Delay Analysis and Claim Preparation: The Soul of Arbitration

DELAY ANALYSIS AND CLAIM PREPARATION: THE SOUL OF ARBITRATION By: Dr Saraswat SB saraswat54@Hotmail.com

INTRODUCTION • India has rapidly growing infrastructure industries which receives huge investments. • Infrastructure projects involve multi-party with entities engaged in different scope of work which leads to complexities in execution of project. • Delays and disputes in construction projects, is due to involvement of multiple entities. • Effective resolution of disputes under agreed terms of contracts is needed to ensure time bound completion of projects. • Majority disputes related to extension of time without imposition of liquidates damages and penalties. • Arbitration provides an effective mechanism for time bound resolution of disputes. • .

Engineering, Procurement And Construction Contracts (“EPC”) • Engineering, procurement and construction contracts (“EPC”) is a prominent form of contracting agreements involving an employer and multiple contractors. • In EPC, engineering and construction contractor carries out the detailed engineering design of project, procures all equipment and materials necessary, and then constructs to deliver a functioning facility or asset to its clients.

Common causes of delays in EPC Contracts • Delays during engineering stage; • Delays during procurement/sub-contracting phase; • Delays in construction/erection/commissioning of the projects; • Miscellaneous reasons for delay including insolvency of either the employer or the consortium partner, etc.

Delays during Engineering Stage Delay in approval of designs & high number of revisions of designs based on comments of Employers. Lack of knowledge of process, technologies, engineering & experience with respect to new work. Late decisions in various engineering activities by employers as well as contractors and sub-contractors. Engineering work may begin later than as envisaged in the schedule. Delay in basic & detailed engineering leads to cascading delay effects on procurement and construction activities.

Delays during Procurement/Sub-Contracting Phase Delay in inspections, issuance of inspection certificate and inspection waiver certificate by the employer. Delay in vendor approvals for procurement of equipment & issuance of dispatch clearance by the employer. Unrealistic target schedule of erection of project. Problems with quality of equipment and re-work in manufacturing of items. Special delays in supply of any item by contractors and design modification by employer as well as contractors . Unclear bid document/purchase specifications for procurement/contracting by the contractors.

Delays during Procurement/Sub-Contracting Phase… - Disputes between contractors and their sub-vendors. - Poor supervision of contractors - Late inspection of manufacturing & clearance at inspection stage. - Damage of equipment during internal handling/storing/shifting. Contractors may lack knowledge about local fabricators/suppliers/sub-vendors delaying in supplies. Delay in payments by employer to contractors and contractors to sub- contractors causing delays in delivery schedules. - Late opening of LC by employer for contractors and by contractors for sub-contractors. - Breakdown of any main construction equipment of the contractors.

Delays in Construction/Erection/Commission of Projects - Breakdown of any main construction equipment. - Inaccurate work which leads to rework/rejection/re-design. - Unsafe working conditions or accidents at the project site. - Labor strike/mismanagement. - Granting extension under contract by Employer if Deadline is missed. Late issuance of design & construction drawing by employer or the contractors. Force majeure situations like war, hostilities, act of foreign enemies’ revolution, terrorism, or civil war within the country, etc. Delay in commissioning due to non-availability of trained man-power to take over the project from the employer’s side.

Delays in Construction/Erection/Commission of Projects Delayed clearances by statutory bodies like environment department, electricity department, labour inspector, etc. Inexperienced personnel with technology/methods/implementation of engineering. Repeated changes in scope of work and introduction of new requirements at later stages. Unpredictable ground and soil conditions at project site Delay in payments by employer to contractors and by contractor to sub-contractors. Availability of specified utilities like industrial water, electrical power, steam etc. for testing and trial run by employer to contractor for pre-commissioning and commissioning.

Other delays in EPC Contracts • Unilateral termination of contract by either party. • Financial problems of a stakeholders whether temporary or permanent/long term. • Insolvency of either employer or any partner in consortium of contractors. • Project being kept on hold by employer. • Employer’s decision to shift location of project from one plant to another. • Misinterpretation of contract and implementation of same by any of stakeholders.

Other delays in EPC Contracts…. • Non-conformity with agreed terms and conditions of contract by contractors. • Pressure on contractor from employer to meet directives which are not in accordance with agreed terms and conditions of contract. • Breach/violation of terms and conditions of contract by either party. • When contract is silent with respect to scope of execution of project that involves large capital. • Disputes arise among consortium partners when they violate internal consortium agreement concerning their relationship while executing project.

According to Delay Analysis Report, delays can be attributable to the following : • Delays by employer; • Delays by contractors; • Delays by sub-contractor/sub-vendors which are part of the consortium of contractors; • Delays of common/overlapping nature which are attributable to two or more different stakeholders in the project; • Delays due to force majeure which is not attributable to any stakeholder.

Analysis of Responsibility for Delay by the Affected Parties Once Project delayed beyond its contractual schedule, then following question arises: Who will bear the consequential financial losses/implications? How the basis of attribution of such responsibility is to be decided? What shall be the basis of such responsibility?

Analysis of Responsibility for Delay by the Affected Parties Situation of deadlock arsis when -

Method of Assessing the Delay in an EPC Project • For delay calculation start and end dates of major executed activities are compared with original agreed start and end dates. • Above method is also used for calculation of individual delays of each activity.

Method of Assessing the Delay in an EPC Project Delay Analysis Report (DAR) prepared by contractor and employer: It is systematic record with all possible evidences and justifications presented activity-wise along with manner and quantum of delay in each major activity and entity responsible for each such activity. Correct analysis and review of DAR gives clear picture for concluding which entity responsible for which delay and quantum of delay. This becomes basis for all claims, LD, penalties in project to be decided or agreed to or awarded by Arbitral Tribunal in an arbitration.

Preparation of Claims • There is no standard formula for preparing the claim as every project has different situations for claims amongst parties. • However, following heads are considered as a point of reference for preparing claims by contractors & employer - • Preparation of claim by the contractor; • Use of Eichleay Formula for calculating the overheads in a claim; • Preparation of counter-claim by the employer.

Preparation of Claims A. Preparation of claims by the contractor: Following components bearing financial implications are the costs relating to many aspects for contractors in EPC projects : • Complete cost of project borne by contractors for duration of delay in project. • Cost of extra engineering hours and in procurement due to delay caused by employer. • Cost of project management and site supervision for contractors for the duration of the delayed period. • Cost of additional insurance, premiums and maintaining the Bank Guarantees and Letters of Credits.

Preparation of Claims • Cost of overheads for contractor. • Cost of price variation as per price variation formula provided under contract for labour, supplies and applicable items. • Cost of extra resources for accelerating project during delayed period. • Arrears or pending amounts, Interest on arrears and late payments, which employer is yet to pay contractor.

Preparation of Claims • Payment for cost of items which were not in scope of work of contractors but have been supplied by contractors as per directions of and requirements of the employer. • Extra scope of work which was not part of contract but has been executed by the contractors. • Additional claims and counter claims based on specific criteria and conditions adopted by the contractors.

Preparation of Claims B. Use of Eichleay’s Formula for calculating overheads in claim: • While preparing the claims, for various heads, accepted rate/data either available under contract or available as national/international standards are considered for computing the claims. • While calculating overheads, Eichleay’s formula can be used which is a 3 step calculation to determine damages.

Preparation of Claims 3 steps in calculation of EICHLEAY’s formula to determine damages: STEP I: Allocable Overhead - The allocable overheads are to be calculated as follows: Total Project Billings x Total Home Office Overhead during Actual Contract/ Total Company Billings STEP II: Daily Allocable Overhead Allocable Overhead/Number of days of performance under project (including delay days) STEP III:Home office overhead damages to be included in the claim Daily Allocable Overhead x Number of Days Delays

Preparation of Claims C. Preparation of counter-claim by the Employer • Recovery of amount for opportunity loss in terms of production loss for delayed period. • Extra counter-claims based on specific criteria adopted by the employer. • Recovery of LD amount from contractors for delayed period of the project. • Recovery of amount for failure in Performance Guarantee (PG) parameters as specified under the contract.

Preparation of Claims • Recovery of amount for items which have not been supplied by contractors in accordance with specifications under contract. • Recovery of amount for works which could not be completed by contractors and are either still pending or have been executed by employer at risk and cost of the contractors. • Recovery of any consequential losses incurred by employer due to any act of contractors whether in pursuance of terms of contract or not.

Arbitration vis-à-vis Construction Contracts in India • Parties to disputes were reluctant to approach courts for resolution of their disputes. • Disputes were not brought to a settlement and parties used to suffer heavily bearing financial losses due to such disputes. • Arbitration is one of the most preferred modes of dispute resolution ensuring resolution of dispute within shorter durations with flexibility of procedures and autonomy of parties. • Introduction of Arbitration and Conciliation (Amendment) Act, 2015 encouraged parties to opt for arbitration as a dispute resolution mechanism.

Arbitration vis-à-vis Construction Contracts in India • After the commencement of the Amendment Act, conflicts are being resolved in a specified span of time keeping intervention of courts to bare minimum. • Legislation has brought larger autonomy to arbitrators to have their own jurisdiction in deciding most issues. • Arbitrations in construction contracts are very complex involving of disputes based on technical issues. • Arbitration legislation should accommodate such issues through special provisions incorporated. • Need for provisions to make arbitration conducive for construction contracts.

Encouraging Arbitration in Indian Construction Sector • Arbitration clause should be incorporated in all construction contracts. • Apex body to evaluate performance of arbitration institutions & individual arbitrators to assess their performance. • Arbitration and Conciliation Act 1996 , should have provision to nominate arbitrators with domain knowledge. Section 26 not adequate to take care of complexities of construction disputes.

Encouraging Arbitration in Indian Construction Sector • Arbitrators, particularly in construction sector, should have knowledge of delay analysis along with having technical background and capability of scientific scrutiny of claims and counter claims. • Arbitrators should have domain knowledge and experience in the construction industry to resolve disputes in the construction sector. This will be a true justice to the dispute.

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Delay Analysis and Claim Preparation: The Soul of Arbitration