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1 Literature Review on contractual issues arising claims

Avoiding construction claims and disputes requires understanding of the contractual terms, early no adversarial communication, and understanding of causes of claims.(Cheryl Semple, Francis T. Hartman, and George Jergeas) identify some of the critical element in construction contract, and investigates the causes of claims, categories of compensation of claims and contract clauses quoted in claims by studying high-rise apartment building and institutional buildings. Construction contract determines the basis for the relationship between the parties involved in it. A contract is a promise or agreement that the law will enforce. Construction contract are very often long, complex document, consequently, disagreement or disputes can arise regarding contractual obligations or expectations, when one party feels that the contractual obligations or expectations have not been meet and they fell that they deserve monetary and/or time compensation they may submit a claim. A claim is defined as an assertation to the right to remedy, relief or property (Canadian Law Directory)

1.1 Introduction to contract law
1.1.1 Legal systems

A legal system, can be viewed as a system for identifying factual situations where the state will impose sanctions on a person (criminal law), where one person can seek redress from another person (civil law), and where a person can challenge decisions of the state and public bodies, such as local authorities (administrative law). For example: If someone takes property belonging to another with the intention of permanently depriving them of that property, this is categorized by the criminal law as a crime (theft) for which the state can seek an order for imprisonment, a fine or both. The same conduct is categorized by the civil law as a tort (known as conversion) for which the person whose property is taken can seek an order requiring the person taking the property to return it, to pay compensation (damages), or both. If the property is taken by the state or a public body in wrongful exercise of a statutory or other power, the decision to do so can be challenged in administrative law by seeking a declaration that it is invalid and should be reconsidered.

1.1.2 Criminal, civil and administrative law

The criminal law is principally concerned with the imposition of fines and imprisonment sought by the state against persons. The civil law is principally concerned with awarding compensation and making orders in favor of one person against another. Administrative law is principally concerned with making orders concerning the administrative actions of the state and public bodies.

1.1.3 Obtaining redress

The usual means of obtaining redress is in a court of law. The criminal courts, primarily the Magistrates' Courts and the Crown Court, are concerned with redress in respect of criminal matters .The civil courts, primarily the County Courts and the High Court, are concerned with redress regarding civil claims. In many countries, a separate court is established to deal with claims concerning the administrative actions of the state and public bodies, but this is not the case in everywhere, where administrative law matters are dealt with by the High Court. The courts are not the only means of obtaining redress in many civil matters.

1.1.4 The civil law of obligations

Each of the principal divisions of law - criminal law, civil law and administrative law - contains numerous subdivisions. The subdivision that is relevant to this publication, and to the series of which it forms part, is that part of the civil law concerned with the law of obligations.

1.1.5 Obligations in contract and tort

The law of obligations has, in turn, two parts: the law of contract and the law of torts. In the law of contract, a person's obligations are primarily founded on agreement and are, in general, owed only to the other party to the agreement, not to persons generally. Because obligations owed in contract are founded on agreement, they can be as prescriptive and detailed as the parties wish and their agreement requires. For example, agreed obligations can concern the development of an office block in accordance with detailed requirements, or the structuring of a long-term business relationship, such as a partnership. It would be impossible to regulate such relationships using only the law of torts, since obligations in tort are too generalized. In the law of torts, a person's obligations are primarily determined by general principles of law and are, ordinarily, owed to persons generally. Since obligations owed in tort are imposed as part of the general law, they are expressed in the form of general standards of conduct. For example: the obligation to exercise reasonable skill and care so as not to cause injury or damage to others forms the basis of the tort of negligence; the obligation not to unreasonably interfere with a person's use or enjoyment of their land forms the basis of the tort of nuisance. Both parts of the law of obligations are significant for the construction industry. Work on a building project, such as the provision of consultant services, construction or materials, will ordinarily be carried out under a contract since this is the only way that obligations having the required definition and precision can be given legal force. But the work provided may, if defective, cause damage not only to the person with whom those obligations are agreed but to others, such as adjacent landowners, users and subsequent owners of the project. While the person or persons with whom the contract is made will, ordinarily, be able to seek redress in the law of contract, those who are not parties to that contract will have to seek redress in the law of torts.

The law of contract is of fundamental importance for the construction industry because the contract is the principal vehicle for those working on a project to be engaged, their obligations are regulated and redress assessed if things go wrong. The law of torts has a subsidiary importance if things do go wrong.

1.1.6 Rights and obligations

Although the law is often discussed in terms of obligations, there is, in general, for each obligation a corresponding right .Thus, an obligation not to unreasonably interfere with a person's use or enjoyment of land can be seen, from the perspective of a landowner, as a right to enjoy and use their land free from such unreasonable interference. An obligation to perform the terms of an agreement can be viewed from the other party's perspective as a right to have those obligations performed. In contract law, these rights and obligations are often referred to as the benefits and burdens of the contract.

1.1.7 Defining a contract

There are various definitions that attempt to encapsulate the essential nature of a contract. The definition that is most readily understandable in a commercial context is that a contract is an agreement that gives rise to obligations, and corresponding rights, that the law will recognize and enforce.

Since a contract is founded on agreement, the parties are free, within wide limits, to agree the obligations to which they wish to be bound. This is known as the doctrine of freedom of contract. It means, at any rate in a commercial context, that the parties to a contract will ordinarily be bound by the agreement they make, however inappropriate, one sided or even ruinous that agreement may turn out to be for one of them. The corollary of the doctrine of freedom of contract is that a person cannot be forced to contract. In a commercial context this means that, if terms cannot be agreed, either party to the negotiations can walk away, however inconvenient or costly, in terms of wasted time and money, this is for the other party. It may be possible to break off negotiations and walk away even if work has commenced in anticipation of a proposed contract.

Once a contract is concluded, it binds the parties in law. If a party to a contract fails to comply with its obligations under the contract, the other can seek redress for that failure. This can be done, as appropriate, by enforcing a right to payment (a claim in debt), by seeking financial compensation for losses suffered as a result of the failure (a claim in damages for breach of contract) or, in certain circumstances where financial compensation does not provide adequate redress, by an order that the defaulting party perform its obligations (a claim for specific performance) or stop acting in breach of its obligations (an injunction). For example, if a consultant fails to perform services he or she has contracted to provide, the client can seek damages based on the additional cost of obtaining substitute performance from another consultant. If an employer fails to pay for work provided by a contractor, the contractor can recover that payment as a debt. If a person contracts to sell land, such as an office or house, but refuses to complete the sale, the purchaser can seek an order that the land be conveyed to it.

1.1.8 Categories of contract

The categories of contract that are most relevant to the construction industry include the following.

Contracts made by deed and simple contracts (the rest). Contracts entered into by deed do not require consideration; simple contracts do. For example, a promise of a gift will be contractually binding only if it is given by deed. Contracts made by deed also attract a longer limitation period (the period during which proceedings for redress must ordinarily commence) than simple contracts. The period is 12 years from breach for contracts made by deed, 6 years from breach for simple contracts.

Contracts for estates or interests in land (such as a contract for the sale or lease of a house or office). Such contracts are governed by the Law of Property Acts and related legislation and by that branch of the law known as the law of real property. Most of such contracts are subject to the code for payment and dispute resolution provided for in that Act.

Arbitration agreements (an agreement that provides that disputes will be determined by a private tribunal sitting as arbitrator, not by the court). Such agreements are subject to the detailed code set out in the Arbitration Act 1996.

Consumer contracts (certain categories of contract, principally contracts for goods, for work and materials and for services where one of the parties is contracting for purposes that are outside the scope of its business, if any, and the other is contracting in the course of a business). Such contracts are subject to various statutory controls that may invalidate certain types of unfair or unreasonable terms imposed to the determent of the consumer.

1.1.9 The importance of contracts in the construction industry:

Contract is only the forming agreements that are recognized as binding by the law of contract that the parties can regulate their rights and obligations in the knowledge that these rights and obligations can, if necessary, be enforced. Given the importance of contract law in structuring commercial relations, it is surprising that those procuring and providing work in the construction industry often deal inadequately with the formation of their contracts. This leads not only to uncertainties about what was agreed and when, but also to disputes about whether a binding agreement was concluded at all and whether legally enforceable obligations are created to provide work or' to pay for it. Such disputes can arise during the work as well as after it is completed.

1.2 Contractual terms used in formation of contract

The obligations that the parties accept when they conclude a contract are contained in its terms. The terms may be express or implied or, more usually, a combination of both.

1.2.1 Express terms

Express terms are those that the parties expressly state when making their contract. Express terms may be written or oral. Oral terms may be evidenced in writing.

* Written terms may be set out in documents forming the contract - for example, where a client and builder execute a copy of a standard form building contract, such as a copy of the FIDIC condition of contract setting out all of the terms they have agreed, or where, as is often the case in a contract for the sale of goods, all of the terms are set out in a letter of offer, accepted by the purchaser orally or by conduct.

* Written terms may be contained in documents referred to (incorporated by reference) in the exchange of communications forming the contract

* Oral terms may be agreed at a meeting or over the telephone. It is preferable for oral terms to be recorded (evidenced) in writing so that there can be no dispute about what was said, for instance by making and circulating a note of what was agreed. But failure to do this will not affect the validity of such terms, unless the contract is of a type whose terms must be made or evidenced in writing.

1.2.2 Implied terms

Implied terms are those that are included in a contract even if the parties do not expressly refer to them at the time the contract is concluded.

* Contract terms are implied by law or by statute if the contract is of a type in which such terms are ordinarily implied and the implication of those terms is not contrary to the express terms of the contract. For example, terms are ordinarily implied by the Sale of Goods Acts into contracts for the sale of goods, and by the Supply of Goods and Services Acts and law into contracts for work and materials or for services.

* Terms may be implied to reflect the parties' presumed intention if, having regard to the words used in the contract and the circumstances at the time it was concluded, they are necessary to give business efficacy to the contract or are so obviously a part of the contract that both parties would, if asked at the time, have said that they go without saying. For example, a contract to use a wharf will be subject to an implied term that it is safe for the ship to lie at that wharf. But a term will not be implied on this basis if it is inconsistent with the express words of the contract.

* Terms may be implied by custom where the custom is a certain and general incident of a particular trade or place, and the use of the term is well known, reasonable and not contrary to law or to the express words of the contract.

* Contract terms may be implied by course of dealing where the parties have contracted on the same terms on a number of previous occasions and they make another contract of similar type without expressly referring to those terms.

1.2.3 Exemption clauses

An exemption clause is a contract term by which one party, usually but not invariably the party proposing the terms of contract, seeks to avoid or exempt itself from what would otherwise be its obligations or liability under the contract (an exclusion clause), or seeks to restrict or limit its liability in some way (a limitation clause).An exemption clause can work indirectly by, for instance, restricting the enforcement of obligations under a contract, or by making enforcement unusually onerous.

Exemption clauses are commonly found in standard terms of business. For example, a seller of goods may seek to limit its obligations by providing in its standard terms that they form the whole agreement of the parties, and no terms are to be implied at law. The purpose of such wording is to exclude the implied terms of quality and title that would otherwise apply to the c0ntract.A consultant may provide in its terms of appointment that any liability, whether for default under the contract or in negligence, is limited to a specific sum. The purpose of such a provision is to cap the consultant's potential liability to its client. Because exemption clauses exclude or limit what would otherwise be a party's obligations or liabilities under a contract, they must be clearly incorporated and clearly worded if they are to be effective. There are also various statutory controls over the effectiveness of such provisions, and, in a few instances, criminal sanctions are imposed on those who seek to include such clauses in their contracts.

1.3 Most Commonly Used Types of contract in the industry

There are various types of conditions of contracts used all over the world. Most commonly used conditions of contracts in the past are FIDIC in Middle East & JCT & NEC in United Kingdom. In United Kingdom mainly JCT & NEC conditions of contract is in practice in various forms. The conditions of contracts are listing the legal structure to be refereed to in case of any dispute or ambiguity arises. It also establishes a common basis to both the contractor and the client in understanding each party's commitments and rights against the other party. Understanding the rights and obligations are important prior to the agreement of a contract between the parties.

Most commonly used types of conditions of contracts are;

· ICE6

· FIDIC (1987)

· FIDIC (1999)

· FIDIC (2004) Red Book

· FIDIC (2004) Yellow Book - Part 1

· FIDIC (2004) Orange Book

· FIDIC (2004) Silver Book

· FIDIC (2004) Green Book

· JCT (1998) Private with quantities

· JCT (1998) With approximate quantities

· JCT (1998) Without quantities

· JCT (1198) Management procurement

· JCT (1998) Traditional procurement

· JCT (1998) Design and build procurement

· JCT (1998) Nominated sub-contract documents

· JCT (2005) Standard building contracts with quantities

· NEC - Professional services contract

· NEC - The engineering and construction contract

· NEC - The engineering and construction contract - Flow charts

· NEC - The engineering and construction contract - Guidance notes

* NEC - The engineering and construction contract - Priced contract with activity schedule

· NEC - The engineering and construction contract - Cost reimbursable

· NEC - The engineering and construction contract - Management contract

* NEC - The engineering and construction contract - Priced contract with bill of quantities

* NEC - The engineering and construction contract - Target contract with bill of quantities

* NEC - The engineering and construction contract - A subcontract version of the engineering and construction short contract

· NEC - The engineering and construction subcontract

· NEC - The NEC partnering option

· NEC - The adjudicator's contract

· NEC - Cost reimbursement contract

· PPC (2000)

1.4 Key contract clauses in used in condition of contract

* Audit - This clause typically outlines an owner's right to perform reviews (audits) of contractor costs or records. Such clauses ordinarily outline what costs or records are subject to audit, when and under what circumstances.

* Changes - This clause is critical. This is the clause that allows the owner to direct changes to the work, including plans, specifications, and time of performance, means, and methods. Absent a change clause, an owner is precluded from making changes to the work. Of particular importance in this clause is whether the clause allows the owner to unilaterally direct changes to the work (in which case, if the contractor refuses to comply with the directives, they are in breach of the contract). Alternatively, the clause requires the owner and the contractor to mutually agree on the change (a bilateral change).

* Contractor Responsibilities - This clause lays out, in general form, the duties, obligations and responsibilities of the contractor in performance of the work. This clause assigns specific risks to the contractor, including customarily the risk of adequate labor and equipment to accomplish the work within the required timeframe, the obligation to perform work safely, to perform work in strict accordance with the terms and conditions of the plans and specifications, and to be responsible for the work of subcontractors and suppliers, etc.

* Delays - This is, ordinarily, a risk allocation clause with respect to delays in the work. “Excusable delay” under a contract results in time extensions but no time related damages. That is, a contractor's performance time is extended because of excusable delay situation, but the contract is not entitled to collect time extension costs nor is the owner entitled to impose late completion damages for this time. “Compensable delay”, on the other hand, results in both a time extension as well a time excusable and compensable to the contractor while contractor caused delay is the responsibility of the contractor (to either make up the lost time or pay the contractually stipulate late completion damages). Third-party caused delay (sometimes referred to as force majeure delay) is, most often, excusable and no compensable to the contractor.

* Differing Site Conditions or Changed Conditions - This clause normally provides an equitable adjustment to the contract in the event the contractor encounters a materially different condition at the site during performance of the work.

* Dispute Resolution - This clause customarily sets forth the mechanism to resolve disputes during the performance of the work. Most dispute clauses contain some form of a stepped resolution system. For example, the clause may require on site negotiation between project managers, followed by an appeal to project executives, followed by 3 days of mediation, followed by binding arbitration under a formal set of rules. Often, the location (jurisdiction) of the disputes resolution will be set forth

* Force Majeure - Some contracts contain a force majeure clause or a clause dealing with delays to the work caused by unforeseeable events beyond the control of both the owner and the contractor. Such clauses often provide lists of examples of force majeure events - acts of God, acts of the government, civil disorder, acts of war, adverse weather, fires, floods, strikes, etc. Other contracts provide for such events in the excusable delay clause.

* Governing Law - The contracts involve parties from differing locations with subcontractors and suppliers from even more locations. Accordingly, contracts often specify which law applies to a dispute, regardless of where the dispute is handled.

* Indemnification - To indemnify another is to protect them against loss or damage either by paying for the loss or standing in their place in the event of legal dispute. An indemnification clause in a contract typically requires a contractor to indemnify the owner against all loss resulting from contractor errors, omissions, accidents, third party property damage, etc.

* Insurance - This clause requiring the owners and contractors to furnish multiple insurance policies prior to commencing work, among which are the following: builder's risk/all risk; workman's compensation; automobile, aircraft, and/or marine liability; general liability; bodily injury; broad form property damage; completed operations; personal injury; etc.

* Late Completion Damages - This clause specify the damages for late completion. In general terms, there are two types of late completion damages - actual and liquidated. Actual damages are those damages an owner actually suffers when a contract is completed late and may include loss of revenue, increased engineering, architectural or inspection services, increased financing costs etc. Liquidated damages, on the other hand, is a pre-agreed upon amount the contractor will pay the owner in the event the project is completed late due to no excusable delay cause-that is, due solely to the contractor's fault. Such damages are typically expressed in terms of a daily cost and need not be proven as actually incurred if the project is completed late.

* Limitation of liability - In order to cap (or limit) a contractor's risk from late completion damages, performance penalties, etc., under a contract, many contracts contain a clause limiting maximum liability to a percentage of the value of the contract.

* Order of Precedence - This clause intended to provide guidance to both the owner and the contractor in the event of conflicting provisions. Typically, specifications have precedence over general provisions, and so on and so forth. The legal concept is to provide guidance to people on projects in the event there are two or more conflicting provisions relating to a topic.

* Owner Responsibilities- Similar to a contractor responsibility clause, an owner responsibility clause ordinarily sets forth the obligations of the project owner, including adequate project financing, all required ad necessary permits, appropriate site access, etc.

* Payments - This is key contract clause in terms of project cash flow. This clause sets forth how often the contractor is to be paid, in what manner, and what are the conditions precedents to the issuance of payment.

* Quantity Variations - The contracts contain estimated quantities to be installed. In the event as-bid quantity estimates vary substantially (+/- 10 percent or more) many contracts (both unit price and lump sum) contain a quantity variation clause which allows either the owner or the contractor to request a predetermination of the as-bid unit price on affected portions of the work.

* Schedules - A schedule clause typically sets forth the requirement for contractor scheduled , including format (bar chart vs. CPM), level of detail, submittal requirements, frequency of schedule updating, damages for failure to submit, delay or time extension analysis requirement, actions to be taken in the events of forecasted late schedule, etc.

* Suspension of Work - This clause habitually allows a project owner to suspend or stop all or some of the work, with or without clause. Such clauses normally provide for some adjustment to the terms of the contract in such events, including a time extension and payment of delay costs. However, recovery of time and cost may be limited by the terms of contract. Often, if the actual clause of the suspension order is something for which the contractor is responsible (i.e., unsafe work conditions, work not in compliance with contract requirement, etc.) no recovery time or cost is allowed.

* Termination - Almost all contracts have a provision allowing the owner to end, in whole or in part, performance of the work prior to project completion. There are, typically, two types of termination; termination for convenience and termination for default. Termination for convenience usually occurs when a project owner decides, for their own reasons, not to complete the project as designed. Such situations might arise if the owner's needs change, if project financing fails, or if the underlying project economics change substantially. In such a circumstance, the owner may elect to terminate the contractor's performance for the convenience of the owner and pay off the contractor in accordance with the terms of the clause. Termination for default arises only when a contractor is found to be in material breach of the contract, has been provided with a cure notice form the owner outlining the material breach, and has failed to remedy the breach in a timely manner. (For example, failing to man the project in such a manner as to assure timely project completion.) Usually the owner will terminate the contractor from the project and call upon the contractor's financial guarantees to complete the work (i.e., letter of credit or surety bond). Some contracts also provide a contractor the right to terminate their participation in a project. Under certain carefully proscribed circumstances (such as, failure to make payments, bankruptcy of the owner, suspension of the work for more than a defined period of time, etc.) the contractor is allowed to terminate their own involvement in the project.

* Time of the Essence/Time of Performance- If project completion by the time or date certain is important to an owner, then they must say so in the contract. As timely project completion is normally important, most contracts contain a clause stating that “Time is of the essence of this contract. “Such a clause must be included to make enforceable a time of performance clause and collection of late completion damages. Absent such a clause, the time of project completion is considered unenforceable. The time of performance clause, typically expressed either in work or calendar days after issuance of notice to proceed, sets froth when the work must be completed and the consequences of failure to meet these dates.

* Warranty - A warranty clause, which ordinarily continues in existence for some specified period of time after project completion, guarantees the contractor's work after project acceptance. It is not uncommon for warranty clauses to require a warranty for 1 year after project completion, during which time, if any portion of the project fails, the contractor is obligated to return to the project and make it right or agree to some commercial settlement of the issue.

All clauses in a contract are important and compiled with in order to avoid any allegation of breach of contract.

1.5 Strengths and Weaknesses of contract in construction industry

Various advantages and disadvantages in the usage of contracts. The contracts are imposing a better control over the contractors and always state the penalties for non-compliance. Punishment used as a tool for guidance of the projects for timely completion and it is not working always successfully.

1.5.1 Strengths

Strengths listed as;

* More hold on contractor's behaviour

* Least botheration

* Firmly laid down rules and regulations

* Pre agreed procedural commitments

* Better control over the contractor

* Pre defined dispute resolution techniques such as arbitration and amicable settlement

* Legal binding between both the parties with the signing of the agreement

* Pre agreed form of tender with clearly defined clauses

* Allocation of risks and responsibilities of each party

* Clearly defined clauses and references

* Laid down contractual requirements and regulations

* Clearly defined directions and remedial actions

* Clearly defined indemnity procedures

* Professional approach to dispute resolution

* Traditional system which is well known to the parties

* Easy to operate and interpret

1.5.2 Weaknesses

* Weaknesses listed as;

* Unfriendly relationship between the parties

* Ambiguities and misinterpretation

* Misunderstanding and misleading

* Unclear and complicated legal points

* Over administrative rules

* Strict and rigid rules with hardly any flexibility

* Increasing the distant between the parties

* Inapplicable and inappropriate regulations

* Improper explanations and complexity

* Leading to arbitration and litigation

* Lengthy dispute resolution techniques

* Unfavourable and unfair conclusions

* Disadvantageous to either party

* Not providing any benefit to both the parties

* Unrealistic and impracticable rules dictated traditionally

* No room for any improvement

* No incentive schemes for performance

* No motivation

* Negative approach

* Dullness and discouragement

* Increases the uniqueness and no continuous development

* Not leading to any supply chain management

* No assurance for timely completion

* Uncertainty on final cost

* Loopholes in quality assurance with improper coverage

* Poor updating to cater the latest disputes

* Far away from practicality providing limited opportunity to the contractor

* Load the sole responsibility on the contractor

* Not facilitated with profit sharing technique

1.5.3 Practicability

Since the contracts are in practice traditionally over a long period, the parties consists awareness of application and acquaint to the system. When a contractor receives a tender to price, he even is not reading the conditions of contract because he has bighearted the same and overconfident. Due to this habit if any amendment made even in the particular application, it will be overlooked by the contractor. This negligence will lead to major disasters and the damage is realized during the progress of the works. There is no remedy, which is possible at this stage and the consequences are to be bared by the contractor.

1.5.4 Applicability and Coverage

Contracts are covering the full scope of the construction of a project. It is furnishing a fair coverage of the contractual issues normally appearing during the operational stage expects the complicated and irresolvable disputes when the contractor is in disagreement. It is a typical interpretation provided by the contracts and if the same is accepted by the contractor then it is resolved and concluded then and there it self.

The serious issues between the client and the contractor are referred to arbitration. This is a process of about one year and in a project spanning over a year of contract period this type of dispute resolution is disastrous. So it can be defined as the coverage of a condition of contract is only applicable for minor issues and not at all for major and complicated contractual issues. There fore it is important to seek for an alternative dispute resolution technique, which is more sustainable in addition to the conditions of contract in the contract administration of projects.

1.6 Previous studies on the issues of problems which generate claims

Identifying potential contract problems While there are numerous items and services that can be purchased, each purchase of goods and services faces the same set of contractual risks that affect the successful accomplishment of any of the 5 “R's”. Abi-Karam (2002) suggested that every purchase should be evaluated for six types of risks: Proposal risk, Surety and liability risks, Schedule risk, Contractual risk, Performance risk and Price risk.

Davison and Wright (2004) expanded on the definition of these risks to include their relationship to the following five “R's”:

Proposal risk: The legal document that defines the item or service procured (the right item), the mutual areas of agreement, and how risks will be allocated and rewarded.

Surety and liability risks: Protection of the agency's financial and legal interests (the right price). The contract will define the insurance requirements, bonding requirements, and licensing that are necessary to protect the agency in the event of contract termination or to meet statutory requirements.

Schedule risk: Ensuring timely delivery (the right time). The contract will contain clear and specific language describing the contract deliverables, delivery terms, and any penalties for late delivery.

Contractual risk: Establishing change order procedures, dispute resolution process and termination procedures (the right price and time).The contract is a living document and allowances must be made to accommodate unforeseen conditions that may affect the purchase. The contract will specify who has the authority to make changes, how changes will be made, and what changes will be unilateral. The contract will specify how disputes will be resolved if mutual agreement cannot be reached. The contract will specify the termination process.

Performance risk: Defining acceptance (the right quality). The contract will define the conditions under which acceptance will occur and what type of inspection will be required.

Price risk: Defining payment terms (the right price). The contract will define how and when the Contractor will be paid. Based on observation and communication with peers, Davison and Wright (2004), proposed that each of these six contractual risks is comprised of a set of contract problems that may occur each time the good or service is procured (Table 1 shows the types of contract administration problem). Each contract problem that occurs can threaten the success of the project by impacting any or all of the 5 “R's” in an adverse manner, such as, delivery of incorrect product, incorrect quantity, an increase in project costs, a delay in delivery, poor quality or the ultimate unsuccessful result, contract termination.

TABLE 1 - CONTRACT ADMINISTRATION PROBLEM WITH EXAMPLES

Sr No

Contractual Risk and Contractual Problem

Example

1

Proposal risk: Unclear scope of

work

Ambiguous specifications lead to disputes over required performance, acceptance.

2

Surety and Liability risk: Increased

cost

Inadequate bonds and insurance to cover vendor failure

3

Schedule risk: Wrong product

Purchase order or contract clearly identifies correct product, but vendor ships incorrect. No dispute involved

4

Schedule risk: Delay

Purchase order has clearly stated completion date. Completion date delayed (any length of time) due to agency or vendor (with or without cause).

5

Contractual risk: Change order

Change in the scope of work (additional work, money, time), after contract award. Can be requested by either party for any reason

6

Contractual risk: Dispute

resolution and personality conflict

Personality conflicts between agency project manager or staff and vendor project manager or employees. Disagreement between the parties that cannot be easily resolved. May involve scope of work, materials supplied, payment schedules, or any other aspect of the contract.

7

Performance risk: Definition of

acceptance

Completion of project is delayed due to non acceptance of final product. Example: difference in either party's definition of what was supposed to be

delivered or provided

8

Performance risk: Poor

performance

Contract clearly states a level of expected performance (this is not in dispute) and quality problems with vendor's performance of work occur.

9

Performance risk: Sub Contractors

The vendor uses subcontractors not on his payroll to perform any or all of the work. Prior approval, for use of subcontractors, was received

10

Performance risk: Other sources

There are very few vendors that can perform the work

11

Performance risk: Risk of failure

The project has a high risk of failure. i.e. New technology, new equipment, new vendor, Project never been done before. Tight timeline or budget

12

Price Risk: Cost

Project has a high cost.

[Source Journal of management research ISSN 1941 -899X 2009 , Vol 1 No 2: E2]

According to Mohamad Ibrahim Mohamad Zulkifli Madon, Rosli Zin, Shaiful Amri Mansuri , the constructions contracts express the intent of parties and memorialize their principal risk allocation decisions (McCallum, 2002). To understand the contract requirements is to understand the contents of the documents and the spirit of the contractual relationships. Contracts are formed and signed based on the fair basis where parties agree amicably to discharge their obligations to satisfy each other needs and requirements. Indeed as construction are a complex and challenging process, it requires interpretation of conformance with myriad laws, code and regulations, marshalling of considerable resources including labor, equipments, materials and good communication and coordination among multiple parties involved in the project (Dennis, 1982). Many factors are unknown or unknowable at the start of any project. This detail understanding of the whole requirements and process of the contract are essential in order to minimize the construction risks that may lead to unnecessary problems such as disputes, claims, litigation, shoddy works, and reworks even lost of future business relations. The effects of construction disputes are detrimental. If disputes are not properly managed, they may cause project delays, undermine team spirit, increase project costs, and, above all, damage continuing business relationships. The proper allocation of responsibilities is a crucial factor in determining whether a particular construction contract should be considered ‘a good' contract. Mc Callum (2002) characterized a good contract clearly informed such party what it must do and to what it is entitled. It also informs each party of its right if the other party does not performed as pronounced. It anticipates the likely problems and resolves them clearly and in a way strikes the parties as a proper allocation of risks and responsibilities. A good construction contract of course, includes well drafted drawings and specifications that inform the contractors what he must do to earn the promise compensation and provide a method of determining whether the objective has been reached.

According to them factors which improve understanding of contract document are

* Sincerity in contracting

* Drawing must be clear and checked by all parties.

* Clarity in contract document for better understanding toward contract documents.

* Client's requirements must be clearly understood.

* Contract document should be written in simple language.

* Establish good communication relationship.

* Contract document must be precise, objective and practical

* Qualified personnel to prepare the contract document.

* Regulatory requirement to be clearly explained.

* Bill of Quantities to be clearly and objectively detailed.

* Minimize use of complicated legal phrases.

* Provide well trained personnel for every project to interface the contract.

* General condition of the contract to be made familiar

* Construction work specifications to be simple and suit class of contractor.

* Mandatory induction session for a contractor before any contract to be

Essam K Zaneldin suggests claims are becoming a way of life and indeed, an impossible part of modern contract system. In UAE construction claims normally seen in almost every construction project, are direct results of the ongoing growth in the construction industry in the country In general claims are common in construction projects and can happen as a result of several reasons that can contribute to delaying a project and increasing its cost. Finishing a project on schedule is a difficult task to accomplish in the uncertain, complex, multiparty, and dynamic environment of construction projects. To enhance the chances of success contractor submitting claims most closely follow the steps stipulated in the contract condition and present sufficient documentation. He carried out the study of types, causes, frequency of construction claims in the emirates of Dubai and Abu Dhabi in UAE using a data from 124 claims for a verity of projects in the two emirates. As per his analysis one of the problem area is the change type of claims was the most frequent types of claims, Extra work types of claims are second and contract ambiguity remain ranked third. He also conclude that change order are the most frequent causes of claims while delay caused by owner ranked second and planning error ranked at third position.

Dr Ayman H Al Momani carried out a quantitative analysis on construction delay in Jordan. The objective of study was determining the causes and level of time extension of public project and to aid construction managers in establishing adequate prior to the contract award using quantitative data. The key task was to design research so that the information obtained permits the assessment of their impact. Therefore the best approach to assessing the potentials is to adopt randomly selected samples. The sampling population was established by selecting 130 public project constructed in different regions of Jordan during the period of 1990 - 97. The data was found in the contract files of several state agency. Data collected were of 5 kinds of public projects Residential houses of public s, office and administrative buildings, school buildings, medical centers and communication facilities. The result of this study indicated that the main causes of delay in construction of public projects were related to Designers, user changes, weather, site condition, late deliveries, economic conditions, and increase in quantity.

K C Iyer, N.B Chaphalkar, G A Joshi suggest most of the construction projects are executed through contracts which are generally not easy to comprehend even by professionals. Advancement in technology and mammoth requirement of infrastructure in developing countries like India, there has been increase in size and complexities in the nature of projects. This gives rise to further ambiguities in the prevailing contract forms eventually making contract forms more complex and difficult and causing adversarial impacts such as increase in number and frequency of claims and disputes besides time and cost overruns. To overcome the worsening scenario, they develop a system that can assist the contract administrators to understand and evaluate worth of their claims prior to taking it to litigation

Many construction disputes can be avoided by careful planning during contract formation. The specific terms and concepts below, which are used in contract drafting, are very important factors for avoiding future problems of claims

(A) Incorporation by reference

(B) Scope of work

(C) Right to stop work

(D) Payment

(E) Exculpatory clauses

(F) Notice

(G) Warranties

(H) Termination for cause and convenience

(I) change orders and changed conditions, and

(J) pay-if-paid and pay-when-paid clauses

Ustinovichius L, Andriuškevichius A, Kutut V, Migilinskas D Barvidas A. analyse construction contract provided by FIDIC and determine there effectiveness by verbal methods. According to him contractors of international construction projects are often faced with complicated situations working in the condition of uncertainty in construction. One of the potential risk factors is associated with the requirement of contract condition. He used a simple quantitave method for evaluating the requirements defined in specifications of the contract.

According to them effectiveness of construction contract can be evaluated based on the following factors

Technical Specification
Cost
Terms of Payment
Schedule
Performance Guaranty
Warranty
Liability
Insurance Cost
Liability Limit

Assaf et al (Assaf SA, Alkhalil M, AL-Hazmi M. 1995) identified the 56 main causes of delay in Saudi large building construction projects. The scope of their research was limited to large public building projects in the eastern province of Saudi Arbia. Large building project include projects that are more than 10,000,000 Saudi riyals (SR) Based on their survey

Based on the contractors surveyed the most important delay factors are

1. Preparation of approval of shop drawings

2. Delay in contractors progress

3. Payment by owner and design changes

From the view of architect and engineer

1. Cash problem during construction

2. The relation ship between subcontractors

3. Slow decision making process by the owner

However, Owner agreed that

1. The Design error

2. Labor shortage

3. Inadequate labor skills

These are the important issues which initiate claim.

Ogunlana and Promkuntong ( OgunlanabS O and Promkuntong K. 1996) conducted study on construction delay in Thailand this paper repots on a study of construction delay experienced during the period, especially in 1992 when the boom was diminishing. The major sources of the delay on high rise building construction project are identified and a comparison with other studied is made to determine if there are special project management problem in developing economies. They found that the problem faced by the construction industry in developing economies like Thailand could be:

Storage and inadequacies in industry/environment infrastructure (mainly supply of resources)

* Shortage of resources

* Unavailability of subcontractors

· Transportation problems

2. Causes by client

* Financial difficulties of owners

3. Caused by contractors incompetence

* Poor contract management, planning and scheduling deficiencies

* Unreasonable low bidding

* Contractors financial difficulties

They recommended that there should be concerted concerted effort by economy managers and construction industry associations to provide the necessary infrastructure for efficient project management.

Dr. Edwin H.W. Chan* and Henry C.H. Suen carried out study on Legal Issues of dispute management in International construction project contracting. According to them contracting parties in international project have to develop ways to respond to the various legal obligations and practice by the international conventions and national authorities and, at the same time, to avoid and resolve disputes arising from legal issues. In light of this, they provide a source of reference for contracting parties to identify those legal issues that are related to dispute management, which includes avoiding and resolving disputes in international construction. In doing so, they carried out an in-depth literature review of previous research studies and face-to face interviews with practitioners in the industry.

They made discussion on the significant issues as follows

Harmonization of construction law
Law of dispute management
Interpretation if international construction contract
Disputology in construction industry.

Causes of Disputes

Causes of disputes over delay identified by Assaf et al. includes: shortage of construction material, changes in types and specifications during construction, slow delivery of material, damage of material in storage, delay in the special manufacture of the building material, shortage of labour, labour skills, nationality of labourers, equipment failure, equipment shortage, unskilled operators, slow delivery of equipment, equipment productivity, financing by Contractor during construction, delays in Contractor's progress payment by Owner, cash problems during construction, design changes by Owner or his agent during construction, design errors made by designers, foundation conditions encountered in the field, mistake in soil investigation, water table conditions on site, geological problems on site, obtaining permits from municipality, obtaining permits for labourers, excessive bureaucracy in project Owner operation, building code used in the design of the project, preparation and approval of shop drawings, waiting for sample material approval, preparation of scheduling networks and revisions, lack of training personnel and management support, lack of database in estimating activity duration and resources, judgment of experience in estimating time and resources, project delivery systems used, hot weather effect on construction activities, insufficient available utilities on site, the relationship between different subcontractor's schedule, the conflict between the consultant and the Contractor, uncooperative Owners, slowness of the Owner decision making process, the joint ownership of the project, poor organization, insufficient communication between Owner and designer at the design phase, unavailability of professional construction management, inadequate early planning of the project, inspection and testing procedures used in the projects, errors committed during field, application of quality control based on foreign specification, controlling subcontractors by general Contractors in the execution of the works, the unavailability of financial incentives for Contractor to finish ahead of schedule, negotiations and obtaining of contracts, legal disputes between various parties, social and cultural factors, accidents during construction . Through a questionnaire survey conducted on 61 contemporary construction projects in Hong Kong Kumaraswamy [8] attempts to better understand disputes; he identifies common root causes, proximate causes and confirms the need of further studies to isolate the real root causes of avoidable claims and disputes. A list of the root causes and the proximate causes is shown in 1. (Grace Younis, Geraed Wood, M. Asem Abdul Malak,)

Unfair risk allocations

Unclear risk allocation

Unrealistic time/cost quality targets

Uncontrollable external event

Adverse culture

Unrealistic tendering price

Inappropriate contract price

Lack of competence of of project participant

Lack of professionalism of project participant

Client lack of information

Unrealistic information expectation

Inadequate brief

Poor communication

Personality clashes

Vested interest

Changes by client

Slow client respond

Exaggerated claims

Estimating error

Others e.g. work error

Internal disputes

Inadequate contract administration

Inaccurate design information

Incomplete tender information

Inadequate design document

Inappropriate contractor selection

Inappropriate payment modalities

Inappropriate contract form

( Sources - Minimizing Construction Disputes: The reletationship between risk allocation and behavioural attitudes by Grace Younis, Geraed Wood, M. Asem Abdul Malak

TABLE 2 - CATEGORIZING CAUSES OF DISPUTES

1

Al Momani

Causes of delay: poor design, change orders, weather, site conditions, late delivery, economic conditions, and increase in quantity.

2

Alkass et al.

Strikes, rework, poor organization, material shortage, equipment failure, change orders, act of God.

3

Bristow and Vasilopoulous

Five areas unrealistic expectations: contract documents, communication lack of team spirit and change.

4

Colin et al.

Six areas: payment, performance, delay, negligence, quality and administration.

5

Diekmann et al.

Three areas: people, process and product.

6

Heath et al.

Seven areas: contract terms, payment, variation, time nomination, re-nomination and information.

7

Hewit

Six areas: change of scope change conditions, delay, disruption, acceleration and termination.

8

Kululanga et al.

Four sources of dispute: (1) errors, defects and omissions in the contract documents, (2) underestimating the real cost of the project in the beginning, (3) changed conditions and (4) stakeholders involved in the project.

9

Madden

Three categories: legal, technical and quantum.

10

Molenaar et al.

Three categories: people issue, process issue and project issues.

11

Rhys Jones

Ten areas: management, culture, communications, design, economics, tendering pressures, lay, unrealistic expectations, contracts and workmanship.

12

Semple et al.

Four areas: acceleration, access, weather, and changes

13

Sykes

Two areas: misunderstandings and unpredictability

( Sources - Minimizing Construction Disputes: The reletationship between risk allocation and behavioural attitudes by Grace Younis, Geraed Wood, M. Asem Abdul Malak)

As per the literature review the common issues which aeries claims are as follows

1) Issues arises normally causes by the client

* Awarding contract to lowest bid

* Suspension of works

* Unrealistic imposed contract duration

* Slow decision making by owners

* Owner interference

* Finance and payment of completed work

2) Issues arises normally by the contractor

* Poor site management and supervision

* Improper planning

* Mistake during construction

* Contractors financial problem

* Bad quality of contractors work

* Subcontractors problem

* Construction method

* Low price of contract due to high competition

3) Issues arises normally by consultant

* Poor contract management

* Delay in the design information and approval of drawing

* Delay in testing and inspecting the product

* Discrepancies in contract document

* Poor management in Quality assurance control

4) Issues arises due to material

* Quality of material

* Shortage of material;

5) Issues due to by Labor & Equipment

* Equipment availability and failure

* Change in material and labor cost

* Labor productivity

6) Issues due to Contractual relationships

* Lack of communication between parties

* Impropriate overall organizational structure linking of all parties to the project

* Major disputes and negotiation

* Third party delay

7) Claims that are normally caused by External factors

* Weather condition

* Regulatory changes and building code

* Problems with neighbors

* Unforeseen ground condition

* Accidents

8) Issues arises are normally by political and social

* Changes in laws and regulations

* Public disorder

* Labour disputes and strikes

9) Issues arises normally by economy

* Inflation

* Availability of labour and equipment

For the purpose of study and based on the above literature review the issues are categorized in following manner

SITE ISSUES

Adverse site conditions
Necessary approvals may not be obtained or may be obtained only subject to unanticipated condition
Archeological and cultural heritage discoveries
No proper access to the site
Project site may be subject to invalidity of approval
Any environmental issue which leads delay and additional cost. E.g. Non stop rain and high wind speed.

DESIGN CONSTRUCT AND COMMISIONING ISSUES

1. Design of the facility is incapable of delivering the service at anticipated cost

2. Construction events occur during construction which prevent the facility being delivered on time and on cost

Commissioning tests which are required to be completed for the provision of services to commence, cannot be successfully completed
Design co-ordination on design and construct basis project.

SPONSOR AND FINANTIAL ISSUES

Interest rate may move adversely and affect the bid price
Failure of sponsor to finance the project because of economic crises
Change in tax policy by government before and after the completion of project
Financial problem arises due to change in ownership

OPERATING ISSUES

Require cost is more than anticipated with an inadequate quality
Design and construction quality is inadequate resulting higher maintenance and refurbishment cost
Change in output specification outside the agreed range
Subcontractor fails to provide the required service.

POLITICAL AND SOCIETAL

Change in law policy during the course of project
Change in regulations during the course of project
Additional approval require during the course of the project which it outside the contract
Labour dispute and strike

EXCULPATARY CLAUSES ISSUES

No damage of delay
Site inspection before the award of contract
Liquidation Damages
Indemnity Clauses

References:

Grace Younis, Geraed Wood, M. Asem Abdul Malak , Minimizing Construction Disputes: The relationship between risk allocation and behavioral attitudes

Jon Murdoch and Will Hughes (2000), Construction contracts Law and Management. Third Edition. Spon Press

Sadi A. Assaf, & Sadiq Al-Hejji. (2005) Causes of delay in large construction projects. International Journal of Project Management 24 (2006) 349-357.

Essam K. Zaneldin. (2006) Construction claims in United Arab Emirates: Types, causes, and frequency. International Journal of Project Management 24 (2006) 453-459.

Ayman H. Al-Momani. ( 2000) Construction delay: a quantitative analysis. International Journal of Project Management 18 (2000) 51-59

M.Asem U. Abdul-Malak, & A.M.ASCE, & Mustafa M. H. EL-Saadi, & Marwan G. Abou-Zeid. (2000). Process Model for administrating Construction Claims. Journal of Construction Engineering and Management 18 (April 2002) 84-94.

K.C. Iyer, & N.B. Chaphalkar , & G.A. Joshi. (2007) Understanding time delay disputes in construction contracts. International Journal of Project Management 26 (2008) 174-184.

Ustinovichius L, Andriuškevichius A, Kutut V, Migilinskas D Barvidas A, Verbal analysis of engineering and construction contract.

Dr Edwin H.W. Chan and Henery C.H. Suen , Legal issues of disputes management in international construction project contracting, Construction Law Journal, Feb 2004.

Ogunlana S O, Promkuntong K, Construction delay in a fast growing economy: Comparing Thailand with other economies. Intentional Journal of Project Management 1996:14(1): 37-45.

Mohammad Ibrahim Mohammad, Zulkifli Madon Rosli Zin Shaiful Amri Mansuri, Clarity and improving level of understanding of contract documentation, Malaysian Journal of civil Engineering 20 (1) : 128 - 136 (2008)

Bill Devidsons, Richard J Sebastain, An analysis of the Consequences of Contract administration problem for contract types. Journal of management research ISSN 1941 -899X 2009, Vol 1 No 2: E2

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