Too costly to ignore: Managing defect claims in construction projects

Introduction

The importance of anticipating and managing defect claims in construction projects should not be underestimated. This is particularly the case in a region like the Middle East, which boasts mega and giga projects, often with unprecedented levels of complexity. Stakeholders must be prepared to navigate the complexities of defect claims to protect their investments and maintain project timelines. 

In this article we provide a practical guide to understanding and navigating the management of defect claims in construction projects. 

What constitutes a defect?

FIDIC’s standard form of contracts, which are commonly used for construction projects in the Middle East region, do not provide an express definition of the term defects. Instead, the concept of defects generally refers to the contractor’s failure to meet its obligations to deliver the works in accordance with the contractual scope and requirements and ensure they are free from deficiencies or faults. Contractors typically have an obligation to remedy any such deficiencies that may arise.

For example, Clause 11 (Defects Liability) of the FIDIC ’99 Red Book ¹ provides that the contractor is required to rectify, at its risk and cost, defects in plant, materials or workmanship which are not in accordance with the contractual terms, or design (if the contractor is responsible for it), or arising as a result of a failure by the contactor to comply with any of its other obligations.

As a result, to ensure that a defect may be identified as such and hopefully avoid disputes as to whether an issue constitutes a defect, it is key that the contractual scope of works, specifications and obligations set out in the construction contract are as clear as possible.

Additionally, contracting parties may want to include in their construction contracts specific provisions which oblige their counterparties to comply with specific technical standards, local building codes and regulations (which may in any event be applicable by virtue of local legislation), and to the extent applicable, local environmental codes and regulations. Doing so will allow parties to identify defective works by reference to specific standards incorporated by reference into the construction contract. Consideration may also be given to incorporating provisions which oblige compliance with good industry standards and practices. Care should be given however to ensure specificity where appropriate so that obligations are not overly broad and onerous, which may lead to endless debates as to what such practices entail, which may in turn result in increased time and cost.

Defects across the construction lifecycle

Defects can appear at any time throughout the construction lifecycle. Understanding when and why they emerge is essential for the effective management and mitigation of potential claims. Each phase of a project, from design to post-completion, presents unique opportunities to correct defects and/or prevent their later occurrence before or during the construction period, as explained further below. By recognising the potential sources of defects at each stage, stakeholders can take proactive measures to identify and address issues before they escalate.

Design stage: the construction lifecycle begins with the design. Defects at this stage can stem from errors or omissions in drawings, inaccurate calculations or inadequate specifications. If left undetected, errors at this stage often result in construction related issues at a later stage, which can be more problematic to address.

Procurement stage: the procurement stage, which follows the design, involves acquiring materials, equipment and selecting (sub)contractors. If poor-quality materials or equipment are sourced which do not satisfy the contract requirements, or if (sub)contractors are poorly selected, these deficiencies may result in instances of defective works.

Construction stage: during the construction stage, defects may arise as a result of poor workmanship, lack of quality control, inadequate supervision, and/or poor or insufficient inspection practices. In this stage, we typically see patent defects, such as misaligned structures, uneven surfaces, etc.; these can delay progress and incur additional costs if not promptly addressed.

Commissioning and handover stage: as the project nears completion and systems are tested, operational defects may surface. At this stage, defects often relate to the performance of systems and incomplete finishes.

Post-Completion stage: latent defects may emerge during the post-completion period. These defects are typically hidden from plain sight, and may only become noticeable over time, such as foundation cracks, water ingress, or deterioration in material performance.

Managing defect claims

Aside from ensuring that the contractor’s obligations (including the standards of workmanship and materials and the design requirements) are clearly set out in the construction contract, there are a number of ways in which stakeholders can minimise the risk and costs of defects and ensure that defects related issues are resolved efficiently:

• Clearly defined Defects Liability Period (DLP): Following practical completion of the works, contracts typically specify a period of time during which the contractor remains responsible for addressing and rectifying any defects that are identified and formally notified by the employer. This period is commonly referred to as the Defects Liability Period, or, alternatively, the rectification period.  For example, Clause 11 of the standard form FIDIC Red Book ‘99 outlines the framework for this obligation, stipulating that the contractor is required to rectify defects during the DNP, which is typically a 12-month period from the date of the taking-over certificate. During this time, the employer has the right to notify the contractor of any defects that arise in the works and require the contractor to promptly remedy those defects at the contractor’s cost. In addition, the FIDIC Red Book allows for the possibility of extending the DLP in certain circumstances. For instance, if after taking over by the employer, the works or a section of the works or a major item of plant cannot be used for the purposes for which they were intended due to a defect or damage, the DLP may be extended accordingly. This extension can be granted for up to 24 months, ensuring that the contractor remains accountable for remedying any defects or damages to deliver fully functional works. Clearly defining the DLP in the contract will minimise disputes as to which party is responsible for rectifying defects post-completion.
• Effective inspection and tracking system: A system of regular inspections of the works is important to ensure that defects are spotted at the earliest possible opportunity. Once identified, they can be rectified promptly, with the least disruption and at the lowest possible cost (as compared to after completion, or when other works in the same area have been completed which may result in re-work). Once defects have been observed and notified, it is key to ensure that the issue is monitored and progressed.  Maintaining a defects register where all defect related claims are recorded and tracked will assist with this. This register should contain details of the defect itself, the date on which it was observed and notified, the location, severity, rectification action and its current status. Maintaining such a register will also assist with prioritising defect rectification, which should have positive time and cost implications for the project.
• Independent inspection of defects: Where a dispute arises in relation to an alleged defect or its severity, having an independent expert assess the defect and where liability lies for that defect may be invaluable in ensuring that the issue does not snowball into a larger dispute. Key to this early intervention will be clear communication between all parties and holding regular progress meetings at which transparent updates are shared.
• Defect notifications: Where defects arise, it is essential that formal notifications of the defect(s) are provided in accordance with the terms set out in the construction contract. Notices should be as detailed as possible, identifying any rectification of the defect required and setting out the timescale for doing so.
• Ensuring thorough and complete documentation: Records are key to ensuring defect issues can be dealt with efficiently. Maintaining proper records of all inspections, correspondence, progress reports, notices and the resolution of defect related matters will undoubtedly aid in managing defect claims.
• Retention: From an employer’s perspective, retaining a percentage (typically 5-10%) of the payments due to the contractor can be helpful in ensuring that any defects for which the contractor is responsible are rectified prior to final settlement. Additionally, construction contracts may be drafted to provide that where there is a failure by a contractor to rectify, the employer may step-in to carry out such rectification and seek recompense from the contractor using the retained sums.

Preventing defect related claims (FIDIC)

It would be remiss of us to not mention the fact that the FIDIC Red Book also includes several provisions designed to empower the employer to identify and address defects as they arise throughout the project stages. Whilst not exhaustive, the key provisions include:

• Appointment of the engineer and allocation of duties: The Red Book requires the employer to appoint an engineer with specific duties and authority to properly oversee the project. This ensures the engineer has the power to monitor and supervise the works closely, ensuring that the contractor adheres to the contract terms and follows its instructions. The engineer has specific powers to reject “Plant, Materials or workmanship…found to be defective or otherwise not in accordance with the Contract.” Ensuring that a competent engineer is appointed to oversee the project is key to managing the potential impacts of defects on a project and delivery timescales.
• Quality assurance system: To ensure the works meet the required standards, the contractor is required to implement a comprehensive quality assurance system, designed to monitor and control the quality of materials, processes, and workmanship throughout the construction phase.
• Testing and Inspections: The Red Book places emphasis on the need for proper testing, commissioning, and inspections throughout the project lifecycle. These activities are critical for identifying any operational defects before the project is completed and handed over.

Decennial liability

Decennial liability is a strict liability imposed on contractors and/or design consultants typically for the partial or total collapse of a building, and for any defects which threaten the stability and safety of the building. As the name suggests, the period of liability is 10 years (or the intended lifespan of the building if shorter than 10 years), and this commences at project handover.

In the UAE, Articles 880-883 of the UAE Civil Code (Law no. 5 of 1985) deal with decennial liability. Pursuant to these mandatory provisions (i.e. they cannot be contracted out of) the contractor is strictly liable for all defects and has joint and several liability with the design consultant for design defects. The limitation period for bringing such a claim is 3 years from collapse or the discovery of the defect.

In Saudi Arabia, decennial liability arises out of the Saudi Building Code. In particular, Article 29 deals with decennial liability, and provides that the 10-year joint liability period commences from the date of issuance of the Occupancy Certificate. Like the UAE Civil Code provision, the liability is in effect regardless of whether the defect or collapse in question was caused by a defect in the land or whether the employer approved the defective building. Also like the UAE, this liability cannot be contracted out of.

Other jurisdictions in the region provide for similar provisions, including for example Qatar, Kuwait, Jordan and Iraq.

Conclusion

There is, unfortunately, no escaping the fact that most projects will experience defects of one form or another. When those defects are identified, and how they are rectified will impact greatly upon the course of the works and the relationship between the various stakeholders. Early detection and proactive management are essential in keeping projects on track.