Dealing with project overruns

If a building or refurbishment project is running behind schedule, it is not always apparent who holds responsibility for it.David Johnson of law firm Boodle Hatfield explains how to determine who is liable for any extra costs that may be incurred.

THE PROBLEM

I work for the operator of a prestigious hotel owned by an affluent overseas family. The hotel has been undergoing extensive refurbishment and the project is now late. The owners of the hotel believe that we, the operators, are liable for the cost of the overrun. I believe, however, that the owners should bear any additional costs. If this argument is not resolved quickly the construction team will down tools. Who ultimately holds responsibility for a project overrun?

THE LAW

It is necessary to look at the building contract as well as at the terms of the operating agreement, any lease, and any other agreements between the owner and the operator.

The identity of the employer under the building contract - owner or operator - will determine who is potentially liable to the contractor.

The building contract will allocate risk between the contractor and the employer. The widely used Joint Contracts Tribunal (JCT) contracts start from the position that the contractor must complete on time and within the contract sum, and is responsible for its own acts, such as poor management, inefficient working or defective work.

However, if the contractor is delayed by events that are outside the control of either party, such as adverse weather, strikes, or government action, then it is given an extension of time (which removes the threat of liquidated damages) but no additional money.

If the contractor is delayed by events caused by the employer, such as changes in design, extra work or delayed access to the building, then it receives both an extension of time and additional payment.

As between the owner and the operator, responsibility for the overrun will depend entirely on what, if anything, has been agreed between them and on the precise causes of the overrun. The fact that one party is the employer under the building contract may not be determinative: it may have been agreed that this party would act as employer, but that it would be reimbursed, wholly or partly, for the cost of the building work by the other party.

On the other hand, if nothing has been agreed and there is no cost recovery or cost sharing mechanism, then the risk of the overrun is likely to rest with the party that employed the contractor.

The precise causes of the overrun will be very relevant: if the delay is due to, for example, one party's failure to provide necessary information or to give approvals, then that party is likely to be responsible, if it can be shown that it is in breach of a contractual term.

An agreement allocating costs may also allocate duties and obligations, and there will generally also be implied terms to the effect that the parties will co-operate and will act reasonably in order to progress the project.

EXPERT ADVICE

The terms of the building contract and any agreements between owner and operator are the essential starting point, but there is often room for negotiation, leading to a commercial settlement. Contractor's claims are sometimes inflated and can be negotiated down.

Even if there are no specific arrangements between owner and operator as regards the sharing of costs, it may be possible to persuade the party that has caused the delay to contribute to the extra costs, possibly by relying on implied terms.

CHECK L IST

â- How does the building contract treat this?
â- What has been agreed between owner and operator?
â- Is there scope for an argument based on implied terms?

BEWARE

Construction projects frequently encounter delays and cost overruns. It is essential that these risks are properly covered by contract documents at the outset of any project, both as between employer and contractor and between owner and operator.

David Johnsonis a partner specialising in construction at Boodle Hatfieldâž"