Construction Contract Termination of Public Building Projects in Western Oromia. Study on Causes and Effects

Thèse de Master , 2023 , 102 Pages , Note: 3.58

Ingénierie - Ingénieur Civil

This research assesses and identifies the causes and effects of construction contract termination in the western Oromia region. Understanding this mechanism might prevent their failure in future contracts. However, due to the complex nature of the construction projects; the risk involved in them is also very high. According to the owner's requirements and within a limited budget it was a very difficult task to achieve a virtuous outcome by the contractor of the project. Contracts are made to be performed by the responsible parties and parties enter into a contract have to perform it as expected by the terms of that contract. A failure to perform following those terms is the breach of contract which will entitle the other party to have an appropriate remedy based on the contract.

The study has been conducted in Western Oromia Region (WOR) public building projects of various projects to access the nature of contract terminations. This was because of the observed problems that might hinder the construction of the public projects and these processes delimit the problem of the administration and the users of the projects.

In developed countries and countries with economies in transition, other than the least developed countries, their local construction industries have the lions share in market opportunities. However, for least developed countries, the construction industries are dominated by Foreign Service providers to the tune of at least 65% in terms of money value of market share. For example, in the Southern Africa Development Community region, and with the exception of South Africa, local contractors and consultants have approximately 30% market share in the region; Malawi (23%), Swaziland (35%), Tanzania (20%), South Africa 85%.

TABLE OF CONTENTS

ACKNOWLEDGMENT

ABSTRACT

LIST OF TABLES

LIST OF FIGURES

LIST OF TABLES IN THE APPENDIX

ABBREVIATIONS/ACRONOMIES

1. INTRODUCTION
1.1 Background of the study
1.2 Statement of the problem
1.3 Research Questions
1.4 Objective of the study
1.4.1 General Objective
1.4.2 Specific objective
1.5 Significance of the study
1.6 Scope of the study
1.7 limitation of the study

2. LITERATURE REVIEW
2.1 Concept of contracts
2.1.1 Definitions
2.2 Construction project overview
2.3 Essential elements of a valid contract
2.4 Type of contracts
2.5 Termination of Construction Contracts
2.5.1 Project Failure Overview
2.5.2 Project success overview
2.5.3 Contract termination
2.6 Types of Termination
2.7 Ways of Termination
2.8 When to Terminate a Project
2.8.1 Typical Contractual Grounds to Terminate
2.8.2 Notice of Termination
2.8.3 Steps to Proper Termination
2.9 Causes Of Construction Contract Termination (Failure)
2.10 Effects or Impacts of Contract Termination
2.10.1 Effects of Project Parties (Stakeholders) On Project Termination
2.10.2 Available Damages from Termination
2.11 Prevention of Construction Project Termination or Failure
2.12 The Effectiveness of Termination on Project
2.13 Why Project management Ignore Termination
2.14 Previous Studies On Construction Contracts Termination
2.14.1 Summary of previous studies on termination of a project

3. METHODOLOGY
3.1 Description of Study area
3.2 Research Design
3.3 method of data collection
3.3.1 Questionnaires
3.3.2 Interview
3.3.3 Case study
3.4 types of data used for the study
3.5 Targeted Population of the study
3.6 Sampling techniques
3.7. Method of data analysis
3.8 Response Rate
3.10 Validity of the research
3.10.1 Content validity of the questionnaire
3.10.2 Statistical validity of the questionnaire
3.11 Reliability of the research
3.11.1 Cronbach's coefficient alpha

4. RESULTS AND DISCUSSION
4.1 General information
4.1.1. Type of the organization
4.1.2. Type of work executed by the respondents
4.1.3. Company classification
4.1.4. Respondents' occupation
4.1.5. Experience years of the respondents
4.1.6. Experience years of the company
4.1.7 Is your Company exposed to unnatural termination of the project
4.1.8 Number of projects exposed to unnatural termination
4.1.8 Who Is Responsible for the Unnatural Project Termination in Company
4.1.9 Impacted body by unnatural project termination
4.1.10 How to solve the resulting dispute from unnatural project termination
4.1.11 Records of information on the previous terminated project
4.2 Project Termination Causes
4.2.1 RII and ranking of main groups
4.2.2 RII and ranking of sub- groups of causes
4.3 Effects Due To Project Termination
4.4 Remedial Measures of Termination

5. SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of the Findings
5.2 Conclusion
5.3 Recommendations

6. REFERENCES

7. APPENDIXIES
Appendix A: Findings from interview
Appendix B: findings from case studies
Appendix C: RII and ranking overall project termination causes
Appendix C1 RII and ranking of managerial group of termination causes
Appendix C2 RII and ranking of financial group of termination causes
Appendix C3 RII and ranking of Political group of termination causes
Appendix C4 RII and ranking of Environmental group of termination causes
Appendix C5 RII and ranking of Project characteristics group of termination causes
Appendix C6 RII and ranking of effects due to termination
Appendix C7 RII and ranking of remedial measures for project termination
Appendix D: Questionnaire outline
Appendix D1. Interview outline
Appendix D3 Case study outline

ACKNOWLEDGMENT

First, I thank the Almighty God for making this work possible. All the praise and gratitude to the almighty GOD, the most gracious, the most merciful, who gave me the knowledge, courage, and patience to accomplish this research, Next to this my pleasure to thank my advisor; Alemu Mosisa (Ass. Professor) and my co-advisor Degefe Mitiku (MSc) who made this research paper possible with their advice, encouragement, supervision, and support from the commencement of the research to its conclusion, their patience and kindness will never be forgotten. With all my appreciation, respect, and love that no words can ever express, I would like to thank all my family members who provided me always with love and care, prays for me and gives me their blessings.

Finally, I also enlarge my heartfelt gratitude to all individuals those directly or indirectly helped me to realize this thesis, especially all my respondents for their kindness and special treatment in responding my questionnaires and interviews; Besides, I also like to say thank you for Wollega University staff members of Construction Technology and Management Department.

ABSTRACT

Construction contracts are one of the high risky contracts because of their unique features such as long periods, complicated processes, unexpected environments, financial intensity, and vigorous organization structures and considered naturally dangerous. So, if it is not been dealt with properly, it could lead to failure. The major objective of this study was to assess the main causes and effects of construction contract termination of public building projects in the western Oromia. The study depends on analytical, descriptive and field study methodologies. The collected data was manipulated by using statistical tools such as frequencies, percentage values, and relative importance index (RII) using SPSS and micro soft excel, means and correlation coefficient tests. Managerial causes, project characteristics causes and financial causes were ranked in the first with an equal RII (0.66, 0.66 and 0.66) and implied that those were the main causes of termination. While the main effects of termination identified were effects on (project progress and loss due to termination, economic growth of the country, users of the project, employees, organization and professionals were the main effects of termination identified. The findings showed remedial measures; forecasting fluctuation of material price in the estimation, Having the proper time of contractor financial payments, Improving proper means of communication between involved parties, and Using skilled professionals to estimate the total time and budget of the project. Finally, the study recommended the contract price should connect with index because of changeable political conditions and award contracts to the most suitable estimated cost and not necessarily to the lowest bidders and contracting companies should prepare effective cost estimate and should not look to increase the number of projects that cannot be controlled by its staff.

Keywords: Causes; Effects; Mitigating; Project; Termination; Western Oromia

LIST OF TABLES

Table 2.1 summary of previous studies on contract termination

Table 3.2 Cronbach's alpha and internal consistency

Table 3.3 Cronbach's coefficient alpha of overall groups of project termination causes

Table 3.4 Cronbach's coefficient alpha of main causes of termination

Table 4.1 RII and ranking of main groups

Table 4.3 RII and ranking of financial sub- causes

Table 4.4 RII and ranking of political subgroup causes

Table 4.7 RII and ranking effects of contract termination

Table 4.8 RII and top three ranking remedial measures for termination

LIST OF FIGURES

Figure 3.1 location map of the study area

Figure 3.2 flow chart of research processes

Figure 4.1 type of organization

Figure 4.2 Type of work executed by the respondents

Figure 4.3 Company classification

Figure 4.4 Respondents' occupation

Figure 4.5 Experience years of the respondents

Figure 4.6 Experience years of the company

Figure 4.8 Number of projects exposed to unnatural termination

Figure 4.9 responsible bodies for the unnatural project termination in company

Figure 4.10 impacted body by unnatural project termination

Figure 4.11 solving the resulting dispute from unnatural project termination

Figure 4.13 Records of information on the previous terminated project

LIST OF TABLES IN THE APPENDIX

Table 1 RII and ranking of overall groups of termination causes

Table 2 RII and ranking of managerial group of termination causes

Table 3 RII and ranking of financial group of termination causes

Table 4 RII and ranking of Political group of termination causes

Table 5 RII and ranking of Environmental group of termination causes

Table 6 RII and ranking of Project characteristics group of termination causes

Table 7 RII and ranking of effects due to termination

Table 8 RII and ranking of remedial measures for project termination

ABBREVIATIONS/ACRONOMIES

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1. INTRODUCTION

1.1 Background of the study

In developed countries and countries with economies in transition, other than the least developed countries, their local construction industries have the lions share in market opportunities. However, for least developed countries, the construction industries are dominated by Foreign Service providers to the tune of at least 65% in terms of money value of market share. For example, in the Southern Africa Development Community region, and with the exception of South Africa, local contractors and consultants have approximately 30% market share in the region; Malawi (23%), Swaziland (35%), Tanzania (20%), South Africa 85% (Annual report on the Ethiopian Economy, 2007).

As a view of different researchers in various researches, the construction industry is growing at a fast step all over the world. In line with the growth of the construction industry, subsequent growth of construction companies are internationally observed. In our country Ethiopia, the growth and increasing demand for the construction industry has followed a similar pattern as observed in the trend of the world. Currently, construction is one of the sectors leading the way towards modernization and industrialization in Ethiopia. Different researches indicate that, the construction sector in Ethiopia, generally in the world, contributes to about 50% of the total capital. It is also said that the construction industry is being the second largest employer in the country and it’s also an engine for technology, innovation and overall development (ERA in 2000, a study on Domestic Construction Industry).

According to the Ethiopian Economic Association (Annual report on the Ethiopian Economy, 2007), the construction industry has important contributions to the Ethiopian economy, as demonstrated by its share in the GDP. The report has described that, there has been increased investment on the development and expansion of various infrastructure projects like roads, airports and residential and non-residential housing units in Ethiopia. The construction industry in Ethiopia is the major sector where public and private sectors are investing huge amount of fund. The percentage share of the construction sector to GDP at constant basic price has increased from 4.3% in 1993 E.C to 5.8% by 2002 E.C. Expansion of economic infrastructure such as; railways, roads, telecom, power, irrigation and buildings being critical towards achieving the country’s Growth and Transformation Plan. Significant amount of the country’s budget is allocated to economic development through financing infrastructures for development of educational and power projects, construction of railways and road projects which increased road network density, construction of health projects to increase access for water and sanitation infrastructure. Share of the Private sector in the value add of construction is also significant. The private sector is investing its capital for acquisition of various fixed assets such as acquiring new machinery and equipment and construction of new buildings and building maintenance activities. The construction industry of Ethiopia has contributed much in reduction of poverty, in increasing employment expansion through small and medium enterprise development and job creation through the construction of low-cost houses in Addis Ababa which was subsequently replicated to other regions. Ethiopia has also issued successive public procurement reforms to adhere good governance principles, reform efforts were made in order to promote competitive tendering for the selection of suppliers and for effective deliver of projects with predictable cost and time (Ethiopian construction industry policy, 2012).

This research assesses and identifies the causes and effects of construction contract termination in the western Oromia region. Understanding this mechanism might prevent their failure in future contracts. However, due to the complex nature of the construction projects; the risk involved in them is also very high. According to the owner's requirements and within a limited budget it was a very difficult task to achieve a virtuous outcome by the contractor of the project. Contracts are made to be performed by the responsible parties and parties enter into a contract have to perform it as expected by the terms of that contract. A failure to perform following those terms is the breach of contract which will entitle the other party to have an appropriate remedy based on the contract (Mckendrick K, 2007)

There were two main types of termination typically mentioned in construction contracts. These were a termination for convenience and termination for causes that was sometimes referred to as termination for default (Brumback, 2006).

1.2 Statement of the problem

As it is studied in various researches, the construction industry is growing at a fast step all over the world. In line with the growth of the construction industry, subsequent growth of construction companies is internationally observed. In Ethiopia; the growth and increasing demand for the construction industry has followed a similar pattern as observed in the trend of the world. Nowadays, construction is one of the segments leading the way towards modernization and industrialization in Ethiopia. However, because of the complex nature of the projects, the risk involved in them is also very high and sometimes we observe unnatural or premature project termination. Contractors are made to be performed by the responsible parties that were entered into a contract. When parties enter into a contract, they have to perform as expected by the contract terms because; termination of construction projects often results in many problems such as claims and dispute issues to the stakeholders of the projects.

Different researchers have done their studies on the title related to this study such as factors of premature termination of projects, the key problems faced by project management professionals in terminating projects in Indian Industry, the causes of contractor's failure in Gaza, and etc.

However, none of those researchers have done their studies on the causes and effects of construction contract termination of public building projects and this was the gap found by the researcher of this study and this study was to identify the main causes and effects of construction contract terminations of PBP in the WOR.

In Ethiopia, Terminations of the project is one of the serious problems that I observed. In last five years I have seen about 3 to 5 terminated projects in Burayou town municipality public projects such like; Serity elementary school construction around Gefersa Guju kebele, youth center construction around abdi nono kebele and in the western Oromia; Guliso wereda G+ 2 office building, Ebuntu preparatory school construction, etc. were terminated projects those observed yet. Thus, here is the observed problem to be solved by concerning such issues within a current situation.

1.3 Research Questions

The study has raised the following questions:

1) What are the main causes of the construction contract terminations in the western Oromia region on public building projects?
2) What are the effects of the construction contract terminations in the western Oromia region on public building projects?
3) What are the possible remedial measures that should be taken to mitigate construction contract termination?

1.4 Objective of the study

1.4.1 General Objective

The general objective of this study is to assess the main causes and effects of construction contract termination on public building projects in the western Oromia region.

1.4.2 Specific objective

1) To distinguish the main causes of the construction contract terminations on public building projects in western Oromia region.
2) To identify the effects of construction contract terminations on public building projects in the western Oromia region.
3) To find possible remedial measures used to mitigate construction contract termination on public building projects in the western Oromia region.

1.5 Significance of the study

Since constructions are among the most important public assets in many countries, construction project improvements bring immediate and sometimes dramatic benefits to construction users through improved access. So, dealing with such important public benefits and important issue is decent for our society. It set several methods and practice for further study in the country.

The study has been come up with many improvements to effective using and protection of construction project management in a well-practiced manner and it may solve many potential problems of the country regarding the construction contract terminations. It could use as reference or standing point for the further investigation and study in this sector.

1.6 Scope of the study

The study has been conducted in Western Oromia Region (WOR) public building projects of various projects to access the nature of contract terminations. This was because of the observed problems that might hinder the construction of the public projects and these processes delimit the problem of the administration and the users of the projects.

1.7 limitation of the study

The survey was limited to public building projects only but not includes other projects such as road, bridge and dam, water work projects and other infrastructures.

2. LITERATURE REVIEW

2.1 Concept of contracts

2.1.1 Definitions

A contract is a legally enforceable agreement. A contract is a legally binding agreement between two or more persons (Kawakye.A, 2008). Legally binding means that the agreement will be enforced by the courts.

A construction contract is a contract specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology, and function or their ultimate purpose or use (Haider, 2009).

Iyer K.et al, (2008) Define the termination of contracts as ending the contract work with no intention of resuming it in the foreseeable future.

The termination of a contract results in its end and neither party is required to continue performance under it. However, once the contract is terminated, the parties may still be entitled to damages based on the termination. The nature and amount of these damages depends, again, on the way termination is treated in the construction contract (Wittbrodt R &, Eaton L., 2009)

2.2 Construction project overview

Gilbreath, (1986) as cited in (Dilts et al., 2006) defined a project as a series of tasks or activities needed to achieve a specific objective within certain technical specifications, within defined start and end dates, and subject to funding limits and resource availability.

Projects have become a central activity in most organizations and companies are investing in increasing resources in projects such as new product development, process improvement, or building new services. Many studies have revealed, however, that most projects do not meet time and budget goals, or fail to satisfy the customer and/ or company expectations. Yet, project success means more than just meeting time and budget goals. It involves additional success dimensions such as business results or preparing for the future (Sauser, B., Reilly, R., Shenhar A., 2009)

2.3 Essential elements of a valid contract

There are several essential elements required for a valid contract to be formed

a. Agreement

Agreement between the parties regarding the purpose, rights, obligations, and remedial measures that the contract will create is essential. A written agreement is not a requirement, but in practice, it is desirable to put the agreement in writing since it will provide substantial evidence for the terms of the contract.

b. Offer and acceptance

An offer is a proposal by one party of its willingness to be legally bounded by the proposal as soon as it is accepted by another party and an acceptance is a full acceptance by the party to whom an offer has been made. (Kawakye.A, 2008).

Informing a contract, there must be an offer consisting of a definite promise from one party to the other of his willingness to be legally bounded on specific terms and an unconditional acceptance of those terms by the second party. An offer may be withdrawn before it has been accepted and will be valid for a "reasonable" time if no time limit is imposed (Seid K., 2008)

c. Considerations

Consideration is what each party contributes to the contract, or in other words, it is what the parties put into and get out of the contract. Consideration must have some economic value, but the law is not concerned with the value being inadequate (Seid K., 2008).

d. The intention to be legally bounded

Although a legal contract necessitates agreement between the parties as to the rights and obligations it will create, a mere agreement by itself will not be enforceable at law unless the parties thereto fully intend to be legally bounded by its terms and conditions. Hence, the parties are required to form a contract enforceable at law if it is intended that the contract is to be legally binding (Seid, 2008)

e. Genuine consent of parties

It is essential that the agreements must be free from misrepresentation, mistake, duress, and undue influence and made with proper and genuine consent by the parties to it (Kawakye.A, 2008).

f. Legal capacity

Certain parties are either not allowed to enter into a contract or are restricted in some way which includes minors, drunks, lunatics, and convicts under sentence. Corporate bodies, such as limited companies and public authorities, can only make contracts within powers contained in their memorandums of associations and persons signing contracts on behalf of their organization should not do so unless they are specifically authorized to commit the organization (Seid K., 2008).

2.4 Type of contracts

As we define the contract before the contract is a legally enforceable agreement between two or more parties with mutual obligations and it is categorized into different types:

I. fixed price contract

A fixed-price contract means that the contractor is to receive a lump sum amount, which compensates the contractor for the cost performing the work, including labor, materials, and equipment as well as overhead and profit. Such contractors are also referred to as stipulated price or lump sum contracts. Under these contracts, the owner usually has no right to direct the contractor in the means and methods of construction and has no right to inquire about the actual cost of performing the work.

Cost-plus contracts

A cost-plus agreement usually requires that the contractors compensated by the owner for the actual costs of construction, plus a fee that may be fixed or may vary with the "cost of construction". In such an agreement, the costs of construction must be accurately defined. This has been the source of many disputes, particularly regarding the overhead item.

Unit price contracts

The unit price contract requires that the owner pay a specified amount for each unit or quantity of work executed. These contracts are common on the road, building, and earthmoving and pipeline projects.

Although unit price contracts do not guarantee the final cost, they may be advantageous for different reasons where the quantity of work may vary, requiring a contractor to bid on a lump sum basis often results in contingency within the price to protect against the risk of a quantity different from that estimated.

2.5 Termination of Construction Contracts

2.5.1 Project Failure Overview

A failed project is usually defined as any project with severe cost or schedule overruns, quality problems, or one that suffers outright cancellation. Work on a project has stopped or slowed to the point that progress on the project has stopped. Not all projects stopped are said to be terminated since some projects that have slowed down considerably are also considered to have been terminated (Dvir, 2005)

2.5.2 Project success overview

Dvir D. (2005) defined project success as the completion of activity within the constraints of time, cost, and performance. This was the definition used for the past twenty years or so. Today, the definition of project success has been modified to include completion. At the proper performance or specification level, with the acceptance by the customer/user, with minimum or mutually agreed upon scope changes, within the allocated period, within the planned cost, without changing the corporate culture and without disturbing the main workflow of the organization.

2.5.3 Contract termination

The termination of a contract results in its end and neither party is required to continue performance under it. However, once the contract is terminated, the parties may still be entitled to damages based on the termination. The nature and amount of these damages depend, again, on the way termination is preserved in the construction contract (Wittbrodt & Eaton, 2009). It is vitally important that contractors and owners understand when and how termination can legally occur and how to handle such termination threats (Brumback, 2006)

2.6 Types of Termination

Spirer, as cited in (El Karriri A., 2011), said there are two types of project termination; Natural termination and unnatural termination.

Natural termination: means that the aims of the project objectives have been attained. Unnatural termination: means that work on the project has stopped because the project constraints have been violated or the project objective has become extraneous to the overall goals. On the other hand as cited in (Brumback, 2006), termination can be for default or convenience.

a. Termination for default

Both the Contractor and the Employer have a right to terminate for default.

1. Contractor’s termination for default- A contractor may terminate the contract for a material breach under A20 1 Para. 14.1.1. This provision provides that a contractor may terminate the contract if the work is stopped for 30 or more days through no fault of the contractor, for specified reasons only, which include: Issuance of a governmental stop-work order, An act of government such as the declaration of national emergency, Failure of prompt payment or failure to issue a certificate of payment with no notified reason for the failure to issue such a certificate, or Failure of the owner to show financial capability upon request.

Additionally, a contractor can terminate the contract for cause if it experiences repeated suspensions, delays or interruptions of the work in the following delay situations: more than 100% of the total number of days scheduled for completion, or 120 days in any 365 day period, whichever is less; or If the work is stopped for 60 consecutive delays through the fault of the Employer.

2. Employer’s termination for default

Under A20 I Para 14.2.1, the Employer can terminate for cause as well, if the contractor materially breaches the contract in one of the following ways: Persistently fails to supply enough properly skilled workers or proper materials; fails to make payment to Subcontractors for materials or labor following the respective agreements; Persistently disregards laws, ordinances, or rules, regulations or orders of a public authority having jurisdiction; or Otherwise is guilty of a substantial breach of a provision of the contract documents.

Termination for cause must be for breaches which are “so material as in effect to defeat the very terms of the contract.

b. Termination for convenience

Only the Employer can terminate, or suspend, the contract for convenience, the contractor is not condemned with this right. With written notice, the Employer can suspend the project for convenience under Article 20 1 para 14.3.1. This power is completely discretionary with the Employer.

However, in such a case, the contract sum and time are adjusted for increases caused by the suspension, delay, or interruption. Furthermore, the Employer can terminate the contractor at any time for convenience under; Article 20 1 para 14.4.1. Upon receipt of written notice, the contractor shall stop operations as directed, take necessary actions to protect and preserve the work, and terminate all subcontracts and purchase orders.

In the case of such termination for the Employer's convenience, the contractor shall be entitled to receive payment for work performed, and costs incurred because of such termination, along with reasonable overhead and profit on the work not executed.

2.7 Ways of Termination

There are four fundamentally different ways to close out a project: Extinction, Addition, Integration, and Starvation.

a) Termination by extinction: means the project has been successful and achieved its goals.

Like the new product has been developed and handed over to the Employer or the building has been completed and accepted by the purchaser. Projects terminated by extinction may have been successful or unsuccessful (Dvir D., 2005).

b) Termination by addition: If a project is a major success, it may be terminated by institutionalizing it as a formal part of the parent organization.

When project success results in termination by addition, the transition is strikingly different from Termination by extinction. Project personnel, property, and equipment are often simply transferred from the dying project to the newly born division.

The metamorphosis is accompanied by budget and administrative practices based on standards procedures of the parent organization.

c) Termination by integration: This method of terminating a project is the most common way of dealing with successful projects, and the most complex. The property, equipment, material, personnel, and functions of the project are distributed among the existing elements of the parent organization (Dvir D., 2005)

The outputs of the projects become a standard part of the operating systems of the parent or client.

The important aspects of the project transition from project to integrated operations are: Accounting/finance; Engineering; Information system/software; Manufacturing; Marketing; Personnel; Purchasing, distribution, legal, and Risk identification and management.

d) Termination by starvation:

There is a fourth type of project termination, although it is not a termination at all. It is slow starvation by budget decrement.

2.8 When to Terminate a Project

(Project Planning &Control., 2011)Cited the reasons when to terminate the project as follow;

1- Some questions to ask when considering termination:

Are there better alternative uses for the funds, time and personnel devoted to the project?

Has a change in the environment altered the need for the project’s output?

Is it time to integrate or add the project as a part of regular operations? Has the project been avoided by technical advances? Is the output of the project still cost-effective?

2- Reasons of projects fail: Insufficient support from senior management; Project organization was not required (Non-Projects and Pseudo-Projects, The wrong person as project manager; Lack of “Critical Success Factors”. and Poor (or insufficient) planning.

2.8.1 Typical Contractual Grounds to Terminate

Termination clauses are a common form feature in standard construction contracts such as the International Federation of Consulting Engineers (FIDIC). It is usual for parties to set out the events upon which one or both parties may terminate the contractual relationship. Some of the typical reasons.

- when one party breaches certain terms of the contract (e.g. workmanship);
- when one party repeatedly fails to perform its obligations;
- When a specific event occurs, e.g. when a party becomes insolvent or has a receiver or administrator appointed over its assets;
- When one of the parties exercise its discretionary right to terminate for its convenience;
- When a prolonged suspension or force majeure type event occurs.

2.8.2 Notice of Termination

If the contractor fails to cure the situation or provide a satisfactory explanation as requested, the contract may be terminated.

The Notice of Termination should contain the following (Texas Administrative Code):

1) The contract number, if any, and date of the contract;
2) The effective date of termination;
3) Reference to the clause under which the contract is being terminated;
4) A concise, accurate statement of the facts justifying the termination;
5) A statement that the supplies or services being terminated may be re-procured and that the contractor will be held liable for any additional costs incurred due to the repurchase.

Before including this statement, the contract should be reviewed to determine whether the right is available under the contract.

2.8.3 Steps to Proper Termination

1. Contractor’s proper termination (Brumback, 2006)

Before termination, the contractor can elect to suspend the work if timely payments are not made by the Employer. This is a safer course of action than termination, and it allows the Employer a chance to cure.

If the contractor must terminate for cause, he must provide a 7-day written notice to the Employer.

2. Owner’s proper termination (Brumback, 2006)

Although not required before termination, the owner can elect to exercise its right to stop work before taking the more drastic remedy of termination. The owner can stop the work if it is not proceeding following the plans, and the contractor's breach is substantial. This is a recommended first step before termination. Further, the Employer can elect to carry out portions of the work itself, provided it follows the notice requirements and allows the contractor to comply.

Before termination, the Employer gives a 7-day written notice to the contractor.

After termination, the Employer is permitted to choose any reasonable method for completing the work and charge that cost to the defaulting contractor, whether or not that method is the best method or the cheapest method.

2.8.4 The 6 steps guide to a smooth closure (termination)

Maylor (2005) groups the necessary activities into a six-step procedure, which can differ depending on the size and the scope of the project closeout and it is very necessary and important to a project (contract) when it is terminated:

1 Completion

First of all, the project manager must ensure the project is 100% complete. (Young,

2003) noticed that in the closeout phase "it is quite common to find several outstanding minor tasks from early key stages still unfinished. They are not critical and have not impeded progress, yet they must be completed". Furthermore, some projects need continuing service and support even after they are finished, such as IT projects.

While it is helpful when this demand is part of the original statement of requirements, it is often part of the contract closeout. (Rosenau & Githens, 2005)Suggested that "the contractor should view continuing service and support as an opportunity and not merely as an obligation" since they can both learn from each other by exchanging ideas.

2. Documentation

Mooz et al., (2003) define documentation as "any text or pictorial information that describes project deliverables". The importance of documentation is emphasized by (Pinkerton, 2003) who notes that “it is imperative that everything learned during the project, from conception through initial operations, should be captured and become an asset". Detailed documentation will allow future changes to be made without unexpected effort since all the aspects of the project are written down. Documentation is the key to a well-organized change of the project owner, i.e. for a new investor that takes over the project after it is finished. (Thompson, 2005) makes a distinction between the documentation requirements of the internal and the external clients since the external party usually needs the documents for audit purposes only. Despite the uninteresting nature of documenting historical data, the person responsible for this task must engage actively with his assignment.

3. Project Systems Closure

All project systems must close down at the closeout phase. This includes the financial systems, i.e. all payments must be completed to external suppliers or providers and all work orders must terminate (Department of Veteran Affairs, 2004)." (Maylor, 2005)Suggest that "formal notice of closure should be issued to inform other staff and support systems that there are no further activities to be carried out or charges to be made". As a result, unnecessary charges can be avoided by unauthorized expenditure and clients will understand that they cannot receive additional services at no cost.

4. Project Reviews

The project review usually comes after all the project systems are closed. It is a bridge that connects two projects that come one after another. Project reviews transfer not only tangible knowledge such as numerical data of cost and time but also the implicit knowledge which is hard to document. 'Know-how' and more important 'know-why' are passed on to future projects to eliminate the need for project managers to 'invent the wheel' from scratch every time they start a new project. The reuse of existing tools and experience can be expanded to different project teams of the same organization to enhance project results (Bucero, 2005)Reviews have holistic natures which investigate the impact of the project on the environment as a whole. Audits can also be helpful but they are focused on the internal of the organization. Planning the reviews should include the appropriate time and place for the workshops and most important the people that will be invited. Choosing the right people for the review will enhance the value of the meeting and help the learning process while having an objective critique not only by the team members but also from a neutral external auditor. The outcome of this review should be a final report which will be presented to the senior management and the project sponsor.

2.9 Causes Of Construction Contract Termination (Failure)

(The UK Office of Government Commerce., 2005)Cited the common causes of termination of project as follows:

1. Lack of clear links between the project and the organization's key strategic priorities, including agreed measures of success. Do we know how the priority of this project compares and aligns with our other delivery and operational activities? Have we defined the critical success factors (CSFs) for the project? Have the CSFs been agreed with suppliers and key stakeholders? Do we have a clear project plan that covers the full period of the planned delivery and all business change required, and indicates the means of benefits realization?

2. Lack of clear senior management and Ministerial ownership and leadership. Does the project management team have a clear view of the interdependencies between projects, the benefits, and the criteria against which success will be judged? If the project traverses organizational boundaries, are there clear governance arrangements to ensure sustainable alignment with the business objectives of all organizations involved? Are all proposed commitments and announcements first checked for delivery implications? Are decisions taken early, decisively, and adhered to, to facilitate successful delivery?

3. Lack of effective engagement with stakeholders. Have we identified the right stakeholders? Have we as intelligent customers, identified the rationale for doing so (e.g. why, what, who, where, when and how)? Have we secured a common understanding and agreement of stakeholder requirements? Does the business case take account of the views of all stakeholders including users? Do we understand how we will manage stakeholders (e.g. ensure buy-in, overcome resistance to change, allocate risk to the party best able to manage it)?

4. Lack of skills and proven approach to project management and risk management.

Is there a skilled and experienced project team with clearly defined roles and responsibilities? If not, is there access to expertise, which can benefit those fulfilling the requisite roles? Are the major risks identified, weighted and treated by the SRO, the Director, and Project Manager and/or project team? Has sufficient resourcing, financial and otherwise, been allocated to the project, including an allowance for risk?

And (The UK Office of Government Commerce., 2005)cited the common causes of termination of the project also as follow:

1. Too little attention to breaking development and implementation into manageable steps.

Has the approach been tested to ensure it is not 'big-bang' (e.g. in IT-enabled projects)? Has sufficient time been built-in to allow for planning applications in Property? & Construction projects for example? Have we done our best to keep delivery timescales short so that change during development is avoided? Have enough review points been built-in so that the project can be stopped, if changing circumstances mean that the business benefits are no longer achievable or no longer represent value for money?

2. Evaluation of proposals driven by initial price rather than long-term value for money (especially securing delivery of business benefits). Do we have a proposed evaluation approach that allows us to balance financial factors against the quality and security of delivery? Does the evaluation approach take account of business criticality and affordability? Is the evaluation approach business driven? Is the evaluation based on whole-life value for money, taking account of capital, maintenance and service costs?

3. Lack of understanding of contact with the supply industry at senior levels in the organization. Our senior management sufficiently engaged with the industry to be able to assess supply-side risks? Are the processes in place to ensure that all parties have a clear understanding? Do we have a clear strategy for engaging with the industry or are we making sourcing decisions on a piecemeal basis? Have we asked suppliers to state any assumptions they are making against their proposals? Have we checked that the project will attract sufficient competitive interest? Have we tested that the supply industry understands our approach and agrees that it is achievable?

4. Lack of effective project team integration between clients, the supplier team and the supply chain. Are the procurement routes that allow integration of the project team being used? Has a market evaluation been undertaken to test market responsiveness to the requirements being sought? Has a shared risk register been established? Is there early supplier involvement to help determine and validate what outputs and outcomes are sought for the project?

2.10 Effects or Impacts of Contract Termination

Effects or impacts due to contract termination were discussed by different scholars as follows.

1. Effects on organization

Hormozi, et al, (2000)Stated that organizing for a project’s termination process is especially important when it has failed because of lasting effects on the termination process will increase their loyalty and commitment and not only to the organization but also to the success of future projects.

In addition, (Bommer, 1991)showed that although the reason may vary, the effect is frequently the same. Project cancellation can affect employee productivity, the reputation of the firm, and the value of the firm’s stock. Although there is little thing of employee productivity and project cancellation, project team’s perception of the cancellation may influence their productivity for the next several years.

2. Effects on professionals

How project is viewed within organization is also very important. Because corporate resources can be very limited, projects that are perceived to be draining scarce resources tend to undercut morale. Other project teams desire the resources ‘squandered’ on unproductive or falling projects. This in turn leads employees to question the wisdom of senior management (Mandell, 1989)and reduces their productivity and level of commitment to the organization (Hormozi et al, 2000).

3. Effects on economic growth of the country

In Sri Lanka, Silva et al (2005) stated that the construction industry is the major contributor to the developments of economy contributing around nine percent (9%) of the GDP of the country. Due to this fact construction industry plays one of the major roles as a key component of the economy improving construction capacity and capability is important to most developing countries (Yogeswaran, 2004). However, unnatural termination of the projects effects country’s economic growth badly by reducing construction capacity and capability.

2.10.1 Effects of Project Parties (Stakeholders) On Project Termination

Nowadays, project management has become a key activity in most modern organizations. Projects usually have a wide variety of objectives, involve numerous internal and external actors, and are conducted in various activity sectors. Since 1980, many academics and practitioners have agreed that human resource management (HRM) is one of the most crucial elements of an organization's success (Belout, 2004).

The project management identifies two requirements for an effective client–contractor relationship. Firstly, contractor organizations must be customer-focused, in terms of understanding and fulfilling the expectations of the client. This customer-focus has been stated as a precursor to success. Secondly, client organizations must be focused on understanding and accommodating the expectations of all stakeholders in the supply chain, such as contractors, sub-contractors, suppliers and other team members, with ''project stakeholders'' defined as ''people or organizations who have a vested interest in the environment, performance and/or outcome of the project. This focus on other stakeholders will create ''win-win'' situations through trust, openness, teamwork and shared goals (Bryde et al, 2005) Stakeholders are individuals, groups or organizations, institutions and others that are actively involved in a project and whose interests may be positively or negatively affected by the project execution. They may also exert influence over the project and its results. In short, they are claimants who claim ownership, who have rights or interests in a project and its activities. Hence, every project is influenced and must be managed from a perspective that goes beyond the basic relationship between customers and companies that perform the project (Seid K., 2008)

The pre-qualification of construction contractors is a very important step in project procurement. Pre-qualification is the process of screening contractors. The selection of a qualified contractor gives confidence to the client that the selected contractor can achieve the project goals (El-Sawalhi et al., 2007)

The responsibility of project integration requires the project manager to perform three key tasks. Firstly, the project manager has to implement an effective planning and control system for all the project activities. Secondly, all communication links within and outside the project need to be established and maintained. Finally, effective project integration requires the project manager to act quickly to resolve internal and external conflicts before they start to threaten project budget, scheduling and performance specification (Ogunlana et al., 2002)

The employer plays the most important role within the construction process and therefore, he is the most important party to the contract for without him there would be no contract and no work for consultants and contractors (Seid K., 2008).

Owners' competencies that affect project success include their capability in managing projects, their understanding of project scope and being able to articulate end-users' needs. Employers, who have competencies such as being knowledgeable, enlightened and having initiative would facilitate project-based integrated teams, leading to higher project performance (Yng Ling et al., 2008).

2.10.2 Available Damages from Termination

Whenever a party breaches a contract, the non-breaching party is entitled to recover some form of damages. In all contract actions, a breach entitles the other party to at least nominal damages, and actual damages which they can prove. In the case of termination, the actual damages must be shown to be the proximate result of the termination (Brumback, 2006)

1. Contractor’s damages (Brumback, 2006)

If a contractor terminates the contract for cause, he is entitled to recover payment for

Work executed and for proven loss concerning materials, equipment, tools, and construction equipment and machinery, including reasonable overhead, profit, and damages. Similarly, if an owner terminates the contract for the owner's convenience, the contractor is entitled to recover payment for Work executed, and costs incurred because of such termination, along with reasonable overhead and profit on Work not executed. In the case of a subcontractor that has defaulted, the general contractor is entitled to recover from that subcontractor any increased costs of completing the work from defaulting subcontractor.

2. Owner’s Damages (Brumback, 2006)

For a contractor’s breach or an owner who terminates for cause, the owner’s damages can be either the cost of repair/completion the difference in value from what was contracted. In general, the cost of repair is the proper measure of damages in a construction case where the owner would not get what he bargained for unless he gets the repair, replacement or completion. If the unpaid contract balance exceeds the costs of finishing the work, the contractor should be reimbursed for the difference. If the work to finish is greater than the balance remaining, the contractor shall pay the difference to the owner. (A201, para 14.2.4).

An exception to the cost of repair method of calculating damage exists, however, where

a substantial portion of the completed work would be destroyed to undertake the repair.

In that case, diminution in value may be used as the measure of damages instead, provided the structure substantially conforms to the contract specifications. If, however, the defects or omissions are major, such that the building does not substantially conform, then the decreased value of the constructed building justifies the high cost of repairs.

2.11 Prevention of Construction Project Termination or Failure

YI et al., (2006) cited the factors to avoid project termination as follow:

1. Scientific identification and prediction of termination

Failure of construction business and management involves studies of various fields.

Only through multidisciplinary and multi-angle discussing, scholars can realize the origins of failures. Only based on a comprehensive analysis of termination issues, they can build scientific and coherent prediction models, and obtain maximal prevention and treatment with minimal cost (Wang 2002). To predict scientifically, many economic approaches should be used for reference. For instance, some important procedures in current Western economics are to scrutinize purposes of economic variables, build mathematical models, make decisions, and forecast.

2. Evaluation of competitive abilities

It should be noted that all of the failures of a construction enterprise could be attributed to a lack of competitive skills. It is a usual occurrence for a construction enterprise to fail in the market environment. To avoid terminations or failure, it is important to improve the enterprise competitive abilities of an enterprise. Competitive abilities of a construction enterprise include three parts: marketing abilities, project management abilities and innovation abilities (Yao, 2003). A firm must be different enough to have a unique advantage over its competitors, especially in a tough market (Arditi, 2000). Competitive abilities of the enterprise are critical to an enterprise, and these abilities also include the abilities of the manager. An enterprise or a project has life, sometimes its life is longer, sometimes is shorter. An enterprise or staff needs to maintain health status. Accordingly, the evaluation of competitive abilities is a vital countermeasure to stop failure for an enterprise.

3. Improving construction management qualities

Qualities are important for a project, an enterprise, or a manager. A manager should emphasize the enterprise's qualities, and the staff should pay attention to his qualities.

Qualities of an enterprise, a staff, and a manager are different. Therefore, it must be emphasized that everyone should study in all life. The development of a construction enterprise lies in the development of employee's abilities. The best method to improve the qualities of an employee is to promote employee training and make him a talented person.

4. Independent professional inspecting and supervising

Business and management of a construction enterprise need independent professionals to supervise. For instance, cost engineers can evaluate exactly and budget prudently; chief inspectors can supervise efficiently; registered structure engineers can calculate accurately and save money; an independent construction professional can furnish full-time inspection and strong supervision should be provided to avoid 'short cuts' by workers. Sometimes, improper construction designing will lead to waste. For instance, if the structural design is as secure as possible, it will construct a blockhouse instead of a building. A construction enterprise should make use of certified professionals and intermediary agencies. In business and management of construction, intermediary agencies can be employed in many fields.

5. Adopting synthetic prevention measures for failure

Generally, without obtaining the goals and the enterprise fails. Failures will result in losses of tangible assets and invisible assets. The first can be calculated by economic figures, including losses of finance and material resources. Whereas the latter cannot be intended by money, such as marque depreciating, the enterprise culture is loose and policy is confusing (Wang, 2002). Failures will bring losses of social wealth and resources. It means that social prosperities are collocated wrongly, and great deals of social wealth are demolished. It even wills consequence in a mass of unemployment, accidents, disasters, crimes, and so on.

In one word, losses conveyed by failure are several. It is necessary to analyze failures from various fields and various angles and adopt synthetic prevention countermeasures to control failure accordingly.

2.12 The Effectiveness of Termination on Project

The project termination constitutes a significant part of the total project; it is often overlooked by project managers. This not only prevents the executing firm to claim the last portion of the contractual value of the project but also develops another series of effects, namely:

- Time over-run;
- Cost over-run as a direct result of time over-run in most cases;
- Tarnishing the image and credibility of the project team;
- Locking up valuable human and other resources that could have been gainfully utilized elsewhere;
- Developing enormous stress on the project personnel.

2.13 Why Project management Ignore Termination

The most direct reason that the Project Closeout phase is neglected is lack of resources, time and budget. Even though most of the project-based organizations have a review process formally planned, most of the time "given the pressure of work, project team members found themselves being assigned to new projects as soon as a current project is completed" (Newell S, 2004)Moreover, senior management often considers the cost of project closeout unnecessary. (Sowards D., 2005) Implies this added cost as an effort "in planning, holding and documenting effective post-project reviews". He draws a parallel between reviews and investments because both require start-up expenditure but they can also pay dividends in the future. Human nature avoids accountability for serious defects. Therefore, members of project teams and especially the project manager who has the overall responsibility will unsurprisingly avoid such a critique of their work if they can.

2.14 Previous Studies On Construction Contracts Termination

The purpose of the contract is to establish the rights, duties, obligations, and responsibilities of the parties and to allocate the risk. The acceptance of an obligation or duty brings with it an acceptance of commensurate risk, which is the risk of being unable to fulfill the obligation or duty because of one’s own inadequate, incapacity, inadvertence, or error, or because of interference from outside sources or events.

Enshassi et al., (2006) in their paper explore ‘the causes of contractor's business failure in Palestine, and investigate their severity from the contractor's point of view.’ The study's results shows that the main causes of business failure are delay in collecting debt from clients, border closure, heavy dependence on bank loans and payment of high interest on these loans, lack of capital, absence of industry regulations, low-profit margin due to high competition, awarding contracts by client to the lowest bidder, and lack of experience in contract management.

Anderson (2010), in her Assay titled “The top three causes of project failure ". She showed that the common three causes were: Lack of clearly designated project leader; Lack of clear expectations and goals and Communications challenges.

Al-Hallaq (2003) demonstrated in his study the causes of contractor's failure in the Gaza Strip are: Depending on banks and paying high, Lack of capital, Lack of experience in the line of work, Cash flow management, Segmentation of Gaza Strip, The low margin of profit due to competition, Lack of experience in contracts, and Award contracts to lowest price.

Hamdia (2008), in his thesis study ‘Investigate of critical success factors for construction sector in Gaza Strip’ shows that the most notable findings of this research were, about 71% of contracting companies in Gaza Strip have a clear description of goals and mission, financial resources are the first Critical Success Factors (CSF), the second CSF is owner satisfaction. Also, pricing policies CSF was the third. Also, the fourth CSF was related to Managerial Skills for contractors. Furthermore, cost control CSF was the fifth. Finally, Mission and Goal have the sixth one. He recommended the necessity for contractors in Gaza Strip to be more interested in strategic planning, to formulate and apply adequate CSFs; and contractors in Gaza Strip must apply modern managerial approaches and scientific tools; as well as top manager in contracting company in Gaza Strip shouldn't concentrate efforts on financial issues, but they are required to be interested in other topics as, human resource development, owner satisfaction, and cost reduction.

Abu Mousa(2005) in his thesis studies about the gain an understanding of 44 risk factors that could face the building projects in the Gaza Strip and also to investigate the effectiveness of risk prevention and mitigate methods. The study illustrated that " The most important risk factors are: financial failure of the contractor, working at hot (dangerous) areas, closure, defective design and delayed payments on the contract. On the other hand, owner respondents concluded that the most important risk factors are: awarding the design to the unqualified designer, defective design, the occurrence of accidents, difficulty to access the site, and inaccurate quantities".

El Karriri et al., (2011) in their paper show that the political factors and clients' related factors like (Israel invasion, imposed closure at Gaza Strip, client’s bankruptcy, clients' bad financial situation, and location of some projects at hot regions) were shown as a part of the critical drivers for contract termination in construction projects.

Dvir D., (2005), in his paper examines the relationship between planning and preparing the project termination and commission and project success. The paper suggests that customer participation in the development process and final user preparations have the highest impact on project success.

Dilts et al., (2006) in their paper investigate the impact of job position or role, when making the decision to cancel a project and the impact of different information-gathering activities, such as information scanning richness of media used, and diversity of information sources by examining the perspectives of decision-makers who have canceled or terminated a public sector project. Two decision-making roles are studied: executives, those with the authority to start or cancel a project, and project managers, those who direct the day-to-day operations of the project. The paper illustrates that in project success or failure cannot ignore the impact of the role.

(De, 2001)In his paper analyzes the key problems faced by project management professionals in terminating projects in Indian Industry. The paper shows that negotiating claims with clients, compliance of statutory requirements, and receipt of the final installment of payment, performance guarantee tests, and handling claims of suppliers are the key problems faced by the project managers in India in terminating projects.

2.14.1 Summary of previous studies on termination of a project

Table 2.1 summary of previous studies on contract termination

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3. METHODOLOGY

3.1 Description of Study area

This study was conducted in the country Ethiopia which is one of the developing countries in the world in the western part of Oromia regional state by considering some zones of Oromia those are located in the western part. Figure 3.1 below illustrates the location map of the study area

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Figure 3.1 location map of the study area

3.2 Research Design

Research design is an action plan for finding answers to the questions being studied.

It is a method for receiving from "here" to "there" where "here" may be defined as the initial set of questions to be answered, and "there" is some set of conclusions or answers about these questions. Between "here" and "there" several major steps may be established including the collection and analysis of relevant data (Naoum, 2007).

Based on the specific objectives, the research was classified as a descriptive explanatory type of research since it identifies the causes and effects of a project termination on contracting parties under the current scenario and the possible incentives to eliminate contract termination in public building projects in the western Oromia region. The research approach adopted was a mixed type of research approach, i.e. both qualitative and quantitative approaches.

In this research, the problem of the study (causes and effects of construction contracts termination) was identified and defined then the related objectives of the study were set.

Thoroughly a research proposal and a plan were done, and a literature review was done accordingly. To collect data, a questionnaire was designed as a means of research through pilot study, validity, and reliability.

The sample of the study was collected, analyzed and discussed to get the results, conclusion, and recommendations.

All elements of the research in this chapter such as sample location, validity, and reliability, etc. were explained and discussed in detail. Figure 3.2 below illustrates the flow chart of overall research processes.

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Figure 3.2 flow chart of research processes

3.3 method of data collection

To accomplish the study objective, the researcher used different methods of data collection like questionnaires, interview and case studies.

3.3.1 Questionnaires

To analyze the quantitative characteristics of the termination of the contract, it has been depending on collecting the primary data by questionnaire (see appendix B1) as a main tool for the study, it saves time and effort. The questionnaire was designed especially for this study and contains four parts; Organization Profile and personal characteristics of the responses, Project termination causes (Managerial causes, financial causes, Political causes, Environmental causes, and Project characteristic causes), Effects of construction termination on (organizational reputation, economic growth of the country, professionals, employee(nonprofessionals), project progress, external parties (project users), Loss due to termination) and Remedial measures to project termination.

[...]

• Cours: Construction Management
• Note: 3.58
• Auteur: Dugasa Tedasa (Auteur)
• Année de publication: 2023
• Pages: 102
• N° de catalogue: V1327849
• ISBN (PDF): 9783346855893
• ISBN (Livre): 9783346855909
• Langue: anglais
• mots-clé: cause, effects, public building, termination