Construction contracting is a risky business. The contractor usually ends up taking on most of the challenges and risks associated with the project execution, having to estimate the works correctly and allocate sufficient labour, plant, and materials for successful project execution. Moreover, contractors have to ensure that the contract meets its contractual obligations and specifications. Here I will discuss the top seven reasons why construction contracts fail.

1. Poor tendering practices  

Contractors are in a hurry to submit tenders before the closing date and don’t spend enough time studying the contract specifications and conditions, so they don’t fully understand the payment terms and claims process. This leads to significant issues as the contract work progresses. During the tender time the allowed contract time period, estimated quantities, and liquidated damage clauses need to be checked to ensure everything is within the contractor’s abilities and due diligence needs to be done on material/product procurement lead times and certification processes so that issues can get flagged for clarification. If it is a Lump Sum contract, a good amount of time needs to be allocated to check all the tender specifications as the risks fall heavily on the contractor’s side.

2. Poor estimation of the works

A good estimation is one of the most critical factors in the success of any project, and it is essential to get this done as accurately as possible. Often estimators will not have enough time to properly build up rates and will end up using historical rates from previous tenders. Project scoping must be undertaken to get accurate quantity measurements but manual errors in scheduled quantities, which add to un-budgeted costs, are all too common. Also, sometimes major material costs or plant costs get accidentally omitted when building up the rates. Consultation with the site team is important when pricing for major variations, as such teams have much practical knowledge that can be tapped into. Excel is commonly used to do estimation works and it is a good practice to check for manual error build-up in the formulas when finalising the totals.

3. Delay in submitting claims and getting paid

The timely submission of progress claims, which are an integral part of the contract, is critical. Contractors need to submit the claims promptly as per the payment terms along with all the supporting documents, or else it could lead to a delay in their payment process which in turn could affect the project’s cashflow. Sometimes, the contractor ends up having to borrow more to run the contract. One can imagine the financial burden this places on the contractor when managing several concurrent projects. Extra works or variations undertaken are also a major risk. These variations need to be documented and approved systematically as the project progresses and delaying this to be approved towards the end of the project will only lead to confusion and disagreement with the owner. It would be prudent to allocate a separate staff member (contract administrator) to manage claims and variations rather than leave it all to the Project Manager. Cashflow problems could even lead to the closure of the contracting business if the claims are not managed properly.

4. Reworks and scope changes

Rework leads to loss of profits. It is better to go slow and do it right the first time rather than being in a hurry and having to redo it. To minimise rework, the company should have good skilled manpower to execute the project as per the specifications and should understand the project scope and best practices in executing the contracted works. Another vital aspect to watch out for is scope changes. Change is inevitable and needs to be managed properly because, quite often, scope changes lead to disruption in the planned work flow, causing delays that lead to an increase in costs. So, it becomes very important that changes are documented and evaluated properly for both work and time related costs. This needs to be submitted to the owner for approval as early as possible, especially all time-related costs, as evaluation of this is always time-consuming. A good, disciplined contract administration process needs to be set up and followed.

5. Lack of competent professionals        

As in any manpower-dependent industry, having competent people to manage the contract is crucial. The Contract Manager should be able to understand the contract conditions and specifications in order to lead the projects effectively. He should be experienced in the field of work and be able to guide the team effectively with all the project challenges. The contract team should be well structured too, with various roles assigned to the right person, to avoid confusion. Having a skilled labour force is very important, so that good quality work is achieved and rework is minimised.

6. Lack of Project Monitoring & Control

Effective monitoring and control is a key factor in project success. The Contractor should have a robust system in place for monitoring the progress and cost. Good project dashboards which show the status of all the critical parameters and contract KPIs, in real time if possible, should be developed and used rigorously. The team needs to develop a good contract management plan that outlines how quality, safety, and overall project progress will be tracked and monitored. Audits need to be undertaken at regular intervals to ensure that these plans are properly adhered to and non-conformance reports (NCRs) need to be recorded and actioned in a timely manner.

7. Gap in communication

Good Communication is necessary for contract administration. The owner and the contractor should be able to communicate well for the smooth execution of the project, with the contractor updating the owner regarding the progress and changes required and the owner being willing to listen to the contractor’s needs. Building mutual trust is essential, as it helps to prevent friction between the parties. Communication within the contract team is also very important. The team working on site and in the office needs to be on the same page regarding project progress and any gap in the communication process needs to be addressed. Today there are many apps that can be used to update progress directly from the site in real time. Contractors should also have a proper structured communication process for issuing RFIs, notices to Engineer, QA submissions and all other contractual correspondences. This is vital when previous correspondences need to be referred to in case of disputes.