Attorneys often say that if Contractors just followed the terms of their contract, they would not have so many problems with payment of Change Orders. That is easy to say, but as a practical matter, it does not work that way. While clauses in the contract require submittal of estimates and approval before proceeding, most Change Orders impose an unstated requirement for immediate implementation, thereby contradicting some of the terms stated in the same contract. Failure to proceed usually results in delay, additional costs, and sometimes puts the entire project at risk.
Attendees at seminars in Qatar, UAE and Saudi Arabia confirm that they are experiencing the same complaints that have plagued United States Contractors for decades, namely that Owners expect Contractors to proceed immediately "in good faith" on change orders regardless of terms stated in the contract. At the same time, any "good faith" commitment from Owners regarding timely payment is conspicuously absent. Today's fast-track construction and design-build environment rarely meets an expectation of timely change order payments. The resulting claims creates a significant increase for the need of attorneys.
Owners feel little, if any, pressure to settle change orders promptly. They seldom attempt resolution until after the change is completed. Owners in the Middle East are known to be habitually late in payment, causing considerable bankruptcy of Contractors. Those Contractors with deep pockets survive, others don't. In my opinion, the same self-serving behavior occurs in the United States, but to a lesser degree. Unknown to most Owners however, this attitude results in significant cost increases and related damages to their own projects over the long term. It is my understanding that many qualified Contractors who were damaged by Owners in the UAE will not be returning, and that others have no interest in bidding. Alternates are available which would improve the Owners' bottom line without compromise to their integrity, or that of the contract itself.
If you go to any ongoing project under construction and ask the Project Manager how many change orders are currently in progress, he will have a very definitive answer . Then if you ask: "How many of the change orders identified have been settled and paid"... the answers will surprise you. Most will declare this is not a problem because his firm (the Contactor) has a positive relationship with the Owner, and trust has been established. That sounds good, but the facts don't support this conclusion. If they did, then claims and litigation would be decreasing, not increasing. My experience with Owners and Construction Managers throughout the Middle East and the United States has resulted in a trend that shows an increase in litigation.
There appear to be several reasons. Most notably, this trend of increase in litigation is attributable to Owners who have no intention of paying the Contractor for Change Orders until after the changes has been completed, preferably at the end of the contract. Despite terms within the contract, and despite what appears a good relationship, several Owners continue to treat Contractors not as partners in a mutually rewarding joint venture. This has caused massive hemorrhaging within the construction industry. The withdrawal of qualified contractors leaving a market area shrinks the pool to those who may not be as qualified, including the seedy and greedy.
To make matters worse, the Engineers assigned to administer the contracts, are not as impartial or qualified as stated in FIDIC contracts. This is evidenced by the following comments from Linkedin's FIDIC contracts discussion group:
"Whereas from the Western perspective the Contract is to be respected, from a Middle Eastern perspective in my short period of time out here, 4 years, the Contract is just a piece of paper to hit the Contractor over the head with if he doesn't perform to the Employer's liking. Generally the Employers state that they are the Clients and we work for them, consequently they want to unilaterally change the contract to suit their own purpose. I even had one Employer, when physically shown the Contract Clause on which I was relying, threw the Contract back at me across the table and told me he didn't care what it said, he was the Client and what he says goes. The Engineer said nothing and has tipped his hat with "yes sir no sir" throughout the Project. The Contract is Red Book 1999 and when we requested the DAB be set up, and even nominated a member, they just ignored the letter without response neither written or verbal. How can you work with such people who have such total disregard of the Contract and yet the alternative is also unthinkable?"
"You are considered to be a third, or even fourth, class person and you will be frustrated and angry until you understand and accept this. If you cannot accept this status, then move on as I did. There are other places to work; some better, some worse. If I don't like the environment, I don't submit a tender and I move on. So my family has suffered and we have gone hungry, but I have no ulcer and we all live. I decided more than 20 years ago that the rewards offered in Arabia did not match the stress, so I moved on. You need patience, tact and understanding to survive and I have very little of the first two. Good luck with the next four years, if you survive."
"... what Paul had highlighted is very true. We, as Contractor, currently have several variation orders issued by the Resident Engineer. The Resident Engineer was requested to respond to the Contractor's proposals. We have however received advice stating that he has instructed us and approval might take time but we have to proceed with the works according to "FIDIC 2005 Harmonized Version" Sub-clause 13.2 Variation Procedure "The Contractor shall not delay any work whilest awaiting a response". How much time is sufficient time for a response, this is not provided in the contract. What will happen at the end, we hope will not be as what Paul stated!! "
"I note your various references to British law, to Western values and to the superior negotiating skills of locals: in the middle-east we are not in a western society, nor are we applying British law and it is not appropriate to try to force our values or foreign law. In addition, the locals are not necessarily more skilled; they just have the strength and protection afforded to local companies/families that arises from judicial systems that are not truly detached from the government. However, as xxxx notes above, many contractors do survive and some thrive. Coming from a more disciplined UK background I too was initially frustrated by the lack of proper administration of contracts and it did start to get to me. But, I recognised this is not going to change overnight from an individual stance and that we need to adapt in the short term while still trying to make recommendations for improvement in the long term. Ultimately, clients are usually driven by the bottom line and our task is to persuade them that the souk mentality does not give them best value. However, it will likely take until the next generation at least before this really gets through"
"There is fair amount of evidence showing that parts of these problems arise with inadequate control systems in place to protect the commercial interests of the Contractors as a class in MENA, whereas the engineers - as a class - are allowed to get away with many transgressions normally prosecuted through the boards of professional licensure in the States - and these are attributes of the entire commercial culture. There is no such system in place anywhere in MENA market - hence the confidence of the Contractors in fair dispute resolution - or even avoidance - is low, and consequently, the pricing of risks is high. If the Owners demanded that the dispute resolution systems to be placed and supervised fairly - even within each contract - they would have enjoyed lower prices on Base Contract work (in Bids) and Changes/Claims across the board."
"There appears to be a total mistrust between all parties which leads to conflict. Secondly is the problem of "Who pays the Engineer?" Generally it is seen that the Engineer is paid by the Employer, is Employed by the Employer in accordance with the Contract Clauses and therefore appears to lean in his direction when making decisions. The third factor is that the majority of people who administer the Contract are in fact Engineers. If you look at any prospectus or curriculum for the training of Engineers, university or professional bodies, the requirements for Law are extremely limited and basic. Consequently, the Engineers who are administering the Contract have only a basic knowledge of how it works. Couple this with cultural and language differences and the Contract generally isn't correctly applied, if applied at all. The Engineers who administer the Contract need to have some specialized training in the Contract and not just make it up as they go along and as suits the Employer."
"I also very much agree with Paul's statement to xxx, where Paul said that he is not faulting FIDIC contracts, only the clauses that provide an excuse for abuse by Owners and their Engineers who are more interested in pleasing their masters than being ethical in their dealing with Contractors. Paul, you even want FIDIC to include new terms in the contract forcing both Owners and Engineers to be more responsive for settlement of change orders during the term of the contract. Don't forget new terms even if included could be changed in the relevant project conditions by the same Engineer's advising them otherwise.
FIDIC is better situated than any one in seeing to it that the situation is resolved. Project financers like the World Bank and other development banks have very close affiliation with FIDIC and respects the opinion given to them by organizations such as FIDIC. This could be a start. Hence, if FIDIC could devise means to do the above not by adding terms in the contract but by reducing the allocation of risks to contractor's and providing a workable system, just like they are providing a system in the dispute resolution process by providing DRE's and DB's".
As stated by professionals who administer contracts in the Middle East: Engineers employed by Owners fear being labeled "pro- Contractor" because they will be blackballed or terminated if they are considered to support the Contractor's position. So when the need for payment arises, or the amount due for Change Orders is discussed it is very hard to be independent when your employer sets a course for non-payment based on subjective opinion, not facts. Similarly in the United States, the Construction Manager and/or Owner's Representative are also employees of the Owner. They also have a tendency to be more concerned with saving their jobs by pleasing their employer then complying with ethical requirements of their profession. The issue of flawed ethics within the engineering profession is discussed in my website blog: "If the Construction Industry Got it is Act Together, it could save America" which states: When ethics are compromised within the enterprise which hires civil engineers, it leads to deterioration in the values once considered the bedrock of the engineering profession." As a result, Engineers, Construction Managers and Owner's representatives usually have perfect excuses for delay and non-payment of Change Orders. These include, but are not limited to: (a) "We don't understand your estimate;" (b) "Insufficient backup and supporting documentation" (c) "Provide alternate prices on all material proposed for purchase".
The legal system fails miserably to provide a remedy in time for the frustrated Contractor attempting to recover cost for Change Orders. This has been witnessed over and over from my own personal experience with Contractors in in the United States, and appears even worse for Contractors in the Middle East where international laws prevail. For example, FIDIC contracts contain contradictory clauses such as 13.3.2: "Contractor shall not delay any work whilst awaiting a response." This clause does not appear in other forms of contract such as the American Institute of Architects (AIA) or Association of General Contractors (AGC).
Once a Change Order is completed, the Owner is in a position to negotiate the Contractor's price down no matter how reasonable or unreasonable. This often puts Contractors in the position to over-reach in their estimate knowing that their price will be negotiated down. Even with signed time and material slips from the field, I have witnessed Owners saying: "I'm not going to pay for your inefficiency. You should have done much better". At the same time, the Owner enjoys the benefit of using the change without having to pay for it during the course of the contract.
One of my clients, a Contractor in Las Vegas, wound up losing his business, his marriage, his home, and his life after realizing that Owner's promises for new work were false. Under enormous pressure, the Contractor decided to cut his losses and negotiate directly with the Owner rather than proceed with development of a claim through the legal process. He listened to the Owner's false promises instead of my advice and that of his attorney. "This happens all the time", said his attorney, after the funeral. It is very sad to see a competent and qualified Contractor commit a probable suicide (by running his car off the road at high speed) attributable to a system which is so one sided and unfair.
Although much has been written on this subject, sometimes the truth is so simple that even the most advanced professionals have great difficulty in accepting its relevant logic or wisdom. Simply stated: When Owners settle on change orders promptly, and pay promptly , most of their construction problems disappear, and the project exceeds expectations. The reason I am attempting to teach this to Owners, both in the United States and the Middle East comes from 50 years of experience: Late payment destroys trust: timely payment encourages trust and leads to even greater performance than that stated within the contract. Part of this message depends on a deeper understanding of "faith" and "trust."
Neither the contract nor the law attempts to describe "faith" and "trust" but without "faith" and "trust", claims and litigation are more likely to occur. The contract itself can become a meaningless nightmare unless both Contractor and Owner are invested in ethics which have been developed from a base of "faith" and "trust".
This is very hard to understand with different cultures and vast differences of experience and beliefs. To help in this understanding, reference is made to "The Biology of Belief" by Bruce Lipton, PhD, a research scientist and a former tenured professor at Stanford's Medical College in California. Dr. Lipton pioneered the influence of quantum physics within his own specialty. His discoveries in quantum physics application to biology are changing today's medical profession regarding the importance of the membrane surrounding the cell structure and the function of DNA. Dr. Lipton shows how one's own belief system affects cells that in turn respond to fear and hatred contributing to lack of "trust" Correspondingly, a belief system founded in love and forgiveness contributes to one' s growth and "trust."
As an example for application to the construction industry, as children we were taught to live by the "golden rule", which states:" Do unto others as you would have them do unto you." However, as time went on the "golden rule" was modified to include: " Do unto others as you would have them do onto you...BUT DO IT FIRST". Of course this is a sarcastic definition from some cynical colleagues in America, but there may be some truth to its implied malicious intent. Similarly, associates in the financial community use the term "golden rule" to mean: "He who has the gold.. rules" This definition appears most applicable to contracts administered in both in the Middle East and in the United States.
Regardless of the definition, the manner in which the "golden rule" is applied often determines the fate of many Contractors. When it is applied with disdain and arrogance, Contractors respond accordingly. Fear of the unknown and intimidation regarding payment will almost always result in a lack of trust and resentment. Under those conditions, anything more than a minimum effort of compliance is most unusual. If, however, the golden rule is applied with faith and trust as intended in its original definition, Contractors will respond with a positive incentive to perform, and deliver an unbelievable effort in a desire to produce a quality project on time, within budget. This is hard to achieve in today's highly structured and litigious climate. It has been my experience to witness contracts on major industrial projects prepared by Owners without any legal background, who have succeeded despite objections by counsel. Needless to say: Those were the good old days.
Having witnessed several successful projects where substantial money was returned to the Owner by the Contractor from proper administration of Guaranteed Maximum contracts, I am convinced that the golden rule works wonders. I am also convinced that the need exists to establish strong "trust" and "faith" so that the same results can be achieved today.
Realizing that Western Contractors may never be fully "trusted" in any Middle East environment, I concentrate my study on "ethics" for Engineers, Project Managers, and those who administrator the contracts in hopes that Owners will eventually learn the significance of the golden rule. Learning to "trust" each other as we build together is one of my goals as a consultant.
Contractors can do much better than they do at present, and so can Owners who are willing to take a leap of faith by paying for Change Orders in a more timely manner. When they do, they will realize a marked improvement in the bottom line, an unexpected return in value from Contractors, a decrease in claims, and an increase of qualified contractors to bid on new projects.
Gogulski & Associates, Inc. has developed innovative ways to avoid risk on Change Orders regardless of cultural differences. With help from Keith Plemmons, P.E, PhD, of The Citadel's graduate College of Engineering,, and others, we have developed means and methods to minimize the occurrence of claims by creating improved project controls, and presentation of the entire project in a clear and concise 3D format.
Once Owners understand that risk can be avoided by a better presentation of the project, including the change order itself, Owners will realize how important it is to pay promptly, and avoid unnecessary claims.
Paul Gogulski, PE has used his broad range of experience to resolve hundreds of cases throughout the country and overseas. He has reduced the cost of litigation during the claims process through skills greatly refined during the course of his career. His recent pioneering in refinements to risk management has led to improvements in the use of BIM and system engineering applications within the construction industry. Dedicated to his profession, Mr. Gogulski is presently working with a professor at a major university and a president of an established consulting firm in the development of software to reduce risk by integrating 4D technology within clients project controls.
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