Articles

India is rapidly developing and is on a path to exponential growth. The
infrastructure sector is growing rapidly with many large ongoing projects receiving
huge investments. Such projects often have multi-party involvement with many
entities engaged for different scope of work within the project. The involvement
of multiple entities (often in the form of a consortium) in one project leads to
more complexities and risks in the execution of the project. This is the primary
reason for increasing amount of delays and disputes in the construction sector in
India.
Such disputes and delays in projects can negatively affect the country’s economy,
leading to a decline in growth. Construction projects have high stakes due to
investment of large amounts of capital and time. When disputes do arise among
the various stakeholders, an efficient and time bound mechanism is needed for
completion of the project as early as possible and to ensure that the disputes are
resolved adequately under agreed contractual conditions. Disputes in
construction projects arise due to a variety of situations, some of which are
discussed hereunder.
Majority of the disputes relate to extension of time in projects without the
imposition of liquidated damages (“LD”) and penalties. Thus begins the battle of
disputes with claims and counter claims from contractors to employers and viceversa.
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 subcontractors 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/subvendors 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 subcontractors 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 employe
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.
V. Arbitration vis-à-vis Construction Contracts in India
On the basis of various description of delays and claims along with the
background of actual case studies of project disputes, it is amply clear that there
are multiple possibilities of disputes and misunderstandings at any stage of any
project which can arise due to various reasons as explained hereinabove, which
may include dishonesty or incompetence of any party, lack of adequate resources
for the execution agencies and so on. These disputes finally attract
claim/damages from one party to the other. Such situations are widely prevalent
in industry and infrastructure projects in India. To minimize the disputes, there is
a primary need to have clear understanding of the contract and actual project
execution requirements and adherence to the same.
However, in practice, such disputes do arise in construction projects,
therefore, there is need for a well proven and accepted mechanism which can
resolve such disputes and settle the claims. It is necessary that the parties to the
dispute have confidence and faith in the chosen mechanism of dispute resolution.
Arbitration is one of the most preferred modes of dispute resolution which
ensures resolution of the dispute within specified shorter durations along with
flexibility of procedures and autonomy of parties to the dispute.
Before the Arbitration and Conciliation Act, 1996, there was not much awareness
with respect to arbitration in the Indian dispute resolution sphere. Therefore,
arbitration was less prevalent in industrial disputes, specifically in the
construction sector. The Arbitration and Conciliation Act, 1996 also did not garner
much popularity in the dispute resolution sphere as it has some salient features
which were not favourable to disputing parties. Parties to disputes were reluctant
to approach courts for resolution of their disputes due to obvious demerits like
long pendency and delays, therefore, they had to make a compromise with the
best available option. This also amounted to the fact that most of the disputes
were neither brought to a settlement through the Indian courts nor through
arbitration and the parties suffered heavily while bearing the financial losses due
to such disputes.
The introduction of the Arbitration and Conciliation (Amendment) Act, 2015 has
certainly encouraged parties to opt for arbitration as the dispute resolution
mechanism to resolve their conflicts in a specified span of time while keeping the
intervention of the courts to bare minimum. This legislation has also brought
larger autonomy to the arbitrators to have their own jurisdiction in deciding most
of the issues which used to be intervened by the courts causing the arbitration
process to take inordinately long time.
It is worth appreciating that the Government of India is taking lot of initiative to
present India as pro-foreign investment and pro-arbitration but the ground reality
is that there is scope for more initiatives and efforts to make construction
disputes arbitration friendly. Arbitrations in construction contracts involving huge
amounts with large number of disputes. They are generally very complex due to
involvement of disputes based on technical issues. The arbitration legislation in
India should accommodate such issues through special provisions incorporated
into the existing legislation. India needs to make provisions to make arbitration
more conducive for construction contracts.
However, majority of arbitrations in India are still ad hoc, which has got its own
disadvantages in comparison to institutionalized arbitration. Institutionalized
arbitrations have more advantages over ad hoc arbitration due to the fact that
each arbitration institution has its own arbitration rules, systems and procedures,
facilities, secretarial assistance and professional expertise to do justice to
arbitration as a mode of dispute resolution.
India has got few well established arbitration centres such as the Indian Council of
Arbitration, SCOPE Forum, International Centre for Alternative Dispute
Resolution, Delhi International Arbitration Centre, etc. but still the number of
arbitrations which are on-going are not very high. The question that remains is
whether arbitration with seat in India has been adopted and accepted as a
preferred mode of dispute resolution in construction disputes? If not, then it
needs to be examined whether there are some measures which can be taken to
encourage arbitration as a major mode of dispute resolution in general and
particularly in the construction sector which has such high value stakes for all
stakeholders.
VI. Encouraging Arbitration in the Indian Construction Sector
1. An arbitration clause should invariably be incorporated in all construction
contracts so that the same can be the basis of arbitration in case of any
dispute between the concerned parties.
2. Since Indian courts are already overburdened and pendency of cases is
high, courts should direct the disputing parties to first to arbitrate as rule and
if the same fails then to resort to resolution through courts.
3. All arbitration institutes should have exhaustive training programs for
spreading awareness about arbitration and training of professionals for
arbitration.
4. There should be an apex body/institution to evaluate the performance of not
only arbitration institutions but also individual arbitrators to assess their
performance. Accredited, qualified, experienced and trained arbitrators are a
necessary starting point for making arbitration a success story.
5. The Arbitration and Conciliation Act, 1996 (as amended) should have the
provision to nominate the arbitrators with domain knowledge of the relevant
discipline so that the award is based on the merit of the dispute as per the
arbitrator’s domain knowledge and experience particularly like engineering,
charted accountancy, etc. It is also a fact that appointment of experts in terms
of Section 26 of the Arbitration and Conciliation Act, 1996 (as amended) is not
adequate to take care of true complexities of construction disputes.
Construction disputes as a whole gamut of disputes starts with technical issues
and ends with technical issues.
6. Arbitrators, particularly in the construction sector, should have a good
knowledge of delay analysis with a technical background and capability of
scientific scrutiny of the claims and counter claims raised in the
disputes during the arbitration.
7. The ratio of number of arbitrations to every arbitrator at any point of time
should not be more than two, otherwise an arbitrator will not be in position to
devote required time to go into true details of the dispute, claim/counter
claim, documentation and to give judicious awards.
8. From the above it is clear that claim scrutiny, justification and final acceptance
is also of a technical nature which needs the understanding of an arbitrator
having technical/engineering experience of project execution and having the
knowledge of the estimates, engineering rates of activities, cost of material of
different qualities and different costs relating to the
operation/maintenance/replacement of equipment, labour rates and
overheads. This should be known to the arbitrator as a matter of practice and
experience in construction arbitration. This background will enable the
arbitrator to understand the true claim and counter claim of the disputing
parties. This will be true justice to the dispute. Therefore, arbitrators should
have domain knowledge and experience of the construction industry to
resolve disputes in the construction sector.