HKA’s ultimate purpose with CRUX is to educate and empower employers, contractors, and the broader supply chain to make better judgments and choices by understanding and applying the lessons learned from its unparalleled expertise.
Too many projects lack a keen awareness of recurrent pitfalls and past successes. Consideration of these risks and opportunities can help to improve the contracting process and, as a result, minimise change and the risk of project disputes.
The data from HKA reveals the high cost of claims and disputes in terms of both money and time. The total value of the claimed conflicts on 1,100-plus projects topped $48.6 billion, and the claimed extensions of time (EOT) totalled 593 years, albeit with significant regional variance. The numerous hours of management work, as well as legal and other related fees, are not included in these calculations.
Changed Fuelled by Covid-19
The Covid-19 pandemic could hardly have come at a worse time for economies in the Middle East and Africa. As a result, companies are looking to diversify away from their historical reliance on oil-generated revenue, with oil prices at rock bottom levels. To achieve this, significant commitments in research time and CAPEX are essential as nation-states build more mixed and sustainable economies.
In a further wave of change, Covid-19 has triggered the consolidation of government agencies as well as several large developers and banks based in the Middle East. And despite significant investment targeted at increasing tourism and long-term residency to shore up economies in the region, building demand, both residential and commercial, will decline due to the departure of many expatriates.
The total value of the claimed conflicts on 1,100-plus projects topped $48.6 billion
Claims and Disputes
For CRUX 2020, the study looked at 313 projects from 26 countries in the region from 2018 to 2020, with an average CAPEX value of $1.8 billion and an average claimed dispute value of $122 million.
Change in scope leads to the updated ranking of factors behind these claims and disputes, as it has in previous years, with late approvals emerging as the next most prominent factor in 2020.Design-related issues, such as incomplete design, late distribution of design information, and design flaws, are also looming large, as they are throughout the rest of the world. This is suggestive of poor coordination of designs produced to tightening timescales. The late provision and poor coordination of design information may also be a factor in pushing late approvals towards the top of the CRUX table of causes of claims and disputes. Moreover, though ranked slightly lower in the examination of data acquired in 2020 compared to prior years, contract interpretation and management remain among the top six factors.
While HKA has observed some improvement in skills and the adoption of better practice, parties in many territories are still hampered by their incomplete knowledge of contract forms.
The study looked at 313 projects from 26 countries in the region from 2018 to2020, with an average CAPEX value of $1.8 billion and an average claimed dispute value of $122 million
Covid-related disruption has already resulted in claims, with many more on the way. However, the root causes of disagreements are deep-seated and will endure if employers and contractors do not address them – especially as market realities put their ability to keep up with change to the test.
Pathways to Resolving Disputes
Employers and contractors’ pathways to resolve their issues may be evolving, as they have in other regions.
As a consequence of tighter cashflows in the wake of Covid-19 and weaker construction markets, the number of negotiated settlements is projected to rise. Contractors are likely to prioritise early payment while avoiding local courts that are unsuited to determining complex engineering and construction issues.
Even though some Middle Eastern governments still insist on state corporations resolving disputes in local courts, arbitration is widely established throughout the region. The recent successes of state governments in a series of significant disputes will encourage even wider use of arbitration. In addition, several quasi-government institutions are adopting dispute resolution boards in the region. However, the potential benefits of this less adversarial approach are not clear when the process is managed more like an arbitration.
So, what actions can be taken to avoid disputes?
As a consequence of tighter cashflows in the wake of Covid-19 and weaker construction markets, the number of negotiated settlements is projected to rise
Act Proactively as Markets Transition
The relative maturity of their construction markets, particularly claims processes, varies substantially between the Middle East and Africa. While the causes of disputes differ, projects in both regions are plagued by late approvals, design problems due to unrealistic timeframes, and inadequate contract and third-party management. However, for each, there are practical actions that can be taken.
Late Approvals
Previous falls in the price of oil have resulted in a flurry of late approvals in the Middle East, as oil and gas corporations paused to reassess the viability of projects. More widely, demand for the latest technologies and sustainable materials has introduced a lag as employers’ engineers and regulatory authorities assess their compliance. Integration of emerging technologies with existing plant on brownfield projects is another complication.
Fewer late approvals will occur if:
- Decision-making processes within employer organisations are simplified to expedite approvals.
- Parameters for approvals are shared with parties closely engaged with design, resulting in more local decision-making and escalation by exception rather than as a rule.
- Contractors are proactive in seeking approvals as early as possible.
- Experienced staff supervise the process, ensuring submissions are complete.
- Defined review points are fixed to avoid arguments over ‘reasonable’ timelines.
- Contracts incentivise engineers to process submissions promptly and deter non-essential requests for additional information.
- The capacity, skills and capabilities of admin and technical staff are increased.
- Knowledge is passed from one design party to the next so that the design adopted can be developed rather than restarted, which inevitably slows up approvals
Covid-related disruption has already resulted in claims, with many more on the way
Incomplete Design
Unrealistic timetabling of projects tendered on immature designs is at the heart of design failures, causing more disputes across the region.
In the Middle East, competition drives prices down as contractors offer value engineered solutions that they cannot mature due to extremely tight programmes. As employers set the timescale, and the open tender price is initially decisive, contractors seek additional fees and time through variations orders
Employers also seek the lowest design price, so consultants operating on slim margins push design detail and associated risk down the chain to contractors. Claims are effectively embedded in contracts at the point of signature when design is incomplete.
Despite this, design accounts for only a modest proportion of the total capital cost of increasingly massive and sophisticated projects. Both the employer and the contractor would benefit from completing projects on schedule, within budget, and according to specifications if:
- More time was undertaken to mature design earlier, alongside more detailed early project planning.
- Greater emphasis could be placed on engaging supply chain stakeholders earlier, pre-empting latent design issues.
- Design risk was apportioned to the party best equipped to address it.
While these changes may prolong the design phase, they should not harm the entire project timetable provided construction is more efficient and effective. They would also result in greater price and schedule certainty, fewer defects and less rework, and a more acceptable risk profile.Contract Management and Management of Third Parties
In the experience of HKA, forms of contract and the roles and responsibilities of the parties involved are routinely misunderstood in the Middle East. Both EPC (Engineering, Procurement & Construction) and Design & Build contracts can be run by employers and engineers as if traditional construction-only agreements. Contractors moving into new industries, such as power and renewables, face a steep learning curve, not least in design and partnering with specialists for EPC projects
Except for those generated in-house by contractors, claims in the Middle East are becoming increasingly sophisticated.
There is a need for:
- Formal training in a wider breadth of contract forms.
- Enhanced communication between parties so that all stakeholders understand delivery timescales and contractual commitments.
- Clarity over roles, responsibility, and ownership of risk.
- Knowledge transfer from senior team members to those growing through their career as part of succession planning.
- ‘Buddying’ systems akin to those adopted in Australia so that lessons learned can be applied in the future
Risk Imbalance
As with project timetabling, risk allocation is unrealistic, and the imbalance has increased over the last 12 months. This time and risk combination is unhealthy, triggering a rash of claims symptomatic of troubled projects. Employers and their lawyers seeking to unload maximum risk should adopt a more commercial, less legalistic mindset. Contractors must deepen their understanding of contract terms and their implications.
Employers need to:
- Give contractors, who are better placed to manage time-related risks, a greater say on timescales.
- Resist the temptation to allocate Covid-related risks (as mooted for oil and gas contracts) to contractors, and explore pragmatic joint measures instead.
- Consider open-book contracts, especially for infrastructure projects where ground conditions pose unforeseeable risks
Contractors need to:
- Appreciate, as design & build specialists, the full risks they assume when moving to EPC contracts.
- Resist pressure to assume the risk of interface delays with other EPC contractors.
- Match the employer team’s sophisticated delay and quantum analytical capabilities to maximise cost recovery
There are clear and common lessons that can and need to be learned to ensure progress is made during the next 12 months and beyond.
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Email: hkasaudi@hka.com
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