Who owns the float?

Most capital projects involve considerable risks and the likelihood of the projectcompletion date being impacted by these risks changes over time as float is consumedand created. We have all heard the challenge “Is it going to be completed on time andon budget?”. An accurately updated programme that contains an appropriate level ofdetail can give the necessary information to perform “what if” scenarios at any stage ofthe project. Project managers (be they owners or contractors) can use the programmeto forecast the effects of variations or other delaying events on the contract. Ownershipof float must be clearly defined and understood in order to properly forecast and assignresponsibility for the impact of variations and other delaying events on the projectcompletion date.

Contractors, in most situations, would like to argue that since they are responsible forperformance they should therefore own the float in their programmes. Let us see whatthis implies.

There are two different scenarios that need to be examined regarding float. The firstscenario is when the project has a sequence of activities that is “near critical” (iecontains a small amount of float, in addition to the critical sequence). The secondscenario is when the forecasted project completion date contains float (ie the contractorhas programmed to finish the project early).

With regards to the first scenario, in the US, it has been decided by the courts that theparty who gets to the float first gains the benefit of the float. For illustrative purposes,let’s call the critical sequence of activities path 1 and the near critical sequence ofactivities path 2. Let’s also assume that path 2 contains 10 days of float. If the ownersubmits a variation to the contractor that delays path 2 by 7 days and path 1 isproceeding as planned , the owner has not impacted the overall project completion dateand no extension of time is warranted. As a result, 7 days of float have been consumedon 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 ofthe 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 7days of delay encountered on path 2 resulted in a 7 day delay to the project completiondate.

When a dispute arises regarding the delay to the project, one may incorrectly assert thatthe variation submitted by the owner was responsible for some of the delay becauseultimately the project was delayed by events on path 2. When the variation wassubmitted by the owner, path 2 contained float and was not critical. As a result, thecontractor is not entitled to an extension of time. Float must be considered at the timewhen the delay was incurred.

It is clear from recent decisions see March 9 2000 Law report by Jeremy Winter ofBaker & McKenzie in Construction News that UK construction law has still some wayto 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 ofwho owned the float became an important point in the decision. The contractor cannotclaim 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 particularpath and is also referred to as “the contractor’s right to finish early”. For illustrativepurposes, let’s assume the contractor and the owner have entered into an agreement tocomplete a project by 1 January 2001. The contractor submits a programme tocomplete by the project by 1 December 2000.

Let’s assume that the project is progressing as planned and the owner submits avariation that impacts the critical sequence of activities. The additional work isestimated to delay the critical path by 15 days and results in a revised forecastedcompletion date of 15 December 2000. In the US, the contractor is entitled to recoverdamages for the delay even though the forecasted completion date is before the contractcompletion date. However, the Contractor must prove that the programme wasreasonable and that the contractor was going to finishbefore the contract completion date.

There are several different ways to demonstrate that the Contractor had a reasonablechance of completing the project on programme. One method is by performing a riskanalysis on the programme. Before we look at what output a risk analysis produces, letus see how a contractor typically prices capital works.

Most of these issues are examined well after the tender pricing has been completed andmost likely when the project is part completed. In its simplest form, the method ofestimating the cost of engineering works involves determining the scope of work in away that lends itself to identifying the key quantities of work that drive productivity andthe overall method of implementation. A combination of pricing sheets, bill ofquantities, method statements, activity programme and resource schedules are used todetermine how the work is to be executed and its consequent cost. The key to the timecalculations are producitivty levels which are based on previous experience of carryingout similar works. The productivity levels reflect risks associated with the work such asweather conditions, labour availability and skill levels, working hours and employmentconditions and possibly repetitive working or learning effects.

It is unlikely that a contractor will allow in his tendered productivity levels forparticularly bad weather or poor subcontractor performance as this will make his tenderuncompetitive. Contractors typically generate a risk register of key risks that may havea significant impact on the project that are not covered by an insurance policy. Theseimpacts are over and above what has already been allowed for in the pricing of thedirect work.

Consideration is given to mitigating actions that can be taken to reduce the likelihood ofthe risk occurring or reduce its impact if it does occur. The cost of these mitigatingactions are then included in the works budget. The result of a typical quantitativeanalysis of the risks as they affect both the time, cost and performance or qualityobjectives 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 hiswork a month early (on 16 September 2000) against a specified completion date of 18October 2000. Due to the risks that the contractor faces, however, he only believes thathe has a 50% chance of completing the work on time. Whereas, his analysis of the risksleads him to believe that he has a 90% chance of completion before the specifiedcompletion date (ie 18 October 2000). Therefore, there is still a 10% chance that hewill complete the project later than the specified completion date and suffer liquidateddamages. This forecast is, by its nature, a snapshot of the likely outcome before anywork has been started and will change over time. This cumulative probabilitydistribution is shown in the figure below.

Forecast project completion date based on risk analysis

0%10%20%30%40%50%60%70%80%90%

100%

1-Aug

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15-A

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0

29-A

ug-0

0

12-S

ep-0

0

26-S

ep-0

0

10-O

ct-00

24-O

ct-00

7-Nov

-00

21-N

ov-0

0

Completion date

Co

nfi

den

ce le

vel

16-Sep-00

18-Oct-00

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

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

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