an overall result for the ‘Earned Hours’. But why is this information needed? Let’s compare both formulas: Planned Hours (PH) = Planned Quantities x Planned Labour Units Earned Hours (EH) = Actual Quantities x Planned Labour Units
Comparing one formula to the other it is clear that the only variable is the difference between the ‘planned’ and ‘actual’ quantities. Therefore if the ‘actual’ quantities installed are more than the ‘planned’ quantities in the reporting period, the Earned Hours will be more than the Planned Hours. Common sense tells us that we would be ahead of our planned progress because we had installed more work than planned. More importantly, if Earned Hours were less than Planned Hours we should be aware that we are behind programme. The Efficiency Analysis or the Actual Hours (AH) Curve
EVM goes a little further than that. The next step is to identify the efficiency of the direct labour or, in other words, verify if the hours spent in relation to the quantities executed are as per planned. The formula for this part of the EVM process is simply: Actual Hours (AH) = Actual Quantities x Actual Hours (Actual Labour Units)
The Actual Labour Units can be measured on a daily or weekly basis per activity depending on the level of accuracy required. It should be noted that this analysis requires a significant commitment from the foreman of the project and that an administrator will be required for every 200 workers to record and monitor the data. SYSTECH INSIGHTS ▶ edition 1
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GRAPH 2 50,000 40,000 30,000 20,000 PLANNED HOURS (PH) EARNED HOURS (AH)
10,000
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MONTHS
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SELF-ELEVATING DRILL RIG, BRAZIL
0
ACTUAL HOURS (AH)
Comparing the Data
It is now possible to compare the three formulae, as follows: Planned Hours (PH) = Planned Quantities x Planned Labour Units Earned Hours (EH) = Actual Quantities x Planned Labour Units Actual Hours (AH) = Actual Quantities x Actual Hours (Actual Labour Units)
Comparing Planned Hours (PH) with Earned Hours (EH) provides us with an indication of progress. If the EVM analysis shows we are behind schedule then we need to know why and take corrective action. Comparing Actual Hours (AH) with Earned Hours (EH) gives us an indication of productivity. Common sense tells us that if we spend more time than planned on an activity our productivity is below par. Similarly if we spend less time than planned our productivity is above par. If the EVM analysis shows we are below par we need to find out why and take corrective action. Likewise, if we are above par we also need to know why and maintain it. Let’s go back to our example, and consider that for the production of 400m of cable trays, we spent 360 ‘Actual Hours’ instead of 320 ‘Earned Hours’. This gives us a production factor of 89% when ideally we want 100% or more. This is not good — we need to know why and implement corrective action. Bringing all the Data Together
The summary of this methodology is presented 8
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below in another example on a project with 45,000 man hours to be constructed over a four-month period. By plotting the data recorded in each period graph 2 emerges over time. From this we can extrapolate the following:
MONTH 1
PROGRESS & DELAY
PRODUCTIVITY
PH x EH
EH X AH
5,000 > 3,000 = delay
3,000 > 1,000 = good
MONTH 2
13,000 < 18,000 = ahead
18,000 = 18,000 = as per planned
MONTH 3
25,000 < 35,000 = ahead
35,000 > 30,000 = good
MONTH 4
45,000 > 40,000 = delay
40,000 < 50,000 = bad productivity
In addition: In Month 1 – the delay and the good productivity indicates a lack of man power. In Month 3 – indicates the perfect world: good progress and good productivity. In Month 4 – indicates a disaster; delay and bad productivity. Why Use EVM?
EVM is informative and allows the Project Manager to make decisions and take corrective actions where needed during the execution of the works. Like all things that are good EVM comes at a cost, requiring good and accurate administration to be effective. Moreover, poor administration of EVM will result in poor information and inappropriate management decisions and actions. In the author’s experience one EVM Administrator working closely with the site foreman, will be able to evaluate the daily EVM data for a work force of 200 men.◉ ▶ ricardo.delarue@systech-int.com
David Finlayson
Director of WA and NT, Australia
The Latham Report in 1994, heavily criticised how the construction industry operated in the UK, and was a catalyst for the introduction of a new Act of Parliament. David Finlayson looks at how the implementation of the Act, and the lessons learnt, affected new legislation in Australia.
T
he UK Housing Grants, Construction and Regeneration Act 1996 was a direct response to the Latham Report. The Act outlawed “pay when paid” clauses, which were common at the time, and gave statutory backing to adjudication as means of dispute resolution. It also gave the right to suspend work for non-payment. The legislation was enthusiastically received in the UK. However adjudication, which was envisaged to be a simple process, was initially the subject of extensive challenges through the courts. The developments in adjudication in the UK were being observed from overseas, including Australia. Whilst the benefits of having a quick and relatively inexpensive means of resolution would have been attractive, some developments occurring in the UK would have been seen as
ARGYLE DIAMOND MINE, AUSTRALIA
A LEGAL MINEFIELD? Adjudication Down Under
less than desirable. It should be noted that the UK Act has since been amended.
Legislation in Australia
The Australian legislation refers to “Security of Payments”. As the term suggests, the legislation is narrower in scope compared to the Act in the UK. The legislation related to adjudication or Security of Payments was developed for each jurisdiction or Territory as follows:
Building and Construction Industry Security of Payment Act 1999 [NSW] (2013 Amendment Bill) Building & Construction Industry Security of Payment Act 2002 [Vic] Building and Construction Industry Payments Act 2004 [Qld] Building and Construction Industry (Security of Payment) Act 2009 [ACT] SYSTECH INSIGHTS ▶ edition 1
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Building and Construction Industry Security of Payment Act 2009 [Tas] Construction Contracts Act 2004 [WA] Construction Contracts (Security of Payments) Act [NT]
Similarities, Differences & Developments
The Australian legislation across all jurisdictions gives the right to receive progress payments and to suspend works for non-payment in certain circumstances, whilst disallowing “pay when paid” clauses. It also gave the right to adjudicate payment disputes. There are however some differences within each of the above sets of legislation—the legislations for Western Australian (WA) and Northern Territory (NT) are seen as a fundamental departure, being referred to as “West Coast” model by some writers, as opposed to NSW-based or “East Coast” model. Perhaps the key distinction in WA and NT is that any party may apply to have a payment dispute adjudicated, whereas in the other jurisdictions only the claimant may apply, for example subcontractor to contractor. Furthermore, an adjudicator under the West Coast legislation has the ability to act in a more investigative manner and is not restricted to consideration of documents submitted by the parties. Where a payment claim is submitted and no payment schedule is issued giving reasons for non-payment, there is the right under the East Coast model, to go directly to the courts to recover the full payment claimed as a debt. The significant differences in legislation together with developing case law have however given rise to concerns, as detailed in Mathew Bell and Donna Vella’s informative article in 2010 “From Motley Patchwork to Security Blanket: The Challenge of National Uniformity in Australian ‘Security of Payment’ Legislation”. They wrote in the abstract:
The primary aim was to ensure that cash flow was maintained for all participants in the contractual chain. A decade later, legislation based upon the New South Wales model is in place in all States and Territories and there is a substantial body of 10
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case law governing how the Acts work in practice. At the same time, however, significant differences in approach across jurisdictions as to key planks of the legislative platform have the potential to defeat its original intent. This article proposes, therefore, that the Australian construction industry faces a moment of decision as to the future of such legislation. The report, by Bruce Collins QC, on subcontractor insolvency in NSW made several specific recommendations in relation to the NSW Act. This resulted in changes, introduced by the Building and Construction Industry Security of Payment Amendment Bill 2013, passed by the NSW Government in November 2013. These changes included:
For head contractors Payment within 15 business days of submitting a valid payment claim Must provide a supporting statement declaring that subcontractors have been paid what is due and owing when submitting a payment claim Pay subcontractors and suppliers within 30 business days of a valid payment claim being made. For sub-contractors Payment within 30 business days of submitting a valid payment claim. Fines were also introduced for non-compliance with certain provisions. The Bill is likely to have a ripple effect, particularly through the East Coast model jurisdictions. In NSW, the Claimant Distribution in the last quarter of 2013 showed fewer adjudications were being initiated by subcontractors (120), than contractors (277). It will be interesting to see whether the introduction of the new Bill has an impact on both the number of adjudications and distribution of submissions in 2014.
Conclusion
Ultimately, adjudication, as a useful mechanism for resolving payment disputes in Australia, will stand or fall on its accessibility and effectiveness in the eyes of the contracting parties, as opposed to specialists, the legal profession or even judges. In NSW, which has seen adjudication used most frequently, and other jurisdictions
PLUTO LNG PLANT, AUSTRALIA
Building and Construction Industry Security of Payment Act 2009 [SA]
following the East Coast model, clear terms are imposed which override those in the contract and only allow responses for items referred to in the Payment Schedule, making the process more attractive to referring parties. It could be argued that the West Coast model is procedurally a fairer process, but introduces elements of uncertainty for referring parties. Unification to provide a set of common legislation across Australia, and updating to reflect key decisions from case law, could be helpful to contracting parties but are clearly not simple tasks. There may also be difficulties in relation to the law as it applies in each jurisdiction. In the meantime contracting parties including clients, consultants, contractors, subcontractors and suppliers must:
Be aware of the legislation and case law as it
applies within each of the jurisdictions in which they may operate;
Ensure that payment processes are compliant
and that payment schedules/notices of dispute are issued as appropriate.
A failure to do so could leave them facing an order for recovery of a debt, or suspension of work for non-payment of a sum it may not consider is justified, or adjudication proceedings with no sustainable defence. Whilst the legislation is considered positive, albeit a little difficult to grasp initially due to the diversity of approaches, it is hoped that it will achieve the objective of improving cashflow, which is the lifeblood of the industry.â&#x2014;&#x2030;
â&#x2013;ś david.finlayson@systech-int.com SYSTECH INSIGHTS â&#x2013;ś edition 1
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A Contract Manager Abroad
Eric Webb
CHANGI DTSS AND WATER RECLAMATION PLANT (SINGAPORE)
Regional Director, Korea
Part one of this twopart article looks at the importance for Western contract managers operating in Asia to understand the local ways of working.
W
estern contract managers lucky enough to have the opportunity to work in Asia often enter the Asian construction sector for the first time with their instilled values and ways of working that will almost certainly not be a perfect fit with both the new environment within which they have to perform, and the dispersed multi-cultural contractual teams within which interaction is invariably necessary on large complex projects.
Cultural awareness in Asia
the dream turning into a nightmare it is time to swim not sink; with not only the obvious language difficulties to overcome but also differing corporate cultures and work methods, differing national cultures and fundamental differences between Eastern and Western cultures and beliefs. Asia is unlike the West and has fundamentally different ways of working, which can seem very strange and not to the liking of many Westerners. But Asia has over 50% of the world’s
Brilliant executives often believe that business skill is sufficient, and dismiss learning about history, the arts, the culture, and the traditions of the country where they are now expected to perform.
An example of the potential for such a blinkered-vision approach was given by Peter Drucker (Management Challenges for the 21st Century, Harper Business 1999) who argued “brilliant executives that are being posted abroad often believe that business skill is sufficient, and dismiss learning about history, the arts, the culture, and the traditions of the country where they are now expected to perform”. Indeed, many issues need to be faced head-on upon reaching your dream posting. To avoid
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population, is a tremendously diverse region comprising all the world religions and a host of cultures, and, along with Europe and America, is the world’s economic engine. So Asia is most certainly a large slice of the global cake and more care is required from the West to take a good
TAIWAN HIGH SPEED RAIL
look at the Asian ways of working. For example, Asian businesses have a strong commitment to their staff and customers, are team-orientated with a preference for consensus over creativity, and prefer gradual rather than radical change. Despite such an emphasis on cooperation and teamwork, culture dictates that open criticism is discouraged where open confrontation and losing face are taboos. The culture of harmony, dependence, and community is the Asian Way as opposed to the Western Way of independence with often little sharing of ideas and information. It is fair to say that employees of Asian companies trust their colleagues and work in an organisational environment where a similar view of the future is shared.
1. East Asia Analytical Unit, Overseas Chinese Business Network in Asia (Parkes, ACT, Department of Foreign Affairs and Trade, Australia 1995). 2. Chin-Ning Chu, Thick Face, Black Heart: The Warrior Philosophy for Conquering the Challenges of Business and Life (Warner Books 1994).
Asia has major economic powerhouses with China, South Korea and Japan at the forefront, whereas in terms of competitive economies, Singapore and Hong Kong lead the way. Although South Korea and Japan now supply the world market with recognisable brand names, a major part of Asia is of course China, and with each passing year China is growing into an economic global giant with both eyes trained on becoming what the Chinese have probably always considered as its rightful place, namely, at the head of the global table. This is a country with over six thousand years of rich history, many territories, 74 dialects and 56 nationalities, a land mass of nearly four million square miles and a population in excess of 1,300 million. Despite such facts, Westerners frequently view the Chinese people as one homogeneous population, but such a melting pot of differences clearly means more than just one culture is at play, with a diverse population of different religions, different sub-cultures
and different ethnic groups. Despite these sub-cultures, Chinese people, for longer than any other group on earth, have nonetheless shared a common culture. Such a common culture will continue to evolve, as the younger generation of Chinese is part of a more global world. The influence of Chinese culture throughout Asia must not be underestimated in a region where the overseas Chinese community has a significant presence in business and politics. Indeed, a study by the East Asia Analytical Unit1 in 1995 argued that “in order to manage business operations effectively in the Asia Pacific region, it is imperative to understand the Chinese way to run business”. Cultures are human-made and cause numerous issues between people, many of which can result in insurmountable problems due to intransigence. But individuals from different countries and different cultures can work together, and differing points-of-view on construction projects have the potential to provide effective and creative solutions. Despite such opportunities, contractual problems arise because many Westerners approach situations based on the assumption that what worked at home will work anywhere. For example, as argued by Chin-Ning Chu, the author of Thick Face, Black Heart2, “the aggressive, high-tone, pushy, go-getting manner is considered a great attribute in the American business world. However, when applied in certain parts of Asia, it is considered repulsive”.◉
▶ So how do Western contract managers address
the dynamics of cultural and multicultural factors to resolve contractual issues on construction contracts? The second part of this two-part article, in edition 2 of SYSTECH INSIGHTS, will look at this perplexing issue. eric.webb@systech-int.com SYSTECH INSIGHTS ▶ edition 1
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Rebecca Redhead Director, Legal Services
Legal Services for the Modern Age
S
ystech International has a well established history of client-focused innovation in developing and delivering its services. It has long been a key part of Systech’s vision to provide multi-disciplinary teams of consultants, including fully qualified, practising lawyers on a cost efficient basis. Recent developments in the regulations concerning the management of solicitors’ firms have brought us significantly closer to realising this vision, and Systech has led the way in embracing this opportunity. The Solicitors’ Regulatory Authority (“SRA”) is the government-authorised body in the UK responsible for licensing law firms, implementing regulations and ensuring continued compliance with those regulations. SLS Solicitors Limited, (trading as Systech Solicitors) is a law firm licensed and regulated by the SRA which has been successfully practising as a niche construction and engineering law practice since 2008. Prior to 6 October 2011, under SRA rules solicitors’
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firms could only be owned and controlled by solicitors. The regulatory environment began to change with the Legal Services Act 2007 which recognised the scope for broadening the legal services market whilst maintaining strict regulation and controls. From 6 October 2011 solicitors’ firms could be owned and controlled by both lawyers and non-lawyers and could offer both legal and non-legal services to the public. A broad range of company structures are covered by the new regulations; in summary these are: Traditional solicitors firms, which can now have non-lawyers as shareholders or managers; Law firms owned by external parties and operated through a separate entity. A combination of different services, including legal services, being offered by one firm; the ‘multidisciplinary’ approach.
licensed and regulated solicitors’ practice offering contentious and non-contentious services to its clients under the same SRA regulations and client protection systems as under the pre-ABS system. Instructing a solicitor still needs to be carried out in accordance with the SRA’s regulations, and so separate terms of appointment will be used to other parts of the
Clients benefit from our integrated approach with our consultants working together under a single point of responsibility to provide a co-ordinated and seamless service.
The structure adopted by Systech is the multidisciplinary approach whereby Systech Solicitors became a Group business allowing legal services to be offered alongside other consultancy services in a fully integrated approach. The Alternative Business Structure (ABS) licensing process was introduced by the SRA and applications were accepted from the beginning of 2012. This was a lengthy process requiring the submission of large amounts of information followed by further requests for clarification. In order for the ABS licence to be awarded, Systech Solicitors needed to demonstrate to the SRA that it was in compliance, and would remain in compliance, with the amended SRA regulations; that its directors were suitable professionals; that both its own accounts and client accounts were administered properly. Systech Solicitors was granted its ABS licence in February 2013, the first specialist construction practice to achieve this. The Systech Group acquired Systech Solicitors in November 2013 and the process of becoming the first construction consultancy ABS was completed in December 2013. Following the transition, Systech Solicitors remains a fully
business, but Systech Solicitors has developed streamlined systems to ensure this is done without any delay or inconvenience. The key difference for our clients is that they will benefit from the closer integration, with our consultants working together under a single point of responsibility to provide a co-ordinated and seamless service, avoiding the abortive work that often arises when using multi-party advisors. There are closer working relationships between the different disciplines creating an extensive pool of contacts, knowledge and experience from which clients will benefit. In our experience, clients sometimes associate the appointment of lawyers with litigation, but this overlooks the range of other skills lawyers can bring to a project. Obtaining specialist legal advice can save cost and time at all stages of project execution, from pre-contract negotiation, contract drafting through to dispute avoidance and resolution. We also provide lawyers for in-house roles on an interim or locum basis. This means our clients can expand their in-house team with one of our experienced construction lawyers. The ABS structure means these lawyers have unique access to support from the wide range of disciplines within the Systech Group and full professional indemnity cover; so our clients avoid the cost and risk of appointing through a recruitment agency. The advantages to clients of our ABS ‘one-stop-shop’ are clear: access to an internationally unrivalled range of expertise; cost and time efficient appointments and fully integrated, multi-disciplinary, co-operative teams providing the best advice and support.◉
▶ rebecca.redhead@systech-int.com SYSTECH INSIGHTS ▶ edition 1
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Jeff Perry
Director of Disputes
An Introduction to
Period Analysis The State of the Art Schedule Delay Analysis Methodology
A
lthough in use for nearly two decades, Period Analysis is a relative unknown methodology in the construction dispute industry. Furthermore, few industry professionals know it is the state of the art retrospective schedule delay analysis methodology. This is the methodology that can produce a “bullet proof” schedule delay analysis in the hands of a skilled operator. It provides a mathematical approach to calculating results with a precision that all the other methodologies cannot produce. If it’s so powerful, why is so little known about it? It’s because scant information has been published about the methodology in the
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past. It is a recognised methodology in North America via the AACE [American Association of Cost Engineering] schedule delay analysis protocols. However, few actually practice the methodology even though it is not that difficult to learn and understand. So to bring it to light, this article presents an overview of Period Analysis for the lay person and those seeking the best of the best schedule delay analysis methodology to win disputes. Period Analysis is a retrospective methodology. That means it is used for situations where delay has occurred and/or continues to be accrued. Period Analysis is the only methodology that provides the ability to quantify the accrual of actual delay over the lifetime of project.
baseline schedule would have a data date of 1 January 2014. And, the contractorâ&#x20AC;&#x2122;s monthly schedule updates would have data dates of 1 February 2014, 1 March 2014, and so on. This schedule updating process is important to recognise because it goes to the heart of the Period Analysis methodology which all the other methodologies miss. Like the more commonly known Windows Analysis, Period Analysis divides the lifetime of a project into discrete timeframes demarcated by the data dates of the available CPM schedule updates. The difference between a Windows Analysis and a Period Analysis is that the Windows Analysis employs a one-step calculation and a Period Analysis employs a two-step calculation. Now, what does that mean?
SYSTECH INSIGHTS â&#x2013;ś edition 1
HAMAD INTERNATIONAL AIRPORT, QATAR
Period Analysis requires the use of the electronic files of network logic (CPM) schedules. That means the electronic versions of the construction schedules which could be in Microsoft Project or Primavera scheduling software. Most major construction projects employ these types of schedules. Each construction schedule has a data date. This is the date on which the schedule reflects the progress of a project. For example, if a schedule has a data date of 1 July 2014, this means the schedule represents the status of the project on the date of 1 July 2014. Beginning with a baseline schedule, a contractor will normally issue his schedule updates on a monthly basis. So for example if the project started on 1 January 2014, the
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Take for example the real life situation where a contractor starts a project and at the end of Month 1 he updates his schedule with progress information and discovers he is two weeks late. In order not to offend the project owner, the contractor revises his schedule to remove the two weeks of delay and issues to the owner a schedule that shows no delay. And, for the next five months the contractor repeats this process of incurring two weeks of delay and then revising the schedule to hide the delay until Month 7 where it becomes obviously clear that the project is delayed and there is no further room in the schedule to hide the delay. So, the contractor gives in to reality and issues to the owner a schedule that shows a delay of 12 weeks (2 weeks – delay/month x 6 months) with a claim for an extension of time (“EOT”) of 12 weeks. So, as most owners would probably respond under such circumstances, he tells the contractor to get stuffed. Not only has the contractor been reporting on-time completion for the past six months, but if the delays were due to the owner, the opportunity for the owner to mitigate his own delays had been denied. So, in this example, let’s assume the owner and contractor both recognize there were a basket of issues that reasonably impacted the Works, but neither is 100% responsible for the total delay. The problem is how to quantify the accrual of actual delay that was effectively erased by the contractor in his schedule updates and prove the owner has culpability for the delays. Since the contractor has the duty to prove his EOT claim, he attempts to prepare a schedule delay analysis. The contractor first employs a TIA (Time Impact Methodology) approach and learns that the TIA can only produce a theoretical result – it cannot equal the actual delay, and it cannot provide a way to calculate how much delay was erased by the contractor in his schedule updates. So the TIA is of no use in a retrospective delay analysis approach to quantify the accrual of delay. Of note, the TIA is actually a
tool for prospective delay analyses only, and should not be utilized to quantify delay in a retrospective analysis. The contractor then employs an Impacted As-Planned Methodology approach and learns that it too can only produce a theoretical result – it cannot equal the actual delay, and it cannot provide a way to calculate how much delay was erased by the contractor in his schedule
The problem is how to quantify the accrual of actual delay that was effectively erased by the contractor in his schedule updates and prove the owner has culpability for the delays.
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updates. So the Impacted As-Planned is of no use in a retrospective delay analysis approach to quantify the accrual of delay. The contractor next attempts to utilise As-Planned v As-Built, Collapsed As-Built, and But-For methodologies and learns that none of these approaches can provide a way to calculate how much delay was erased by the contractor in his schedule updates. The contractor next attempts to utilise a Windows Analysis and learns that this approach cannot provide a way to calculate how much delay was erased by the contractor in his schedule updates. The reason is that the Windows approach simply compares update to update (i.e. one step calculation). This approach would see no delay for six months and then one big 12-week delay at the end. The Windows Analysis only sees what the contractor published in his schedules to the owner. There are variants on the Windows Analysis to identify critical delays, but the fact is one is looking progressively forward in each window and then at the As-Built condition after the schedule changes were introduced into the schedule update. The Windows Analysis approach can therefore not recognise the mitigations incorporated into the schedule update to erase the delay.
Having run out of solutions, the contractor rings up Systech and requests assistance. With the contractor’s schedules in hand, Systech utilises Period Analysis to recreate the contractor’s schedules that showed the two weeks of delay before the contractor made changes to the schedule to erase the delay. This enables a calculation of delay or mitigation of delay accomplished by incorporating changes to the schedule structure. Hence, the two step calculation. The sum of these two calculations equals the total delay in the Period. This process is repeated for each monthly update to calculate the accrual of delay over the course of the Project. As in this example, Systech prepared an accrual of the two weeks of delay in each Period due to lack of progress (calculation 1) and its subsequent mitigation to zero delay at the end of the Period (calculation 2) as a result of schedule structure changes (amendments). More technically described, for each Period (the timeframe demarcated by the data dates of the schedule updates), the Period Analysis enabled Systech to quantify the delay due to lack of progress, to identify the critically delayed activities due to lack of progress, and to forensically identify the changes made to the schedule update to mitigate the delay. The result of the delay analysis is a tabular
quantification to show there were two weeks of delay in each month due to lack of progress, and then there was a mitigation of the two week delay due to certain changes to the schedule structure. To quantify the share of responsibility for the delay, causation for each delay in each Period is identified from the contemporaneous project records. The records then provide a means to identify responsibility for the delay. The Period Analysis approach therefore enables a quantification of the accrual of delay over the course of the Project, enables identification of the cause of delay based upon the contemporaneous project records, and enables a precise calculation of the share of responsibility for the delay. The findings of the delay analysis are documented into a report with appropriate exhibits and the contemporaneous project records relied upon to demonstrate causation and apportion delay. The result is a mathematically superior delay analysis with definitive proofs for causation and responsibility. In the end, the Period Analysis produces a truthful and equitable result based upon the project records because the results are based upon accrual of actual delay. The owner and contractor are then able to reach an amicable agreement on excusable and compensable delay to the contractor.◉
▶ jeff.perry@systech-int.com SYSTECH INSIGHTS ▶ edition 1
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Gavin MaxwellHart Olkiluoto Nuclear Project 3, Head of Contract Management
Systech’s Gavin Maxwell-Hart is currently advising one of the major supply contractors on the Olkiluoto 3 Nuclear Power Plant in Finland, a role which has seen him appointed as Head of Contract Management. In this article he outlines the complexities of working on nuclear projects.
CONSTRUCTING THE NEW GENERATION OF
NUCLEAR POWER PLANTS
T
o put the Olkiluoto project into prospective, it is one of the largest industrial projects ever carried out in Northern Europe and will have had more than 4,000 people from 55 different countries working on the site. In 2005, Finland became the first Western European country in 15 years to give permission for the construction of a new nuclear reactor. The plant is the first European Pressurised Reactor [EPR] to have gone into construction and will produce 1600 MW. The EPR is also the only one of its generation to have been certified in the United Kingdom and two of these reactors are planned for the £16billion project at the Hinkley Point C
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Nuclear Power plant in Somerset, which is now awaiting final consent and go-ahead from the European Union. Constructing projects of such size and complexity is not for the faint-hearted. Where nuclear power is concerned there is a never ending demand for uncompromising dedication to safety through design and manufacturing quality, resulting in the highest tolerances within the construction build to give the absolute confidence in the safe operation of the plant for the ensuing 60 years. There is also the overriding necessity to gain the requisite national Nuclear Safety Authority’s approval and Operating Licence in order to allow the initial loading of nuclear fuel and the ultimate safe generation of power to the national grid.
OLKILUOTO 3, FINLAND
This approvals process demands reviews of all detailed design and construction methods and requires the production of a large volume (often in excess of 100,000 documents) of engineering reports. Then there is the co-ordination, collation and approval of the factory acceptance tests (FAT tests), test certification and quality audits and records to verify the highest performance of the quality of the as-built nuclear plant. In addition it is necessary to provide a complete trail of documentation to allow traceability of manufactured components, suppliers’ equipment and I&C installations and systems to meet the requirements of the highest safety classifications. Not only does this create a logistics nightmare but also a contractual headache between the different designers, construction companies, tiers of subcontractors, suppliers and sub-suppliers. Depending on the organisation and management structure for the construction phase, there could be between 50 and 100 first-tier subcontractors and suppliers, with a further 400 to 500 second-tier subcontractors and equipment suppliers. In turn, as you move down the supply chain the number of organisations that need to be bound into the production and supply of all the requisite safety, verification and compliance
certification and documentation is very likely to extend into the thousands. It therefore goes without saying that there must be a strong organisational and logistics structure, but this must be backed-up by an equally strong contractual relationship structure to ensure the best performance throughout
It is one of the largest industrial projects ever carried out in Northern Europe and will have had more than 4,000 people from 55 different countries working on the site.
the depth and breadth of the supply chain. This is generally taken as-read within the nuclear industry, but it does not negate the need for tight contractual control to ensure there is a “stick and a carrot” approach to award the best performers and to have the necessary tools to be able to allow control, management and stimulus for the potential non-performers. Systech has developed a strong practical knowledge of the contractual control mechanisms and an extensive expertise that will allow it to service the growth of the new generation of nuclear power plant construction across the globe.◉
▶ gmaxwellhartconsult@systech-int.com SYSTECH INSIGHTS ▶ edition 1
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Scott Park Director, Abu Dhabi
Global Claims:
A Necessary Evil?
A
fter many sleepless nights at work, John finishes his claim. He feels good about his narrative as the background history is well supported by contract clauses that give rise to major entitlements. A couple of weeks after its submission, John receives a letter saying that the claim has been rejected as it has been prepared on a “global basis.” The Delay and Disruption Protocol issued by the Society of Construction Law defines a global claim as “one in which the contractor seeks compensation for a group of employer risk events but does
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1. Page 58, The Society of Construction Law Delay and Disruption Protocol, Society of Construction Law, October 2002, ISBN 0-9543831-1-7. 2. Page 28, The Society of Construction Law Delay and Disruption Protocol, Society of Construction Law, October 2002, ISBN 0-9543831-1-7
not or cannot demonstrate a direct link between the loss incurred and the individual employer risk events.”1 The Protocol provides further guidance. “The not uncommon practice of contractors making composite or global claims without substantiating cause and effect is discouraged by the Protocol and rarely accepted by the courts.”2 Whilst many will agree that a global approach tends to undermine the strength of a claim, and should therefore be avoided when possible, others argue that there is a time and place for the global claim. On which side should you stand?
ADNEC TOWER, ABU DHABI TRAFFIC CONTROL TOWER, ABU DHABI
Traditionally, the following conditions needed to be established for each claim to be properly considered: Relevant event: occurrence of a defendant risk event supported by contract provisions. Damage: claimant suffers due to the event.
YAS MARINA, FORMULA 1, ABU DHABI
Causation: the damage incurred as a direct result of the relevant event.
Hence, a typical global claim would say that: It cost 100. Owner paid 70. Contractor claims the difference of 30.
In comparison, a typical properly developed claim would have: Loss due to incident #1 is 20. Loss due to incident #2 is 10. Contractor claims the total of 30.
For the sake of argument, what happens if it is clear that a contractor suffered losses due to various owner-risk events, but was unable to determine the exact losses for each event? Should the claim for such losses be rejected leaving the contractor to absorb the undue losses in totality? Is this equitable? In the recent and possibly the most talked about case of Walter Lilly v DMW [2012], Judge Akenhead injects some common sense into the old tradition: “In principle, unless the contract dictates that
a global cost claim is not permissible if certain hurdles are not overcome, such a claim may be permissible on the facts and subject to proof.” In simple terms: Global claims are permissible… unless the contract says otherwise. Facts and proof will be required to support the entitlement.
This leaves us with a couple of options depending whether you are siding with the claimant or the defendant. My recommendations are: If you are the claimant, prepare the losses for individual issues wherever possible. If it is not possible to avoid the claim being global, put it forward as an opening negotiation position. But, know that you will need to back it up with more details later. If you are the defendant, you can reject the global claim for the lack of information. And that the rolled up claim may be accepted in full unless you are able to prove defaults of the claimant’s own within the losses being claimed.
In summary – global claims should be avoided where possible. But if you have no other option, go global as a means of starting the negotiation. Is it a necessary evil? We will let you be the judge of that.◉
▶ scott.park@systech-int.com SYSTECH INSIGHTS ▶ edition 1
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Geoff Ansell
Director of Global Marketing and Training
EDINBURGH TRAM, SCOTLAND
Project Record Collection goes Mobile
T
here are three important basic elements required to successfully manage a project and be best prepared to deal with the many issues that arise, such as compiling the as-built programme, preparing a progress report, supporting an application for more money, applying for more time to finish the project, defending against an accusation of poor performance, challenging a particular version of events, and producing or responding to a claim:
Records, Records, and Records!
▶ To learn more
about our app, and to arrange for a trial on your project, contact geoff.ansell@ systech-int.com
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Whilst the need for records and their importance is well recognised by contractors, all too often we find that record keeping is an area of acknowledged weakness. How often have we heard a contactor say “we have fantastic records”, only to find the truth to
SYSTECH INSIGHTS ▶ edition 1
be very different? Or “we did keep site records in the day book and on a laptop...but I am not sure where they are now”. Systech International has taken on the challenge of finding an answer to this problem and our solution is a mobile phone app – the site diary app.
The App
The site diary app will revolutionise the preparation of project records, ensuring that a daily contemporary report is produced by staff with direct knowledge of the events. The app will be specifically configured for each project and Systech will help the contractor with decisions on the reporting fields to include. There is complete flexibility and example fields would be site access, daily activities being undertaken, labour and plant resources on site, work activity completion percentages,
the critical path programme activities, instructions received, delays to progress, outstanding information or the management of risk. We will also agree who in the project team will respond to each field. Questions can be altered part way through a project to take account of revised priorities or staff changes. Each individual submits their daily report (which can include photographs) to a database that automatically consolidates the responses for each project into a single PDF format, which is then emailed to an agreed distribution list early the following day. The PDF report can go to members of the project team and also the relevant managing office, allowing senior management to check that the reports are being maintained daily and that the correct information detail is being logged. If required, corrective actions can therefore be quickly implemented. The database also has a word search function allowing bespoke reports to be prepared to support, for example, on the management of the project or additional variation and claim entitlements.
A Word of Warning
Whilst the site diary app will allow contractors to prepare contemporary project records, the users must be trained in the quality and type of information to include – to avoid the risk of “rubbish in, rubbish out”. Users should also be aware that the site app records may be admitted as evidence should a dispute occur and care should therefore be taken in their compilation. Emotive and colourful language, such as that which came to light
The site diary app will revolutionise the preparation of project records, ensuring that a daily contemporary report is produced by staff with direct knowledge of the events.
Records prepared on the app at the time the work is carried out, by staff with direct knowledge of the events as part of their daily activity, carry great weight and credibility. The distribution of the daily report can include the client and other members of the project team allowing the records to be “tried” at the time of their preparation, adding further to their weight and credibility. The daily site app reports will also help contractors comply with their contractual obligations for providing notices – FIDIC “as soon as practicable”; JCT “forthwith”; NEC “becoming aware of the event”; IChemE “within 7 days of the event”; GC/Works “immediately upon becoming aware”. The inclusion of data fields on the app to record items of “change” or “impediments to progress” will act as a prompt to users and enhance their timely capture. By using the app contractors will not only have all the records they require to manage the project but will put themselves in a strong position to maximize any additional financial and time entitlements or defend criticisms.
Conclusion
With our app, you can be sure that a daily contemporaneous site diary is being maintained and be secure in the knowledge that you have all the project records you need stored in a safe and accessible location. Concerns over lost records (where is that laptop?) or indeed whether records were maintained in the first place, will be eliminated and the need to prepare easily challenged “after the event” records a thing of the past.◉
▶ geoff.ansell@systech-int.com
CROSSRAIL, LONDON
Contractual Context
in the Walter Lilly v Mackay case [2012 – EWHC 1773] should be avoided at all costs!
SYSTECH INSIGHTS ▶ Summer 2014
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Richard Morris Director, Expert Services
TOP TIPS
NEC Success Richard Morris, recently presented breakfast seminars in London and Manchester during which he shared his thoughts on how a contractor could successfully deliver a project let under the NEC form. Here are his top tips. Know your contract and make sure you understand the amendments from the standard terms. There are often many of these. Hold a collaborative workshop for the entire delivery team before the project commences. The Project Manager (PM) is not your friend! Only the PM is empowered to instruct change. Do not accept any instructions from another party. Records, records, records. if it is not writ ten down it did not happen. Use the NEC3 subcontract and make sure to pass down the amendments from the main contract. It is worth spending time and effort on the Accepted Programme. It is a suite of documents, not just a bar chart, and the latest version will form the basis for assessing compensation event entitlements – so keep it up to date too.
Sort out issues before they become problems. Put in place a robust early warning notice procedure and make sure all members of your team understand their role in the timely flagging of potential issues. Delays to early warning notices can reduce compensation event entitlements. Keep early warning notices short and to the point. Use compensation events to increase the value of the project and get “time in the bank”. Good records will help protect you from disallowed costs. If you are operating under Option A, aid your cashflow by including lots of short activities in the activity schedule. Make sure you have a properly resourced team.
▶ richard.morris@systech-int.com
▶ The breakfast seminars are part of Systech International’s comprehensive training services offering. Our training is delivered by construction and legal professionals with hands-on project experience, using a combination of academic and practical elements to enhance greater understanding. To learn more about our training services contact geoff.ansell@systech-int.com
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Systech I N T E R N A T I O N A L
Consultants backed by industry-leading support from within the business Systech International offers high-quality managed services from consultants, backed by industry-leading support from within the business. Our consultants are highly skilled professionals with an expertise gained over many years in the profession. They can call on the support of their Systech colleagues with specialist skills and experience for advice.
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SYSTECH INSIGHTS IS PUBLISHED BY: © SYSTECH INTERNATIONAL Chapter House 18-20 Crucifix Lane London, SE1 3JW Tel: +44 (0) 207 940 7656 www.systech-int.com All articles © SYSTECH INTERNATIONAL. Permssion to reproduce part or all of any article must be requested. Design and digital implementation by Lexographic.co.uk