How to manage the risk of project delays

How to indentify, manage and reduce the risk of delay. By Neal Morris and Kevin Joyce of Pinsent Masons.

Despite the emergence of new standard form contracts, best practice construction methods and detailed, computer based critical path programming, approximately 40% of construction projects still overrun their original contract period.

As the consequences of unanticipated overruns are often serious, having an appropriate risk management strategy in place, which is workable in practice, is essential.

The risk of delay

The first step in any risk management strategy is to identify the problems the risk of delay creates. For the contractor, delay to the completion of the project may, depending on the reason for the delay, result in a liability for delay damages to the owner, an increase in site overheads and potential liabilities to subcontractors. Similar risks exist for subcontractors and others in the supply chain.

Not only does this have an impact on the profitability of a project, but it may also create cashflow problems and the risk of insolvency due to the delayed recovery of payments and having resources tied up in the project for a prolonged period of time.

For the owner, a delay will mean that the asset being constructed will not be able to be used when originally intended. This may mean the owner has to incur alternative accommodation costs and suffer a delay in receiving income from the asset.

The cost of financing a project can also potentially increase depending upon the banking arrangements that are in place and the delay may give rise to claims by the contractor, contingent on the contractual allocation of risk and the events causing the delay.

Contractual management

So, how can these risks of delay best be managed, either by contracts or by practical measures?

If properly drafted, contracts can manage the risks of delay in a number of ways. For example, liability for the financial consequences of delay can be allocated to the party that is best placed to manage that risk - a recent study carried out by the Chartered Institute of Building showed that in around two-thirds of building projects, and half of engineering projects, delay-related costs were perceived to be predominantly at the risk of the contractor.

The parties can also be creative in sharing the financial risks in the contract. For example, the contract may contain terms which provide for the following:

• a limited period of time free of delay damages;
• apportionment of the financial liability with another party by calculating a lower, liquidated level of delay damages; or
• by including in the contract certain events that would entitle a party to time, but not to money.

The contract should also provide contractual powers to help manage the risk of delay, including powers to accelerate the work, bring in extra resource, omit or postpone works temporarily or even terminate the contract if required.

Contractual obligations should be placed in terms of programming the works and sanctions can be included in the contract for failure to meet these obligations (e.g. those in use under NEC forms).

Consultants' terms of appointment should also emphasise the importance of providing timely design information and clearly spell out what 'timely' means in practice by a contractual design release programme, the failure of which remains probably the most common cause of delay to a project.

Practical management

In addition to the contractual terms, there are also practical ways in which the parties can best manage the risk of delay.

The parties, particularly the owner, need to take a realistic view from the outset as to the time it will take for the project to reach completion. They should be cautious of setting an unrealistic completion date and it is usually advisable for the owner to undertake their own delay risk assessment and add a contingency.

Contractors can manage the risk of delay by being realistic about the programme for the works and by planning for the usual contingencies that are critical to completion. They should involve the site team, their key subcontractors and, where appropriate, consultants in their tender programme at an early stage, before contractual commitment.

Contractors should also be aware of the contractual allocations of risk for delay events and understand the obligations that need to be complied with under the contract, such as the serving of notices and keeping adequate records. Failure to do so may restrict or exclude entirely the right to be compensated for events that are otherwise at the owner's risk. This may also expose the contractor or subcontractor unnecessarily to liability for liquidated damages.

Delay is often regarded as unavoidable given the nature of construction and engineering projects. However, the risk of delays occurring and its consequences can be minimised and managed by having appropriate contractual terms in place that are workable in practice and by proactive legal risk management during the course of the works.