DELAY ANALYSIS AND CLAIM

PREPARATION: THE SOUL OF ARBITRATION

By: Dr Saraswat SB
saraswat54@Hotmail.com
 INTRODUCTION
• India has rapidly growing infrastructure industries
which receives huge investments.
• Infrastructure projects involve multi-party with entities
engaged in different scope of work which leads to
complexities in execution of project.
• Delays and disputes in construction projects, is due to
involvement of multiple entities.
• Effective resolution of disputes under agreed terms of
contracts is needed to ensure time bound completion of
projects.
• Majority disputes related to extension of time without
imposition of liquidates damages and penalties.
• Arbitration provides an effective mechanism for time
bound resolution of disputes.
 Engineering, Procurement And
Construction Contracts (“EPC”)

• Engineering, procurement and construction contracts

(“EPC”) is a prominent form of contracting
agreements involving an employer and multiple
contractors.

• In EPC, engineering and construction contractor

carries out the detailed engineering design of project,
procures all equipment and materials necessary, and
then constructs to deliver a functioning facility or asset
to its clients.
 Common causes of delays in EPC
Contracts
A. Delays during engineering stage;

B. Delays during procurement/sub-contracting phase;

C. Delays in construction/erection/commissioning of
the projects;

D. Miscellaneous reasons for delay including insolvency

of either the employer or the consortium partner, etc.
 Delays during Engineering Stage
Delay in approval of
Lack of knowledge of
designs & high number of
process, technologies,
revisions of designs based
engineering & experience
on comments of
with respect to new work.
Employers.
Late decisions in
various Delay in basic &
Engineering detailed
engineering engineering leads
activities by work may begin
to cascading
later than as
employers as well delay effects on
envisaged in the procurement and
as contractors schedule. construction
and sub- activities.
Delays during Procurement/Sub-Contracting Phase

Delay in vendor approvals Delay in inspections,

for procurement of issuance of inspection
equipment & issuance of certificate and inspection
dispatch clearance by the waiver certificate by the
employer. employer.
Special delays in
Unclear bid Unrealistic target
supply of any schedule of
document/purc
item by hase erection of
contractors and project. Problems
specifications
with quality of
design for equipment and
modification by procurement/co re-work in
ntracting by the manufacturing of
employer as well
contractors. items.
as contractors .
 Delays during Procurement/Sub-Contracting
Phase…
- Late inspection of - Disputes between
manufacturing & clearance at contractors and their sub-
inspection stage.
vendors.
- Damage of equipment during
- Poor supervision of
internal
handling/storing/shifting. contractors

- Late opening of LC
Contractors may Delay in payments
by employer for
contractors and by lack knowledge by employer to
contractors for sub- about local contractors and
contractors. fabricators/suppl contractors to sub-
- Breakdown of any iers/sub- contractors causin
main construction vendors delaying g delays in delivery
equipment of the in supplies. schedules.
contractors.
 Delays in Construction/Erection/Commission of
Projects

- Breakdown of any main - Unsafe working conditions or

construction equipment.
- Inaccurate work which
leads to
rework/rejection/re-design.
accidents at the project site.
- Labor strike/mismanagement.
- Granting extension under
contract by Employer if
Deadline is missed.

Delay in
Force majeure
Late issuance of commissioning
situations like war, due to non-
hostilities, act of design &
availability of
foreign enemies’ construction
trained man-
revolution, drawing by
terrorism, or civil power to take over
employer or the the project from
war within the
contractors. the employer’s
country, etc.
side.
 Delays in Construction/Erection/Commission of
Projects
Delayed clearances by
statutory bodies
Inexperienced personnel with
like environment
technology/methods/impleme
department, electricity
ntation of engineering.
department, labour inspector,
etc.
Repeated changes Availability of specifi
in scope of work ed utilities like
Delay in
and introduction industrial water,
payments by
of new electrical power,
employer to
requirements at steam etc. for testing
contractors and and trial run by
later stages.
by contractor to employer to
Unpredictable
sub-contractors. contractor for pre-
ground and soil
commissioning and
conditions at
project site commissioning.
 Other delays in EPC Contracts

• Unilateral termination of contract by either party.

• Financial problems of a stakeholders whether
temporary or permanent/long term.
• Insolvency of either employer or any partner in
consortium of contractors.
• Project being kept on hold by employer.
• Employer’s decision to shift location of project from
one plant to another.
• Misinterpretation of contract and implementation
of same by any of stakeholders.
 Other delays in EPC Contracts….
• Non-conformity with agreed terms and conditions of
contract by contractors.
• Pressure on contractor from employer to meet directives
which are not in accordance with agreed terms and
conditions of contract.
• Breach/violation of terms and conditions of contract by
either party.
• When contract is silent with respect to scope of
execution of project that involves large capital.
• Disputes arise among consortium partners when they
violate internal consortium agreement concerning their
relationship while executing project.
According to Delay Analysis Report, delays can be
attributable to the following :

1. Delays by employer;
2. Delays by contractors;
3. Delays by sub-contractor/sub-vendors which are
part of the consortium of contractors;
4. Delays of common/overlapping nature which are
attributable to two or more different
stakeholders in the project;
5. Delays due to force majeure which is not
attributable to any stakeholder.
 Analysis of Responsibility for Delay by the
Affected Parties

Once Project delayed beyond its contractual schedule, then following

question arises:

Who will bear How the basis of

the attribution
consequential of such
financial responsibility is
losses/implicatio to be decided?
ns? What shall be the
basis of such
responsibility?
 Analysis of Responsibility for Delay by the
Affected Parties
Situation of deadlock arsis when -

Contractor aims to be Employer aims to avoid

exempted from
imposition of LD by
asserting that employer is
responsible for delay.
any outcome where
employer is required to
compensate for
contractors claims.
Employer tries to shift
responsibility and makes
counter claims.
 Method of Assessing the Delay in an
EPC Project
• For delay calculation start and end dates of
major executed activities are compared with
original agreed start and end dates.

• Above method is also used for calculation of

individual delays of each activity.
 Method of Assessing the Delay in an
EPC Project
Delay Analysis Report (DAR) prepared by contractor and
employer: It is systematic record with all possible evidences
and justifications presented activity-wise along with
manner and quantum of delay in each major activity and
entity responsible for each such activity.

Correct analysis and review of DAR gives clear picture for

concluding which entity responsible for which delay and
quantum of delay.

This becomes basis for all claims, LD, penalties in project to

be decided or agreed to or awarded by Arbitral Tribunal in
an arbitration.
 Preparation of Claims
• There is no standard formula for preparing the
claim as every project has different situations for
claims amongst parties.

• However, following heads are considered as a point

of reference for preparing claims by contractors &
employer -
A. Preparation of claim by the contractor;
B. Use of Eichleay Formula for calculating the
overheads in a claim;
C. Preparation of counter-claim by the employer.
 Preparation of Claims
A. Preparation of claims by the contractor:
Following components bearing financial implications are
the costs relating to many aspects for contractors in EPC
projects :
➢Complete cost of project borne by contractors for
duration of delay in project.
➢Cost of extra engineering hours and in procurement due
to delay caused by employer.
➢Cost of project management and site supervision for
contractors for the duration of the delayed period.
➢Cost of additional insurance, premiums and maintaining
the Bank Guarantees and Letters of Credits.
 Preparation of Claims

➢Cost of overheads for contractor.

➢Cost of price variation as per price variation formula
provided under contract for labour, supplies and
applicable items.
➢Cost of extra resources for accelerating project during
delayed period.
➢Arrears or pending amounts, Interest on arrears and late
payments, which employer is yet to pay contractor.
 Preparation of Claims

➢Payment for cost of items which were not in scope of

work of contractors but have been supplied by
contractors as per directions of and requirements of the
employer.
➢Extra scope of work which was not part of contract but
has been executed by the contractors.
➢Additional claims and counter claims based on specific
criteria and conditions adopted by the contractors.
 Preparation of Claims
B. Use of Eichleay’s Formula for calculating
overheads in claim:

• While preparing the claims, for various heads, accepted

rate/data either available under contract or available as
national/international standards are
considered for computing the claims.

• While calculating overheads, Eichleay’s formula can be

used which is a 3 step calculation to determine damages.
 Preparation of Claims
3 steps in calculation of EICHLEAY’s formula to determine damages:

STEP I: Allocable Overhead - The allocable overheads are to be

calculated as follows:
Total Project Billings x Total Home Office Overhead during Actual Contract/
Total Company Billings

STEP II: Daily Allocable Overhead

Allocable Overhead/Number of days of performance under project (including delay
days)

STEP III:Home office overhead damages to be included in the claim

Daily Allocable Overhead x Number of Days Delays
 Preparation of Claims

C. Preparation of counter-claim by the Employer

• Recovery of amount for opportunity loss in terms of
production loss for delayed period.
• Extra counter-claims based on specific criteria adopted
by the employer.
• Recovery of LD amount from contractors for delayed
period of the project.
• Recovery of amount for failure in Performance
Guarantee (PG) parameters as specified under the
contract.
 Preparation of Claims

• Recovery of amount for items which have not been

supplied by contractors in accordance with specifications
under contract.
• Recovery of amount for works which could not be
completed by contractors and are either still pending or
have been executed by employer at risk and cost of the
contractors.
• Recovery of any consequential losses incurred by
employer due to any act of contractors whether in
pursuance of terms of contract or not.
 Arbitration vis-à-vis Construction Contracts in
India

• Parties to disputes were reluctant to approach courts for

resolution of their disputes.
• Disputes were not brought to a settlement and parties used to
suffer heavily bearing financial losses due to such disputes.
• Arbitration is one of the most preferred modes of dispute
resolution ensuring resolution of dispute within shorter
durations with flexibility of procedures and autonomy of
parties.
• Introduction of Arbitration and Conciliation (Amendment)
Act, 2015 encouraged parties to opt for arbitration as a
dispute resolution mechanism.
 Arbitration vis-à-vis Construction Contracts in
India

• After the commencement of the Amendment Act,

conflicts are being resolved in a specified span of time
keeping intervention of courts to bare minimum.
• Legislation has brought larger autonomy to arbitrators
to have their own jurisdiction in deciding most issues.
• Arbitrations in construction contracts are very complex
involving of disputes based on technical issues.
• Arbitration legislation should accommodate such issues
through special provisions incorporated.
• Need for provisions to make arbitration conducive for
construction contracts.
Encouraging Arbitration in Indian Construction
Sector

• Arbitration clause should be incorporated

in all construction contracts.
• Apex body to evaluate performance of arbitration
institutions & individual arbitrators to assess their
performance.
• Arbitration and Conciliation Act 1996 , should have
provision to nominate arbitrators with domain
knowledge. Section 26 not adequate to take care of
complexities of construction disputes.
 Encouraging Arbitration in Indian Construction
Sector

• Arbitrators, particularly in construction sector, should

have knowledge of delay analysis along with having
technical background and capability of scientific scrutiny
of claims and counter claims.
• Arbitrators should have domain knowledge and
experience in the construction industry to resolve
disputes in the construction sector. This will be a true
justice to the dispute.
THANK YOU