Tuesday, November 3, 2009

Costs of Construction Delay

The previous instalment of qs news described the key factors that can cause delay in 
construction projects. This is the second instalment, discussing the costs associated 
with construction delays. 

A number of factors can cause construction delays. These include: 
   The Developer 
   The Contractor
   The Consultant 
   The Material 
   The Contractual Relationship  
   Labour and Equipment 
   The Contract 
   The External Environment 

Developer - Cost of Delays 
Should something unforeseen and beyond the control of the contractor occur on site, delays will generally 
result. These delays will often inconvenience the contractor and the developer will be required to reimburse the contractor for the resultant loss. Some of the costs that may occur due to unforeseeable delays include: 

Onsite Costs 
– When delays occur, the site still needs to be maintained. That means site labour continues and rent for on site sheds and machinery needs to be paid. 

Down Time Costs 
– This is time spent waiting on site for delays to be identified and rectified. This may include waiting for new contracts to be issued, or for new machinery being bought to site. While waiting for these to occur, workers are still being paid to do little or no work. 

Site Supervision Costs
– Again, while delays are occurring the site still needs to be supervised, which is a further cost as no work is being completed on site. 

Contractor - Cost of Delays 
All delays in construction have costs associated. If delays occur, their associated costs are often predetermined in the contract, ensuring that prior to project commencement, both parties are aware that if the project is not completed on time there are costs associated. In a contract, the penalty rates that apply to the contractor for late completion of a project are called liquidated damages. Used correctly, the liquidated damages clause within the contract gives control to the principal over the projects completion date. It also reduces the risk passed onto the principal from time and cost overruns incurred as a result of poor management on behalf of the contractor. Without these clauses, no incentive or consequence exists for the contractor to complete the project on time. Liquidated damages may be calculated on a daily or weekly basis, with the rate payable agreed between the Developer and Contractor at the time of signing the contract. Liquidated damages generally are based on an estimate of the total damages, including possible effects of interest payments, which may be incurred by the developer if the project was to finish late. Liquidated damages can be calculated based on one or more of the following: 

Claimable Delays 
With the exception of some very biased contracts, provision generally exists for contractors to claim additional costs incurred for the duration of the contract for factors beyond their control. These delays should be addressed carefully by the developer and the contractor prior to the signing of the contract so as to be fully aware of the potential costs of delays. 

What happens if delay costs aren’t documented in the contract? 
Poor attention to delay issues in contracts at the commencement of the project lends itself to a range of unfavourable outcomes for the developer in the event that delays are encountered. Insufficient use of the liquidated damages clauses could potentially see the project move well overtime, with no considerable compensation in place for the developer, leaving them to fund the additional interest and/or holding costs associated with the delays. Should the “Costs of Delays” clause within the contract not be correctly utilised, potential exists for constant and/or exorbitant claims being made by the contractor for costs associated with project delays that could well be beyond the control of the developer. Which ever the scenario, much of the time these situations lead to disputes between the parties to the contract which often have adverse effects on the delivery and the immediate profitability of the project. As part of our project assessment procedures, BMT & ASSOC review these critical items within the contract for potential risks and make recommendations as to how these can be minimised.


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