Rob Horne, Partner, Head of Construction and Engineering Disputes & Risk and International Mobility & Infrastructure Sector Leader, features in CICES magazine with an article on dispute avoidance through risk management.
(This article was first published by CICES. You can read the article online here.)
Dispute avoidance through risk management
"Danger is Everywhere" is the title of a series of children's books following the exploits of Dr Noel Zone, the worlds foremost (and only) dangerologist. I loved reading these with my child when they were younger but perhaps we need a few more dangerologists, or riskologists, in the construction industry.
Risk Perception
Before you can manage it you have to see it. Why can't some people (it often feels mostly found in the construction industry) perceive risk accurately?
Outside of commercial risk in construction projects there is a well-established body of data on risk perception. The data has, for perhaps obvious reason, tended to focus on the impact of risk perception on making health and safety related decisions, but the principles are very much relevant to the more commercial risk analysis which can make or break a project.
Research in psychometrics has shown that risk perception is highly dependent on intuition, experiential thinking, and emotions. This would include an individual's personality traits and previous experience, as well as contextual factors such as how the risk is framed when communicated or perceived and the perceived seriousness of the events and their consequences. For each individual there is quite a complex perception web, and on any project there will be multiple people perceiving the risk and therefore likely to draw different conclusions. Added on to that melting pot of disparate individual perceptions, at the core of most risk perception are emotions, feelings and intuition. We are not well equipped, as a species in the broadest sense, to vocalise an emotional reaction in a way easily understandable to someone in the same way it is felt. Our language is primarily a means of conveying information or data; "look, a tiger!" is a very good transfer of information, however without substantially more, that language is not itself sufficient to perceive let alone analyse or manage risk.
In order to try and convey emotional responses and content we either go into long list of more data in the hope that the added data provides the context that makes up for the emotional absence or we put in place processes to enable a better transfer of information.
Contractual risk management
The "long list of data" approach is, perhaps, the traditional concept of risk identification and management in construction, both within the four corners of a project and in terms of corporate reporting. However, do the most used standard forms offer an alternative?
In a commercial construction contract sense, risk will generally fall into one of three headings; time, cost or quality. There are of course others such as property damage, health and safety etc but let's just going to focus on time, cost and quality here for simplicity.
Starting with the JCT 2016 design and build form the word "risk" is used approximately 50 times but almost invariably in relation to insurance.
| Time | The risk being a late finish. Clauses 2.23 to 2.26 deal with changes to the time for completion. 2.24 provides that "If and whenever it becomes reasonably apparent that the progress of the Works or any Section is being or is likely to be delay the Contractor shall forthwith give notice...". Nothing in that clause gives an easy understanding of risk perception or management. The perception point here is "...whenever it becomes reasonably apparent..." which is a highly subjective test likely to get a non-data driven response but then with a requirement to verbalise it in the form of a notice. |
| Cost | The risk here being increase in the form of loss and expense, is dealt with by clauses 4.19 to 4.22, or change which is dealt with by clauses 5.1 to 5.7. In relation to loss and expense, the wording mirrors that of the delay provisions outlined above "If in the execution of this Contract the Contractor incurs or is likely to incur and direct loss and/or expense as a result of [delay or Relevant Matter], he shall...be entitled to reimbursement of that loss and/or expense." Again the words "...incurs or is likely to incur..." imports a risk based assessment. |
| Quality | The risk being defects, is dealt with at clause 2.35. Here the wording is different and is not risk focussed at all "If any defects...appear within the relevant Rectification Period...within a reasonable time...shall be made good by the Contractor unless the Employer shall otherwise instruct". So quality is purely data driven, as such it is much more easily communicated and much easier to manage as a consequence. |
In summary then, the JCT approach identifies points at which information is to be shared and focusses on the transfer of data in consequence. It does not really give the parties tools to consider how the risk is being, or should be, perceived.
Turning to FIDIC, the 2017 Red Book mentions risk approximately 35 times but, while the word may be used a little less than in the JCT form above, the context is much broader; from the introductory notes explaining that one of the principles of the contract is to provide balanced risk sharing. At face value a different approach, but are there in fact tools then brought into the contract to enable that more dynamic focus on risk?
| Time | Section 8 deals with commencement, delay and suspension and clause 8.5 particularly deals with extensions of time. Clause 8.5 provides that "The Contractor shall be entitled...to Extension of Time if and to the extent that Completion...is or will be delayed". Note the change in wording from "reasonably apparent" and likely to cause delay" under the JCT form. The change to "is or will be" language here reduces the non-data driven need for risk perception, though the future looking "will" still leaves the door open a little. |
| Cost | Section 13 provides for variations and adjustments and clause 20.2 for payment for extensions of time. In relation to extension of time payments. Unlike under the JCT where the time and cost provisions align, under the FIDIC the very data driven time provision is paired with a much more subjective cost provision. Clause 20.2.1 provides that " The claiming Party shall give notice to the Engineer...not later than 28 days after the claiming Party became aware, or should have become aware of the event...". It is the requirement to notify when you " should have become aware " that leads to a risk perception point. In fact, what I omitted from clause 8.5 above was that it too is subject to the provisions of clause 20.2. Therefore, while there is at first glance a reduced risk point for time, it is reintroduced through the claim process. In fact, clause 20.2 gets worse from a risk perception perspective as you dig a little more deeply. Clause 20.2.3 requires the claiming Party to " keep such contemporary records as may be necessary to substantiate the Claim ". While this may look data driven, with no explanation or even indication of what is " necessary to substantiate the Claim " we are back to a large risk perception area. |
| Quality | Section 9 details test on completion, essentially checking for defects, with clause 9.1 providing the Contractor's obligations. Section 11 provides more detail on defects arising after completion. Under section 9 there are a prescribed list of test which must be demonstrated to have been successfully concluded, very data driven, with a failure leading to a re-test. Clause 11.1 provides that " If a defect appears...a Notice shall be given...by the Employer ." There is no timing issue so this appears data driven. However, the requirement during the defect notification period is for the Contractor to " execute all work required to remedy the defect " and by clause 11.2 such work " shall be executed at the risk and cost of the Contractor ". FIDIC therefore moves from a very data driven testing regime to a much more risk perception driven rectification requirement. |
While FIDIC may vary in approach to JCT neither form provides any guidance or tools to assist the parties to engage in risk perception, assessment or management activities.
Lastly, NEC4 Engineering and Construction Contract, also published in 2017, mentions risk a little under 30 times, so the least of the three forms considered. Like FIDIC the application of the phrase is broad and includes " risk opportunity " as a phrase and also talks about the pro-active management of risk in its preface.
| Time & Cost | Section 6 deals with compensation events which, under the NEC suite, deal with both time and cost consequences together. As a point to note and before getting to compensation events, NEC4 also talks about the inclusion of "time risk allowances" in creating and then updating the programme which is its central management tool. Clause 61 deals with notifying compensation events and has quite a complex term "The Contractor notifies the Project Manager of an event which has happened or which is expected to happen as a compensation event if (1) the Contractor believes that the event is a compensation event and (2) the Project Manager has not notified the event to the Contractor. If the Contractor does not notify a compensation event within eight weeks of becoming aware that the event has happened, the Prices, the Completion Date or a Key Date are not changed". For risk perception purposes there is quite a lot going on here "an event which has happened or is expected to happen...the Contractor believes that the event is a compensation event...becoming aware that the event has happened...". After the notification there are then detailed points on assessment including 62.1 "The Contractor...may submit quotations for other methods of dealing with the compensation event which it considers practicable" which again creates a risk perception point. Then in relation to assessing the compensation event itself there is a mix of actual cost and forecast cost as well as a forecast of time using the "Accepted Programme current at the dividing date" and allows the Contractor to include "risk allowances for cost and time for matters which have a significant chance of occurring and are not compensation events". Under NEC therefore while there is some data there is a very large proportion of risk perception involved. |
| Quality | Section 4 deals with quality management and clause 41.4 provides that "If a test or inspection shows that any work has a Defect, the Contractor corrects the Defect and the test or inspection is repeated." Other than reserving the Client's position on any defects found after the defect date there are no additional rules, keeping this very data driven. |
| Early Warning | Clause 15 of NEC4 introduces the idea of early warning, as a process. The process involves a notice where something may delay Completion, increase cost or impair the works in use. Most importantly, and as a differentiator with both JCT and FIDIC, the process then leads on to a meeting (previously called the risk reduction meeting, now the early warning meeting) which is specifically set out in the contract as being an opportunity to co-operate in avoiding or reducing the risk, seeking mutual advantage, deciding on actions to take and maintaining an up to date register of all that. This is a focussed risk perception process for the parties to examine the issues as well as the data. |
At face value, many of the provisions of NEC4 are similar, in terms of risk perception playing an key part, to JCT and FIDIC. However, the early warning process provides a contractual mechanism or hook for tackling the perception issues and gaining alignment and understanding common to all.
Human Dynamics and collaboration
What is written in the contract will not necessarily be what happens out on site. Some project teams go above and beyond the ideology of the contract while others seem to fight against it whenever possible, and indeed even when it is not possible, form a legal perspective! This can be wrapped up as the influence of human dynamics on the operation of the contract and delivery of the project. I was lucky enough to help write a book on this subject (Human Dynamics in Construction Risk Management) which became Global Construction Success (now published by Wiley). Perhaps one way to look at this topic is that even if you have a hammer in your tool box there will still be some people who will use a screw driver to knock in a nail. While human dynamics, as applied to risk perception, risk management and dispute avoidance all seems negative, the human dynamic actually is the only thing that will make the contract processes work at all. It is the linking mechanism between risk perception and effective risk management which, together, enable dispute avoidance.
Turning back to our three contract forms JCT and FIDIC both set out to and do indeed provide a rule book for the interactions of the parties. They set out what each party must and must not do. However, that leaves a gap when the unknown happens. NEC on the other hand starts out by trying to address this by having its first two clauses say comply with the contract (10.1) but also act is a spirit of mutual trust and co-operation (10.2). This is the introduction and recognition of human dynamics in the contract process.
A manged risk is a managed dispute
Passive observation is not enough, neither is following a set of contractual rules. Managing a risk requires more.
This is the heart of the matter. You cannot avoid a dispute without managing a risk, you cannot manage a risk without perceiving it, and you cannot gain that perception without understanding what drives the perception. Much as we might like to think it is, the perception of risk is not actually driven by data, rather data is the tool used to confirm the perception that has already been formed. So to manage the risk put the data to one side (only to start with, you will defiantly need it later) and focus on why you are, or are not, seeing the risk in the same way as others. Find common ground, again before launching into the data or you will be swamped, buried, blinded pick your analogy but you wont be dealing with the perceived risk anymore.
Does that mean that record keeping is a waste of time and we should all just go with our feelings? No, not entirely at least. Make space for the feelings/intuition/gut instinct, which ever label you are most comfortable with, then look at the data. Think about and talk about the perception first to understand the risk in all its dimensions. Once you have your line drawing, fill in the colours with data to see the full picture.
Drawing the threads together
To have any hope of avoiding disputes you have to be able to accurately perceive and then manage risk as it arises. The earlier the risk is perceived and the management started, the more options are available to avoid uncontrolled escalation of the problem. However, risk perception is complex ad different for everyone so human dynamic and interaction is critical; to management, of course but also to the early stage of risk perception. Translating that perception into something communicable in a meaningful way comes through dialogue (rarely if ever written notices) where emotional content or, if it is easier, gut instinct, can be analysed not solely through an accumulation of endless data.
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