The importance of being Earnest
Introduction
No, this is not an article about Oscar Wilde’s play about a baby found in a handbag, it concerns the need and obligation of all parties involved in construction projects, to be just that, sincere and earnest in their desire to make the project a success. It also touches on the need and obligation of experts in disputes to be just that, expert, earnest and independent.
My Oxford dictionary defines the word earnest as: – serious, zealous, ardent.
In this article and its follow up, I comment and provide insights into the following issues:
- My own background and experience of “my” industry;
- The importance of money and the unusual commercial nature of construction;
- The root cause of construction disputes;
- When problems arise;
- Independent experts;
- The erosion of expert independence;
- An unusual use of experts;
- Dispute avoidance.
My Background
After training and qualifying as a Quantity Surveyor, I wanted a broader experience of the construction process. I was approached by a former colleague to work in Saudi Arabia and I was seconded to at that time a contractor that was executing very large contracts including some of the largest value projects in the World. My original eighteen-month contract stretched out to almost 11 years. After spending some five or so years working on sites, I was promoted to subcontract manager and ultimately contracts or commercial manager. I reported directly to the Saudi Board and to a visiting Main Board Director. At one time the portfolio of contracts that I was overseeing was some US$4.8bn.
I have also been involved in construction projects and disputes in over 30 counties on four continents and as an expert I have given evidence some 35 times in arbitration and litigation.
The Importance of Money and the Unusual Commercial Nature of Construction
I need hardly explain why money is so important to companies, but the construction industry is rather different from many other industries.
Taking a simplistic approach, many other industries will know (within reason and the limitations of their supply chains) what their raw materials or suppliers’ costs will be. They will also know what their labour costs and their overheads and running costs are. The greatest unknown might be the vagaries of the market that might affect the number of units that it can sell, or customers it can attract, and of course profitability. They enter the marketplace with known costs but with potentially unknown income.
A construction company on the other hand has a different set of unknowns. In tendering, it has to forward forecast or estimate what its future costs will be, including its subcontractors’ costs. Frequently it will be held to its contract price, subject only to prescribed and limited or zero variables. On most contracts, its final price (and therefore its future income) will for a large part be pre-determined.
Anyone who has been involved in estimating and tendering, knows that there are no prizes for coming second. Contractors’ have to estimate its future costs, and then, the really difficult bit. It has to assess or guess the final price that will win the project, that may be a reduction in its initial estimated costs, but still trying to balance potential risks. In difficult times, the tender price can sometimes be at a level that barely covers direct cost.
Add to that, the plethora of subcontractors and suppliers providing services and goods to tendering contractors. They have the same problem, forward forecasting of costs and winning the contract.
Whether there is any demand for the final product, i.e. the building, power station, refinery, road, harbour or airport etc., is not the contractors’ concern. What might and does affect contractors is if the employer and/or its consultants procrastinate or deny unfairly the contractor’s entitlement to payments for variations and/or changes to contract duration and cost brought about by client delay.
Contractors, therefore, enter into contract with known income, but estimated costs.
All any contractor (including successful subcontractors) have to do therefore, is finish the project on time, on budget, get paid and, bingo, there is the profit!
To quote Hamlet, “Ay, there’s the rub”. To finish the project on time, on budget and get paid.
Subcontractors’ face the same issues with the contractor. If the contractor has not been paid properly, then that will most probably cascade down the payment chain.
In my experience, the largest single issue by far that consumes all Boards of all construction companies is money. From forward forecasting for new and future projects and forward forecasting the income and cost outcome of existing projects, they need and demand factual information and updates.
“How much do we expect to recover”? Or, “what’s our potential liability”? These were always key questions that I had to provide reports on and answers to.
In my time as commercial manager, I monitored all live projects (and a few dead ones) with my team and reported at regular intervals to the Board on “income at risk”, and “costs at risk” on all contracts.
On site and as subcontract and ultimately commercial manager, I worked closely with the different departments within the company including the different engineering disciples, programmers, costing and of course senior management. Understanding the internal workings of a very large construction company provided to me an invaluable insight into how contractors’ work.
I was also responsible for co-ordinating with external solicitors’ and counsel (and ultimately testified in an arbitration) on a dispute where “my” construction company was sued by a sole source Californian supplier for US$ 99m. Because of the suppliers late, erratic and at times substandard materials, our losses were over US$30m. on a contract value of just under US$ 100m. I also gave evidence in the hearings in London. We won, but it was a pyrrhic victory, the supplier was bankrupt!
My reports to the Saudi Board always addressed money issues and I met with my project teams, project managers and ultimately Saudi Board members at regular intervals. Once a month I met with a visiting Main Board Director and went through all contracts identifying current progress on expected income and cost and anticipated progress on money issues.
On all projects, what the Board needed and demanded were straight answers and facts. In order to answer their questions, apart from a thorough working knowledge of the projects, I also gave them facts and any solutions that I and my team were implementing or proposing to improve income or mitigate difficulties.
Since then I have spent several years working on projects that have experienced various types of catastrophes. That experience, coupled with my previous life working on live projects allows me a degree of insight into much of what can go wrong on projects; what can be done to avert or at least to mitigate the effects of the potential difficulties; and if problems occur, what can be done to minimise the effect.
One of the other major differences between construction contractors and a manufacturer is that the company that designs and builds say cars or aeroplanes, controls both the design and manufacturing and assembly process, some of which will be done in house. However, on most construction projects, a large part of the design is done by external consultants employed not by the contractor, but the employer. I will comment on this issue later.
The Root Cause of Construction Disputes
Why are there so many disputes in construction? I recall a conversation I had with a Washington lawyer who was brought in to advise on a problem project in Saudi Arabia between “my” construction company and the American Corps of Engineers. I started to say something about “the fundamental difference between us and the Corps”. He stopped me and said, “listen, the fundamental difference between you and the Corps is that THEY don’t want to give YOU the MONEY” (his emphases).
A piece of advice I have never forgotten and sometime repeat when people ask what the dispute is about. My reply – money! (refer also to my article Construction Law Journal (Vol 31 No 8) titled “Follow the Money”.
There are many theories espoused about the causes of construction disputes. Forget them all. Money is the root cause of all construction disputes. One party wants more or wants to spend less; the other party doesn’t, can’t, or won’t agree. The parties then fall out.
An Arbitral Tribunal or a Judge will determine who owes what to whom. There are several varieties of reasons that a dispute occurs, but all ultimately focus and end on that fundamental theme or are resolved through negotiation with a payment from one party to another.
When Problems Arise
The construction industry is no respecter of size or longevity. Recently, in the UK, we have seen the demise of Carillion, although to be clear, Carillion were more than just a construction company.
One disastrous construction project can and has destroyed well established construction companies and severely damaged others. In my article in the Construction Law Journal referred to above I described where the world’s largest international contractor (the UK’s Davy McKee) was brought down by one bad contract and I quote from the article “…. the pounds 118m contract had overrun by more than pounds 100m.”
Another construction company that I was familiar with and had great respect for, was Germany’s Philip Holzman. At its peak in 1994, the company was Germany’s largest contractor. It had 43,000 employees and was amongst the largest construction companies in the World. It experienced severe problems and despite public efforts for a recapitalization, the company filed for insolvency in 1999 and was finally liquidated in 2002.
During my time in Saudi Arabia if I was to use single words to describe my advice to the members of the Board at that time, including the need to address major decisions, they would be thorough, factual, honest and earnest. If I had doubts or concerns, I identified them. I required the same from my colleagues working on sites.
Boards are not interested in fantasy figures as they can’t and certainly should not be asked to make decisions based on them. Of course, there are almost always ranges of amounts, but in the end, I was always asked my opinion of what I perceived the outcome of any difficulty might be and what might be the consequences, i.e. the right number. If I was asked what might be done to obviate a problem, including subcontractors, I was frequently charged with resolving it within parameters that I had established, or to explain why the parameters needed to be changed. The Board needed that advice to ensure that the correct action was being made as they certainly did not want any later surprises.
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