Month: January 2026

Payment for contractor in conduction industry needs to be on time to improve contractor’s cash flow and contractor effectiveness to complete the project on time. For some reason, delayed payment has become a norm in the construction industry and is one of the biggest challenges for the contractors in many parts of the world.

Causes of Delayed Payment:

Here are some of the reasons for delayed payment in construction industry:

• Employer may not have the necessary funding arrangements
• Employers delay the payment for their own financial advantages
• Complex process and procedure for payment review, certification, and release of money
• Lack of proper process implementation
• Unrealistic Cash flows
• Disagreement on the valuation of works at site.

In some cases, contractor also contribute to this situation by not providing adequate supporting documents, making incorrect valuation, or maybe not following the procedures.

Contractual Provisions for Delayed Payment – FIDIC Red Book – 1999

 Sub-Clause 14.8 [Delayed Payment] deals with the consequence of the delayed payment

 If the Contractor does not receive payment in accordance with Sub-Clause 14.7 [Payment], the Contractor shall be entitled to receive financing charges compounded monthly on the amount unpaid during the period of delay. This period shall be deemed to commence on the date for payment specified in Sub-Clause 14.7 [Payment], irrespective (in the case of its sub-paragraph (b)) of the date on which any Interim Payment Certificate is issued.

 Unless otherwise stated in the Particular Conditions, these financing charges shall be calculated at the annual rate of three percentage points above the discount rate of the central bank in the country of the currency of payment and shall be paid in such currency.

 The Contractor shall be entitled to this payment without formal notice or certification, and without prejudice to any other right or remedy.

 In case of the default from Employer, contract provisions entitle the Contractor to additional finance charges without being required to give any formal notice or certification.  In addition to the above provision, contract also empowers the contractor to suspend or reduce the rate of work in case of delayed payments. If the contractor believes that the situation warrants extreme measures, then contractor will be entitled to terminate the contract.

Sub-Clause 16.1 [Contractor’s Entitlement to Suspend Work] and Sub-Clause 16.2 [Termination by Contractor] deals with the contractor’s right to suspend the works and terminate the contract, respectively.

Sub-Clause 16.1 [Contractor’s Entitlement to Suspend Work]:

By giving 21 days’ notice, contractor may suspend work or reduce the rate of work if Engineer fails to certify the payment in accordance with Sub-Clause 14.6 [Issue of Interim Payment Certification] or Employer fails to comply with Sub-Clause 2.4 [Employer’s Financial Arrangement] or Sub-Clause 14.7 [Payment]

Sub-Clause 16.2 [ Termination by Contractor]:

 Contractor will be entitled to terminate the contract, after giving appropriate notices, if

• Employer does not comply with Employer’s Financial Arrangement [Sub-Clause 2.4.
• Engineer fails to issue the Payment Certificate within 56 days after receiving statement and supporting documents from contractor.
• Contractor does not receive the amount due under an Interim Payment Certificate within 42 days after the expiry of times stated under Payment Sub-Clause 14.7 [Payment]

If the contractor suffers delays and/or incurs cost because of suspension or reducing the rate of works, then the contractor will also be entitled subject to Sub-Clause 20.1 [Contractor’s Claim] for an extension of time and cost.

As part of the administration of the contract, Engineer to avoid late payment repercussions, should:

• be fully aware of the Contract provisions for timely payments.
• Advise the Employer of the due date for payment once the payment is certified.
• follow up on payment status and request the Employer to advise the Engineer whenever the amount is paid to the contractor.
• if certified amount is not paid to the contractor, then prior to the due date, Engineer shall promptly remind the Employer to make payment by the due date. Engineer shall also and remind employer of the potential contractual consequences for not making a payment on time.

FIDIC Conditions of Contract sets out the clear procedure for the Contractor to adopt in case of delayed and or non -payments. But, in most of the cases contractor refrain from exercising their contractual rights as part of their long-term strategy to maintain a better relationship with the employer or may be due to the lack of contractual knowledge.

On a final note, making payments to the Contractor in full and on time is the Employer’s contractual obligation. In case of default, Contract will be entitled to exercise their contractual right which can even lead to the termination of the contract.

Complexity of splitting a large project in multiple construction packages requires complex interfaces and prove to be very tricky. If it is a case of single construction package, owner awards the project to one contractor whereas in case of splitting the project into multiple construction packages, the owner divides the contract (based on size, cost, location etc.) and awards to various contractors.  For an effective and successful programme management, its vital for owner to lay out a distinctive road map to establish a model for contractual relationship.

Does packaging of large projects into smaller contracts increases the construction cost? Well, there are various theories advocating the single contract vs the multiple contracts or vice versa. In my opinion, it depends on the preferences driven by particular interest of the owner. Owner shall create strategy and look for key drivers to execute the construction under single contract or multiple contracts. The driving factors could be cost, dependency, contractual relationship, diversification, and risk distribution.

Below tables outlines few of owner’s priorities/ key drivers and its associated effect on a single contract vs multiple contract.

Key Drivers	Single Contract	Multiple Contract
Cost	Low cost compared to multiple contracts	High tender price due to allocation of risk of working with different contractors not known at the time of bid. Big contractors generally do not want to bid for multiple contract model leading to less competitions and increased price.Increased design and administrative costs as multiple contracts are administered
Time	Single contractor can optimize the schedule, permits and construction activity with a smaller construction duration	Due to multiple contractors, the construction duration will be ideally more
Diversification	Only suitable for the big companies	Promote and encourage small companies to participate
Competitive Bid	Less competitive as big scale contractors will participate.Big contractor even can form joint venture leading to less competition	Multiple small bidders can attract more competition
Dependency	Dependent on Single contractor will have more risk toward the project.	More flexible and less risky as the single contractor dependency is eliminated
Co-ordination and Management	Easy to administer because of its centralization of responsibility	Requires careful co-ordination and Management as multiple contractors are involved and no single contractor is responsible for the entire project.
Owner in house expertise	Single contract model does not really require owner’s in-house expertise for management	Requires owner’s in-house expertise to manage multiple contractor’s
Claims and Change Order	No cross contractual claims.	Prone to cross contractual claims as delay from one contractor affects another contractor schedule.Multiple contract results in more change orders. Multiple change order will lead to extension of supervision services (consultant/Engineer) due to effect of contractor’s EOT
Interface	No interface complexities between various contractors	Interface risk will be more which can undermine the proper execution of the project

A suitable packaging and contract strategy shall create a balance between all the key-drivers.

Key Takeaways for Multiple Contract:

1. Check for interdependencies.
2. Review on number of packages against the number of potential bidders in the market
3. Carefully prepare separate bidder list
4. Timing of contract award – simultaneously or sequentially
5. Create milestones for better interface.

Kamal Kumar Dubey MRICS, MCIArb, MCInstCES, MCIOB, RICS accredited Commercial Mediator, makes a point Having talked about conflict resolution strategies and four principles of win -win negotiation (Principled Negotiation – Art of Conflict Management) in the previous article www.constructionweekonline.in/people/16267-principled-negotiation-art-of-conflict-management,it is important to assess the bargaining position of other party before getting into negotiation process. This article primarily talks about the best alternative to a negotiated agreement and seven step negotiation process.

This article primarily talks about the best alternative to a negotiated agreement and seven step negotiation process. Negotiators usually protect themselves against the worst outcome. What will be your call in the worst-case scenario? What if the other party is in a strong negotiation position? What is the bottom line? If you are a seller what is the least amount you will accept before walking out of the negotiation? Or if you are a buyer, what is the maximum amount you will pay? These assessments will identify your alternatives to a negotiation process i.e. BATNA

Parties involved in principled negotiation should also identify BATNA (best alternative to a negotiated agreement), a concept developed by Roger Fisher and William Ury of the Harvard Program on Negotiation. BATNA refers to important alternative options that a party can utilize incase the negotiation fails, and an agreement could not be reached. If a person involved in the negotiation knows his best alternative, he can negotiate agreements more successfully.

A strong BATNA ideally means better deal (favorable terms) or no deal because you have a strong alternate plan. Consider a situation wherein you are negotiating your salary with two job offers in hand. You have a strong alternate plan (i.e. job offer) if the outcome of the negotiation is not in your favor. If you know your bottom line, then you can push hard or back off in negotiations.

The concept of BATNA can be understood with the following scenario wherein a buyer and seller are negotiating a car deal. Buyer came across an advertisement wherein seller would like a value of $30K. However, buyer is willing to spend only $20K for a car. Since, the car is well maintained and under warranty, buyer would like to approach seller for a negotiation.

Before approaching the seller, the buyer should look out for his bottom line. What if the seller is not willing to sell the car for $20K? What is the best alternative? Few suggested approaches to identify the best alternatives are:

• Since the car is well maintained and within warranty, is the buyer willing to pay $25K?
• What is the seller’s alternative if he will not sell for $25K? Will he still get a good price?
• What are the seller’s alternatives if the car is not sold for a certain time? Is the seller going to stick to the same price?
• The buyer can do some research to understand the current market value of the car.
• What if an agreement is not made? The buyer will continue to use public transport.
• What are other alternatives available for the buyer?

Similarly, the seller will also have to assess his alternatives, once buyer approaches for a negotiation. One of these alternatives could be attractive for buyer when buying a car. On the other hand, selling the car for 25K can be better for seller than holding the car for a longer time. This assessment of alternatives to a negotiated agreement will protect both the parties from accepting the terms that are non-favorable.

The whole idea of the negotiation is to get something better than the BATNA and if your BATNA is clearly identified, you can steer the negotiation process in your favor. From the buyer’s perspective, $25K is his BATNA and buyer does not really want to pay more than that. Similarly, the seller must decide his BATNA and will not sell the car for a value less than his BATNA.

At this point, the parties will walk away if the agreement is not reached. Once BATNA is identified, the next stage is to prepare and arrange to negotiate. It is always a difficult task to decide the starting point for a negotiator. How do I start? What is my first approach? How will the buyer approach the seller for negotiation”.

Professor Michael Dues, University of Arizona, in his book “Conflict Management Achieving Solutions for Life, Work and Beyond” identifies seven step process that can be applied within four principles of negotiation developed by Roger Fisher and William Ury.

What is Mediation primarily?
Mediation is a way of resolving disputes between two or more parties outside the scope of formal litigation. It is an informal, confidential, flexible process in which the mediator assists the parties to negotiate a settlement.

The mediator is primarily a process person, a facilitator, helping the parties define their agenda, identify the issues, communicate more effectively, generate options for mutual gains, and negotiate impartially to reach a mutually agreeable solution. Unlike arbitration, where the Arbitrator listens to the arguments of both sides and makes a decision, a mediator assists the parties to develop a solution themselves.

Mediators sometimes provide ideas, suggestions, or even formal proposals for a settlement.

What are the key elements of Mediation?
1) Voluntary: It is a voluntary process wherein participation of both the parties is required. A mediation session cannot be scheduled unless parties agree to mediate. Since the parties have no legal liability, they are free to walk out of the process.
2) Non-binding: The process in non-binding until a settlement agreement is formed. It neither binds the parties to reach to an agreement nor imposes any decision on the parties.
3) Private Process: The process is private and confidential ‘without prejudice’ to the legal proceedings. Any statement given by the parties during negotiation process is not admissible as an evidence in legal proceedings. However, once the settlement is reached and an agreement is signed by parties, it can be enforced legally.
4) Flexible:  The process is flexible wherein parties can settle the dispute on their own terms and conditions. A mediator does not judge or impose decision. The parties are free to set their own criteria for amicable settlement.

Why choose Mediation
Mediation is not a new phenomenon in the construction industry to resolve conflict. It is now widely used as an alternate dispute resolution and provides benefits when compared to arbitration and litigation.

Some of the benefits include:
• Control: The outcome is controlled by the parties. It is the parties who decides on the terms and conditions of settlement agreement and not the mediator.
•  Flexibility: The process can be tailored to suit the need of parties. Mediators have opportunities to use innovative processes for managing conflict.
• Cost and Time efficient: Mediation usually produces results in a relatively short time (few days or weeks or a month). Mediation will probably be resulting successful resolution while saving considerable time and cost (*affordable) when compared to litigation or arbitration.
• Confidential: Negotiations are dealt privately which allows the parties to frankly discuss about facts, their positions, their interest, and various options of settlement.

What is the process of Mediation?
Structured mediation ideally involves a 5 step process, each with different goals and objectives:

1) Preparation: A crucial stage where the mediator meets with the parties either in person (privately or jointly) or over the phone and starts building a relationship and trust with the parties. Mediator’s role is to educate the parties about his role and ensure that parties are committed to the process. Before the process takes place, the mediator helps the parties by:
• Explaining the process of mediation
• Setting up and deciding an appropriate venue for mediation
• Explain about confidentiality and privilege
• Identify the best way to communicate/contact the parties
• Asking for a preliminary session individually with the parties to obtain information about the dispute and identify the reason why the dispute is not settled. Mediator, to create transparency and to be fair, shall inform the parties about holding a preliminary session
• Answer further questions from the parties.

2) Opening Statement: This is when the mediation begins. Mediator, under this process will make an opening statement in front of the parties and set the tone for the process. The key is to begin the process by creating a positive atmosphere, foster confidence, and trust in the parties and therein by taking control and setting the agenda for the process. An opening statement by a mediator primarily covers below crucial points:
• Self-Introduction
• Congratulate parties for attending.
• Explain the role of Mediator (Neutral, impartial, assist the parties to reach agreement but will impose any decisions)
• Explain the goal (to reach a settlement) and ground rules of mediation (not to verbally attack other parties, not to interrupt the process)
• Emphasis on the voluntary nature of mediation
• Explain the next process after opening statement.
• Ask parties to make an opening statement providing a summary of dispute from their perspective. Ideally, first chance to present the case is given to the claimant. However, the decision lies with the mediator. An opening statement by the parties allows mediator to know more about the facts and issues.
• Set the agenda for the process.

3) Exploration: Mediator’s responsibility under this stage is to identify all the issues raised by the parties. This can be done either privately with the party or in a joint session. An important phase, where mediator not only needs to know the facts by asking who, what, why, where when and how, but also be a listener. The parties during the process should not get an impression that they are not being heard.
During exploration, mediator’s objective is to explore information, open discussion with parties, understand parties’ position & interest, challenge parties’ ideas, invent option for mutual gains and guide the parties to make decisions.

4) Negotiation with parties: After exploration, Mediator will steer the negotiation process to an interest-based negotiation. The outcome of the negotiation process heavily relies on the mediator’s ability to ensure that parties are focusing on the interest and not on the positions. Multiples options, based on interest, goals, and needs of the parties are generated for mutual gains and settlement.
During the process, mediator needs to:
• Focus on parties’ interest
• Encourage parties to generate multiple options in a joint session
• Brainstorm
• Generate possible solutions
• Set objective criteria
• Make process forward.

5) Settlement Agreement & Closure: Once the parties reach settlement, mediator needs to prepare a settlement agreement for the parties’ signature, which upon signature will be legally binding.
A successful mediation effort has an outcome that is accepted and owned by the parties themselves.

Key takeaways:
1) Treat the parties with empathy
2) Be a good listener
3) Understand the interest and common ground.

The author is MRICS, MCIArb, MCInstCES, MCIOB, RICS accredited Commercial Mediator.

You could write to the author at kamal@kamaldubey.com.

We come across conflict in business, organisation, personal relationships, and deal with it accordingly. We are somehow, knowingly, or unknowingly negotiating at different levels to deal with conflicts. If handled properly, we build stronger personal and professional relationships and if managed poorly, can cause significant damage to relationship and sometimes to reputation. Conflict is inevitable in human behaviour and is imperative to deal with it appropriately

According to Joyce Hocker and William Wilmot conflict is an “expressed struggle between at least two interdependent parties who perceives incompatible goals, scare resources, and interface from the other party in achieving their goals”.

It’s important for us to deal with the conflict in a better way to avoid damages arising out of conflict and to achieve mutual gains. Kenneth Thomas and Ralph Kilmann applied the various theories of conflict and developed five basic conflict resolution strategies considering the underlying human behaviour (i.e. assertiveness and cooperativeness) which can be applied at any level: personal, business, relationship, community even nations.

Conflict Resolutions Strategies:
Kenneth Thomas and Ralph Kilmann developed two-dimensional (assertiveness and cooperativeness) plot to reflect five conflict resolution strategies. This is based on the assumptions that how an individual attempts to satisfy his interest against an attempt to satisfy other party interest. Human responds differently to conflict, depending on their skills and behaviour.

A provisional sum is an allowance (lump sum) included in the contract for a work which is either:

1. Not fully designed, does not have enough information for the bidder to accurately price; or
2. Works, for which the Employer intends to, keep a discretion, for carrying out the works in full, part or not at all.

Allowance for the provisional sums is pre-determined by the owner’s cost consultant.

Type of Provisional Sums

According to RICS New Measurement Rules (NRM 2), Provisional sums can be categorized as:

• Defined provisional sum means a sum for which there is sufficient detail for the contractor to make allowance for them in program, planning, and for pricing the cost of preliminaries.
• Undefined Provisional sum means a sum provided for work that is not completely designed and for which contractor cannot make allowance in their program, planning, and for pricing of preliminaries

Separate provisions for overhead and profit shall be made in the bill of quantity for the provisional sums

From Contract Perspective:

FIDIC 1999 – Red Book:

Sub-clause 13.5 [Provisional sums] – The provisional sums can be expended in full or in part upon Engineer instruction. The instruction will form part of Variation for additional works and shall be valued in accordance with sub-clause 13.3 [Variation Procedure]; and/or Engineer can issue an instruction to the contractor to purchase the plant, material, and services from a nominated subcontractor, which shall be valued on the actual amount paid plus overhead and profit.

If required by the Engineer, the contractor shall produce the invoices, quotations in support of the amount.

Adjustment of Provisional sums

Provisional sums are valued based on the existing contract rates, or in absence of which, these are evaluated as per actual cost of the work plus overhead and profit. However, in case of omission of the defined provisional sum from the contract, preliminaries shall be adjusted as a part of the evaluation of the works, if the preliminaries are affected due to omission of works.

In case of undefined provisional sums wherein the contract cannot make allowance in their program, planning, and pricing preamble, additional preliminaries shall be assessed as part of the evaluation of the work, if the execution of work does require an additional preliminary related cost.

Prime Cost Rate

Prime cost rate refers to a provisional rate included in the contract for the purpose of supply of specific materials (supply only rates) for which the quality of materials is not determined at the time of tender. The purpose of the PC rate is to ensure that the employer is in control of the finished product.  A typical example could be paving tiles, wall & floor tiles, specific cladding. A PC rate excludes all costs associated with installation, all associated items required for installation of material, contractor/ subcontractors’ preliminaries, which the contractor is required to price in other relevant BOQ items.

Adjustment of Prime Cost Rate

The price difference between an allocated budget for prime cost and the final cost will be charged as an adjustment to the prime cost in a progress claim, rather than a variation. The contract sum will be increased if the actual cost is higher than the bill of quantities allowance and if the cost, then the contract sum will be reduced accordingly.

Consider the below example for the adjustment of PC rate:

Supply and Install surface mounted florescent wardrobe light      5No.      AED550/no.        AED2,750.00

(PC rate AED 250/no.)

In case, the cost (supply) of wardrobe light increases to AED325/no, then the contractor can claim extra amount arising due to such increase (i.e., From AED 250 to AED 325) and OH & P associated with the increased rate. A deduction shall be treated in the same way. The overall purpose is that the other elements, which are known and agreed remains fixed and is not amended.

INTRODUCTION:

Commercial and Financial success of a construction project heavily relies on a commercial management functions performed by a commercial manager. A successful project demands strong commercial management, strategic procurement advise and sound administration. In simple terms commercial management is looking after the profits of an organization by managing the risk and coordinating with various stakeholders from inception till close out of the project.

The success of a projects depends on three key major drivers -time, cost, and quality. A commercial manager not only balances these key drivers against the client/organization requirements, but also ensure that relationship and reputation is maintained for the successful outcome of the project.

ROLE OF A COMMERCIAL MANAGER IN CONSTRUCTION PROJECTS:

So, what a commercial manager can do and what it really brings to an organization?

Commercial manager should be able to understand the core skills of a quantity surveyor and integrate those skills to oversee and manage the construction project. Engagement of commercial manager at an early stage provides value to money wherein commercial manager acts as an advisor by understanding stakeholder requirements/objectives and help them transform these requirements into a successful project by providing in-depth analysis. A commercial manager shall be engaged from the inception of a project throughout the project life cycle; Inception, Feasibility, Procurement Strategy, Tender, Contract, Construction, Operation & Maintenance.

Every stage in project development requires strategic decisions and robust commercial strategy to achieve client/organization objective. Below are key roles and responsibilities of a commercial manager engaged with different stakeholders (Client, Consultant and Contractor):

Pre-Contract Commercial Management:

1. Understanding Project and Client requirements: It is important for a commercial manager to understand client requirements, project requirements by considering the below:
   1. Status of initial study and feasibility study
   2. Client requirements – identification of scope, location
   3. Project viability
   4. Programme and timeline
   5. Stakeholder involvements
   6. Risk assessment
   7. Operation and maintenance requirements
   8. Project finance and funding
2. Development of a Cost Plan: Cost plan is necessary in the construction project. This provides an early estimate which assists our client in determining whether a project is feasible within their time and budget. A commercial manager will consider current market rates and previously completed projects to develop a realistic cost plan and establish a cost planning process for establishing a budget for design, construction, and operation & maintenance of a project. A commercial manager will provide a cost estimate at various design development stage (i.e. concept, preliminary and detailed design) and will further undertake the value engineering exercise in line with client priorities and value.
3. Advising on Procurement Strategy: A commercial manager should advise and develop procurement strategy. A procurement strategy for a project will depend on various criteria. Client generally looks for (a) defect free project (b) fit for purpose (c) completed within budget and time and (d) life cycle costing. The suitable procurement strategy will create a balance between numerous interests (time, cost, quality, stakeholder requirements) which is possible conflicting. Commercial manager shall consider below criteria before developing a procurement strategy:
   • Project finance
   • Contract packaging – complexity of the project
   • Programme – time
   • Budget and estimate
   • Design responsibility
   • Operation and maintenance requirements
   • Role of Client, Engineer and Contractor during implementation stage
   • Management of risk
   • Post contract flexibility
   • Form of contract
   • Contract price and payment
4. Advising on Tendering Strategy and Contract Award: A good tendering strategy by a commercial manager shall ensure transparency, sound, and competitive tenders, minimize the cost of tender and provide fair and equal opportunities. Commercial manager shall advise client/organization on various tendering strategy, robust tender document, methods of selection of tenderers, commercial evaluation of a tender by safeguarding client’s interest

Post-Contract Commercial Management –

An ongoing post award commercial management is required to ensure contract compliance and to identify opportunities for further improvement and value addition.

1. Contract Administration: Commercial manager, having a better understanding of contract terms and conditions, responsibilities & obligations of parties, contractual mechanism, contractual requirements (Bonds and Guarantees), ensures that contractual compliance are met during the project execution.
2. Valuation of works: Construction progress usually valued monthly. Commercial manager will assess the value of works and certify the payment for organization on interim basis. Commercial manager will also monitor the cash flow (planned vs actual) and provide cost at completion (forecast budget). Commercial manager, in an event of cost overrun, will advise on the mitigation measures
3. Change Management Procedure: Change is inevitable in the construction industry. Managing change is the key aspect of a commercial management. Commercial manager will be responsible for developing a change management procedure and dealing with the change in real time as the works proceed. As part of the change management, commercial manager shall assess client requirements, design requirements, preparing initial budget for approval
4. Programme: Though the organization will appoint an experienced planner, commercial manager will understand the challenges and its impact because of programme.
5. Cost Reporting: Cost reporting is one of the key tasks performed by a commercial manager which provides cost information to the client/management. The report will be prepared monthly and generally includes the cost incurred to date and the cost likely to be incurred during the rest of the project for the purpose of cost control. A poor cost reporting will lead to project overruns and loss to the organization. A commercial manager will include the below information as part of the cost report:
   • Value of works done
   • Cost incurred to date
   • Approved Variation Order(s)
   • Potential Variations
   • Approved Claims
   • Potential claims
   • Cost associated with Prime Cost and Provisional Sums
   • Cash Flow
   • Progress (Planned vs Actual)
   • Estimate at completion
6. Claim Management and Dispute Resolution: Even though the projects are planned carefully, claim and dispute arises. A commercial manager will evaluate the cause of affect of the event giving rise to a claim, demonstrates organization’s entitlement of a claim and will also prepare a defence strategy. A commercial manager will also advise on the dispute avoidance strategy by advising client/management of early discussions with the stakeholders and shorting the issues before a dispute arises.

The commercial manager, accordingly, provides commercial leadership throughout the entire lifecycle of project by operating at the highest level of the project decision making process and advising on the commercial issues. Overall, it is the commercial strategy, commercial process, commercial controls, and commercial decisions which makes a project profitable and successful

Introduction:

Construction contractors are prone to risk and uncertainties. Considering the complexity of a construction contract, it is important to identify the risk and a tool to manage the risk and safeguard the parties from loss and damages.  That tool, to cover the risk of a construction contract is “Insurance”. So, Contract Insurance is a method to manage the risks in a construction contract.

Risk – An overview:

Risks are inherent in the construction contract. Any Loss, damages, injury, or liability arising in the construction contract requires protection. Those risks could be:

• Construction Risks:  injury to a person or vehicle, damages to a property
• Technical Risk:   Inadequate design, Faulty design, wrongful advice
• Environmental Risk: Natural disaster, pollution, weather

Type of Insurances:

• Contractor All Risk Insurance (CAR):      

An insurance policy which covers loss or damage to the contract works. The policy provides cover against two primary risk- (1) Property damage and (2) Third-Party injury.  Property damage may include improper construction of the structure or damage caused to the permanent works. The appointed Sub-contractors working at the site, are covered under third-party injury.

Type of losses to contract works, under CAR Insurance typically includes following items:

• Flood, storm, Earthquake
• Lightning
• Fire and explosion
• Losses from riots, strikes or civil commotion
• Collapse of structure

The policy, however, can be expanded to include the following items:

• Cost associated with clearing and removal of debris
• Rectification of Defects
• Professional fees
• Damage to surrounding property not forming part of contract works
• Cover for losses during Maintenance period

Typically, Contractor all Risk Insurance (CAR) policy excludes the following items:

• Faulty Design
• Wilful act or wilful Negligence
• War
• Political Risk
• Injury to own workers
• Financial loses due to bankruptcy or insolvency

The policy covers total contract works value plus a mark up for any ancillary cost such as professional/consultancy fees. The policy is valid until the issuance of a Taking-over certificate for the completed works and for another 12 months (or any such period stipulated in the contract towards Defects Liability Period) to cover the works outstanding on the date of Taking-over certificate

• Workmen Compensation: 

Workmen compensation policy covers contractors’ liability for death, injury, sickness of contractors personal and employees while executing the works. As per UAE laws, it is mandatory for the Employers to compensate the employees for an accident arising out of and in course of their employment. The main benefits include.

• Occupational death but can be expanded to cover non work accidental death
• Permanent disability but can be expanded to non-work permanent disability
• Medical expenses.

Few of major exclusion in the policy is – Natural Death, suicide, death, or injury resulting from alcohol or drugs.

• Contractors Plant and Machinery:

The policy covers loss or damage to the contractor’s construction mobile equipment’s such as excavators, cranes, and construction vehicles (owned, hired or leased) against sudden accidental and unforeseen loss or damage excluding electrical mechanical and electrical failure whilst at work or rest, in transit as well as during maintenance.

• Public Liability Insurance:

The policy covers for liability arising out of death, personal injury and property damage to the third-party prior to the works being taken over. The policy covers legal liability to third parties including legal fees and pay out arising from injury to people or accidental damage to property because of business activity.

Public Liability is part of the Comprehensive General Liability policy wherein Public liability insurance covers injuries to the visitors to the business property while General liability coverage is more extensive covering visitor injuries, employee injuries and defective-product damages.

• Professional Indemnity Insurance:

The policy covers legal liability for breach out duty arising due to professional negligence, error, or omission by an engineer/architects or by a contractor in a design build contract.  Professional Indemnity typically are adopted by the Design Consultants or the Design- Build Contractors for financial protection due to faulty deign, and professional negligence (incorrect or wrongful advice). The policy can be issued for a single basis or annually.

The PI is made on a “claims made basis” which means that the claim reported during the term of reinsurance are therefore covered regardless of when the claim occurred. In UAE, the Professional Indemnity insurance is required to be in place until the limitation period, i.e. 10 years.

• Decennial liability insurance:

In some countries such as UAE, there is  a 10 year strict liability wherein the contractor, engineers and architect are jointly liable to the employer in case of total or partial collapse of a structure or building, or for any defect that threatens the structural integrity of the building from the date of handing over of the works. This insurance is very difficult to obtain from the insurance companies and even if any insurance company would provide this insurance, the premium is likely to be very high