The Role of Risk Allocation in Minimizing Disputes in Construction Contracts تلاواقملا دوقع يف تاعزانملا ليلقت يف رطاخملا عيوت رود By: Ganiyu Olawale Odunusi ID: 120030 Dissertation submitted in partial fulfillment of the requirements for the degree of MSc. Project Management Faculty of Business Dissertation Supervisor Dr Arun Bajracharya (Associate Professor) January 2014 The Role of Risk Allocation in Minimizing Disputes in Construction Contracts 2014 DISSERTATION RELEASE FORM Student Name Student ID Programme Date GANIYU OLAWALE ODUNUSI 120030 Master in Project January, 2014 Management Title The Role of Risk Allocation in Minimizing Disputes in Construction Contracts I warrant that the content of this dissertation is the direct result of my own work and that any use made in it of published or unpublished copyright material falls within the limits permitted by international copyright conventions. I understand that one copy of my dissertation will be deposited in the University Library for permanent retention. I hereby agree that the material mentioned above for which I am author and copyright holder may be copied and distributed by The British University in Dubai for the purposes of research, private study or education and that The British University in Dubai may recover from purchasers the costs incurred in such copying and distribution, where appropriate. I understand that The British University in Dubai may make that copy available in digital format if appropriate. I understand that I may apply to the University to retain the right to withhold or to restrict access to my dissertation for a period which shall not normally exceed four calendar years from the congregation at which the degree is conferred, the length of the period to be specified in the application, together with the precise reasons for making that application. Signature ID: 120030 Page 2 The Role of Risk Allocation in Minimizing Disputes in Construction Contracts 2014 Abstract An increase in the litigation cases resulting from the outbreak of mismanagement in construction contracts has prompted the need to examine the cause of disputes in construction projects. This research study delved into this issue by examining the role of risk allocation to minimize disputes in construction contracts via litigated cases that are analyzed using the concept of transaction cost economics theory. By so doing, the researcher sourced for three related cases from different legal portal archives and examined the causes that led to the case being a litigation case. The three litigation cases were examined using qualitative content analysis methodology. The analysis led to the three tier categories that were identified as the causes of disputes in the cases. The clients related causes involved the approach to project management, communication problems, errors in design, and contracting details, while contractors related causes included contracting details, approach to project management, development of bid, and communication problems. Subsequently, the risks across the cases were identified as concurrent delay and differing site conditions. The findings of the litigation cases were used to consolidate the proposition of the study. In this study, the contractors were seen to be held responsible for most of the risks within the project contract, which was as a result of misinterpretation/misrepresentation of contract agreement, acting on an implied contract and promises. It was concluded that the construction contracts can serve as a medium through which the contractual parties can co-exist and operate within a cooperative environment. Thereafter, recommendations were proffered on the need to properly allocate project risk accordingly to the party that can best handle the risk with the lowest transaction cost involvement. Keywords: Risk Allocation, Transaction Cost Economics, Construction Contracts ID: 120030 Page 3 The Role of Risk Allocation in Minimizing Disputes in Construction Contracts 2014 :ثحبلا صخلم هذه يف تاعازنلا بابسأ ةساردل ةجاحلا تلاواقملا دوقع يف ةرادلإا ءوس نع ةجتانلا يضاقتلا تلااح يف ةدايزلا تعفد .عيراشملا تلااح ربع تلاواقملا دوقع يف تاعازنلا نم دحلل رطاخملا عيزوت ةسارد للاخ نم كلذو ةلأسملا هذه شقاني ثحبلا اذه .فيلاكتلا يف داصتقلاا ةيرظن موهفم مادختساب اهليلحت مت يتلا يضاقتلا تدأ يتلا بابسلأا ةسارد تمت ثيح ثحبلا عوضومب ةقلاع اهل ةينوناق تلااح ثلاث ددع ثحابلا مدختسا ،راطلإا اذه يفو .تلااحلا هذه يف يضاقتلا تلااح ىلإ مت لماوع ةثلاث كانه نأب حضتا ليلحتلا جئاتن للاخ نمو تلااحلا هذه رابتخلا يعونلا ىوتحملا ليلحت ةقيرط ثحابلا مادختسا .تلااحلا هذه يف تاعازنلا بابسأ يه اهرابتعا ،ميمصتلا يف ءاطخأ ،تلااصتلاا لكاشم ،عورشملا ةرادإ جهنمب قلعتت ءلامعلا وأ كلاملاب ةقلاع اهل يتلا بابسلأا نأ نيبتي لحارم روطت ،عورشملا ةرادإ جهنم ،دقعلا ليصافت يف لثمتت نيلواقملاب ةقلاع اهل يتلا بابسلأا نيح يف ،دوقعلا ليصافت .عقوملا فورظ فلاتخاو نمازتملا ريخأتلا للاخ نم رطاخملا ديدحت مت كلذ دعب ،تلااصتلاا لكاشم ،ءاطعلا مظعم نع نيلوؤسملا مه مهنأب ةساردلا هذه يف نيلواقملل رظني ،ةساردلا حرتقم زيزعتل يضاقتلا تلااح جئاتن مادختسا مت .دوعوو ةينمض دوقع ىلع ءً انب كلذو دقعلا قافتلاا فيرحت / ريسفت ءوسل ةجيتن كلذو عيراشملا دوقع يف رطاخملا شياعتلا اهللاخ نم نكمي ةدقاعتملا فارطلأا ةفاكل ةليسو ةباثمب نوكت نأ نكمي تلاواقملا دوقع نأ ثحبلا جئاتن تصلخ يف رطاخملل حيحص عيزوت وأ صيصخت ىلإ ةجاحلا نأشب ةيصوتلا تمت ثحبلا ةياهن يفو .ةينواعت ةئيب نمض لمعلاو .فيلاكتلا لقأبو هعم ديجلا لماعتلا عيطتسي يذلا فرطلا حلاصل ًاقفو عورشملا ID: 120030 Page 4 The Role of Risk Allocation in Minimizing Disputes in Construction Contracts 2014 Acknowledgement I would like to appreciate Professor Paul Gardiner for accepting me into the project management master programme and for his diversity in the method of teaching. My sincere appreciation goes to Professor Muhammad Dulaimi for instilling in me the depth of knowledge I gained in the course of the master programme. I really appreciate my supervisor and personal tutor, Dr Arun Bajracharya for his guidance, tutoring and the research understanding I gained from him. Also, I appreciate the entire staff of The British University in Dubai for making my stay a fruitful one. To this end, I wish to mention Professor Bassam Abu-Hijleh for his support and kindness during my study years. ID: 120030 Page 5 The Role of Risk Allocation in Minimizing Disputes in Construction Contracts 2014 Dedication I dedicate this research work to my beloved ones who stood by me in times of difficulties. First of all, I would appreciate my mother who continues to pray to see me become a better person in life and to my wife for her patient and support. Secondly, to my lovely kids, Sofiyyah and Salma for bearing during the time they needed me most. Lastly, to my elder ones, friends and to my late dad who departed at the tail of my master programme. I pray Allah grants him eternal bliss. ID: 120030 Page 6 The Role of Risk Allocation in Minimizing Disputes in Construction Contracts 2014 Abbreviations SCC – Supreme Court of Canada Ex. Ct. – Exchequer Court of Canada Rev’g – Reversing the decision SUP – Site Utilization Plan EFS – Engineering Feasibility Study DOS – Department of State OBO – Office of Building Operations SED – Standard Embassy Operations COR – Contractor’s Officer Representative ASBCA – Armed Services Board of Contract Appeals IFB – Invitation For Bids YBBA – Yellow Banks Borrow Area MSL – Mean Sea Level ID: 120030 Page 7 The Role of Risk Allocation in Minimizing Disputes in Construction Contracts 2014 Table of Contents Abstract ......................................................................................................................................................... 3 Acknowledgement ........................................................................................................................................ 5 Dedication ..................................................................................................................................................... 6 Abbreviations ................................................................................................................................................ 7 List of Figures ............................................................................................................................................. 13 List of Tables .............................................................................................................................................. 14 Chapter 1.0 Introduction ............................................................................................................................. 17 1.1 Background to the study ................................................................................................................... 17 1.2 Research Questions ........................................................................................................................... 21 1.3 Research Aim and Objectives ........................................................................................................... 22 1.4 Scope of the Research ....................................................................................................................... 23 Chapter 2.0 Literature Review .................................................................................................................... 23 2.1 Introduction ....................................................................................................................................... 23 2.2 Construction Contracts ...................................................................................................................... 26 ID: 120030 Page 8 The Role of Risk Allocation in Minimizing Disputes in Construction Contracts 2014 2.2.1 Overview .................................................................................................................................... 26 2.2.2The Role of Construction Contracts ............................................................................................ 27 2.2.3 Types of Construction Contracts ................................................................................................ 28 2.2.4 Strategic Development for Contracts ......................................................................................... 33 2.3 Risk Attitude ..................................................................................................................................... 36 2.4 Allocation of Risk ............................................................................................................................. 37 2.4.1 Risk Allocation Model ............................................................................................................... 39 2.4.2 Legal Research Perspective ........................................................................................................... 48 2.5 Pre-legal disposition to dispute ......................................................................................................... 51 2.6 Concept of Transaction Cost Economic (TCE) ................................................................................ 52 2.6.1 Transaction Cost Economics Perspective .................................................................................. 52 2.6.2 Importance of Transaction Cost Economics .................................................................................. 53 Chapter 3.0 Research Methodology ............................................................................................................ 55 3.1 Research Design ................................................................................................................................ 55 ID: 120030 Page 9 The Role of Risk Allocation in Minimizing Disputes in Construction Contracts 2014 3.2 Research Approach ........................................................................................................................... 56 3.2.1 Qualitative Research .................................................................................................................. 57 3.2.2 Approach of Case Study ............................................................................................................ 57 3.3 Data Collection and Research Method .............................................................................................. 59 3.3.1 Data Source ................................................................................................................................ 61 3.3.2 Analytical Method...................................................................................................................... 62 3.4 Case analysis ..................................................................................................................................... 62 3.4.1 Introduction ................................................................................................................................ 62 3.4.2 The Unit of Analysis .................................................................................................................. 63 3.4.3 Technique Adopted for the Case Study ..................................................................................... 63 3.4.4 Identifying Causes of Litigation ................................................................................................ 67 3.5 Case Study and Qualitative Content Analysis .................................................................................. 71 3.5.1 Case Study ................................................................................................................................. 71 3.5.2 Qualitative Content Analysis ..................................................................................................... 71 ID: 120030 Page 10