Articles

India is a developing large country but fast on the growth path. Therefore, construction sector occupies one of the most important position in the country. Construction sector bring growth and development in the country. Its contribution to GDP of India is around 1.4% which is next highest to the agriculture. It employs around 40 Million of work force. As per the reliable source around Rs70, 000 crores is stuck up in the arbitration of India indicating that construction sector has huge number of disputes. In spite of this, the infrastructure and construction sector is growing rapidly with many ongoing large construction projects having huge investment. Due to multi - party nature, the projects are becoming more complex and risky. There are many risks in the large and mega construction projects in any country in general and in India in specific. One of the identified risk is delay of the projects due to various reasons of reasons of delays therefore, the disputes in the construction sector are on rise. Any kind of disputes in the projects, delays the projects which are not good for country’s economy as growth declines. Whenever such disputes do arise among the stake holders, it is essential that there should be a mechanism in place to sort out the dispute and complete the project as early as possible under agreed contract conditions. Construction disputes always arise in a variety of situations which are being dealt herewith. These disputes finally lands in demands of extension of time of project without imposition of any liquidated damages( LD) and penalties and brings claims and counter claims from contractors to employers and vice-versa and that begins the battle of conflicts and disputes.


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A large engineering, procurement and construction (“EPC”) contract generally involves an employer and one or more contractors. One of the first requirements for such a project is engineering of the process/technology, equipment and structures which in turn need the support and application of various engineering disciplines like civil, mechanical, electrical, instrumentation, automation, chemical, metallurgical, etc. which may vary from one industrial project to another, depending on the process of production.
EPC projects involve the procurement of various kinds of equipment, entailing the complete procurement process and quality control. The equipment is transported/shipped from national and international destinations through complex processes and regulatory mechanisms involving many national and international agencies relating to transport, customs clearance, international shipping, storing and preservation. Equipment is erected by an entity having the specialized knowledge and requisite quality control mechanism in place for the particular type of equipment. This may relate to mechanical, electrical, electronics, information technology or automation aspects of engineering which is executed through labour contacts, erection contracts, service contracts or all three. Once the equipment is installed, very specialized knowledge is required for inspecting, testing, operating and handing over of the equipment to the employer by the contractors under the agreed terms and conditions of the contract. Since, there are thousands of activities done in a construction project by many agencies, sub-contractors, sub-vendors, service providers, etc., completion of the construction project is certainly a complex activity.
Though many companies have a system of detailed contracts with exhaustive terms and condition setting out the specifications, quality control, scope of work, roles and responsibilities of agencies, payment, LD, performance guarantees and penalties, schedule of executions, etc., however, it is still not always possible to cover each and every activity of the project under the contract. When such large projects are executed by different consortium partners, there are always variations in conditions of the project with reference to the agreed terms under the contract. Such variations need quick decision making and agreement by all concerned in completion of the project without any delays.
Most of the times different parties do not agree to accept responsibility for such technical/contractual variations. A consequence of such disagreement is delay in the completion of the project which leads to financial implications for different parties involved in the execution of the project. Delays in execution of the project brings out not only financial accountability but also extra claims by the contractors as a compensation from the employer. This is a major reason for disputes in construction contracts. From the employer’s perspective arise counter-claims against the contractors for loss of opportunity and other potential counter-claims due to delay in execution of the project. In most cases, LD is imposed by the employer on contractors which is a major point of conflict in construction contracts.
The major causes of delay in execution of EPC projects are discussed in the next section.
I. Common Causes for Delays in Execution of EPC Projects
Based on industry experience, the following are some common causes in large EPC projects in the industry and infrastructure sectors which result in delays and extra claims leading to disputes among various stakeholders of the project, particularly between the employer and consortium of contractors:
A. Delays during Engineering Stage:
The following delays can be covered under the category of engineering delays:
1. Delay in approval of designs and engineering due to various reasons at different stages of execution of the project, right from beginning and up to handing over of the project. One of the major reasons for delay in approval is repetitive comments by the employer or consultants engaged by the employer and high number of revisions by the contractor based on such comments.

2. Delay in issuing the change order by the employer to contractor.

3. Delay due to lack of knowledge of the process, technologies and engineering by consultants as well as other agencies. Delay is also possible due to lack of proficiency and engineering skills of the contractors and sub-contractors who are responsible for design/engineering of equipment.

4. Delay due to lack of experienced of the employer/contractors’ personnel with respect to new work in the projects.

5. Engineering work may begin later than as envisaged in the planned schedule, causing delays. This can be due to delays by the contracting in starting the engineering work as well as delays due to the employer who is required to share specified design data to the contractors.

6. Delay due to late decisions in various engineering activities of the project by employers as well as contractors and sub-contractors. Engineering delays caused by all entities involved in the project leads to a compounded increase in delay of the total engineering in the project.

7. Delay in basic engineering and detailed engineering causes major delays in the project as such engineering delays have a cascading delay effect on procurement and construction activities of the project.


B. Delays during Procurement/Sub-Contracting Phase:
The following delays can be covered under the category of procurement delays:
1. Delay in vendor approvals for procurement of equipment/materials by the employer.

2. Delay in inspections, issuance of Inspection Certificate and Inspection Waiver Certificate by the employer.

3. Delay in issuance of Dispatch Clearance by employer.

4. Special delays in supply of any item by contractors.

5. Delay caused by design modifications/changes by employer as well as contractors due to unavoidable circumstances. These design form the basis for procurement of equipment and materials.

6. Delay due to unrealistic target schedule of erection of the project. Procurement of equipment/materials is not possible under delivery schedules which are shorter than required due to the necessary duration of manufacturing/fabrication.

7. Delay due to problems with the quality of equipment and re-work in manufacturing/fabrication of items.

8. Delay due to selection of inappropriate/unapproved sub-vendors. This might be due to wrong selection criteria like lowest price criterion by the employer as well by main contractors.

9. Delay due to ambiguous and unclear bid document/purchase specifications for procurement/contracting by the contractors.
10. Delay in issuing change orders/amendments of contract/purchase orders.

11. Delay due to late inspection of manufacturing or late clearance at the inspection stage by consultants/employer.

12. Delay due to damage of equipment during transportation/international shipping/internal handling/storing/shifting.

13. Delay due to wrong/scarce specification of equipment in contract by employers.

14. Delay in communication of issues and decisions by the employer to contractors and vice-versa.

15. Delay due to dispute between contractors and their sub-vendors.

16. The contractors may lack of knowledge of local fabricators/suppliers/sub-vendors and this may cause delay in the project as they cannot get the supplies delivered in time due to lack of knowledge regarding the background, capacity and capabilities of the local fabricators/suppliers/sub-vendors.

17. Delay due to payments by employer to contractors and by contractors to sub- contractors which causes further delays in delivery schedules.

18. Delay due to late opening of LC by the employer for contractors and by contractors for sub-contractors.

C. Delays in Construction/Erection/Commissioning of the Projects.
The following delays can be covered under the category of construction delays:
1. Delay caused by the employer in making the site available to the contractor to enable the contractor to start the work under the project.

2. Delay in availability of construction power from employer if it is required to be made available by employer under the terms of the contract.

3. Delay caused by major defects in construction, leading to repeated re-work by the contractors.

4. Delay caused by breakdown of any main construction equipment of the contractors.

5. Delay due to poor supervision of the contractors which may be due to a number of reasons.

6. Delay due to labour strike/mismanagement caused due to a number of reasons.

7. Delay in granting extension of time under the contract by the employer in the event that the project is not completed within the agreed timelines.

8. Delay in issuance of labour passes and various clearances by the employer to contractors.

9. Delay due to “Force Majeure” situations like war, hostilities, invasion, act of foreign enemies’ revolution, terrorism, sabotage by persons other than the contractor’s personnel, or civil war within the country, etc. Such delays are not under any party’s control.

10. Delay due starting of erection later than what was planned under the contract schedule.

11. Delay due improper and incorrect job execution methods and lack of engineering knowledge.

12. Delay due to unfavourable weather condition
13. Delay due to late issuance of design and construction drawings by the employer as well as the contractors.

14. Delay due to execution of the project by the contractors using incomplete drawings or drawings with incorrect revisions.

15. Delays due to delayed delivery of equipment at site by the contractors. There are times when the employer also delays the supply of specific equipment during the project.

16. Delay due to unsynchronized delivery of equipment/materials for erection by the contractors.

17. Delay due delivery of wrong equipment/material for the erection by the contractors which then needs replacements or re-works.

18. Delay due to inaccurate work which leads to rework/rejection/re-design.

19. Unrealistic milestones under the contract also become the basis of delay in the project as the same cannot be achieved.

20. Delay in availability of particular information/document/drawings required as per the contract to the contractor from the employer and vice-versa.

21. Delay due to missing designs and missing supply of items which cause stoppage of work until corrective action is taken.

22. Delay in payments by the employer to contractors and by the contractor to sub-contractors.
23. Delay due to unsafe working conditions or accidents at the project site. Fatal accidents not only bring the execution of the work under the contract to a standstill, but also brings fear into the minds of workers leading to decline of labour productivity.

24. Delays caused due to personnel who are inexperienced with new types of work/technology/methods/implementation of engineering.

25. Delay caused due to delayed clearances for the project by statutory bodies like environment department, electricity department, boiler inspector, labour inspector, etc.

26. Delay due to non-availability of proper tools, tackles and safety appliances. This affects the progress of the work and brings down the labour productivity.

27. Delay due to non-availability of proper construction equipment & machinery at the project site as well as offsite.

28. Delays may be caused due to delay in availability of necessary and specified utilities like industrial water, electrical power, required gases, steam etc. for testing and trial run by the employer to the contractor for pre-commissioning and commissioning of the project.

29. Delay due to repeated changes in the scope of work and introduction of new requirements at later stages of the project when the project is already at an advanced stage of execution.

30. Delay due to indecision or late decision in erection activities of the project.

31. Delay due to delayed permits during erections by the employer.

32. Delay due to unpredictable ground and soil conditions at the project site.

33. Delay by sub-contractors of contractors as they are engaged in co-related jobs of the project.

34. Delay in commissioning due to lack of availability of enabling/related packages from the employer’s side. For example, the raw material system which may be part of a project and is essential for another project may not be ready when the other project is ready.

35. Delay in commissioning due to non-availability of trained man-power to take over the project from the employer’s side.

D. Other reasons for delay in EPC Contracts:
The following delays can be covered under other category of delays:
1. Unilateral termination of the contract by either party.

2. Financial problems of a stakeholders whether temporary or permanent/long term.

3. Insolvency of either the employer or any partner in the consortium of contractors.

4. The project being kept on hold by the employer.

5. The employer’s decision to shift the location of project from one plant to another.

6. Misinterpretation of the contract and implementation of the same by any of the stakeholders.

7. Pressure on the contractor from the employer to meet directives which are not in accordance with the agreed terms and conditions of the contract.

8. Non-conformity with the agreed terms and conditions of the contract by the contractors.

9. Withholding of contractors’ payments by the employer and attempts by the contractors to extract more money from employer.

10. Breach/violation of the terms and conditions of the contract by either party.

11. When the contract is silent with respect to certain situations/scope of execution of the project which involves large capital.

12. Delays may be caused due to disputes which arise among the consortium partners when they violate the internal consortium agreement concerning their relationship while executing the project.
Finally, these delays in EPC contracts are attributable to one or more parties and the actual responsibility for the delays truly emerge when the delays are identified based on Delay Analysis Report prepared by all the concerned agencies and such delays can be attributable to the following:
1. Delays by employer;

2. Delays by contractors;

3. Delays by sub-contractor/sub-vendors which are part of the consortium of contractors;

4. Delays of common/overlapping nature which are attributable to two or more different stakeholders in the project;

5. Delays due to force majeure which is not attributable to any stakeholder.

II. Analysis of Responsibility for Delay by the Affected Parties
As soon as a project is delayed beyond its contractual schedule, multiple questions arise among the various stakeholders regarding responsibility for bearing the consequential financial implications/losses due to delay, the basis for such responsibility and how the same is to be decided. The primary cause of concern is delay in execution of the project and the financial implications are a consequential outcome of the delay in execution of the project. In most cases, the contractor aims to be exempted from imposition of LD by asserting that the employer is responsible for the delay in order to claim costs from the employer for the delayed period as approved time extension. At the same time, the employer normally takes the opposite stand and denies any delay attributed to it. The employer further aims to avoid any outcome wherein the employer will be required to compensate the contractor for the contractor’s claims along with waiver of LD. The employer attempts to shift the responsibility of the delay to the contractor and makes a counter-claim against the contractor. This situation leads to a deadlock as it normally cannot be resolved by the parties amongst themselves.
III. Assessing the Delay in an EPC Project:
The project is executed within agreed L2 & L3 schedules between the contractors and the employer which confirm the complete project execution schedule and has the project critical path. These schedules also contain the start and end dates of various milestones and major activities of the project. While conducting the delay analysis, all the start and end dates of major executed activities of the project are compared with the original agreed start and end dates. The difference between two dates calculates the delay in that activity. In this manner all the individual delays of each activity of the engineering, procurement and construction phases are calculated.
The delays in these EPC components is plotted on the original schedule of the project. This way how the delays of the EPC components has impacted the original project is determined. From here the total delay in the project is calculated. A systematic record with all possible evidences and justification is presented activity-wise along with the manner and quantum of delay in each major activity and the entity responsible for each such activity. This is prepared by the contractor as well as employer separately and is known as the Delay Analysis Report (“DAR”). The correct analysis and review of this DAR gives a clear picture to conclude which entity was responsible for which delay and the quantum of the delay. This becomes the basis for all claims, LD, penalties in the project to be decided or agreed to or awarded by the Arbitral Tribunal in an arbitration.
IV. Claim Preparation
There is no standard format/formula for preparing the claim as every project is unique and has different situations for claims amongst the parties. However, the following heads are considered as a point of reference for preparing the claim by contractors as well as the employer.
A. Preparation of Claim by Contractor
The following components bearing financial implications are the costs relating to many aspects for contractors in EPC projects:
1. Complete cost of the project borne by the contractors for the duration of the delay in the project.

2. Cost of extra engineering hours due to delay caused by the employer.

3. Cost of extra hours in procurement due to delay caused by the employer.

4. Cost of project management and site supervision for the contractors for the duration of the delayed period.

5. Cost of additional insurance, premiums and maintaining the Bank Guarantees and Letters of Credits.

6. Cost of overheads for the contractor.

7. Cost of the price variation as per the price variation formula provided under the contract for labour, supplies and applicable items.

8. Cost of extra resources for accelerating the project during the delayed period.

9. Arears or pending amounts which the employer is yet to pay the contractor.

10. Interest on arrears, late payment and the payment not yet received by contractors from the employer.

11. Payment for cost of items which were not in the scope of work of the contractors but have been supplied by the contractors in terms of directions and requirements of the employer.

12. Extra scope of work which was not part of contract but has been executed by the contractors.

13. Additional claims and counter claims based on specific criteria and conditions adopted by the contractors.

B. Use of Eichleay Formula for calculating the overheads in a claim
While preparing the claim, for various heads, the accepted rate/data either available under the contract or available as National/International standards are considered for computing the claims.
However, while calculating the overheads, the use of EICHLEAY formula can be used which is has a 3 step calculation to determine damages and is as follows:
1. Allocable Overhead

The allocable overheads are to be calculated as follows:
Total Project Billings x Total Home-Office Overhead during Actual Contract Period
Total Company Billings
2. Daily Allocable Overhead
Allocable Overhead___________
Number of days of performance under the
project (including delay days)

3. Home office overhead damages to be included in the claim

Daily Allocable Overhead x Number of Days Delays

C. Preparation of Counter-claim by Employer
The following components bearing financial implications are the costs relating to many aspects for the employer in EPC projects:
1. Recovery of the amount for opportunity loss in terms of production loss for the delayed period.

2. Extra counter-claims based on specific criteria adopted by the employer.

3. Recovery of LD amount from contractors for delayed period of the project.

4. Recovery of amount for failure in Performance Guarantee (PG) parameters as specified under the contract.

5. Recovery of amount for items which have not been supplied by the contractors in accordance with the specifications under the contract in terms of quantity and quality.

6. Recovery of amount for the works which could not be completed by the contractors and are either still pending or have been executed by the employer at the risk and cost of the contractors.

7. Recovery of any consequential losses incurred by the employer due to any act of the contractors whether in pursuance of the terms of the contract or not.

Dr Saraswat SB,
Resident Director,
Danieli-corus, Netherlands