What Can We Do When We Don’t Get Paid?

What can we do if we don't get paid? We get asked this question a lot.

In some regions, legislation is quite strict on payment terms, but in other parts of the world it is very common for the paying party to hang onto their money for as long as possible.

Most forms of construction contract will include some sort of remedy for non-, or late payment, so you will need to check what these are on your projects. As an example though, let’s have a look at what the FIDIC 1999 Editions have to say about late payment.

Sub-Clause 14.8 (Delayed Payment) states that:

‘If the Contractor does not receive payment in accordance with Sub-Clause 14.7 [Payment], the Contractor shall be entitled to receive financing charges compounded monthly on the amount unpaid during the period of delay. This period shall be deemed to commence on the date for payment specified in Sub-Clause 14.7 [Payment], irrespective (in the case of its sub-paragraph (b)) of the date on which any Interim Payment Certificate is issued.

Unless otherwise stated in the Particular Conditions, these financing charges shall be calculated at the annual rate of three percentage points above the discount rate of the central bank in the country of the currency of payment, and shall be paid in such currency.

The Contractor shall be entitled to this payment without formal notice or certification, and without prejudice to any other right or remedy.’

This provision is quite clear; as soon as the payment is overdue, I would submit a notice that payment is overdue along with a claim for financing charges. The notification should serve as a polite reminder just in case the payment is stuck in the Employer’s system, or the Engineer has failed to issue the payment certificate.

If the notice resolves the problem, then all is well. If not, and the payment remains unpaid, I would prepare a claim for financing charges and submit it at monthly intervals until the payment is made.

Such a claim is less about recovering additional money – the amount will not add up to very much anyway – and more about making the Engineer and Employer aware that you will insist on your rights. Hopefully, this will make them think twice about defaulting again or failing to comply with any other obligations.

FIDIC gives the Contractor additional rights under Sub-Clause 16.1 (Contractor’s Entitlement to Suspend Work), which states that:

‘If the Engineer fails to certify in accordance with Sub-Clause 14.6 [Issue of Interim (Payment Certificates] or the Employer fails to comply with Sub-… or Sub-Clause 14.7 [Payment], the Contractor may, after giving not less than 21 days' notice to the Employer, suspend work (or reduce the rate of work) unless and until the Contractor has received the Payment Certificate, reasonable evidence or payment, as the case may …

If the Contractor suffers delay and/or incurs Cost as a result of suspending work (or reducing the rate of work) in accordance with this Sub-Clause, the Contractor shall give notice to the Engineer and shall be entitled subject to Sub-Clause 20.1 [Contractor's Claims] to:

‘(a)    an extension of time for any such delay, if completion is or will be delayed, under Sub-Clause 8.4 [Extension of Time for Completion], and

‘(b)    payment of any such Cost plus reasonable profit, which shall be included in the Contract Price…’

From the above, after submitting a 21-day notice, the Contractor may either suspend the Works or reduce the rate of progress and will be entitled to an extension of time arising from such actions and the recovery of Cost plus profit. If we consider that Cost could mean demobilisation, remobilisation and prolongation costs, then this could soon mount up to a considerable sum.

The 2017 editions of FIDIC contain slightly changed wording to the above two clauses, but they are essentially the same as the 1999 Editions in relation to failure to pay.

My recommendation would be to submit the 21-day notice as soon as the payment or certificate becomes overdue. Again, this may serve to resolve the situation and if so, the notice will have achieved the required result.

However, contractors are often reluctant to enforce the suspension and actually continue to work normally after the 21-days have expired. I have to question the wisdom of such an action. If you don't suspend the Works, there is no delay and thus, no entitlement to an extension of time or payment of cost. If the Contractor continues to work at a reduced rate, he will later have to prove that he has reduced the rate of work, which can often be difficult.

I once rejected a Contractor’s claims in such a situation because, when examining actual against planned progress, the progress had clearly not been reduced. I would recommend that contractors seriously consider keeping their resources away from site for a couple of days.

Such an action will force the Employer to unlock all but the most serious of issues. If the Employer does not pay when faced with this situation, then questions must be asked about his ability or willingness to pay for the rest of the project and if this is the case, does the Contractor wish to keep digging himself into a deeper financial hole?

What do you think? Is it easier to obtain payment when the Employer still needs something from the Contractor, or when the project has been completed? Leave your answer in the comments below.

This blog was written by ICCP Executive Officer and Fellow, Andy Hewitt. If you would like to learn more about claims, check out our training partner, Claims Class.

Enjoying the ICCP's articles? Why not sign up to our mailing list and receive new articles straight into your mailbox. Or, want access to a library of member's only content on contracts and claims, check out our Membership page and join the ICCP community today.


Improve Claims By Effectively Using Visuals in Narratives

A student once raised the point to me that graphics and other visuals can be effectively used to enhance a claim document and I have to agree with him on this point, provided that some basic rules are followed.

While some people see and understand things better through pictures, others prefer the written word.  I have to admit that I am one of the latter in this respect. When presented with a claim which consists almost entirely of charts, tables and other graphical representations, I have simply not been able to understand it, because there have not been any written explanations of the graphics. This is something to do with the left and right sides of the brain and one will be stronger than the other in most people.

Unfortunately, we seldom know what type of brain the people who will eventually read our claim will have, so it is definitely a good idea to appeal to both types. What is absolutely vital for the success of a claim is that the respondent is able to understand the contents fully and that the claim leads them ‘by the hand’ to the conclusion that you wish them to reach.

So, how can we effectively use graphics and visuals?

First, remember that visuals should only be included in addition to the narrative to illustrate the point being made.

Images can be embedded in the text to better explain a point. For example, a fragnet may be included to demonstrate how a delay has been built up for inclusion in the delay analysis. Obviously, the fragnet would also need to be included in the delay analysis programme that would be included as an appendix, but a snapshot of the fragnet would be useful in the narrative itself and will make the reader’s job easier by not obliging them to refer to the full delay analysis programme at this point.

However, when including a graphical illustration such as a fragnet, never assume that the reader will be able to understand it. You must explain, in a step-by-step manner, how it has been created and what it means, so we are appealing to both left- and right- brain dominant people.

Here is an example of how a drawing extract can be embedded in a narrative to illustrate a variation:

  1. The Contract design provides that the telephone and CCTV distribution networks were to be laid in two separate cable ducts along different routes.
  2. During the engineering phase of the project, the Contractor was verbally advised that the Employer wished to change the design so that the telephone and CCTV ducts would be laid within the same trench in a common route. 

 

Drawing showing revised telephone and CCTV arrangements.

The above tells the ‘story’, much better than words alone.

The use of tables can also be an effective way of providing information that can be easily digested. Take a look at the following example:

“Appendix E herein includes a time impact programme which is based upon the updated programme of 12 January 2016, into which the additional works have been added as follows:

Activity

DaysStart

Finish

Procurement & Delivery of Partitions & Suspended ceilings (actual)6812/01/1620/03/16
2nd Floor Office Area Fit-Out
Joinery 1st Fix (duration as baseline for 1st floor)512/01/1616/01/16
MEP 1st Fix, IT and Telephone (duration as baseline for 1st floor)1417/01/1630/01/16
Plastering (duration as baseline for 1st floor)2831/01/1627/02/16
Floor Screeding (duration as baseline for 1st floor)728/02/1605/03/16
Partitions (actual delivery date)2620/03/1614/04/16
MEP 2nd Fix, IT and Telephone (duration as baseline for 1st floor)1210/04/1621/04/16
Joinery 2nd Fix (duration as baseline for 1st floor)422/04/1625/04/16
Ceramic flooring (duration as baseline for 1st floor)1426/04/1609/05/16
Suspended Ceiling (duration as baseline for 1st floor)710/05/1616/05/16
MEP Final Fix, IT and Telephone (duration as baseline for 1st floor)715/05/1623/05/16
Painting (duration as baseline for 1st floor)724/05/1630/05/16
Carpeting (duration as baseline for 1st floor)331/05/1602/06/16

Additional work, time impact details”

The above concisely illustrates the build-up of additional works that have been included in a delay analysis for an extension of time claim. If a graphic of the programmed activates were also included to show the above in ‘picture’ format, this would be even more effective.

So, the next time you’re writing a claim narrative, think about the points you are trying to make and consider whether they could be enhanced through visual representation; it could lead to a much more effective claim.

This blog was written by ICCP Executive Officer and Fellow, Andy Hewitt. If you would like to learn more about claims, check out our training partner, Claims Class.

Enjoying the ICCP's articles? Why not sign up to our mailing list and receive new articles straight into your mailbox. Or, want access to a library of member's only content on contracts and claims, check out our Membership page and join the ICCP community today.


Trying Your Luck: where do you draw the line with your claim submissions?

I was recently asked a question which, at one time or another, you may have asked yourself. The question was:

‘Where do you draw the line when it comes to 'trying your luck'? Is it better to be realistic in your submissions, taking your own delays into consideration, or do you submit all, knowing that they're incorrect, and wait for the Engineer to discover what you have done?’

Obviously, a scenario where the claim is solid and difficult to refute is preferred, but there will often be ‘grey’ areas when it comes to entitlement or quantum. When preparing claims for clients, we give our client the benefit of the doubt within the claim and if the Engineer notices these or disagrees with them, then this will be a basis for negotiation.

It’s always good to give the other side something where they can score a few points to show that they are doing their job. To answer the question though, I think that there are two things to consider.

First, from a claims consultant's point of view, we must ethically and professionally advise our contractor clients of the strength of the potential claim. If it is not strong, tell them why and ask how they wish to proceed. Sometimes they will thank us for our advice and decide not to proceed. On other occasions, they will decide to prepare a claim to throw into the negotiation ‘pot’ or to make a point.

If we have correctly advised our client and we are subsequently asked to produce a claim which presents the best argument possible, then provided that we have advised them of the chances of success, we have acted professionally.

Second, from the contractor’s point of view, I believe that it is important for the contractor to have thought about a claims strategy that is agreed at senior management level rather than by the people responsible for preparing the claims. In my experience, most contractors do not do this, so we try to work with them to develop such a strategy. When doing this, consideration should be given to the following:

  1. The value of the claim – does the cost/value relationship warrant the expense of claim preparation?
  2. The strength of the claim and its chances of success – is it a straight-forward matter or something that could be easily argued to prevent resolution?
  3. Negotiation margin – do we evaluate the claim fairly with strong justification or build in something to be negotiated out later?
  4. The party responsible for reviewing the claim – does the respondent have expertise available, or are they likely to bring in experts to advise them?
  5. Available and suitable experience to prepare the claim – does the contractor have suitably experienced resources to prepare the claim or will it be necessary to incur costs by ‘buying in’ the required expertise?
  6. Client relationship – do we have a good relationship that we wish to maintain or have relations broken down?

After considering these matters carefully, it will usually be quite easy to decide whether to proceed with a less than strong claim and try your luck, or to not proceed at all.

This blog was written by ICCP Executive Officer and Fellow, Andy Hewitt. If you would like to improve your claim management skills, check out e-courses from our training partner, Claims Class.

Enjoying the ICCP's articles? Why not sign up to our mailing list and receive new articles straight into your mailbox. Or, want access to a library of member's only content on contracts and claims, check out our Membership page and join the ICCP community today.


20 Changes in the FIDIC 2017 Editions

You probably know by now that FIDIC have published new editions of the Red, Yellow and Silver FIDIC Forms of Contract. I have highlighted 20 changes that are particularly relevant to claims practitioners.

  1. The Red Book now has 106 pages of General Conditions as opposed to the 1999 Edition which had 62 pages. The Yellow and Silver books have been similarly increased. The increased volume is said to be to bring greater clarity and include more procedures to be followed as a matter of contract.
  2. The word “Claim” is defined as ‘a request or assertion by either Party to the other Party for an entitlement of relief under any Clause of these Conditions or otherwise in connection with, or arising out of, the Contract or the execution of the Works.’
  3. There is a provision to include a percentage in the Contract Data (formerly the Appendix to Tender) for profit and if no percentage is stated, the percentage shall be 5%.
  4. The term “No-objection” has been introduced and defined.
  5. “Notice” is defined as ‘a written communication identified as a Notice and issued in accordance with Sub-Clause 1.3 (Notices and Other Communications)’.
  6. There are many more requirements for the parties to submit Notices.
  7. A Notice of Dissatisfaction may be issued by either Party if they are dissatisfied with an Engineer’s determination.
  8. There are more detailed requirements for the Contractor’s Programmes, including programmes to show actual progress.
  9. A provision is included for including rules and procedures to deal with concurrent delay.
  10. Advance warning provisions have been included.
  11. The procedures for evaluating and agreeing Variations and much more prescriptive.
  12. The type of events previously included under Employer’s Risks and Force Majeure clauses have been consolidated into a single clause – Exceptional Events.
  13. Both Employer’s and Contractor’s Claims are now dealt with under Clause 20 (Employer’s and Contractor’s Claims).
  14. The provisions of dealing with disputes have been separated into a new Clause 21 (Disputes and Arbitration) to reflect the fact that claims only become disputes if a Party gives a Notice of a dispute.
  15. Specific provisions of the requirements of a claim submission are included under Sub-Clause 20.2.4 (Fully detailed Claim).
  16. Under Sub-Clause 20.2.4 (Fully detailed Claim), the claim submission period has been extended from 42 days to 84 days, but submission has now become a condition precedent to entitlement.
  17. Under Sub-Clause 3.7 (Agreement or Determination), if the Engineer does not give Notice of agreement of rejection of a claim within 42 days, the Engineer shall be deemed to have given a Notice rejecting the claim.
  18. The Dispute Adjudication Board (DAB) is now referred to as the Dispute Avoidance/Adjudication Board (DAAB) which reflects enhanced requirements for the DAAB to be proactive in dispute avoidance.
  19. All DAABs are standing boards.
  20. There are many more ‘deeming’ provisions whereby if a Party does not act in accordance with an obligation, then the provisions will state that a specific action is deemed to have taken place.

On the face of it, the 2017 forms of contract will require more contract administration if the claim procedures are to be complied with, but if we think about things for a moment, this is not necessarily the case.

Many of the changes have been introduced by FIDIC because feedback and the number of disputes showed that the parties simply did not do things in the way that the 1999 versions required. For example, Contractors did not submit claims within 42 days of the event and Engineers did not respond to claims within 42 days, but there were no consequences for failure to do so.

As a result, claims were often left until the end of the project. In many cases, they then became hard to resolve and often resulted in disputes which required additional (and often costly) resources to manage matters.

Isn’t it better to avoid reaching this situation by putting the necessary resources in place from the beginning of a project and settle claims as the project proceeds? You may think that this is an expensive option, but if we consider that the costs of arbitration may reach US$ 500,0000, I think not.

This blog was written by ICCP Executive Officer and Fellow, Andy Hewitt.

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Why It’s Important To Understand Your Contract – From A Claims Perspective

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

No?

Well, to be honest, neither did I until I sat down and counted them when writing a book on the subject…and I have been dealing with the FIDIC contracts in detail and extensively for around 15 years!

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

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

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

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

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

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

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

This blog was written by ICCP Executive Officer and Fellow, Andy Hewitt.

Enjoying the ICCP's articles? Why not sign up to our mailing list and receive new articles straight into your mailbox. Or, want access to a library of member's only content on contracts and claims, check out our Membership page and join the ICCP community today.