Timelines and time limits in construction contracts, especially large ones that may take months or years to complete, can be a source of frustration, financial setbacks and legal problems if there are delays. The larger the contract and the longer it was projected to be completed, the greater the likelihood of delays and disruptions. Owners, contractors and sub-contractors need to be aware of the consequences of delays and disruptions in construction projects, their obligations and the legal risks involved.
What are the causes of delays and disruptions in construction projects?
The terms “delay” and “disruption” are often used interchangeably, but while interconnected, mean different things. A delay is simply the longer time taken to complete a particular project, while a disruption is something that takes place during the construction project that can interrupt the normal flow of the project, such as an abnormal weather event, a major strike or financial crisis. Disruptions may cause delays and push time lines back, but this is not necessarily inevitable.
Delays in construction projects may become critical if the whole project is delayed significantly, but there are also non-critical delays which may affect certain components of the project while not impeding the final completion date.
Whether a delay or disruption leads to a dispute between the owner and the contractor depends on the cause of the delay. Some delays are due to something that the contractor, a sub-contractor, or the owner has or hasn’t done, i.e. they can be attributed to one party or the other. These delays may be considered inexcusable and are the major reasons why disputes and legal action become involved.
There are also some delays which are not the fault of any of the parties involved in the construction contract. These typically excusable delays and disruptions are normally unforeseen and are out of the direct control of the contractors or owners. Commonly accepted causes of such delays and disruptions may include:
- unexpected severe weather, such as floods, storms, hurricanes and hard to control fires;
- other natural disasters such as earthquakes and volcanic eruptions;
- social disorder, such as riots, strikes and political violence;
- global pandemics and resulting locally imposed restrictions;
- unexpected cost increases due to rapidly rising inflation or other unforeseen causes.
Excusable delays and disruptions rarely lead to disputes and are normally addressed by negotiations and adjustments. By their very nature, these delays and disruptions have not broken any clauses in the project contract, so legal action is not a consequence.
On the other hand, inexcusable delays and disruptions typically lead to a sequence of legal actions, especially if they are regarded as having broken one or more clauses in the project contract.
Typical causes of these sorts of inexcusable delays and disruptions include:
- poor initial planning;
- mismanagement;
- labor strikes and disputes caused by breach of contract by contractor;
- changes in design requested by owner;
Compensable versus non compensable delays
Delays and disruptions which are not the fault of either the owner or the contractor, i.e. any of the excusable delays and disruptions mentioned above, do not normally lead to compensation being sought by the side that has been most affected by the delay. Non compensable delays are usually rescheduled so that a later completion date is factored in which is acceptable by both sides involved in the contract.
Delays and disruptions which can be attributed to the actions or poor decision making of the contractor, sub-contractors or the owner may lead to compensation being sought. The exact nature and extent of the compensation depends on the individual circumstances of the delay or disruption.
The steps which the different parties may take if there is a dispute about whether the delay could have been avoided should preferably have been covered by the terms of the contract that the different parties involved would have agreed to. The aggrieved party at this point should engage a business law attorney to help work through the legal options involved and have a negotiating or litigating role when the parties engage in working through the dispute.
Steps that follow a delay which is considered compensable
The main steps that could be followed to resolve a dispute are similar to any other breach of contract between two or more business parties. These are, in the sequence which is typically used:
- negotiation;
- mediation;
- arbitration;
- litigation.
All delays and disruptions in construction projects can become frustrating and expensive. As an aggrieved party works through the four steps involved in dispute resolution above, the cost of further delays, legal costs and loan repayments increases incrementally, making it sensible to try to reduce the time taken to come to an acceptable agreement on how the delay should be compensated.
Negotiation may involve formal face to face meetings, phone contact, written or digital correspondence. It is the first method to be used to resolve delays in projects which are believed to have been the fault of one or other parties. It has the advantage of being open to flexibility and compromise and as long as it addresses the causes of the delays and disruptions may lead to an agreement about how to proceed further with the project. This may mean accepting an extension to the time taken to complete the project, extra financial investment sought or lower profit margins being absorbed by the party considered to have been responsible for the delays.
Mediation is the next step when negotiation has broken down. The mediator is a neutral third party who attempts to help the disputing parties come to a resolution without imposing any conditions on the dispute outcomes.
Arbitration is the next step when mediation is unsuccessful in resolving the dispute. An arbitrator is appointed by a governing party or by agreement by the disputing parties has the legal authority to impose a decision on the dispute. The decision is made after the arbitrator has reviewed all the evidence presented by the parties involved in the dispute.
Litigation is the most time consuming and potentially the most expensive way of resolving the dispute, but in some cases when other methods of resolution have broken down completely may be the logical next step. Litigation involves taking the alleged breach of contract to the court as a lawsuit. It will mean hiring attorneys and the time for the court to make a legally enforceable decision may mean that the project will be held up for even longer. However, in the end, litigation may be the only way to resolve the dispute in such a way that is acceptable by the litigant and which involves changes to project times, financial compensation or specific actions that one or other parties must take that are legally enforceable. Decisions made by the court may mean penalties being imposed if the decisions are ignored.
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