Delay Penalties, Their Calculation Mechanism, and Settlements with Contractors (2018–2023)

·         Episode (25)

·         Opinion: I see that there is negligence in some centers of public responsibility, such as ministries, regarding certain settlements with contractors, and their corollaries of delay penalties, the mechanism for their calculation, and the disbursement of entitlements, without effective procedures by the relevant government sector, according to the SAACB report!

·        The report issued by the State Audit and Administrative Control Bureau (SAACB) for the period 2018–2023 reviews the reality of delay penalties, the mechanism for their calculation, and financial settlements with contractors, highlighting the existence of negligence by some government entities in managing this file, whether in following up delays, calculating penalties, disbursing entitlements, or taking the necessary corrective measures. The report indicates that this negligence negatively affects the progress and quality of public projects and leads to significant disparity in decisions and procedures between ministries and different entities!

·        Despite the existence of a legal framework that regulates this process—such as Cabinet Decision No. (5) of 2014 and its amendments, the General Regulation No. (7) of 2021, Article (8/14) of contractors' contracts, and the Ministry of Finance instructions of 2021—practical implementation suffers from the absence of unified standards and clear practices. It was found that there is inconsistency in calculating delay penalties, a lack of executive instructions to activate deduction of damages resulting from government entities' delays in disbursing payments, in addition to the absence of an official mechanism to assess the amount of damage when contractors delay execution!

·         The following lists the most prominent material violations and observations contained in the report:

1-     Unclear criteria for determining responsibility for delay: The Regulation No. (5) of 2014 and its amendments do not specify clear criteria to determine whether a delay is justified or unjustified!, in addition to the absence of unified standards, which leads to differing estimates among government entities.!

2-     Lack of approved procedures to activate damage deductions: There are no clear executive instructions for the mechanism of deducting damage or compensating for delays caused by government entities in disbursing payments. The Ministry of Public Works and the Ministry of Finance have also not issued joint instructions to define: cases of deduction, criteria for its application, and the systems and records to be referred to!

3-     Absence of standards to evaluate losses resulting from late delivery: There is no official and approved mechanism to assess the size of the damage resulting from a contractor's delay in delivering works, and penalties are calculated in some projects, while in other projects the engineer's or supervisor's report alone is relied upon without fixed standards!

4-     No mechanism to determine penalty rates among contractors : Penalty rates vary between projects without a fixed standard or unified instructions, in addition to this leading to a large disparity between projects that have the same nature of delay!

5-     Significant delays in disbursing payments to contractors: Long delays in disbursing payments were recorded, even though contractors submitted their documents, and in some cases these reached more than two years..., and some delayed payments may extend for long periods that exceed the allowable financial values, and affect the progress of projects!

6-     Large delays in executing projects beyond their specified durations: There are many projects that exceeded the contractual durations specified for execution, and it was noted that some delays extended for many months without penalties being activated as required!

7-     Granting some contractors unjustified extension periods: It was noticed that time extensions were granted after the agreed execution period ended, and extension periods may last for months in some cases, without clear justifications!

8-     Weak oversight of penalty schedules: There is no effective internal control over the schedules prepared to calculate penalties..... and the ministry's internal control unit does not participate in reviewing files, and does not audit the schedules before their approval.!!

9-     There are a number of projects funded by donor entities, that have not been completed, even though execution has continued for years. It was found that three projects had not started implementation at all, as of 12/31/2023, with a completion rate of 0%, despite being included in the public entity's plan!

·        The report concludes by listing some of the most prominent recommendations that should be taken into account, based on my review of the SAACB report, to correct the situation in dealing with contractors, as follows:

1-    Issuing clear instructions to activate deductions: It is necessary to have a decision and instructions that regulate: how to apply deductions on contractors and government entities, the cases in which deduction is permitted, and the documents and records to be referred to!

2-    Establishing criteria to identify unjustified delay: Clear criteria must be defined to help committees determine: what delay can be accepted as justified? and what delay requires imposing penalties?

3-    Forwarding all delay files to specialized committees : All projects experiencing delays should be referred to specialized committees to determine: the amount of the penalty, or compensation, or the regulatory procedures to be taken, noting that this is not currently practiced!

4-    Preparing unified standards to determine penalty rates: A manual or specific instructions should be prepared to determine: penalty rates, criteria for imposing them, and the cases in which extension or exemption is permissible!

5-    Paying contractors' payments on time: Delays in disbursing contractors' payments are one of the reasons for project disruption! Therefore, financial procedures must be expedited and payments must not be left pending for months and long years!

6-    Monitoring projects and implementing time schedules: Vigorous follow-up and adherence to timelines are necessary to ensure: delivery of projects on time and to prevent accumulation of stalled projects!

7-    Calculating post-initial-delivery periods: The additional period granted to the contractor for maintenance or modification work must be counted as a delay when it exceeds the allowable limits!

8-    Activating accountability for delay: It is necessary to take measures against contractors proven to be late without justification: these measures may include tools such as: a warning, penalties, suspension of contracts, or other regulatory procedures!

9-    Involving the internal control unit : The internal control unit must be involved in: reviewing penalty files, reviewing contractors' contracts, and participating as an observer in tender committees, to ensure integrity and accuracy!