NEC 3 or FIDIC? Which is most effective in managing

the most commonly identified areas of dispute within

construction?

Paul Alexander Berry

081370685

MSc. Quantity Surveying

School of the Built Environment, Heriot-Watt University

March 2013

i

Statement of Authorship

______________________________________________________________________

I..., confirm that this work submitted for

assessment is my own and expressed in my own words. Any uses made within it of the

works of other authors in any form (e.g. ideas, equations, figures, text, tables,

programmes) are properly acknowledged at the point of their use. A full list of the

references employed has been included.

Signed

Date...........

ii

Table of Contents

____________________________________________________________

Page

Statement of Authorshipi

List of Tables and Illustrations..iv

Acknowledgements...v

Abstract.vi

Glossary of Abbreviations.vii

1. Introduction

1.0 Introduction..1

1.1 Rationale...1

1.2 Research aim.....3

1.3 Research objectives...3

1.4 Outline research methods.....4

1.5 Dissertation structure....4

2. Literature Review The Construction Industry

2.0 Introduction..6

2.1 Data of industry and disputes...6

2.2 Main causes of disputes within the construction industry..10

2.3 Conclusion..14

3. Literature Review NEC 3 and FIDIC

3.0 Introduction16

3.1 Main areas of dispute.16

3.1.1 Contract choice16

3.1.2 Allocation of risk.20

3.1.3 Variations.22

iii

Page

3.1.4 Interpretation of the Contract. 24

3.2 Conclusion..26

4. Research Methodology

4.0 Introduction28

4.1Research aim and hypothesis reinstated..28

4.2 Quantitative and qualitative research..28

4.3 Research method/selection approach..31

4.4 Conclusion...33

5. Data Collection and Analysis

5.0 Introduction34

5.1 Contract choice...34

5.2 Allocation of risk36

5.3 Variations41

5.4 Interpretation of the contract..43

5.5 Conclusion..45

6. Conclusion and Recommendations

6.0 Introduction47

6.1Contract choice47

6.2 Allocation of risk48

6.3 Variations48

6.4 Interpretation of the contract..49

6.5 Recommendations..49

6.6 Further Study..50

References51

iv

List of Tables and Illustrations

____________________________________________________________

Tables Page

Table 2.1.1 Summary of TCC cases between the period 2004-2010.7

Table 2.1.2 LCIA cases referred during 2000-2011...8

Table 4.3.1 Differences between research methods..30

Table 5.4.1 Summary of readability statistics of FIDIC and NEC43

Illustrations

Figure 2.1.3 UK Construction PMI by Category of Activity.9

v

Acknowledgements

______________________________________________________________________

Firstly, I would like to thank my supervisor Dr. Roshani Palliyaguru for her support and

guidance throughout this research.

Next to my wife Laura, who has had to endure many hours of reading and reviewing my

work over the past four years.

To my mother and mother in law for their support during the study, with many

babysitting sessions.

Finally, to the people whom I interviewed and discussed the topics of the research in

depth.

vi

Abstract

____________________________________________________________

Construction contracts are the main documents used to set out contractual relationships,

lines of communication, payment mechanisms and dispute resolution procedures on

construction projects. These projects often account for vast percentages of individual or

company capital resources and a large percentage of a construction companies turnover

can be based around one project, therefore exposing all parties to a great financial risk.

When the financial crisis hit the global economy in 2008/2009 and the credit markets

ceased much of its lending capital, the construction industry was one of the hardest hit

sectors.

This raised many questions. What impact did the financial crisis have on the

construction industry? How do construction contracts manage the industry in times of

crisis? These areas became the focus of the study. The first of the two questions is

addressed by examining the historical data available over the period before, during and

after the financial crisis. The second question was considered and found to be more

complex in nature. The answer was found in the study of the nature of disputes within

the industry and how these areas changed over time. Finally, how the disputed areas

were managed by the NEC 3 and FIDIC.

Due to the large number of types of construction contracts in use today, two of the most

commonly utilised forms are considered, NEC 3 and FIDIC. These contracts were

selected for their international coverage and widespread usage. When considering

certain clauses within NEC 3 and FIDIC, NEC 3 option B and FIDIC red book have

been considered. This is due to the traditional contract delivery method found in both

NEC 3 option B and FIDIC red book which has provided a suitable comparison basis

for the study.

vii

Glossary of Abbreviations

____________________________________________________________

ADR Alternative dispute resolution

CIPS Chartered Institute of Purchasing and Supply

FIDIC International Federation of Consulting Engineers

GDP Gross domestic product

LCIA London Court of International Arbitration

NEC New Engineering Contract

PMI Purchase Managers Index

TCC The Technology and Construction Court

UK United Kingdom

0

1

Chapter 1: Introduction

____________________________________________________________

1.0 Introduction

It is well documented that the nature of the construction industry is such that it has

always been subject to disputes. There are often many factors which contribute to

disputes and which arguable became more evident when the financial crisis hit the

global economy in 2008- 2009. The devastating effects were endured throughout the

world, in all business sectors. Construction did not escape and indeed, the industry was

one of the hardest hit areas due to the inter relationship with the housing market and the

subsequent need for organisations to borrow capital in order to invest in its projects. On

a worldwide scale, construction projects were put on hold; and many ceased completely

while in progress. The number of companies going out of business was unprecedented

and the effects are still felt by the industry today.

1.1 Rationale

To examine and discuss the impact that the global financial crisis has had on the

construction industry, and in particular, to explore what the main areas of dispute are

within this industry. Furthermore to establish which, if any, of those have become more

prevalent as a result of the financial decline. Consideration shall be given to two of the

most commonly utilised contracts, namely NEC 3 and FIDIC and it shall be determined

which is most effective to potentially manage the identified disputed areas, by

examining the provisions contained therein. Finally, it will be determined whether the

said contracts contribute or indeed initiate such disputes; and specifically whether there

is one contract deemed more effective in the current commercial climate.

Many construction lawyers would say that the best way to avoid or prepare for a

potential dispute begins with the contract itself. The New Engineering Contract was

first published in March 1993 and the third edition was published in June 2005 (Gould

2008). NEC 3 is a suite of contracts with various options which are chosen depending

on the type of project and the desired outcome to be achieved. It is intended to have

sufficient flexibility in its terms to allow for any form of project delivery. It focuses on

simple, direct drafting and on project management principles. Similarly, FIDIC, also a

suite of contracts provides individual contracts for the most common forms of project

2

delivery; however each contract may need to be adapted to suit a particular project

delivery concept (Shnookel & Charrett 2010).

Construction projects can be complex and involve a team of individuals working

together, all with different backgrounds and agendas. Richmond and Coggan (2001)

define a construction project as,

...not merely a collection of inanimate tasks, they also include a mixture of

people issues, procedural issues that must also be resolved in order to ensure

that each project meets the clients requirements and supports the contractors

activities.

It is vital to the success of any project that a set of rules and guidelines is established to

determine how the documentation is most effectively utilised and how the

administration of these projects is undertaken. Contracts must be fair to both parties to

enable them to enter the agreement with confidence, and to allow any potential disputes

to be dealt with as quickly and cost effectively as possible. However, a prevalent view

in relation to construction contracts is that it is adversarial in nature, whereby the

contractor requires maximum profits with minimum expenditure whilst the client

expects high quality at the lowest cost (Dagenias 2007). A construction contract

attempts to lay down, inter alia, the rules on how the project is to be managed, the

responsibilities of each party, the payment terms, the allocation of risk between parties,

and how the contract is to be administrated.

FIDIC form of contracts is widely regarded as the most common form of contract in use

internationally. However, the NEC 3 suite of contracts are becoming more common

place and are being used by a number of major construction projects, both in the United

Kingdom and internationally, rivalling the FIDIC forms. The reasons for this and also

whether the global financial crisis contributed to the shift will be discussed further

within this research. Particular attention will be given to certain clauses contained

within the aforementioned contracts, which are often at the root of many disputes.

The global financial crisis and the subsequent lack of funding available to companies,

means that many have to endeavour to substantially reduce expenditure or face the

possibility that it may not be in a position to complete the works on a project. The

impact on the construction industry resulted in extreme measures being taken by many

3

companies in order to survive. Wilkes (2010) illustrates the desperate measures adopted

by some,

Unfortunately, when times get tough, tactics sometimes get dirty. It appears

that so-called guerrilla tactics in arbitration have been increasing. These

include, for example, attempts to derail proceedings, filing repeated

unmeritorious challenges, stalking, threatening and intimidating witnesses, and

filing litigation against arbitrators and even arbitral institutions.

One of the main aims of both FIDIC and NEC 3, is to avoid disputes arising between

the parties. This is particularly important to companies following the financial crisis.

However, a company itself is responsible and contributable (to an extent) for the

effectiveness and value of the chosen type of contract. This is another relevant area

which will be examined further within this research.

1.2 Research aim

The aim of the research is to examine the effects of the global financial crisis on

construction industry disputes and to determine whether FIDIC or NEC 3 suite of

contracts has the effective mechanisms in place to manage the disputed areas, post

financial crisis.

1.3 Research objectives

The research objectives are as follows:-

Identify the effects of the global financial crisis on the types of construction

industry disputes and determine what the main disputed areas are and whether

the nature of these disputes has changed or remained the same post financial

crisis;

Establish whether the number of disputes has increased following the crisis and

whether the cause of these disputes has changed post financial crisis;

Analyse FIDIC and the NEC 3 suite of contracts and the mechanisms contained

therein for managing the identified disputed areas;

Establish if one of said contracts manages the disputed areas more effectively

than the other.

4

1.4 Outline research methods

Deskwork: researching books, journals, newspapers, government papers,

statistics, case law and the specific forms of contracts. The aim to establish:-

o Trends in construction disputes;

o Trends in companies failing;

o Causes of construction disputes;

o Relevant clauses in the contracts to manage the disputed areas;

o Published views on the contracts in use and their management of these

disputed areas;

o Case law on past judgements on these disputed areas and examining the

contracts;

o Collate, decipher and present the information.

Field work:

o Interviews were arranged with a number of industry professionals who

have experience of both FIDIC and NEC 3. The questions were

established after the deskwork was completed in order to contribute to

the arguments contained within the research;

o Data will be examined and conclusions drawn from it.

1.5 Dissertation structure

Chapter one examines a general background to the topic and identifies the aims and

objectives of the research.

Chapter two is a literature review with a focus on the construction industry and the

impact of the financial crisis of 2008-2009. It shall then establish the main construction

disputes and how (if at all) the identified disputes have changed over the time period

prior to, during and after the financial crisis. Finally, the most common areas of dispute

shall be outlined.

Chapter three focuses the literature review on two of the most common suites of

contract in use within the construction industry, FIDIC and NEC 3, linking these to the

identified disputed areas.

5

Chapter four establishes and addresses the research methodology utilised in relation to

the study.

Chapter five shall discuss the findings of both areas of the literature review and

incorporate this with the feedback ascertained from the industry professionals.

Chapter six includes the conclusions derived from the study and provides

recommendations for future research.

6

Chapter 2: Literature Review- The Construction Industry

______________________________________________________________________

2.0 Introduction

This chapter will examine the effects of the financial crisis on the construction industry,

specifically, exploring the effects on the number of disputes within the industry. The

causes of the disputes will be established and it will then be determined whether the

disputes are linked to the wider economic environment. Thereafter, the chapter will

examine in more precise detail the main causes of the identified disputes.

During recent years construction, as with many other business sectors, has experienced

a challenging time. Primarily, this is attributable to the collapse of the financial markets

in 2008/2009. In 2013, the ripple effects of the crisis and road to recovery are still on-

going for many companies within the construction industry in the UK and throughout

the world. Arguably, the increase in insolvency and tightened control of the credit

markets together with the global financial crisis have all led to an increase in

construction disputes. As a direct result of this, there have been more disputed claims

for payments, with many contractors seeking recovery of payment from clients which

have limited funds. Variation, latent conditions and claims for delay are also disputed

areas in which there has been a rise (Frei 2010).

There is a common perception that the number of disputes will rise whenever there is a

downturn in general market conditions. This may be accurate to an extent, however as

the research will discuss further, simply the nature of the construction industry itself

means that disputes have always been an issue. That being said, the current market

conditions certainly provide an environment likely to bring underlying disputes to

fruition.

2.1 Data on industry and disputes

Within the UK, the figures released by the TCC do not provide a particularly positive

picture with regard to the number of claims during the peak time of the financial crisis

(2008 -2009) compared with previous years. The report for the year ending 2009 was

summarised as follows:-

The TCC (Technology and Construction Court) recorded in the period October

2008 till September 2009, 516 new claims brought in London alone. This was

7

compared to, 366 cases in 2007 2008, 407 cases 2006 2007, and 392

cases 2005 2006, which represents the highest case load in the courts

history(TCC Report 2009).

However, when examining disputes over the past 6 years, there has not been a

substantial rise, as was indicated in the TCC report. This is illustrated in table 2.1.1

below. As can be seen, the total number of claims indicates that the amount of new

actions raised over the regions covered by the TCC, does not differ substantially with

past figures. In particular, in 2006-2007 there was an increase in the amount of actions

raised.

Table 2.1.1 Summary of TCC cases between the period 2004 -2010

Source: Beale and Company Solicitors LLP

A firm of solicitors carried out a study in September 2011, on the work performed by

the TCC over several years and discovered that within two separate periods, 2008-2009

and 2009-2010, the number of claims issued remained largely the same; and there was

an increase in the numbers recorded in the two previous periods (2007-2008 and 2004-

2005). It is evident, from this that claimants willingness to revert to court has not been

inhibited as a result of the economic recession (Vernon 2011). However, when

examining the slow-down in construction output within this period, one would expect

claims to rise, as the indicated by the TCC summary. It may be the case that this has

not occurred as sub-contractors, particularly, are often reluctant to pursue these matters

due to the cost and time involved. Indeed, another possibility may be that main

contractors do not want to jeopardise future work from larger clients, which may result

from raising an action against them. Evidently, it may be the case that ADR techniques

are working effectively and subsequently these cases are not reaching the TCC. Wilkes

(2010) recognised that the 12 month period prior to November 2009 had seen, the

steepest rise in casework referrals in the history of the institution

Table 2.1.2 below illustrates the number of disputes referred to the LCIA was

formulated over the past ten years.

8

Table 2.1.2 LCIA cases referred during 2000-2011

Period 200

0 -

200

1

200

1 -

200

2

200

2 -

200

3

2003

2004

2004

2005

200

5 -

200

6

2006

-

2007

200

7 -

200

8

200

8 -

200

9

200

9 -

201

0

201

0 -

201

1

Disputes

referred

158 159 192 191 204 251 270 352 506 552 504

Source: LCIA Annual Report 2011

Diligence must be taken in interpreting these figures as the LCIA does not deal

exclusively with construction issues but a wider range of areas. These include, inter

alia, the sale of aircraft, oil exploration, buying selling of commodities, IT and

insurance. The figures within the table 2.1.2 provide an idea of the volume of disputes

within the general business community, which construction plays a significant role. It

was reported that the construction industry accounts for 8 per cent of gross GDP in the

UK (OConner 2012).

Eight other arbitration institutions around the world have been identified, reporting the

same rise in referrals. These include the Arbitration Institute of the Stockholm Chamber

of Commerce; the Hong Kong International Arbitration Centre; and the International

Arbitral Centre of the Austrian Federal Economic Chamber (Wilske 2010)

If business in general is showing signs of an increase in disputes, it is important to

identify why this is not subsequently reflected in the cases referred to the TCC. It is

possible that many of the companies involved in disputes have, for example, simply

been liquidated or dissolved. Kollewe (2009) recognised during the height of the

recession in 2009 that, The property and construction sector is being hit hard, with

administrations up 73% compared with 2007, as house prices continue to fall and

mortgage approvals hit all-time lows.

In 2009, the Construction Index reported that:-

429 companies entered into administration;

1059 companies entered into liquidation; and

245 companies entered into receivership.

9

These statistics demonstrate the number of businesses which collapsed during 2009

when the full force of the recession was felt. For a significant percentage of companies

who have folded, it is certain that at least one or more of its on-going disputes would be

dropped and therefore not reported; reducing the number of disputes which were

recorded.

Figure 2.1.3

Source: CIPS 2012

Figure 2.1.3 illustrates the construction industry workload increasing back to pre-

recession levels. Due to the increased workload, it would be expected that the disputes

would start to fall back to pre-recession levels. However, this this does not appear to be

the case. Construction Index reports that in 2010, 323 companies entered into

administration; 1307 companies entered into liquidation; and 181 companies entered

into receivership. The TCC are still reporting new case referrals, with 873 referrals in

2011 being one of the highest levels in the past seven years. The LCIA reported a

referral rate of 504, only 2 less than 2008/2009. The number of referrals is still high

and it is obvious that there will be a ripple effect for the next few years in terms of the

impacts of the recession. This contributes to the figures remaining higher for a further

period of time.

10

In reviewing recent data results, Harris (2012) concluded that current industry data

shows the cost of construction disputes rising from an average of 4.6 million in 2010

to 6.5 million in 2011. The time taken for disputes to be resolved is also increasing

from 6.7 months in 2010 to 8.7 months in 2011. Disputes within the construction

industry still appear to be occurring more frequently, be more costly and are take longer

to resolve. Therefore, although it would be expected, a direct result of the downturn in

the financial market conditions that the number of disputes would increase (which in

some cases they have), it must be borne in mind that the nature of the construction

industry means that even when the global economic climate is strong, there will always

be a large number of disputes. The construction industry appears to be coming through

the recession with workloads increasing and continuing to improve, reverting back to

levels similar to those pre-recession (CIPS 2012).

2.2 Main causes of disputes within the construction industry

It is evident from the previous sections that construction disputes may fluctuate with the

economic environment. That being said, regardless of whether the financial climate is

buoyant or whether there is a downturn, disputes within the industry will always be a

major issue. The main cause of these disputes will be examined below.

Harris (2011) has stated the top five causes of disputes in construction contracts, as:-

Failure to properly administer the contract;

Ambiguities in the contract documents;

Failure to make interim awards of extension of time and monetary relief;

Unrealistic risk allocation between employers and contractors;

Change imposed by the employer.

Contractual issues such as incorrect contract selection and failure to administer a

contract correctly are among the most common failures which contribute to many of

these disputes.

Firstly, if we turn to examining risk allocation which is fundamental to the contract

choice, Smulian (2012) identified that sufficient risk allocation is required before the

type of contract is selected. Often a contract is taken off the shelf and the parties simply

fit the project to what the contract requires as opposed to meeting the clients

11

requirements. There are crucial decisions and issues that need to be addressed at the

very inception of a project such as:-

How much responsibility will the client agree to, or, what are its capabilities in

having responsibility for the project?

How much influence does the client want to have over design and quality

issues? and

How critical is timescale and budget to the overall success of the project?

It appears to be more about understanding what the client needs in terms of the

procurement route and what contract will best ensure that the clients requirements are

met. Defining all contractual relationships clearly, establishing what is expected of all

parties to the agreement, and allocating the risk to the party best able to manage that

risk, are the basics of many construction contracts. By conforming to this criteria and

ensuring that the initial stages of the tendering process are carried out with these factors

borne in mind, the project will have more chance of a successful conclusion.

Once the client has decided how much risk it is prepared to accept, and how much risk

must to be passed on to the contractor, the appointed consultant and the client can then

start to explore procurement routes and decide on the most effective contract in order to

administer a project in the most efficient way.

Documentation required for the purposes of the contract, such as drawings,

specifications and possibly bills of quantities, must then be collated in order to satisfy

the requirements of the procurement route and chosen contract, before tenders are then

invited. However, the tender process can also be a cause of dispute in itself, with

contractors having to price work on incomplete contractual documents and scopes of

works that are not clearly defined. This can subsequently lead to disputes. In the

competitive tendering process, together with incomplete contractual documents, the

desire to submit the lowest price also brings problems. It is commonly identified as a

dispute area based on the fact that for many contractors it is deemed to be the primary

selection factor (Love 2010).

This method of tendering often leads to contractors cutting profit margins and

subsequently trying to claim variations and extensions of time under the contract, some

of which may not be warranted, in order to try and recover any shortfall or elements

12

which may have been overlooked. Typically, this may include items such as service

connections or permits for the works. When contractors are working under tight

margins, claims for variations, latent conditions and delay claims may arise more

frequently (Frei 2010). Although there are many different ways in which a project is

tendered, competitive tendering is still the most common way to tender construction

projects.

Prior to the commencement of a project, there are a number of obvious areas which

must be addressed and which, if not addressed correctly, can have potentially disastrous

consequences on any project. Examples of these include:-

Poor allocation of risk;

Wrong procurement route choice;

Wrong contract choice;

Poor contract documentation;

Unfair tendering processes.

Many projects commence with the contractor attending on site, with all or some of the

aforementioned failings having occurred before the contractor has any direct input into

the project. Subsequently the contract cannot be administrated effectively. It is

important to understand the reasons as to why decisions are made on how the project is

to be managed and thereafter the part they play in contributing to the cause of disputes.

This highlights the importance of selecting the correct contract, procurement route and

tendering process.

Failure to properly administer a contract was the most common cause of dispute in

construction contracts in 2010 and 2011 according to statistics released by Harris

(2012). This can include a wide range of issues, and is primarily an issue in relation to

the type of contract chosen; the interpretation of that contract; and how this should be

effectively administered throughout the construction of the project from both parties

(i.e. the client and the contractor).

One reason highlighted as a cause which may lead to the failure to properly administer a

contract, is the use of new types of contracts and the lack of skills and understanding of

the necessary requirements for these contracts. Similarly, simply choosing the wrong

13

contract for a particular project can have very serious repercussions. Smulian (2012)

states, .problems are stemmed from clients spending too little while procuring the

contract on the technical and legal advice needed to deliver the job. Furthermore,

Enthusiasm for contracts such as NEC3 led to these being adopted without adequate

budgeting for the level of administration support needed.

Another common problem at the beginning of a project is the parties (i.e. the

consultants appointed to draft the contract) lack of understanding in terms of what the

client requires and therefore selecting the correct contract to achieve these objectives.

All parties must be aware of their own responsibilities before entering into a contractual

agreement. It is essential for the success of any project. However, this issue continues

into the management of the contract with those who are administering the contracts not

doing so in an effective manner. Once the contract has been established, undoubtedly

the correct people in the correct position who have the correct skills to carry their role

within the team are a vital part of getting the project to be administered effectively.

This is not a new problem as Smith and Waldron (2009) point out,

As far back as 1994 there was a problem with the industry using the wrong

people in the wrong position within a project and in the Latham report which a

common thread within his report was one of constructing a team based on

natural talent, and playing to the skills of team members.

In 2010, the skills of the workforce were still in question. Love et al (2010) stated that,

The client group suggested that the prevailing skills shortage was a

problematic issue for consultants and contractors, and this was affecting their

ability to deliver services within specified time frames.

This is still an issue in 2013. It is often thought that the main issue is that the

individuals who are responsible for carrying out certain tasks are not doing so

effectively. It is highly likely that due to the nature of the industry, mainly with ease of

entry, that problems such as this have been an issue for much longer than documented.

During times of high workloads and high margins it may be possible that there are

individuals in the wrong positions and this may be overlooked. There is opportunity to

make money elsewhere on the project and mistakes can be, and often are hidden.

14

This is deemed not only a problem for the client, but contractors have responsibility for

administering its part of the contract by providing information and applications in the

designated time frame set out. If this is not achieved, then problems may arise. Harris

(2012) highlights the problem in relation to interim extension of time and monetary

relief as,

.directly related to the failure to provide interim extensions of time and

monetary relief. This issue would appear to have a number of features directly

related to the quality and standard of substantiation provided to support the

application.

Under most construction contracts there is a mechanism for claims for extension of time

and the recovery of monies over and above the agreed price and timeframe. Not

surprisingly, this area is also highlighted as a main cause for disputes within the

industry. A client representative was quoted as saying,

Contractors dont seem to plan for changes; I mean even the smallest change.

There is no contingency and a slightest change means that they claim for an

extension of time and or disruption because they are reactive. We dont take this

nonsense from them Loval et al (2010).

The fact that confrontational attitudes are commonplace within the industry only makes

the opportunity for a dispute to arise more likely. Providing a contractor is attempting

to mitigate any delays, then within all construction contracts are provisions for the

contractor to claim for additional time or payment.

The reason these mechanisms are in place is so that they can be utilised when the need

arises. There are a number of reasons under which a contractor will be entitled to make

a claim under this section of the contract. These may include client changes; inclement

weather; delays by external parties; changes to the law.

2.3 Conclusion

It is clear that although the construction industry has been adversely affected by the

financial crisis, the amount of disputes has not been substantially affected, but remains

consistent with past figures. The main causes of disputes also remain consistent with

past years and were found to be:-

Allocation of risk;

15

Contract choice;

Interpretation of the contract; and

Variations.

16

Chapter 3: Literature Review NEC 3 and FIDIC

______________________________________________________________________

3.0 Introduction

Having examined the background and causes of construction disputes, this chapter will

go on to describe and analysis (to an extent) two of the most commonly used contracts

within the construction industry, namely NEC 3 and FIDIC. Furthermore it will be

established which suite of contracts most effectively manages the construction industry

today. The previous chapter identified main causes of disputes within construction

contracts. The areas shall now be examined in further detail and in relation to NEC 3

and FIDIC.

3.1 Main areas of dispute

3.1.1 Contract choice

The choice of contract is critical to the successful outcome of a construction

project. If not chosen correctly there can be serious consequences for the

project. There are a number of standard forms of contract suites available and

most offer different options which can be chosen to suit the way in which the

project is being procured. FIDIC and NEC 3 suites will be examined in detail.

First, the options available will be highlighted then focus will be primarily on

FIDIC Red Book and NEC 3 Option B, whilst focusing on the actual content of

the contracts generally. Both the aforementioned contracts are for traditional

procured contracts, where the design is mainly the responsibility of the employer

and the project is thereafter tendered.

Whilst initially considering the contract to be utilised, the actual way in which

the contract is to be procured must also be determined, as the majority of

construction contracts are set up to deliver a project in a particular way. There

are various issues to consider at this stage such as:-

Complexity of the works;

Type of project;

Level of risk that the client is willing to undertake during the project;

Determining the party responsible for the design works;

Financing the project;

17

Employers experience and expertise;

Method of determining final price.

Within the NEC 3 suite of contracts the following options are available for the

project delivery method:

Option A (priced contract with activity schedule);

Option B (priced contract with bill of quantities) provides that the

contractor will be paid at tender prices. Basically, a lump sum contract

approach;

Option C (target contract with activity schedule);

Option D (target contract with bill of quantities) provides that the

financial risks are shared between the contractor and the employer in

agreed proportions;

Option E (cost reimbursable contract); and

Option F (management contract) is a cost reimbursable contract, where

the risk is, therefore, largely taken by the employer. The contractor is

paid for his properly incurred expended costs together with a margin.

Within the FIDIC suite of contracts the options available for the project delivery

method are:-

Red Book (traditional contract design completed by employer - the

accepted contract amount based on estimated quantities and re-

measured);

Yellow Book (design by contractor, lump sum contract);

Silver Book (turnkey contract, lump sum most risk transferred to

contractor);

Green Book (for smaller contracts traditional contract);

Gold Book (design, build and operate contractor design builds and

operates).

There are other options available for specific areas, such consultancy work and

dredging, however these are outside the scope of this paper.

Having decided the way in which a project has to be delivered and thereafter

considering what standard form to use, there may be a requirement to alter the contract

further in order to suit a specific project. There are different views when selecting the

appropriate standard form for a project in relation to amending a contract.

18

As observed by Allen (2010), The contract itself needs to be fitted around the project

constraints and characteristics and not the reverse. Furthermore, Griffiths (2011)

argues that, no contract should be changed at all under any circumstances.

In the event that a standard form is not presented in such a way, that all parties to the

contract understand and can interpret it correctly then this can result in substantial

problems. More often than not, professional legal advice is not sought and there is little

or no precedence to clarify legal points which have been raised in previous disputes. In

a bid to drive down time and costs at the tender stage it is imperative that the contractors

bidding for the work are familiar with the content of the contract and are comfortable

proceeding without the advice of legal advisors. Furthermore, even when the advice of

professionals is sought often it can be done so with a view to tilt the effects of the law

with the intention of favouring the parties position. The case of Bridgeway

Construction v Tolent Construction Ltd illustrates this point and also that the tendency

to skew the contract is not always confined to that of standard contracts.

Smulian (2012) observed that risk allocation,

you need to do proper risk allocation then choose the contract, instead

people take a contract of the shelf and say, oh it says design and build so we`d

better do it that way, rather than look at the clients requirements.

The point made by Griffith when considering the party who is making the contract, that

participants in the construction process to often seek to gain an advantage,

illustrates that meeting the clients requirements may mean giving them an unfair

advantage over the contractor who may not yet be involved with the project. Arguably

however, this should not be a problem. The Property Council of Australia has standard

form PC1-1998 which claims not to aim to balance the competing interest of the

employer and contractor and believes that, the people who initiate and pay for

buildings and construction projects are entitled to set the agenda and allocate the risks

(Shnookel and Charrett 2010). It is evident that standard contracts are essential for the

construction industry insofar as lowering cost and the time required constructing

contracts. Through frequent use, the parties to a contract become familiar with the

clauses and therefore more confident in its interpretation. It must be remembered,

however, that due care must be taken not to become complacent. The critical factor is

that the parties to the contract are aware of what their duties and responsibilities are

under that contract and the consequences of not adhering to these.

19

It has been determined that mechanisms must be included within a contract to allow the

standard form to be moulded to suit the particular project. We shall turn now

specifically, to the mechanisms incorporated within NEC 3 and FIDIC in order for the

contracts to be tailored to a specific project.

NEC 3 is set up in the following way: -

Options A to F which provide different procurement routes and methods of

payment for a contract;

There are core clauses which are common to all options A to F;

There are specific clauses depending on the chosen option;

There are clauses for two alternative dispute resolutions, namely W1which can

be used when the Housing Grants and Regeneration Act 1996 does not apply

and gives a table of who can refer to adjudication together with timescales. W2

is usually used in the UK and gives the parties the right to refer any dispute to

adjudication at any time one of these options must be chosen;

Optional clauses can then be chosen for the secondary options available, if

required, for a particular contract.

The secondary options are crucially relevant to the argument of whether a standard form

should be altered to suit the client, or, whether it should be left in its standard form

regardless of the nature of the project. The secondary choices are optional for the

parties. There are another two choices not previously mentioned. The Y clause is

concerning the governing country of law of the contract. The Z clause is providing the

opportunity for a party to include additional clauses in order to shift the onus of risk to

the other party. The more contractual terms of a contact are amended, the higher the

risk of confusion and complexity.

Allen`s (2010) opinion, as previously stated, appears to be suggesting that a contract,

such as NEC3 should be used with the option of clause Z, allowing the party selecting

the contract to make choices that enable the contract to suit a specific project and not

simply in order to make a project fit a standard contract, as previously discussed.

FIDIC also allows for contract specific requirements. FIDIC contracts consist of

general conditions and particular conditions of the contract. The general conditions are

the clauses and sub clauses that are deemed to be applicable to the majority of projects

as a whole. If a clause is not relevant to a particular contract it should be removed or

20

not enforceable. To alter a general condition of a FIDIC contract, a license must be

granted by FIDIC itself. However, the particular conditions should be made up to suit a

specific contract. Within the conditions of contract options, it provides sample wording

on particular conditions. It is stipulated that if the said wording is not appropriate, then

care should be taken so there is no risk in introducing ambiguity by inserting additional

clauses, both general and particular.

Although FIDIC does allow for amendments to be made, it attempts to steer the drafter

in the direction of the parameters of the intended meanings of the clauses. It also

incorporates some 20 general condition clauses, compared to NEC 3 which only has 9

core clauses. Within FIDIC the option is available to amend a particular condition,

similarly to the Z clauses in NEC 3.

One of the most important decisions that must be considered when selecting a contract

is the amount of risk that the client is prepared to accept. Clients requirements are all

different. The consultant selected to procure a project must advise accordingly, having

analysed the clients requirements and capabilities thoroughly.

3.1.2 Allocation of risk

Risk is dealt with primarily at the contract selection stage. The chosen procurement

route determines the level of risk the client is prepared to accept before then entering

into a contract. When the contract is being executed, both FIDIC and NEC3 manage

this area in different ways.

Within the introduction to a FIDIC contract, there is a statement relating to the

distribution of risk, which states,

One of FIDIC`S aims has been to produce documents which offer a fair

balance of risk between contracting parties and to ensure that the risks incurred

by the parties to contract are clearly identifiable and understood.

The underlying philosophy of FIDIC is that the employer is best placed to manage the

risks that an experienced contractor could not reasonably be expected to anticipate

during the tender stage, find are beyond their control, or find are not readily insurable

(Roe and Ramzan 2011). Griffiths (2011) commented on NEC 3 that,

21

it`s claimed superiority is based on replacing the more traditional forms

with Project Management practices and the partnering principle of mutual trust

and co-operation, expressed up front in core clause 10which highlights the

focus that NEC 3 has on strong project management principles.

Both NEC3 and FIDIC start with the post contract allocation of risk in the same way.

Within NEC3, clause 80.1 states, plus any additional risks accepted by the employer

named in contract data part 1. FIDIC, clause 17.3, provides, a list of risks to be

undertaken by the employer. Both contracts place all other risks with the contractor.

NEC 3 takes the management of risk further by introducing a management system of

risk register, early warning, and risk review meetings. This system works by a

predefined register of risks being identified by the employer and contractor and is built

upon throughout the course of the project by either party issuing an early warning.

After this time a risk review meeting is then held whereby the risk is discussed and

entered into the risk register. The project manager simultaneously advises on the course

of action to be taken. When managed by the parties in a collaborative manner, this can

be an effective tool (Sliwinski 2013). Often confusion can arise between risk

management and risk allocation. The distinction can be blurred as a result of clause

80.1 which allows additional risks to be adopted by the employer by adding them to the

contract, whereas both risk allocation and risk management are supposed to be

standalone provisions (Carrick 2010).

The risk register is included in NEC 3 contract data part 2, to be completed by the

contractor. This has no contractual relevance, however forms a part of the management

system incorporated to encourage the issue of risk to be discussed between the parties.

Blackburn (2012) observes, on the use of systems such as the NEC3 risk management

system that:-

Risk management tools are often not used, or are operated in a cursory

way such they become ineffective with both parties losing the benefit that

would flow from the process if it was properly implemented;

Many people seem to approach risk management as a tool to enable them to

progress the works, rather than a complete management tool;

Some see risk management as a hurdle to be overcome rather than a tool to

be used to for the benefit of the project or to their advantage.

22

The provision within FIDIC to make each party aware of any impending risks, is

partially provided for under clause 8.3 programme. This clause only requires the

contractor to give notice of any, probable events and circumstances which may

adversely affect the work, increase the contract price, or delay the execution of the

works. It may be considered an implied term that the employer should do the same.

NEC3 has incorporated the management system in place to deal with post contract risk

allocation; however the actual wording of the clauses appears to have caused some

confusion in terms of its interpretation as to how these measures should be applied.

While FIDIC allocates the risk to the parties at the commencement of the contract and

then is dependent on the contractor advising the employer should a problem arise.

3.1.3 Variations

Both FIDIC, red book and NEC3, option A are based on a traditional procurement

method. They also follow both the new and old Royal Institute of British Architects

plan of work where the design should be essentially completed before the project is

tendered (Merlin & Mark 2012). The client carries all risk for design changes and

variations to the scope of works, unless this is caused by the fault of the contractor.

The impact of construction variations on a construction project can have a substantial

impact to the successful outcome of the project. Even the most successful projects can

account for 5-8% increase in cost (Cox et al 1999). It is therefore obvious why

variations are one of the main sources of dispute in construction projects. When a

substantial increase to the final cost is not allowed for in the clients forecast or the

contractor`s price, this undoubtedly causes problems. Not only are there direct costs of

the variations such as resources, materials and time of carrying out additional works, but

also indirect costs that are not easy to quantify. Bower (1999) provides examples of

indirect costs which include:-

Rework and lost effort on work already undertaken;

Time lost in stopping and restarting current tasks in order to make the

variation;

Change in cash-flow, financing costs, loss of earning etc.;

Loss of productivity due to reprogramming, loss of rhythm and unbalanced

gangs;

Revision to project reports and documents;

23

Loss of float therefore increased sensitivity to delay.

Traditionally, the costs had been left until the end of the contract, when all disruptive

effects are rolled up and the parties are left to argue the impact and cost of such events.

However NEC3 does not allow for this, as the variation is named as a compensation

event and the contract encourages the parties to resolve time and cost implications as

and when they arise. Robinson (2012) stated that,

The idea is that the parties interests to agree a predication as to what time and

cost generated by a compensation event, rather than to become embroiled in a

dispute at a later point.

NEC3, although encouraging discussion and management of such events, imposes a

time bar on the contractor in terms of the timescale it has to inform the project manager

of a compensation event. FIDIC also enforces that the contractor must inform the

engineer of any issues that may cause it to make a claim within a certain time frame or

lose the right to that claim. Both NEC 3 and FIDIC have provisions which require the

contractor to give notice for any minor change or subsequently face losing the right to

claim at a later date. In relation to this issue a main difference between FIDIC and

NEC3 is highlighted by Champion (2008),

Under the NEC form the duty would be to notify within eight weeks of

becoming aware of the event. But under the FIDIC form, the duty to notify only

arises when it is perceived that he may be entitled to additional time or money,

which may be months or years later.

Within FIDIC the onus is on the engineer to prove that the contractor was aware that the

event would lead to additional time and/or cost to the project. Whereas NEC 3 requires

the contractor to notify as soon as it become aware of any change to the scope. This

may appear irrelevant when considering a variation to the contract, insofar as it may be

understood that the variation would take the format of a clear instruction. In reality,

however, this is not always the case. The instruction may be recorded in the minutes of

the site meeting, verbally given on a site visit, or noted on drawing comments. If

overlooked the contractor may be challenged to prove that it was not aware of the

variation, which could spiral subsequently into a dispute.

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3.1.4 Interpretation of the contract

Interpretation of the contract is a cause of dispute for various reasons. The main reason

being a lack of understanding from the parties administering the contracts, specifically,

failing to understand their roles and responsibilities; the correct timing for when tasks

are to be carried out and the consequences resulting from tasks not being undertaken.

Another school of thought on this area is that the parties administrating the contracts are

simply ignoring many of its terms. Broome and Hayes (1997) found that many industry

professionals commented that it is often said,

that on the best projects, the contract is left in the drawer and numerous

resident engineers, project managers and contractors employees have told these

authors that to run a project by the terms of the existing standard conditions

would mean that progress onsite would be at best slow and often impossible.

The opinion of Broome and Hayes was in a general context and not referring to any

particular form of contract. Timescales given within a contract are to be used as

guidelines and attempt to aid in keeping the project moving forward.

The terms of a contract should be clear, concise and laid out in a manner that is easily

understood. NEC advised that the main characteristics in relation to a contract are,

that it is a clear and simple document using language and a structure which is

straightforward and easily understood. This is a well-documented aim of the NEC

form of contracts, to ensure that contracts are clear, simple to use and written in plain

English. However, as will be evident later in this chapter, care must be taken when

administering the contract. It is important that careful consideration is given to the

actual words of a contract, so that those interpreting the contract do not get lulled into a

false sense of security by simple wording which may be too clever (Broome and Haye

1997).

FIDIC forms of contracts also claim to be written in a manner that utilise a style

and format that can be readily understood by construction professionals (Jaeger

and Hok 2009). The word professional implies that the individual utilising the contract

may have some form of formal training.

Jaeger and Hok (2009) have published information on the use of FIDIC in civil law

countries as opposed to common law countries such as the UK it examines the language

used within a contract. It describes the language used as being, aimed at users who

25

have knowledge of legal writing ...and furthermore that, It is critical that the English

language used by FIDIC involves the understanding of legal English. A more

sophisticated understanding of contractual terms, vocabulary and abbreviations is

sought, more often than not, in the use of FIDIC forms of contract (Jaeger and Hok

2009).

In relation to whether NEC has achieved a clear contract that is easily understood and

also whether FIDIC is more complex and difficult to understand compared with NEC,

two main studies have been explored. Broome and Haye (1997) focus directly on NEC

and whether a clear document has been produced. Rameezden and Rajapake (2007)

(considered later in the research) compare the readability of both FIDIC and NEC and

the understanding from industry practitioners. The findings of both shall be discussed

further within this research.

In 1996 a survey was carried out by Broome and Haye to try and establish whether the

NEC 2nd Edition contract had achieved what it had set out to do and also whether it

provided a clear and easily understood document. They interviewed 81 personnel, from

all aspects of the industry, involved with the use of NEC contracts. Relevant points of

their findings are as follows:-

Easier to understand. However, it was noted that the plain English may be

too clever and as such result in people not giving the words full

consideration;

Clearer risk allocation. It was agreed, without exception, that the definitions

of employers risk, as compensation events are clearer than in any other

contract form;

Clearer roles. The roles and duties of the project manager and supervisor are

generally felt to be well defined in the NEC compared to the roles of the

resident engineer or architect in other forms;

Clearer procedures working at site level. After the initial learning curve is

over and the project is properly resourced to deal with the problems as they

occur then it is easier to make work because the procedures are logically laid

out and charted;

NEC procedures have been used on successful projects to help solve

problems rather than apportion blame after the event.

26

Although the findings were predominantly in relation to at NEC, the authors also stated

that FIDIC conditions are poorly laid out and contain long sentence lengths. They also

found that there were many redundant legal expressions (Broome and Haye 1997).

It is evident from the findings that NEC 2nd

edition had already produced a clear and

easy to use form of contract which defines roles and responsibilities of the parties

tasked with administrating the contract. NEC has incorporated a number of changes to

the 3rd

edition consisting of valuable feedback from the industry and 10 years use of the

2nd

edition. However, it is arguable whether this makes it more understandable and

easier to use than the FIDIC forms.

3.2 Conclusion

FIDIC and NEC 3 both offer a wide selection of project delivery choices in relation to

the different options that are available. There is a difference however, in the way which

the particular contracts are moulded to suit the specific project. NEC 3, Z clause

appears clearer as the sole place to make an amendment is by adding a Z clause. This

enables the user to build confidence when regularly using the document. FIDIC is not

found to be as clear, as the particular conditions section forms a large part of the

document and this can be altered primarily with the recommended wording. However,

this does not always result in the opportunity to substantially change the meaning of

some core clauses.

When considering post contract risk management, NEC 3 incorporates a management

system in its terms which, if used correctly, can be of a great benefit to a project.

However this is not always the case. During these times of austerity, it may be thought

that the introduction of additional systems and resources to manage these systems is an

expense that is not warranted. The more traditional method, found within FIDIC, of

allocating risk at the start of the project and managing any future risk as they become

apparent, appears to be better suited to the current times and unless the project is highly

complex or larger scale, then FIDIC would be the better option.

By naming a variation as a compensation event, NEC 3 ensures that the variation is

dealt with as and when it arises. This should prevent any conflicting views at the final

account stage when the employer and contractor have long since moved on from early

events. However, it is argued that the full extent of the impact from the variation may

27

not initially be evident. This only affects a small number of cases however and therefore

does not prevent the opportunity to deal with events as and when they arise or make it

less appealing. The time bar clause included in both FIDIC and NEC 3 is found to be a

fair clause. In both cases if a party becomes aware of an issue and does not disclose it,

this would go against all moral standing.

NEC 3 is certainly clearer and easier to understand when comparing both contracts.

The argument that it may be too clear has been unfounded and it has been found that

NEC 3 achieves what it has set out to do and provides a clear and easily understood

document. The only confusion appears to come from the introduction of the contractors

register which has no contractual significance whereas the employers risk register does.

FIDC has been found to require professional training to understand its terms. This may

not be a detrimental requirement as those entering into contractual agreements in the

construction industry should be trained in the agreements they are entering in order to

fully understand its contents and implications.

28

Chapter 4: Research Methodology

____________________________________________________________

4.0 Introduction

The purpose of this chapter is to identify and explain the rationale behind the chosen

research methods.

The aim of this research is to establish what the impact on the global financial crisis had

on the construction industry and specifically to discover if the common areas from

which disputes arise within the area have changed. It shall then aim to consider two of

the most popular international construction contracts in use today and if either of these

is more suited to the construction industry after the financial crisis of 2008/ 2009 than

the other.

The research has been carried out in two stages. The first is a literature review. The

second was to conduct interviews with a number of industry practitioners from both

client facing and contracting backgrounds. The literature review was divided into two

sections. The first was to establish the impact of the financial crisis on industry disputes

and determine whether the nature of disputes had changed due to the crisis and then

establish the main areas of dispute at this time. The second part of the literature review

was to analyse two contracts, NEC 3 and FIDIC, in relation to the identified disputed

areas and determine which (if any) is most effective in managing the disputed areas.

4.1 Research aim and hypothesis reinstated

The aim of the research is to examine the effects of the global financial crisis on

construction industry disputes and determine what the main disputed areas are.

Thereafter to explore whether FIDIC or NEC 3 suite of contracts contain effective

mechanisms to in order to manage the established disputed areas in the aftermath of the

global financial crisis.

4.2 Quantitative and qualitative research

Quantitative research is a numerical study of data gathered. There are arguments that

this type of data gives solid evidence which is easily understood. The information

gathered can be presented in a tabular or graphical form giving clear answers to

29

questions asked. This method was utilised particularly at the beginning of the study to

establish trends in disputes which had been referred to the courts before, during and

after the financial crisis. Within the study, repeatability of the nature of case referrals

was studied over the years to establish trends in the courts. This was helpful in

establishing whether the cause of disputes changed over this period, and the nature of

any changes and causes. Amaratunga et al (2002) described a weakness of the

quantitative method research, that it only gives a snap shot of a situation. However, this

was effective for the first area of the study as this was what was required in order to

examine the impact of the financial crisis.

Qualitative research differs from quantitative as it considers questions such as how, why

and what. It attempts to understand why people act in a certain way and in real

situations. This method can take the form of observation, unstructured interviews,

archived writing journaling and photographs, all which allow the researcher to develop

an overall picture of the investigation. The interview was thought to be the best form of

establishing the general feeling of the selected construction contracts and their practical

application. This was also deemed as an opportunity to try and establish, for example,

if the selected professionals genuinely understood the contracts themselves, with this

being one of the identified disputed areas. If a questionnaire was issued instead, the

respondent would have had the opportunity to conceal the fact that they did not

understand the contracts in some way. It was anticipated that the relaxed atmosphere of

the interview would allow the researcher to decipher the interviewees answers based on

their response. Indeed Nuttalls (2011) view on qualitative research enforces this idea

as it was described as achieving a, deep, often contextual, emotional understanding

of peoples motivations and desires.

30

The table below highlights some of the differences between the two methods,

quantitative and qualitative.

Table 4.3.1 Differences between research methods

Quantitative Qualitative

Inquiry from outside. Inquiry from inside.

Underpinned by a

complete set of

epistemological from

those in qualitative

research.

An attempt to take account for the differences between

people.

Are simply different

to the same end.

Aimed at flexibility and lack of structure, in order to allow

theory and concepts to proceed in tandem.

Involves the following

of various states of the

scientific research.

The results are said to be through theoretical generalisation,

"deep rich and meaningful".

The results are said to

be the hard

generalisable data.

Inductive where propositions may develop not only from

practice, or literature review, but also from ideas

themselves.

An approach to the study of the social world, which seeks

to describe and analyse the culture and behaviour of

humans and their groups from the point of view of those

being studied (Amaratunga et al. 2002)

Venkatesh et al.(2013) stated that mixed methods of research have been termed the third

methodological movement, with quantitative being the first and qualitative representing

the second. Mixing different types of research can compensate for any weaknesses of

the other chosen method. Qualitative research can be used to reinforce or clarify any

issues proved by quantitative method and vice versa. Amaratunga et al. (2002) state

that qualitative and quantitative methodologies are not antithetic or divergent;

rather they focus on different dimensions of the same phenomenon. This illustrates the

31

point that there is a definite benefit in utilising both methods of research and

furthermore that they can complement each other in doing so.

4.3 Research method selection/approach

The aim of this research is to compare two standard forms of contract, namely NEC 3

and FIDIC, and compare the mechanisms contained in each to manage commonly

disputed areas within the construction industry. Before this can be done, however it

must be established what the common areas of dispute are within the construction

industry. It was also necessary to establish if the disputed areas had changed over the

course the financial crisis and if so the reasons for this and the nature of any changes.

The literature review provided a deep understanding of the industry today and how the

financial crisis has impacted the industry as a whole and in particular, the areas of

dispute. As this section was considering previous research and published data, a

quantitative study was carried out using published data and literature to establish court

referrals both in terms of numbers and causes of dispute. Reports were also analysed to

establish workloads over the past 10 years. These were then compared to the number

court referrals. Thereafter, the aim was to try to establish if there were any links

between these reports and case referrals in relation to any decline or increase in work

compared with the increase or decline in case referrals over the same period. This

section of the research was concluded within the first chapter and was the basis for the

remainder of the research. It has been established that the most common areas of

dispute within the construction industry today are:-

1. Allocation of risk;

2. Contract choice;

3. Interpretation of the contract;

4. Variations.

The second part of the research was to explore and analyse NEC 3 and FIDIC in relation

to the chosen topic and establish their use in todays market. Thereafter NEC 3 and

FIDIC are discussed in relation to the identified areas of dispute. A literature review

was then carried out on NEC 3 and FIDIC to determine how they each managed the

disputed areas. This allowed an understanding to be developed in terms of whether any

of the contracts contributed to any of the disputed areas coming to fruition, in terms of

any flaws they contained. The literature review uncovered some common issues.

32

These were analysed, and questions were compiled from the relevant issues which

formed the basis for a qualitative study to be undertaken.

Initially, a questionnaire was considered the most effective method; in an attempt

confirm the findings of the literature review. However, due to the nature of the disputed

areas, an informal structured interview was found to be a more effective option. As it

was established that the disputed areas were found to be linked to interpretation of the

contracts, evidence of some foul play with regards to allocation of risk and contract

choice, an interview appeared to be the best solution to allow the researcher the

opportunity to get a feel for the response of the interviewee.

Three interviews were conducted on industry professionals in a semi-formal setting and

the recorded in a transcript highlighting important and relevant issues. A number of

casual conversations took place on the subjects being researched, although the

conversations were not recorded, their content was noted and used to reinforce the

findings of other areas of the study. This subsequently assisted the writer in forming

opinions. The industry professionals selected for the interviews had been exposed to

the aforementioned contracts, throughout their careers. Furthermore, the interviewees

were selected due to their position within their company and international experience

(as FIDIC was found to be more widely used abroad); demonstrating a level of seniority

in which to influence the management and/or selection of a contract used on a

construction project. The interviewees are described below:-

Interviewee A

Position: Managing Director

Sector: Consultancy/Construction

Number of years experience: 30 +

Interviewee B

Position: Senior Project Manager

Sector: Construction

Number of years experience: 25

Interviewee C

Position: Commercial Manager

33

Sector: Consultancy/Construction

Number of years experience: 25

4.4 Conclusion

Whilst considering the research methods available, it was considered that a quantitative

study would be utilised to establish the impact of the financial crisis on construction

industry disputes and published data and literature was analysed to draw conclusions.

This was also considered to be the most effective option when considering types of

disputes.

The second part of the study was more suited to qualitative research, specifically the

interview conducted. This gave the interviewer the opportunity to analyse the

interviewee as they were questioned on issues directly related to the study, such as

understanding the contract and allocation of risk.

Informal conversations were also utilised with industry practitioners as this was found

to be very helpful in developing an understanding of some issues found within the

research.

34

Chapter 5: Data Collection and Analysis

____________________________________________________________

5.0 Introduction

This chapter shall discuss data gathered from the findings of the literature review and

include the feedback gained from the interviews within the context of the identified

disputed areas. Relevant clauses in the contracts shall also be compared and discussed

throughout the chapter.

The data collected for the research, commenced with a literature review to establish the

general opinions of the industry on both NEC 3 and the FIDIC. Particularly, NEC 3

option A and FIDIC red book for specific clauses. Any differences discovered in the

management of predefined areas contained within the said contracts were explained.

The data gathered was studied and analysed and a set of general questions were

compiled for the purpose of the interviews.

5.1 Contract choice

Both NEC 3 and FIDIC were found to be similar in terms of the options available for

selection of project delivery. The interviewees were asked the following questions:-

Question 1

Have you ever found yourself working under the wrong type of contract for the project

you were working on?

Answer 1

A. It is not the contract selection that is the problem but the people working

with the contracts, not understanding the procurement route. I have had

people come from a design and build project phone the design team on a

traditional build and expect the design team to drop everything and

answer their queries.

B. Sometimes the client does not have the capability to provide his

obligations under the contract. The consultant could have looked at

different options, such as design and build.

35

C. No generally most clients employ a consultant to manage the process and

advice on contract type.

During the course of the research it was found that when a contract is amended by a

party, this proved to be more of an issue as opposed to when the wrong contract was

selected. NEC 3 and FIDIC both contain mechanisms for the contract to be amended by

the parties to the contract. NEC 3 contains clause Z option which allows a party to the

contract to insert additional clauses. FIDIC provides for amendments to the general

conditions within the particular conditions section. The purpose of the second question

was to ascertain whether each interviewee had come across this issue and if they

consider it to be acceptable to amend the contract. It is stated below:-

Question 2

Do you think that the standard construction contracts in their original form should be

altered in any circumstances?

Answer 2

A. Yes they need to be made to suit the situation.

B. Yes in some circumstances. We find ourselves taking more risk than we used

to, if you do not accept the terms you could find that you are not in the

running for the project.

C. Yes, you need to alter it to suit the country and any special requirements, but

not to put more risk onto the contractor. In this climate some clients like to

try and put more risk onto the contractor because they can. The time taken

for the quantity surveyor to read and understand the implications of the

additional clauses makes the use of a standard form pointless.

The feedback from the interviewees in question 2 corroborated what had been

concluded in the literature review. It is necessary that the contracts contain the

provision to alter certain aspects. For example to ensure that the contract adheres to the

applicable law of the country it applies and to and also so that it can be tailored to meet

certain exceptional circumstances. However, to amend the allocation of risk would not

be fair and just. One of the main advantages of using a standard form is that the parties

become familiar with the terms and conditions contained within the contract and as such

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it becomes easier for the parties to use and interpret. For example, if contractors are

pricing a project which is covered by one of the standard forms, it should provide them

with confidence in its content in order to price a project without having to employ legal

experts to interpret and analyse the contract before doing so. In altering the meanings of

clauses, the allocation of risk and the general context and purpose of a standard form of

contract is futile in many ways.

In exploring the opposing argument, which is that the party financing the work should

have the opportunity to allocate risk as he sees fit, it was found that although a valid

point, should the client require such large changes then a specific contract should be

drafted. By taking a standard form and changing it to suit the needs of particular client,

will only cause suspicion and confusion within the industry. The advantage of a

standard form would then be lost.

5.2 Allocation of risk

Allocation of risk and indeed the management of risk, are areas which NEC 3 as a

contract, places a great deal of emphasis on. Arguably, it is different from other

standard forms insofar as it also incorporates good management practices and issues

together with contracts, flow charts and procedures to encourage effective and efficient

project management. The main tool incorporated into the contract which can be utilised

is that of early warning (clause 16). It is also included in the risk register in clause

11.2(14). The risk register is a register which is produced at tender stage, highlighting

risks to the project. It is then maintained throughout the project and when other risks

become apparent or highlighted as an early warning, it will be entered into the register.

NEC 3 clause 11.2(14), lists the information to be contained within the register as

description of risk and details of action to avoid or reduce the risk. Clause 16.4 requires

the project manager to update and re-issue the risk register along with any instructions

for the meeting in order to overcome the notified risk.

The early warning means that there is responsibility on both contractor and project

manager to make the other parties aware of any matter that could impact on the project,

as soon as they become aware of it. Under clause 16.3, a risk reduction meeting is

called. The risk is discussed and allocated to one or both parties to manage that risk.

The solution is entered into the risk register accordingly.

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NEC 3, clause 11.2 (13), places the responsibility on the contractor to do whatever is

required to complete the works stated in the contract. This is reinforced in clause 20.1,

whereby the contractor has to provide the works in accordance with works information.

All responsibility for risk is passed to the contractor in clause 81.1, which states,

from starting date until the defects certificate is issued all risks that are not carried

by the employer are carried by the contractor. This clause provides that without the

contractor issuing an early warning, it shall be responsible for all risks. Therefore, the

contractor must allow for all risk which is not listed as a compensation event in its

prices and programme.

NEC 3, clause 80.1, lists the employers risks within the contract. Clause 60.1 (14) lists

these risks as a compensation event. A compensation event is an event listed where the

contractor has the right to increase the contract price or time for completion. It was

found during the literature review that some parties find the additional systems in NEC

time consuming and expensive to implement. It was therefore beneficial to ascertain

opinions on this area in question 3.

Question 3

Do you think that the risk management system included within the NEC 3 contract

assists in the efficient running of the project?

Answer 3

A. If used correctly then, yes it can make a difference but all parties must buy

into the ethos and see it as a means to help manage risk and not reallocate

risk.

B. The resources required to administer the contract can include additional

cost to both parties due to the increase in paperwork generated as a result of

the early warnings and risk registers. I do not know if the benefits are worth

the additional time and effort and feel that the time could be better spent

managing the project. FIDIC also requires you to inform of problems but

without the paperwork.

C. Yes, but it requires additional resources to implement the system.

The risk management system incorporated into NEC 3 is sold as one of the main

advantages of the contract, and the only major difference to that of other standard forms.

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The question remains as to the value of the addition resource requirements to implement

the additional risk management system. If a project is of a significant size and/or

complicated nature in terms of execution of the project, there may be a requirement for

the additional risk management system and resources.

In the introduction to a FIDIC contract there is a statement relating to the distribution of

risk. FIDIC aims to ensure that the parties can clearly understand and identify the risks

and to produce a document which balances the risk fairly between the parties. The

general conditions which manage the allocation of risk are contained within the

following clauses:-

Clause 17.2 essentially places all risks to a contractor for the works during the

time in which the site is under the control of the contractor, unless there is a risk

listed in the employers risk clause 17.3. This clause lists 8 reasons in which the

employer will be liable for any of these events causing delay and or disruption to

the project. These risks include war, terrorism etc.;

Clause 4.10 is in relation to site data. This states that an employer should make

available all data on subsurface and hydrological conditions at the site, including

environmental aspects that it has available or becomes available after the base

date. However, the risk is passed to the contractor, who under the contract will

be responsible for the interpretation of the data, deemed to have visited the site

and examined the site, including sub surface conditions before submitting the

tender;

The balance is addressed in clause 4.12 which deals with unforeseeable physical

conditions. Specifically, this clause deals with obstacles that may impact on the

works that are deemed to be unforeseeable to the contractor at tender stage,

having carried out the appropriat