An optimal contract strategy in managing extension of time provisions in building contracts

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An optimal contract strategy in managing extension of time provisions in building contracts

 

Author: Au, Chung Yu Maria
Title: An optimal contract strategy in managing extension of time provisions in building contracts
Degree: Ph.D.
Year: 2012
Subject: Construction contracts -- Management.
Construction projects -- Management.
Production scheduling.
Hong Kong Polytechnic University -- Dissertations
Department: Dept. of Building and Real Estate
Pages: [11], 193, [33] leaves : ill. ; 30 cm.
Language: English
InnoPac Record: http://library.polyu.edu.hk/record=b2615870
URI: http://theses.lib.polyu.edu.hk/handle/200/6972
Abstract: In view of the significant implications of project delay, some developers tend to transfer as much time-related risk as possible to contractors by removing contractors' entitlements to Extension of Time (E.O.T.) due to delaying events. However, not all these risk aversion provisions in a contract are legally enforceable or cost effective. This study aims at developing guiding principles for developers (hereinafter called "employers" as one of the contract parties) to include legally sound E.O.T. provisions in contracts and providing a model for assessing the cost for transferring delaying risks to contractors for employers' consideration. The first part of this study addresses the legal concern. Support is drawn from the literature and principles of law in United Kingdom and Hong Kong. In addition, eight construction professionals have been interviewed to understand their pragmatic considerations in practice. This part of the study reveals that for delays caused by employers, omission of related E.O.T. provisions may render time 'at large' and inappropriate deletion of the provisions may be classified as unfair contract terms which may be unenforceable in courts. Therefore, to secure time and cost certainty, employers should be well aware of the legal rules and the practical considerations of contractors, for striking a balance between fairness to contractors and attainment of employers' own project goals.
Risk allocation through contractual provisions involves financial considerations, and the assessment of the cost for risk adjustment has long been a difficult problem in risk management. In the second part of this study addressing the financial concern, deletion of E.O.T. due to inclement weather is selected as the illustrative example. As contractors' pricing for contract risks in tenders determines how much the employers have to pay for the risk shifts, a model is developed to find out contractors' behavioral pattern in pricing weather risk in tenders. This is done by investigating the relationships among the weather history, contractors' risk perception, risk attitudes and risk behaviors. The term 'situational variables' is further introduced to fill in the possible gaps between one's risk attitude and risk behavior. With questionnaire data collected from building contractors of different size groups in Hong Kong, their behaviors are analyzed statistically. The survey reveals that contractors' perception on the significance of weather risk is in line with the estimated weather risk worked out from historical weather records. Besides, in programming their works, contractors would allow fewer days of delay than what they perceive the inclement weather would affect their progress of works, indicating their general risk-loving attitude. It is also common for contractors to make further discounts to their programmed risk before including the associated delaying cost in tenders. Meanwhile, it is interesting to know that contractors of different sizes would have different patterns of risk behaviors. Their behaviors would also be affected by different situational variables, however, they generally consider employers' reputation to honour payment on time, reasonableness of the amount of liquidated damages, etc. as very important factors. Based on the survey findings, three sets of regression formulae for different-sized contractors have been formulated to enable employers to assess the number of days of delays priced by contractors in tenders. The high predictability of the model has been confirmed by interviewing three contractors and by substituting the data of three real projects into the model. The model demonstrates that it is generally more cost effective for employers to delete the E.O.T. provision due to inclement weather in contracts.

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