Professional Documents
Culture Documents
Semantic Risk Assessment For Ad Hoc and Amended Standard Forms
Semantic Risk Assessment For Ad Hoc and Amended Standard Forms
Abstract: In spite of the widespread availability and documented advantages of using standard forms of construction contracts (SFCs),
actual practice and recent evidence suggest that owners still rely on ad hoc (bespoke) or heavily amended SFCs. This practice is problematic
to contractors who are required to submit tenders within tight time frames and hastily assess the risk allocation of these nonstandard forms of
contract. This paper presents a semantic model and quantitative assessment framework to help assess the risk allocation of these contracts and
hence allow more informed decisions to be made by contractors prior to tender submission. The model is based on 9 clause families and 41
construction clause components that were determined based on a detailed analysis of 4 major SFCs as well as several bespoke and heavily
amended SFCs, in addition to a subsequent verification by domain experts. The analytical hierarchy process (AHP) is further used to assign
relative weights to the clause families and components based on collaborative input from 10 construction contract experts. The model was
tested on two case studies for a residential construction and hotel retrofit projects. Results show that the contract risk rating (CRR) computed
by the model closely correlates to the contingency values allocated by contractors into their tender price. DOI: 10.1061/(ASCE)LA.1943-
4170.0000253. © 2018 American Society of Civil Engineers.
Author keywords: Construction contracts; Risk assessment; Semantics; Standard contract forms (SCF); Ad hoc contracts; Analytical
hierarchy process (AHP).
The construction industry is prone to a large number of risks that obligations is that by Ibbs and Ashley (1987) that mapped 96
affect the intended outcomes of construction projects. In addition, clauses to 6 measures of project performance (cost, schedule,
the size and complexity of construction projects are increasing, quality, safety, owner satisfaction, and contractor satisfaction).
which adds to the frequency and severity of risks typically encoun- Khazaeni et al. (2012) developed a quantitative model to deter-
mine the optimal risk sharing in a construction contract among
tered in these projects. Any construction project by its very
contracting parties. Their model, which integrates fuzzy logic
nature involves certain unavoidable risks. One of the earlier studies
and the technique for order of preference by similarity to the ideal
in this area was undertaken by Bunni (1985), in which a compre-
solution (TOPSIS), can be used during contract negotiations. The
hensive list of risks particular to construction projects was devel-
model, however, did not include clear reference to specific clauses
oped along with their underlying causes. The main risk groups
in a construction contract. Similar work by Lam et al. (2007) de-
were (1) physical works, (2) delays and disputes, (3) direction and
veloped a model to determine the risk rating of a project based on
supervision, (4) damage and injury, (5) external factors, (6) pay-
a linguistic assessment (e.g., extremely likely to occur, likely to
ment, and (7) law and arbitration. Recent studies (e.g., Goh and
occur, somewhat likely to occur, unlikely to occur, extremely
Abdul-Rahman 2013; Mbachu and Taylor 2014) only reinforce
unlikely to occur) of probability and consequence of failure. Their
the same. Indeed, the literature relating to risk and risk management
work also did not focus on contractual obligations and their effect
on construction projects is ample, and hence the rest of this back-
on project risks.
ground review will focus on research relating to risk allocation/
Additionally, Bunni (2005) proposed a classification for risks
sharing among the contracting parties as per the provisions of allocated under construction contracts between employers and con-
the construction contract itself. tractors, based on their effects. The classification recognized two
Equitable risk allocation between contracting parties is widely types of risks. The first type incorporated risks that could lead
emphasized (Peckiene et al. 2013). Risk allocation and sharing in to damage, physical loss, or injury, whereas the second type in-
contracts have been examined by researchers in different sectors cluded risks that could lead to economic and/or time losses. Bunni
of the construction industry, e.g., underground rail (Hwang et al. (2005) further added that the treatment of these two types of risks in
2016), road infrastructure (Albalate et al. 2015), water supply construction contracts is different. The first type encompasses risks
(Ameyaw and Chan 2015), and others. that might be insurable, and they are governed usually by insurance
Risk allocation and sharing were also investigated in particular clauses in the construction contract. On the other hand, the second
contract forms. Balanced risk sharing in target cost contracts was type, which is the area this research focuses on, in principle in-
studied by Chapman and Ward (2008). Chan et al. (2011) identified volves uninsurable risks and is typically controlled by the remain-
the party most preferred to take the risks associated with target cost ing clauses. Apparently, if this type of risk is not understood and
and guaranteed maximum price contracts in Hong Kong and re- properly addressed in the contractual context, many problems
vealed that, in general terms, risks on tender documentation and could arise.
project design are better borne by clients, whereas construction- The readability of construction contracts has also been investi-
related risks are perceived to be taken by contractors. Bing et al. gated by researchers such as Rameezdeen and Rajapakse (2007),
(2005) investigated the same for public-private partnerships (PPPs) Rameezdeen and Rodrigo (2014), and Chong and Zin (2010). This
and private finance initiative (PFI) procurements. line of work has focused on assessing the clarity of construction
To help with balanced risk allocation in construction contracts, contracts by employing various text analysis algorithms. The aim
Hanna et al. (2013) developed worksheets, as well as supporting is to determine how well a construction contract overall, and its
flowcharts, legal advice, and risk allocation principles, to identify individual clauses, are readable and hence less prone to misinter-
construction risks that have a high potential for conflict and to help pretation during contract implementation.
allocate these risks to the appropriate parties of the contract. To A thorough review of the risk literature related to the semantic
improve the risk allocation among the contracting parties, Lam et al. and readability aspects of a construction contract has revealed the
(2007) presented a decision model that transforms the linguistic following:
principles and experiential knowledge expressed by construction 1. The vast majority of research has focused on risks pertinent to
experts into a more usable and systematic quantitative-based analy- project conditions while less than sufficient attention has been
sis by using fuzzy logic. Also, multiagent systems were used by given to how these conditions relate to the contractual obliga-
Karakas et al. (2013) to simulate the negotiation process between tions in a construction contract.
parties (mainly contractors and clients) about risk allocation and 2. A lack of quantitative models that can be used to assess the ex-
sharing of cost overruns in construction projects. Moreover, the tent of risk allocation/sharing among contracting parties and its
optimal risk sharing ratio in target cost contracts using ideas effect on contract contingency.
from principal-agent theory was examined by Hosseinian and 3. Quantitative models that have been developed in the past have
Carmichael (2014). To account for situational uncertainties, mostly focused on contract readability with little examination of
Nasirzadeh et al. (2014) incorporated fuzzy principles into sys- the semantics (i.e., true meaning) of contract clauses and its
tem dynamics to quantitatively allocate contractual risks. Fuzzy effect on contract management.
review of three ad hoc and three heavily amended FIDIC con- component, three distinct options in increasing order of preference
tracts; and a review of a tender risk analysis template used by a to the contractor are possible:
large Egyptian contractor. • Sums include the value of executed works and costs
2. Framework development: Based on the aforementioned review, • Sums include the value of executed works, costs, and profit loss
a model comprising 9 clause families, 41 clause components, • No entitlement for termination for convenience is defined
and various clause options was developed. The clause families
were developed through a bottom-up exploration of common
clauses in the data set being studied. Once the clause compo- Contract Model Framework
nents were initially identified, the researchers commenced a
grouping process to cluster clauses into a family that addresses This section presents the clause families forming the model frame-
a common issue of the contractual obligations of the construc- work and examples of the resulted clause components and options.
tion contract. The three levels of hierarchy forming the model framework are pre-
3. Framework verification: The model was verified and refined sented in Fig. 1. The figure shows that each clause family consists
through interviews with six construction contract experts. of some clause components, and each component has more than
The profile of these experts is listed in Table 1. The process one option. The model framework consists of 9 clause families
of refinement involved reviewing to identify (1) clause compo- and a total of 41 clause components. The clause families and their
nents that were deemed irrelevant, (2) clause components that associated abbreviations are
were redundant, and (3) clause components that were missing • DD—Delayed drawings or instructions
from the model. The review also included the merging of two • UPC—Unforeseeable physical conditions
families of contract clauses. The end result was a more compact • DSW—Delays and suspension of work
model that included 9 clause families and 41 clause components. • ETO—Employer’s taking over
4. Quantitative model development: The framework was extended • VA—Variations, adjustments, and evaluations
to include weights for each clause family/component/option • IP—Interim payments
using the analytical hierarchy process (AHP) via interviews with • EET—Employer’s entitlement to termination
10 construction contract experts. • STC—Suspension and termination by contractor
5. Model validation: The model was implemented on two case stu- • CD—Claims and disputes
dies for large-scale construction projects. Quantitative results of
the model were compared to contingency sums allocated by the
Delayed Drawings or Instructions
contractor as a proxy for risk allocation.
The cornerstone of this research is the identification and defi- Contractual risks under this family are attributed to the failure by
nition of the clause family, clause component, and clause option the engineer or employer’s representative to issue the required
(Fig. 1). The clause family is considered a group of contract clauses drawings, instructions, or inputs, as requested by the contractor
that address a certain risk or homogeneous group of risks. A clause within a timely manner. This family comprises two clause compo-
family consists of one or more clause components. Clause compo- nents. The first component entitles the contractor to an extension of
nents are semantic components extracted from the subclauses of time (EOT) if he or she suffers delays as a result of said failure. The
standard contracts, which can be in different forms under construc- second component entitles the contractor to additional sums if he or
tion contracts. Contractors should assess each component, along she incurs costs as a result of the occurrence of said failure by the
with its applicable options, prior to entering into contracts, as engineer.
Clause Clause
Component 1.1 Component 1.2 Claims and Disputes
Downloaded from ascelibrary.org by UNIV OF CONNECTICUT LIBRARIES on 01/17/18. Copyright ASCE. For personal use only; all rights reserved.
DSW-4 Contractor entitlement to EOT if he or she suffer 3.00 3.00 3.00 1.00 0.33 1.00 2.00 2.00 17
delays as a result of failure by employer to give him
or her possession of the site
DSW-5 Contractor entitlement to EOT if the works were 3.00 3.00 1.00 3.00 1.00 1.00 1.00 2.00 18
suspended by the engineer because of a reason for
which the contractor is not responsible
DSW-6 Contractor entitlement to additional payment if the 5.00 5.00 6.00 1.00 1.00 1.00 0.50 2.00 20
works were suspended by the engineer because of a
reason for which the contractor is not responsible
DSW-7 The contract defines milestone(s) at which delay 3.00 3.00 3.00 0.50 1.00 2.00 1.00 2.00 18
damages may be applied by the employer in case of
delay by the contractor beyond the corresponding
completion date(s)
DSW-8 Contractor entitlement to treat part of the works as 2.00 2.00 2.00 0.50 0.50 0.50 0.50 1.00 10
an omitted part if such was suspended for a period
defined in the contract
v X
n X
n 0.5
wi ¼ P n i ð2Þ ED ¼ ðai;j − wi =wj Þ 2
ð3Þ
i¼1 vi
i¼1 j¼1
CD-5 Engineer obligation to issue his or her decision pertaining to a submitted claim within a 10
certain period after receiving the particulars
CD-6 Contractor entitlement to additional cost if he or she suffers delays attributed to the public 12
authorities
CD-7 Arbitration is the dispute resolution method under the contract 22
1, the favorable option takes a score of 0, and the intermediate for the execution of these buildings with limited commercial
or less favorable option takes a score of 0.5. qualification.
Thereafter, the employer proposed a new ad hoc contract to be
used that was not balanced like the previously mentioned SFC.
Model Application After this major change in the conditions of the contract, the con-
tractor submitted extensive contractual qualifications. During the
Model Application on FIDIC Form of Contract negotiation meetings, the employer accepted some of the above
contractual qualifications while rejecting others. Based on the ac-
The contract risk model was implemented based on the General cepted contractual qualifications, the contractor’s pricing was set at
conditions of contract, for construction for building and engineer- 51,043,820 EGP (US$6.7 million).
ing works designed by the employer, First Edition 1999, issued by Contractor’s Qualification and Significance of Clause
the International Federation of Consulting Engineers. Components. Only about one-fourth of the clause components
When the contract model was implemented in the General of said ad hoc contract were favorable to the contractor. This is
conditions of FIDIC 1999, the contract risk rating was computed based on the fact that one-fourth of the contract clauses’ compo-
to be equal to 14% as per Eq. (4). Although said form of the con- nents being analyzed had the clause option that most favors the
tract is distinguished by a risk-sharing concept, the risk score for contractor. An example of favorable versus unfavorable options
its conditions is 14%, not 0%, which means no risk, as it com- can be found in Table 5, with the most favorable option from
prises some components not counted as favorable to contractors. the perspective of the contractor having a score of zero. Meanwhile,
Among these are the time-barred component for serving the the remaining components were either not defined in the contract or
notice of claim (CD-1), the component concerning the employer’s were defined in their risky options. Hence, the contractor submitted
entitlement to terminate the contract for convenience (EET1), an extensive basis of proposal (qualification) to negotiate the terms
and finally the component that entitles the contractor to additional and conditions of the ad hoc contract.
cost only, without profit, as a result of suspension of works The points forming such a qualification that affect the clause
(DSW-5). components, based on their original wording, and the affected
For the previously mentioned components, Table 5 presents the clause families are presented below:
favorable options in the model framework versus ones presented in 1. In order to meet the time for completion, the contractor’s
said form of the contract. time schedule is based on technical documents issued by the
contractor for approval, or comments shall be returned within
(3) calendar days from the receipt date and (2) calendar days
Model Application on Selected Case Studies
from the resubmittal date for reapproval, and in response to in-
This section presents a study of two cases for construction projects spection requests placed by the contractor no later than 24 h
in Egypt. This study is based on discussing the contractual quali- from the date of submission. (Impacted Family: DD)
fication (or exception) to the conditions of tender submitted by the 2. The contractor’s bid is based on biweekly invoices to be paid
contractors at the precontract stage. It is primarily based on a com- within 15 days maximum from days of submission. (Impacted
parison between the presented contractual qualification/exception Family: IP)
and the clause components in the form of different options. 3. In case the employer delays paying the contractor invoices more
Additionally, for each case, two trials were implemented using than 15 days from the date of invoice submission, then the con-
the model based on two different sets of contract conditions, and tractor shall be entitled to an extension of time for the contract
the differences in risk ratings were calculated. equivalent to the days of delay. Also, the contractor shall be
Contractor entitlement to additional costs because of the rise of cost of work inputs Not defined/shall Defined
not be entitled
entitled to a time-related cost to cover his or her indirect costs Case Study (2): FIDIC RED BOOK 1987/92 with Particular
during the extended period. (Impacted Family: STC) Conditions
4. No omission of contract work shall be deducted from the con- The project involves the retrofit of a major hotel in Cairo, Egypt.
tract and assigned to others. In the case of any variation to the The work comprises several construction packages and is executed
contract that causes variation to items that are not included in by an international contractor that works in Egypt and the Middle
bill of quantity (BOQ) the evaluation of the variation to the East at large. For confidentiality, the parties to the contract and the
contractor shall be based on 20% overhead and profit over project manager will not be named.
the built-up rate. (Impacted Family: VA) The contract is based on the Conditions of contract for works
5. Should changes in legislation from the date of tender submission of civil engineering construction (FIDIC RED BOOK 87,
result in unforeseeable additional costs or time being incurred reprinted 1992), with the particular conditions prepared by the
by the contractor, then in such case the contractor shall notify employer.
the employer with such additional costs for reimbursement, and Contractor’s Qualification and Significance of Clause
to receive a time extension. (Impacted Family: VA) Components. The contractor submitted the financial offer accom-
6. The contractor’s prices are based on the current rates of con- panied with contractual qualification with value of 552,954,309
struction materials and equipment announced at the date of sub- EGP. After submitting the offer, some negotiation meetings were
mission as listed in this qualification. At any time if there is a conducted at the precontract stage between the parties involved
price increase that would exceed the specified prices, the calcu- to discuss some contractual and technical details.
lation references in the escalation formula will take effect. The Discussions between the parties during negotiation meetings
escalation formula will be applied starting with the next invoice resulted in waiving the contractual qualifications submitted by
after the price increase takes place. (Impacted Family: VA) the contractor and other technical ones. An additional sum of
7. In the case that the contractor encounters adverse physical con- 5,050,000 EGP was agreed to be added to the contractor’s submit-
ditions, especially related to the soil conditions, which are un- ted offer against waving the said qualifications.
foreseeable, and suffers delays and/or additional costs, then the The contractor’s submission of the contractual qualification
contractor shall be entitled to an extension of time for any delay prior to signing the contract was simply an attempt to change
and an equitable adjustment in payment of any such cost. (Im- certain clauses under the contract. The concerned points of such
pacted Family: UPC) qualification as per the original wording are presented below:
Contract Model Application. Following the extensive reference to 1. “Monthly payment application to be certified and paid within
the contractual qualification and corresponding clause families, the 42 days from submission.” (Impacted Family: IP)
contract model was used to evaluate two different scenarios, each 2. “Although the contract conditions Sub-clause 60.10 entitle the
depicting a distinct set of conditions, and to calculate the corre- contractor for interest on late payment, a considerable delay in
sponding CRR for each. The two scenarios are (1) rejecting all sub- payment may not be remedied through this provision. Due to
mitted qualifications and (2) accepting all submitted qualifications. maximum finance facilities of any contractor, the Contractor
Additionally, the contractor has provided an estimated pricing for will have no choice, in case of delay in payment for more than
each of the two scenarios in consideration. 4 weeks, but to slow down the progress of the works and then to
Trial 1 involved calculating the CRR for Scenario (1), which completely stop the work if the period of delay reaches 8 week
concerns rejecting all points under qualification prior to contract in addition to Contractor’s entitlement to associated costs.”
signing. For this scenario, the calculated CRR was 73%, with pric- (Impacted Family: STC)
ing equivalent to 52,524,090 EGP. Trial 2, on the other hand, in- 3. “With reference to item 11 of the tender clarifications approx-
volved calculating the CRR for Scenario (2), which concerns imate dates for the Contractor’s possession of Sections of the
accepting all points under qualification, prior to contract signing. Site and access will be issued in a tender addendum which
In this scenario, the calculated CRR was 45%, with pricing equiv- was not received till now therefore the Contractor assumed dates
alent to 50,022,943 EGP. of milestones for possession of Sections in the submitted time
The variance in these risk ratings is due to changes in the com- schedule. Any change to these milestones dates will entitle the
ponents’ options, which correspond to a difference in the contrac- contractor for EOT along with associated costs.” (Impacted
tor’s pricing values in the amount of 2,501,147 EGP. Examples of Family: DSW)
differences between components of the VA Family based on con- 4. “With reference to item 23 of the tender clarifications regarding
ditions of the ad hoc contract and the submitted qualification are the movable furniture and fixtures contractor package. In all
presented in Table 6. cases, prior to the start of any works by other contractors in
conditions of the contract only and when additional sums were Standing Committee on Professional Liability, Fédération Internatio-
agreed upon to be added to the financial offer. nale des Ingénieurs-Conseils, Lausanne, Switzerland.
For each trial, the options of the affected clause components Bunni, N. G. (2005). The FIDIC forms of contracts, 3rd Ed., Blackwell
were selected. The calculated risk ratings are equivalent to 31 Publishing, Oxford, U.K.
and 47% for Trial 1 and Trial 2, respectively. As noted before, Chan, J., Chan, D., Lam, T., and Chan, A. (2011). “Preferred risk allocation
the lower risk rating means less contractual risk for the contractor. in target cost contracts in construction.” Facilities, 29(13/14), 542–562.
The variance between these risk ratings reflects the difference be- Chapman, C., and Ward, S. (2008). “Developing and implementing a
tween the applicable options of the concerned components for both balanced incentive and risk sharing contract.” Constr. Manage. Econ.,
26(6), 659–669.
trials.
Chen, C., Jiang, C., and Li, H. (2013). “Modifications to the FIDIC Silver
As referred to earlier, the contractor waived all the submitted
book in a buyer’s context: A case study of the Haiphong Power Plant II
qualifications against additional sum of 5,050,000 EGP, which project.” Appl. Mech. Mater., 357, 2498–2504.
was added to the value of the submitted offer. When focusing Chong, H.-Y., and Zin, R. M. (2010). “A case study into the language struc-
on the contractual qualification highlighted above, a sum equivalent ture of construction standard form in Malaysia.” Int. J. Project Manage.,
to 1,100,000 EGP as part of the overall amount of 5,050,000 EGP 28(6), 601–608.
was agreed upon between the parties against waiving the concerned Cortés-Aldana, F. A., García-Melón, M., Fernández-de-Lucio, I.,
points. The resulting variance between the different risk ratings Aragonés-Beltrán, P., and Poveda-Bautista, R. (2009). “University ob-
reflects this agreed sum of 1,100,000 EGP. jectives and socioeconomic results: A multicriteria measuring of align-
ment.” Eur. J. Oper. Res., 199(3), 811–822.
Davis, R. (1986). “Advantages of standard contract forms.” J. Manage.
Summary and Conclusion Eng., 10.1061/(ASCE)9742-597X(1986)2:2(79), 79–90.
de Luca, S. (2014). “Public engagement in strategic transportation plan-
This paper presents a model for assessing the risk allocation of ad ning: An analytic hierarchy process based approach.” Transp. Policy,
hoc and amended SFCs based on a semantic assessment of 9 fam- 33, 110–124.
ilies of clauses and 41 clause components. The model is based on a Goh, C., and Abdul-Rahman, H. (2013). “The identification and manage-
ment of major risks in the Malaysian construction industry.” J. Constr.
review of four common SFCs, three particular conditions to SFCs,
Dev. Countries, 18(1), 19–32.
three ad hoc contracts, and input from subject matter experts. The
Groselj, P., Stirn, L. Z., Ayrilmis, N., and Kuzman, M. (2015). “Compari-
model allows contractors to bid on projects with ad hoc or amended son of some aggregation techniques using group analytic hierarchy
SFC to rapidly assess the risk allocation using a predetermined process.” Expert Syst. Appl., 42(4), 2198–2204.
checklist and weighted scoring based on the AHP. The model Hanna, A. S., Thomas, G. R., and Swanson, J. (2013). “Construction risk
was used for two case studies involving a residential and hotel identification and allocation: Cooperative approach.” J. Constr. Eng.
project in Egypt. Results show obvious correlation between the Manage., 10.1061/(ASCE)CO.1943-7862.0000703, 1098–1107.
CRR computed by the model and the magnitude of contingency Hosseinian, S., and Carmichael, D. (2014). “An optimal target cost contract
included in the contractor’s tender price. The model can be used with a risk neutral owner.” Eng. Constr. Archit. Manage., 21(5),
by both contractors and employers to assess the magnitude of risk 586–604.
introduced in their contracts by relying on ad hoc (bespoke) con- Hwang, B., Zhao, X., and Yu, G. (2016). “Risk identification and allocation
tracts or introducing significant amendments to a standard form of in underground rail construction joint ventures: Contractors’ perspec-
construction contract. The presented model in this paper attempts to tive.” J. Civ. Eng. Manage., 22(6), 758–767.
reduce the extent of subjectivity in the process of evaluating con- Ibbs, W., and Ashley, D. (1987). “Impact of various construction contract
clauses.” J. Constr. Eng. Manage., 10.1061/(ASCE)0733-9364(1987)
tractual risk allocation from the contractor’s point of view by (1) de-
113:3(501), 501–521.
veloping a structured approach to review key contract clauses by
Karakas, K. T., Dikmen, I., and Birgonul, M. (2013). “Multiagent system to
developing a master list of clause families, components, and op- simulate risk-allocation and cost-sharing processes in construction proj-
tions and (2) combining the collective knowledge of several domain ects.” J. Comput. Civ. Eng., 10.1061/(ASCE)CP.1943-5487.0000218,
experts rather than relying on the expertise of a single individual. 307–319.
Khazaeni, G., Khanzadi, M., and Afshar, A. (2012). “Optimum risk allo-
cation model for construction contracts: Fuzzy TOPSIS approach.”
Can. J. Civ. Eng., 39(7), 789–800.
References Lam, K. C., Wang, D., Lee, P., and Tsang, Y. T. (2007). “Modelling risk
allocation decision in construction contracts.” Int. J. Project Manage.,
Works Cited 25(5), 485–493.
Mbachu, J., and Taylor, S. (2014). “Contractual risks in the New Zealand
Albalate, D., Bel, G., Bel-Piñana, P., and Geddes, R. (2015). “Risk miti- construction industry: Analysis and mitigation measures.” Int. J.
gation and sharing in motorway PPPs: A comparative policy analysis Constr. Supply Chain Manage., 4(2), 22–33.
of alternative approaches.” J. Comp. Policy Anal.: Res. Pract., 17(5), Murdoch, J., and Hughes, W. (2008). Construction contracts law and
481–501. management, 4th Ed., Taylor & Francis, London.
resource allocation, McGraw-Hill, New York. management.” Environ. Manage., 51(3), 777–785.