Typical Construction Claims against Owners
The most frequently found reasons to file a claim against the owner of a project are:
- Poor project planning;
- Scope changes ;
- Constructive change orders;
- Errors and omissions;
- Contract acceleration and expediting;
- Work suspension and stoppages;
- Site access or availability;
- Other contractors interferences and delays; and
- Strikes and acts of God.
A brief discussion of each of these subjects will follow.
Poor Project Planning
Inadequate attention to front end project planning usually ends in:
- Inadequately defined scope of work; or
- Incomplete and/or incorrect design.
Most of the time, poor planning is attributed to rushed (fast track) projects bringing about:
- Shortened bid periods;
- Limited site investigation;
- Unreasonable construction periods;
- Badly specified construction materials; and
- Inappropriate manpower.
Whatever the reason, claims are abundant when planning is not taken seriously enough to produce an adequate environment to develop a project.
Scope changes are usually initiated by a change order, letter of intent, or a field directive. All of these may direct changes or deletions in the work required by the contract, but within physical limits and the general scope of the work.
Change orders become part of the contract as soon as they are signed by the contractual owner representative. The contractor may or may not sign the change order but is required to proceed immediately.
If the contractor does not agree with the change order time or price he must contest it within the prescribed period of time stated in the contract document.
Change orders and their compounding effects on the contract execution are the most usual source of claims.
Constructive Change Orders
Sometimes owners or their authorized representatives give or fail to give directions that interfere with the normal contract development. These actions have the same effect as if a formal change order has been issued, and a constructive change is usually claimed by the contractors.
Constructive changes are sometimes found after the fact, when reviewing schedules, records, letters and minutes of meetings. This does not negate the contractor's right to submit a claim.
Contractors are advised to train their construction teams to recognize constructive changes since this can make the difference between a profit and a loss situation.
Errors and Omissions
A potential for claims arises when the contractor questions plans and specifications given by contractual terms and the owner or his representative fail to recognize it as a valid change order.
It is essential to document the case as it develops and communicate the results and possible impact according to contractual stipulations. Errors and omissions are difficult to prove because technical issues can become unclear due to circumstances such as:
- Change of design perspective;
- Change of vendors specifications; and
- Changes in staff originally handling the contract.
Contract Acceleration and Expediting
Contractors are frequently directed to accelerate performance of the contract or a portion of it within the original or adjusted completion date. This direction constitutes a change in the contractual obligations and the contractors have the right to pursue compensation for it.
Also, contractors may expend extra effort in response to a directed increase in work without an increase in time allocated to the contract. This constitutes a constructive acceleration. Validation of this kind of claims is, of course, difficult and requires the contractor to prove his case.
Work Suspension and Stoppages
When contractors are notified to suspend work under circumstances other than those for which they are to blame, they have the right to be compensated for the time and cost involved in the suspension
or part of the suspension even if the contract document calls for work-around directives.
Documentation related to the status of the job at the time when the stoppage takes place must be accurately established for settlement of work suspension and stoppages related disputes.
Site Access or Availability
When the contractor scheduled activities have the need for a right of way or a location to proceed and the owner fails to provide it on time, the contractor may pursue compensation for the time and cost of the resources scheduled and proved unable to perform.
Since this situation is usually aggravated by owner failure to recognize any implication on the development of the job, it is recommended to faithfully document the situation by related correspondence, schedules, photographs and the like.
Other Contractors' Interference and Delays
When the contractual obligation forces the contractor to joint-occupancy, interferences resulting from the lack of progress by other owner's contractors in the area may hamper performance and a justifiable claim for compensation will arise.
Planning and scheduling of this type of jobs must be broken down in as much detail as possible to allow proper of interfacing with others and analysis of delays should they occur.
Strikes and Acts of God
Time delays due to facts beyond contractor's control as union strikes, boycotts, unusual weather, earthquakes, fires, and floods are excusable delays and the contractor is entitle to a time extension.
Due to a number of circumstances such as, failure to understand the scope of the job, misunderstood technical requirements, bid mistakes, and desire to improve competitive edge, contractors occasionally come up with extremely low bids which make them excessively cost conscious in their efforts to recover from their tight situation generating disputes and claims for almost every other issue during the contractual period.
Typical Claims against Contractors
Owners also have the right to claim to recover from issues that may harm them economically. Claims by the owners usually concern:
- Contractors late completion;
- Out of specification materials;
- Defective work; and
- Property damages.
Contractor Late Completion
Contracts usually call for a completion date on the assumption that the owner is in need of the facility by that date. A late finish by the contractor may bring inconvenience and/or financial losses to the owner.
Some contracts include clauses where penalties are considered against the contractor in the event of completion delays, but whether or not the contract contains such a clause, the owner may claim damages for late completion.
Out of Specification Materials
Discrepancies may result due to differences in interpretation of contractual material specifications. Contract specification omissions are frequent, with the undesirable result that decisions have to be waited for or directions given at the job site, with the consequent delays and/or increases in scope of the job.
The main problem comes while supplying materials where it is known there are numerous competitive manufacturers which might substitute for one another. Decisions have to be taken on the run and it is usually all left to the discretion of the owner's engineer.
The contract language is to be followed, but when the issue is material specifications multiple complications arise since every owner wants to save money by competitive bidding prices from different manufacturers while at the same time achieving the maximum financial and functional efficiency.
Contractors are responsible for the quality of their work as specified in contractual terms. This is not always easy to establish due to the fact that by definition defective work is difficult to spot and decide upon.
Defective work may be blamed on the designer due to lack of adequate specifications, on the owner due to after-the-fact actions that disturbed the original design; or on the contractor due to lack of skills.
It is not difficult to see why so many claims are generated on this subject.
Property damages claims may result from several sources such as:
- Damaging owner's installations;
- Damaging neighbors installations;
- Violating rights of adjacent property owners; and
- Violating Government area regulations.
Even if contractual clauses call for holding the owner blameless in all of the above cases, it may happen that law suits have to be settled by the owner before he can pass the blame to the contractor and accepted by him.
Legal Implications of Critical Path Methods
Critical path methods (CPM's) have become the most useful and practical tool for negotiating contractual disputes.
Properly designed schedules include consideration for:
- Total scope of the job;
- Organized sequence of activities needed to perform the job; Duration for all activities involved; and
- Resources needed to accomplish each activity
In other words critical path method schedules depict what has to be done, when it has to be done, how it has to be done, who has to do it, and where it has to be done.
Contractual obligations usually include the following:
- Approval of an original CPM;
- Procedures to update the CPM periodically;
- Procedures to revise the CPM; and
- Procedure to utilize the CPM as a tool for claim settlements.
The legal implications of an approved critical path method schedule are as follows:
- Both parties are bound to follow the schedule specifications;
- There is an implied guarantee by both parties that they will not hinder, delay and/or disrupt the other party;
- Manpower levels and crew sizes established in the schedule have to be followed unless changes are duly authorized;
- Equipment utilization incorporated in the schedule is binding and failure to follow it, constitutes a breach of the contract;
- Materials, tools and consumables as specified in the schedule are equally binding;
- Contractors are liable for productivity lower than that allocated in the schedule;Job manning and lay off schedules are contractual obligations and lack of compliance constitutes a breach of the contract;
- Inspections and approvals by the owner, should be performed according to schedule; and
- Any deviation from schedule should be settled as per contractual procedures involving schedule revisions.
Claim Analysis Procedures
The main purpose of establishing a claim analysis procedure is to have a comprehensive, consistent and systematic approach to claim analysis and evaluation during the negotiation period.
The following outline has proved successful in accumulating the required data for an analysis as well as aiding the analyst in his approach to the problem at hand.
All available documentation and information which is pertinent to the claim should be gathered and examined closely. It is essential to realize that the analyst should exercise complete and unbiased judgment in reviewing the contractor's position as well as that of the owner.
Study review data pertinent to the claim must be categorized as follows:
1.- Brief of the Case .-
Contracts should be read and analyzed carefully. Contracts differ depending on the nature of the job; special clauses can be found, scheduling requirements are not alwaysthe same, unit rates do not necessarily follow a set pattern, and a number of minor changes peculiar to the claim in hand may have to be taken into consideration.
The analyst must not forget that the contract is his most important document and that having a detailed knowledge of it facilitates understanding and appropriate interpretation.
Study of the claim submitted by the contractor gives the analyst the necessary guidance in deciding which areas of the contract should be investigated in more detail than others. Furthermore, it sets out the contractor's standing and pretensions.
Change order log and associated schedule areas.
Since most of the problems during the development of a contract are derived from change-order generation, it is essential to have a well- organized change-order log which must include schedule association, type of settlement, job definition, resource allocation plus stipulated progress, cost and schedule controls.
This documents will show figures duly approved by both parties and they will provide a firm basis for reconstruction of the facts. They will be the foundations of an as-built schedule which in turn
will present irrefutable evidence.
Job explanation meeting minutes.
Having a good record of what transpired during the job-explanation meeting has proved to be helpful in resolving parts of a claim which may be subject to different interpretations, all of them apparently reasonable.
Weekly construction meeting minutes.
A careful reading of the minutes of the weekly construction meeting gives the analyst a good idea of how the relationship between the owner and the contractor developed and how problems in different areas were handled.
Once the brief of the case, as outlined above, has been completed, the analyst will have form his own opinion of the job and can now start to study the owner's position on the claim.
2.- Owner's Position.-
Due to ever-changing circumstances, owner policies at times affect the contractor in a way that might be overlooked by the owner's representatives, thereby creating an unfair situation for the contractor.
The analyst must determine from his studies and job-related interviews if the job philosophy had been changed at any time and decide thereafter what kind of impact it might have produced.
Scope of the job.
Careful study of all drawings and specifications stipulated in the contract is a must for the analyst and will give him the edge at the negotiation table over misinterpretations of the scope of the
job by the owner or the contractor.
Owners expectations are generally understated, seeking the lowest starting position in negotiations . Recognition of this fact should enable the analyst to make unbiased recommendations.
3.- Contractor Position.
Scope of the claim.
Having an open and receptive mind when analyzing the contractor's claim, will allow the analyst to clearly understand the claim foundations and to avoid getting involved in issues not being addressed by the contractor.
Contractors' claims are generally overstated seeking the highest starting point in negotiations. Analysts must be aware of this fact and be ready to disclose it at the first contact with the contractor.
4.- Claim Analysis and Evaluation.
Based on all the information gathered thus far the analyst should be able to organize the available data to establish a comparison between what was planned and what actually happened and why. In evaluating the results of the above-mentioned comparison the analyst must keep in mind that contractual stipulations will govern decision-making at this stage.
If schedules are an essential part of the claim, 'as-planned' and 'as-built' schedules must present a clear picture to all parties.
Schedules should only show the part of them that have been affected by the issue in dispute and the resulting impact on major milestones.
The analyst should complete the investigation by offering specific, constructive suggestions in terms familiar to the party's representatives. Presentation is a key factor in claim analysis. If all parties can understand the results and recommendations presented by the analyst, they will create an environment for fruitful, positive negotiations.
Claim Prevention Suggestions
1.- Carefully analyze and consider exactly what you are building and precisely how it will be built so the contractor does not have to assume or guess about any aspects of the job.
2.- Complete the project design before the contract is bid, and if some parts of the project cannot be completely designed at bid stage, clearly identify them and its possible impact.
3.- Conduct a thorough review of the design prior to the bid stage to identify and correct any design errors or inadequacies.
4.- Give bidders sufficient time to carry out a complete review of the bid package and an investigation of the construction site.
5.- Allow enough construction time, remember that in this context, time is not money. Do not assume that bidders will simply increase their bids to cover a short schedule.
6.- Identify with enough anticipation what type of contract will best suit the project.
7.- Think about every sentence included in the contract, why it is there and whether it is necessary.
8.- Clearly identify in the contract every operation that the contractor must accomplish to complete the job.
9.- Draft for clarity, not confusion. Use a standard list of definitions, and always use the same defined word consistently.
Never use statements such as:
- About 2 meters;
- Firm (How firm?);
- As soon as possible; and
- Frequently (How frequent?).
10.- Consider material arrival schedule as part of the contract. Identify long lead items and possible vendors in the bid package. Avoid sole-source procurement unless absolutely necessary.
11.- Clearly identify who will be responsible for material delays.
12.- Analyze all potential bidders before preparing a bid slate. Examine contractors' prior contracting experiences, claims history, management capabilities and financial ability.
13.- Carefully analyze contractors' technical proposal paying particular attention to the proposed method of construction and the planned number of manhours claimed necessary to execute the job.
14.- Seriously question contractors' excessively low bidding on :
- Scope of the job;
- Technical requirements;
- Schedules and crew sizes;
- Material suppliers;
15.- If you are forced to live with a 'low-ball' contractor, anticipate a claim and work on it from the beginning.