An optimal contract strategy in managing extension of time provisions in building contracts

Some employers tend to transfer as much time-related risk as possible to contractors by removing contractors' entitlements to Extension of Time (E. O. T. ). However, not all these risk aversion provisions are legally enforceable or cost effective. This study aims at developing guiding principles for employers) to include legally sound E. O. T. provisions in contracts and providing a model for assessing the cost for transferring delaying risks for employers' consideration. The first part of this study addresses the legal concern. Support is drawn from the literature and principles of law. In addition, eight professionals have been interviewed to understand their pragmatic considerations in practice. This part reveals that for delays caused by employers, omission of E. O. T. provisions may render time 'at large' and inappropriate deletion may be classified as unfair contract terms which may be unenforceable in courts. Employers should be aware of the legal rules and strike a balance between fairness to contractors and attainment of employers' project goals. Risk allocation through contractual provisions involves financial considerations. In the second part addressing the financial concern, deletion of E. O. T. due to inclement weather is selected as the illustrative example. As contractors' pricing for risks in tenders determines how much the employers have to pay, a model is developed to find out contractors' behavioral pattern in pricing weather risk. This is done by investigating the relationships among the weather history, contractors' risk perception, attitudes and behaviors. The term 'situational variables' is further introduced to fill in the gaps between risk attitude and behavior. Questionnaire data was collected from building contractors in Hong Kong. The survey reveals that contractors of different sizes would have different patterns of risk behaviors. Their behaviors would also be affected by different situational variables, however, they generally consider employers' reputation to honour payment on time, reasonableness of the amount of liquidated damages, etc. as very important factors. Regression formulae have been formulated to enable employers to assess the number of delaying days priced in tenders. The high predictability of the model has been confirmed by interviewing three contractors and by substituting the data of three real projects into the model.