Can you afford to go slow?

Supply Management - 05/06/2008

Paul Cinnamond
Director
Blake Newport Associates Limited

You don’t have to look very far to find projects in different sectors that have suffered from major delays. Recent examples include Wembley Stadium, the NHS National Programme for IT and the West Coast Main Line. They lead to negative media coverage, late receipt by purchasers of the products contracted for, increased costs and often substantial damages for suppliers.

Whatever the size or nature of a project, it is imperative that purchasers have a full understanding of their role and responsibility in managing delays. A purchaser may have contractual terms in place stipulating when the various elements of a project are to be completed, often called milestone dates. They should also be aware that if suppliers are delayed in the works that they are undertaking, and such delay is caused by the purchaser, they may be liable for additional costs that arise as a result. Without the right provisions purchasers may be left open to financial compensation claims. Stringent delay management is the best means by which buyers can protect themselves.

Delay Management features prominently in the construction and IT industries. These sectors, whilst providing substantially different products in physical terms, are similar to each other in that they often involve delivery of projects, often to fixed price and timescales, with some dependencies on the purchaser in order to ensure that works are progressed to time. For example, whether one is providing a major new underground rail extension, or alternatively developing major software applications for a government body, there will still be a duty on the supplier to deliver in line with the scope as set out in the contract and to the agreed timescales; and the purchaser must ensure he discharges those obligations that are set out as dependencies in the contract, such as provision of design information in a timely manner, or providing personnel to take part in acceptance testing of the products that are being provided by the supplier.

Given this division of responsibilities, confusion can ensue when parties do not meet their contractual obligations and the issue of compensation for delay or disruption arises.

In the construction industry there are a number of separate ‘standard form’ contracts. Within these are provisions that permit the purchaser to grant extensions of time to the supplier. This means that should delays occur to intended Completion Dates due to the fault of the purchaser (for example, failure to provide access to site or a failure to provide information to the supplier as per pre-agreed timescales) then the supplier may well be entitled to an extension of time. Should this be granted, the completion dates in the contract will be ‘reset’, as will the date from which any liability for liquidated damages on the part of the supplier might arise. The supplier may also be in a position to pursue additional costs that it incurs which arise from the delay, if the contract provides for this.

Delay management provisions in contracts such as those described above are important. For example, if a purchaser were to cause delay to a supplier and there were no such mechanisms under the contract for the purchaser to extend time, then time is said to be ‘at large’. Any expressly stated completion date(s) in the contract could ‘disappear’, along with the ability on the purchaser’s part to deduct liquidated damages for late delivery against those completion dates, and the supplier would be obliged to complete within ‘a reasonable time’. The results of this can be severe – increasing uncertainty and the chances of further, longer delays over the total programme of works.

A duty on suppliers
Whilst the granting of extensions of time that are rightly due to suppliers is a key part of delay management, suppliers should not fall into the trap of assuming that an extension of time automatically entitles a claim for compensation. This is not the case and in fact it is up to the supplier to demonstrate that the relevant event against which they are claiming has had a direct impact on the completion of their work.

If a purchaser is faced with a delay claim they should recognise it is the duty of your supplier to clarify exactly what ‘ relevant events’ are relied on in seekng an extension of time. Also, many events that occur may not entitle the supplier to an extension of time, if they are not classed as relevant events under the contract. Furthermore, whilst some relevant events may permit the supplier to gain an extension of time (eg. postponement of liquidated damages) they may not permit the supplier to recover any of its additional delay-related costs. This is often the case where delays are caused by Force Majeure type provisions (which exempt a party from performance when an extraordinary event prevents it from meeting contractual obligations).

It is desirable that within the delay management provisions of a contract, a duty is placed on the supplier to notify the purchaser’s company of delays at the time that the supplier becomes aware of such delays. For example, if the purchaser’s company is providing late design information to the supplier, and this is having a ‘knock-on’ delay effect to the supplier’s other activities, then the supplier must notify the purchaser of this immediately. This enables action to be taken within the purchaser’s company at the time to ensure that such delays are not perpetuated. It is also important in contracts to give the risk to the party who is best able to bear it. So in cases where the purchasing company’s actions can affect the progress of a project, then it is arguably best set out in the contract that such actions are their responsibility.

Advice for all
My advice is simple: employ effective delay management provisions and ensure transparency from the beginning of a contractual process. Make sure you work closely with your suppliers from early on in the project to reach agreement on how a programme of works should be delivered. By routinely measuring and monitoring the programme of works against actual progress, any delays that do occur can be managed, so controlling additional delay costs and removing the element of surprise that often occurs when delays are announced by suppliers at a late stage.

More News and Media