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Who owns the float?

Most capital projects involve considerable risks and the likelihood of the project completion date being impacted by these risks changes over time as float is consumed and created. We have all heard the challenge Is it going to be completed on time and on budget?. An accurately updated programme that contains an appropriate level of detail can give the necessary information to perform what if scenarios at any stage of the project. Project managers (be they owners or contractors) can use the programme to forecast the effects of variations or other delaying events on the contract. Ownership of float must be clearly defined and understood in order to properly forecast and assign responsibility for the impact of variations and other delaying events on the project completion date. Contractors, in most situations, would like to argue that since they are responsible for performance they should therefore own the float in their programmes. Let us see what this implies. There are two different scenarios that need to be examined regarding float. The first scenario is when the project has a sequence of activities that is near critical (ie contains a small amount of float, in addition to the critical sequence). The second scenario is when the forecasted project completion date contains float (ie the contractor has programmed to finish the project early). With regards to the first scenario, in the US, it has been decided by the courts that the party who gets to the float first gains the benefit of the float. For illustrative purposes, lets call the critical sequence of activities path 1 and the near critical sequence of activities path 2. Lets also assume that path 2 contains 10 days of float. If the owner submits a variation to the contractor that delays path 2 by 7 days and path 1 is proceeding as planned , the owner has not impacted the overall project completion date and no extension of time is warranted. As a result, 7 days of float have been consumed on path 2, however, path 2 still contains 3 days of float. As the project proceeds, the contractor encounters difficulties on path 2, at no fault of the owner, and path 2 is delayed 10 days. Assuming path 1 was proceeding as planned, after 3 days of delay were encountered on path 2 it became critical. The remaining 7 days of delay encountered on path 2 resulted in a 7 day delay to the project completion date. When a dispute arises regarding the delay to the project, one may incorrectly assert that the variation submitted by the owner was responsible for some of the delay because ultimately the project was delayed by events on path 2. When the variation was submitted by the owner, path 2 contained float and was not critical. As a result, the contractor is not entitled to an extension of time. Float must be considered at the time when the delay was incurred. It is clear from recent decisions see March 9 2000 Law report by Jeremy Winter of Baker & McKenzie in Construction News that UK construction law has still some way to go to reflect project management and risk management best practice. In the recent

case of Ascon Contracting v Alfred McAlpine Isle of Man (October 1999), the issue of who owned the float became an important point in the decision. The contractor cannot claim for the damages due to delay, other than direct costs, during a period of float. The second scenario relates to float ownership for the project rather than a particular path and is also referred to as the contractors right to finish early. For illustrative purposes, lets assume the contractor and the owner have entered into an agreement to complete a project by 1 January 2001. The contractor submits a programme to complete by the project by 1 December 2000. Lets assume that the project is progressing as planned and the owner submits a variation that impacts the critical sequence of activities. The additional work is estimated to delay the critical path by 15 days and results in a revised forecasted completion date of 15 December 2000. In the US, the contractor is entitled to recover damages for the delay even though the forecasted completion date is before the contract completion date. However, the Contractor must prove that the programme was reasonable and that the contractor was going to finish before the contract completion date. There are several different ways to demonstrate that the Contractor had a reasonable chance of completing the project on programme. One method is by performing a risk analysis on the programme. Before we look at what output a risk analysis produces, let us see how a contractor typically prices capital works. Most of these issues are examined well after the tender pricing has been completed and most likely when the project is part completed. In its simplest form, the method of estimating the cost of engineering works involves determining the scope of work in a way that lends itself to identifying the key quantities of work that drive productivity and the overall method of implementation. A combination of pricing sheets, bill of quantities, method statements, activity programme and resource schedules are used to determine how the work is to be executed and its consequent cost. The key to the time calculations are producitivty levels which are based on previous experience of carrying out similar works. The productivity levels reflect risks associated with the work such as weather conditions, labour availability and skill levels, working hours and employment conditions and possibly repetitive working or learning effects. It is unlikely that a contractor will allow in his tendered productivity levels for particularly bad weather or poor subcontractor performance as this will make his tender uncompetitive. Contractors typically generate a risk register of key risks that may have a significant impact on the project that are not covered by an insurance policy. These impacts are over and above what has already been allowed for in the pricing of the direct work. Consideration is given to mitigating actions that can be taken to reduce the likelihood of the risk occurring or reduce its impact if it does occur. The cost of these mitigating actions are then included in the works budget. The result of a typical quantitative analysis of the risks as they affect both the time, cost and performance or quality objectives of the project produces a probability distribution of when the project is

forecast to be completed. My example relates to a contractor planning to complete his work a month early (on 16 September 2000) against a specified completion date of 18 October 2000. Due to the risks that the contractor faces, however, he only believes that he has a 50% chance of completing the work on time. Whereas, his analysis of the risks leads him to believe that he has a 90% chance of completion before the specified completion date (ie 18 October 2000). Therefore, there is still a 10% chance that he will complete the project later than the specified completion date and suffer liquidated damages. This forecast is, by its nature, a snapshot of the likely outcome before any work has been started and will change over time. This cumulative probability distribution is shown in the figure below.

Forecast project completion date based on risk analysis


100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
00 0 0 0 -0 -0 -0 gug ug ep Au
18-Oct-00

Confidence level

16-Sep-00

0 -0 ct -O 24 -O

15

29

12

26

Completion date It is usual for contractors to produce monthly progress updates of their programmes on capital projects with actual progress and produce a forecast of the resulting completion date. Together with the programme update, the risk register can be updated on a regular basis (generally not as often as the programme updates). The updating of the quantified risk analysis and production of the graphic would help demonstrate how much time the contractor needed to have reasonable confidence that the project was going to be completed by the forecast completion date. If this type of data is not available, under current legal thinking, it is likely that the contractor may lose his entitlement to the remaining period of float if an owner change is instructed.

0 7N ov -0 0 21 -N ov -0 0

-0

-A

-A

-S

1-

-S

ep

10

ct

-0

Even under traditional forms of contract, there are a large number of contractors who carry out regular risk updates, but probably do not pass the output on to their employers for fear of removing the flexibility they think they have over how to complete the project. As the procedure described above is considered to be part of project management best practice one should not need additional resources to carry out the review and update of the risk register and programme. The benefits are substantial (in terms of management time) when work does not go as planned and the claiming party is trying to justify its entitlement to an extension of time or costs for work completed before or after the contractual completion date.

The Author: Anthony Morgan is a Director and expert in Construction Disputes in Forensic Services Department of PricewaterhouseCoopers.

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