International Construction Projects
The construction industry does not have clearly defined borders and its characteristics range from simple to complex. Construction supplies basic materials (such as aggregate, cement, steel reinforcement and pre-packaged mixtures) right up to cutting-edge technology developed and used by experts. The industry has contributed to, and is a vital element of, almost everything we see around us. For example, the diversion of water courses, land reclamation, houses, shopping centres, offices, factories, health care facilities and large infrastructure-related civil engineering works such as bridges, tunnels, highways, airports and harbours. Others installations include water treatment plants, dams, nuclear power plants, wind power plants and projects in the field of electricity generation. The contribution made by the construction of factories, warehouses and production lines that serve other industries, (including mining and research centres) cannot be ignored. The particular activities relate not only to new construction works, but also repairs, extensions, reconstructions and demolitions.
The diverse nature of the construction industry reflects the complexity of contemporary society as a whole, leading then to necessary specialization of particular activities in construction. A construction project is further comprised of complex processes, services and supplies reaching beyond the scope of this industry alone. For example, insurance, financing, bonds and guarantees, purchase of plant and equipment, security guards, operations and maintenance of work processes.
A construction project is a specific process or, rather, a sum of many processes. Mostly, it is an individual process. There are variables relating to the positions of its participants, their assignments and relationships, external conditions (concerning the economy, the nature of the site, climatic conditions, project risk and hazard levels in general), project management and delivery methods, procurement methods and public support.
Construction projects face hazards of various kinds, caused either by humans or natural elements. Therefore, people, time and environmental elements play a major part here. The construction project itself tends to be a unique set-up of processes with unpredictable impacts caused by individual hazards. For large construction projects, their duration will often exceed two years. These projects are realized over extensive areas and are often difficult to safeguard perfectly. Therefore, a construction project is not a production line you can just program to smoothly create a product, within a well-defined time, quality and financial outlay.
Design errors, extremely adverse climatic conditions, unforeseeable on-site conditions in physical or social terms, site access-related issues, building permit problems, delays due to the requirements of environmentalists and variations are just some examples of potential complications.
Effective risk management must be the aim of everyone involved in a construction project. In other words, to identify patterns and potential problems, variations, hazards and risks in order to manage them effectively. This can only be achieved through the perfect preparation of each particular project. This is the theory.
However, in practice, the lowest bid price tends to be the most important criterion in public tender evaluations nowadays. This is also a reason why contracts (for works or for design) that determine particular project relations must anticipate and involve transparent, efficient and reasonable solutions to potential problems and complications.
In the course of time, five main groups of construction project participants have emerged as major players in the construction industry. These groups are directly involved in construction projects or have an influence or a particular function within the industry. They are the contractors, designers, regulators, employers and users (Murdoch and Hughes, 2008). Lenders (banks), insurance and reinsurance companies must also be mentioned as further (indirect) construction project participants because of their significant influence on construction projects. We will now discuss these important roles in the construction project.
Most frequently, contractors can be encountered as either global or local construction companies. Construction companies differ in specialization and size—from small contractors for specialized activities up to supranational organizations that enjoy major industrial and political influence.
In the field of large construction projects, contractors often collaborate within joint ventures, setting up delivery chains at numerous levels. A general contractor enters into relationships with the subcontractors who further delegate parts of their obligations down to other specialized trade contractors, and so on down the chain. A particular delivery method will influence the positions of the individual contractors.
The role of a designer is to provide the employer with solutions, drawings and specifications. Working on a construction project, the designer will often provide project management, contract administration and supervision services to the employer. When hearing the word ‘designer’, one usually imagines an individual, but less often a company providing the services in support of construction project realization. Today, the latter prevails, as design works becomes ever more demanding and too large to be dealt with by an individual on their own.
In the construction industry, regulators apply their professional expertise, for example, in the following areas:
- land planning and related processes;
- building permit applications;
- health and safety;
- environmental issues;
- quality assurance;
- to ensure fair business competition; and
- to ensure proper management of public resources.
Project realization by the contractor is a service to the employer. Someone about to build a house for their family may be an employer. A developer, who is funding a shopping centre construction to sell to potential operators, may be an employer. The employer themselves may be a future owner or an operator.
A taxpayer, who is financing public projects via a public authority in the fields of transportation, infrastructure, construction of prisons, health care facilities, and so on, can also be considered an employer. An employer’s characteristics depend, therefore, on whether the related funds are public or private. Significant differences between the private and public employers can be encountered. For example, in France, the contractor cannot suspend the works if the employer does not pay for the works performed in a public project. The so-called ‘l’exception d’inexécution’ known in private projects in France cannot be used. According to article 48-3 CCAG Travaux 1976, the contractor can suspend the works only after three unpaid monthly invoices (Wyckoff, 2010).
In contracts, the employer is often referred to as ‘the owner’, ‘the buyer’ or ‘the client’, and so on. For the purposes of this book, we will mainly use the term ‘the employer’.
All of us are users of products that are the result of construction efforts—whether we like it or not. Our views on construction projects are often subjective and vary for many different reasons. Other vital aspects are how the public perceive the inconvenience and nuisance that can occur during the course of construction or if the public really think that there is a need for a particular building. Specific traditions and cultural influences of the relevant society are a significant factor as well.
As a field of activity, the construction industry is traditionally burdened by uncertainties that may cause distrust between the employer and the user.
Construction contracts are different from other commercial agreements because of the high degree of uncertainty. While the contract documents will provide a definition of the scope of works to be performed, a high degree of project complexity still leaves a lot of room for uncertainty along the way to the final result. This makes the task of administering the contract an important part of the larger process of ‘managing uncertainty’.
Furthermore, the question of ‘moral hazard’ is sometimes mentioned (Winch, 2010), i.e. the difficulties the employer can face in ensuring that the contractor will perform the contract in good faith and bring it to its desired outcome. As a rule, the contractor possesses better technical and managerial skills than the employer. The absence of a proper contract that will provide clear terms and procedures regarding all relevant aspects and an efficient risk allocation may leave the less informed employer exposed to the risks associated with moral hazard and suffering from a potentially severe compromise regarding the desired outcome.
On the other hand, large public procurement construction projects are often accompanied by political irresponsibility on the employer’s side, mainly when problems are encountered. Nobody wants to be responsible for cost overruns and delays. To avoid responsibility, employers sometimes shift the risk of negative consequences of badly prepared projects onto contractors (e.g. delayed expropriation risk or bad ground conditions risk in underground works). Such ‘one-sided contracts’ actually negatively affect the smooth implementation of projects and consequently are considered disadvantageous to the borrowers due, amongt other things, to the late completion of the project (JICA, 2011). If this is done systematically, it is also dangerous for society. From a socio-economic point of view, it leads to frustration and a waste of resources in the short term and more expensive construction works and damage to the local economy over the long term.
Corruption is another ‘moral hazard’, which is much more serious and afflicts the construction industry as a whole.
There are certain well-known rules of risk allocation. The ultimate rule is that risk allocation must be efficient and if there is a non-insurable risk that is hard to quantify, the risk should be borne by the one who bears the majority benefit. It is self-evident who bears the majority benefit if it is a public construction project. In this case, it is the employer and the users. Furthermore, the state as an employer is often the stronger party (applying a take it or leave it approach to contracts). Thus it seems to be appropriate to apply the principles of protection of the weaker party (the contractor) in such public construction projects.
Another principle that must be stressed is the principle of good faith protection. The governing law usually does not protect the one who is not fair, misuses their position and, as in the case of public employers, invites contractors to deliver projects where risks are speculatively shifted onto contractors and the terms of reference of the particular contract happens to be a sophisticated trap.
Another problem seems to be the fact that international contract forms are often ‘imported’ to developing countries. Naturally they are less familiar to the local employers in both legal terms and working procedures (Banica, 2013). Employers in both the private and public sectors do not pay enough attention to the uneven knowledge asymmetry when facing and entering an agreement with a contractor, as well as to the need to manage this risk through contractual means and by employing a consultant as contract administrator or project manager. Employers tend to show an exaggerated optimism and focus extensively on establishing an initial contract price, without a clear understanding of the importance of setting clear rules regarding the management of change, regardless of the source of the change such as claims, variations, disputes, additional work, etc. (Banica, 2013).
Add to this the fact that the construction industry in developing countries (still in the first stages of modernization) has not yet formed a body of knowledge or produced a significant number of contract managers/consultants familiar with international contracting and procurement practice and the local specificities and working culture (Banica, 2013).
The position of the ‘contract administrator’ is of key importance. A contract administrator hired by the employer on a professional service agreement basis deals with coordination, monitoring, supervision of compliance with standards, certifies the works done, testing, taking over, participates in variation, price and time management, claim evaluation, contract interpretation and dispute avoidance. They should help to complete a successful project in a fair way and in accordance with the contract, achieving the demanded standard in the agreed time and for the agreed price.
The contract by itself is not enough to solve the problem of moral hazard and the asymmetry of knowledge between the employer and the contractor. The second key element required is the presence of a third contractual party—namely, the contract administrator (Banica, 2013).
In terms of contract administration, there are three usual arrangements in force:
- The ‘engineer’ as an employer’s agent, whose job is to monitor and supervise the work, whose duty is to make fair determinations on certain matters (e.g. on claims for extension of time and additional payments; see an example of such determination in Appendix 6). The engineer issues certificates on payments, taking-over and performance.
- The employer’s representative where the contract is administered directly by the employer or its representative. If the contractor is to achieve the certainty of time and price stipulated, then the involvement of the employer must be limited to a minimum during construction.
- The construction manager as an employer’s agent hired to coordinate all processes on a professional service agreement basis without direct responsibility for design and works (see Chapter 3).
1.4.1 The Engineer
The engineer’s rights and duties consist simultaneously of two parts. The first is acting on the employer’s behalf, where the contractor can take the engineer’s conduct as the employer’s conduct and misconduct (such as the engineer’s instructions regarding variations). Acting in their second role, the engineer is an impartial third party who is professionally skilled to maintain an equitable balance between the contractor and the employer (such as in settling disputes). The independence of the engineer (an entity/person appointed and funded by the employer), often becomes the topic of numerous debates. It is in the interests of all construction project participants to ascertain and clarify the engineer’s competencies to limit disputes about who will, in fact, act as the engineer on a particular project. The question, ‘What are the attributes of the engineer and when can a party be said to have tacitly accepted someone as the engineer?’ (ICC, 2009) was answered, for example, in the ICC case no. 10892 (the tribunal found that the engineer was the employer itself in this case).
A competent engineer (allowed to do their work by the employer) is in many cases a mandatory prerequisite for a successful construction project. A company or a group of consulting engineers and designers are mostly acting in the role of ‘engineer’. Their specific representatives have to be appointed for particular activities. An engineer can also be an employee of the employer, but this is a very problematic approach in practice. In respect of this, Jaeger and Hök (2010, p. 222) refer to a decision of the Arbitration Court of the International Chamber of Commerce. In this case, the arbitrators dealt with the replacement of the engineer with an employee of the employer (where the employer was a statutory body). According to the arbitrators, this replacement resulted in contract frustration. The authors support the view that it is unacceptable for the employer and the engineer to come from the same organization. However, in this case, the International Federation of Consulting Engineers (FIDIC) conditions included an express impartiality clause.
As a rule, the engineer’s individual rights and duties are assigned by a particular agreement with the employer. The engineer is typically entitled to give the contractor instructions related to work executed (and to remedy any defects) and the contractor is obliged to follow their instructions. The engineer must usually, for example, clarify any ambiguities and discrepancies should they appear in the contract. But it is not within the engineer’s powers to change the contract—they are not, therefore, empowered to relieve either of the parties of their duties, commitments or responsibilities arising from the contract. Their assignment does not exempt the contractor from any liability they have under the contract.
The engineer should be a professional with all necessary skills and experience, and have a good knowledge of the contract and contractual procedures (e.g. methods of re-measurement, delay procedures and disruption). The engineer should be able to foresee all legal, commercial, and technical consequences of their instructions, particularly those that lead to variations. They should be able to fairly evaluate the adequacy of new rates or prices where it is necessary to create them. The engineer should also be able to fairly determine—in terms of claims—additional payment or extensions of time for completion (Jaeger and Hök, 2010).
According to the FIDIC CONS MDB/Red Book (2005 MDB Edition), the engineer has the following roles (JICA, 2011):
- Employer’s agent: the engineer provides the following services to conduct the contract management:
- production of detailed design drawings under Sub-Clause 1.9;
- issuance of instructions for variation of the works under Sub-Clause 13.1;
- review of plans and drawings submitted by the contractor under Sub- Clause 4.1;
- carrying out project management services including time and cost management, quality control, testing and inspection, safety and environmental management under various Sub-Clauses especially 8.3, 13, 7, 9 and 4.9.
- production of detailed design drawings under Sub-Clause 1.9;
- Certifier: the engineer issues various certificates certifying the quality of the contractor’s performance and payment is therefore at the engineer’s discretion. The engineer’s certificates have a strong binding effect on both the Employer and the contractor. Examples of certificates follow:
- taking-over certificate under Sub-Clause 10.2;
- certification of work completion date under Sub-Clause 11.9;
- interim payment certificate under Sub-Clause 14.6;
- defect liability certificate under Sub-Clause 4.9;
- final payment certificate under Sub-Clause 14.13.
- taking-over certificate under Sub-Clause 10.2;
- Determiner in claim settlement: The contractor has a right to claim settlement from the engineer. The engineer should consult with both parties on the matter in question based on Sub-Clause 3.5 in order to come to an agreement. If the consultation reaches an impasse, a fair determination should be made based on the contract.
The Engineer’s certifications and fair determinations
Within the scope of their activities, the engineer can issue various types of certificates. The FIDIC forms, for example, presume numerous certificates. These include interim payment certificates, final payment certificates, taking-over certificates and performance certificates. Pursuant to the FIDIC forms, any approval, check, certificate, consent, examination, inspection, instruction, notice, proposal, request, test or similar act by the engineer (including absence of disapproval) shall not relieve the contractor of any responsibility they have under the contract. This includes responsibility for errors, omissions, discrepancies and non-compliances. Pursuant to FIDIC forms, for example, it further applies that the engineer may, in either of the payment certificates, make any correction or modification that should have properly been made to any previous payment certificate. A payment certificate alone shall not be deemed to indicate the engineer’s acceptance, approval, consent or satisfaction.
Under FIDIC, whenever the employer or the contractor submits a claim, the engineer is required, in the first instance, to mediate between the parties to facilitate agreement. If the parties cannot agree, the engineer must make ‘a fair determination in accordance with the contract, taking due regard of all relevant circumstances’. Accordingly, any determination must express the rights and obligations of the parties in accordance with the contract and applicable law, irrespective of any preference expressed, or pressure exerted by either party.
In terms of engineer certifications, it is very interesting to compare the opinions of lawyers from different countries (available at: http://globalarbitrationreview.com) who responded to the following questions:
- When must a certifier under a construction contract act impartially, fairly and honestly?
- To what extent are the parties bound by certificates (where the contract does not expressly empower a court or arbitral tribunal to open up, review and revise certificates)?
- Can the contractor bring proceedings directly against the certifier?
- England and Wales