Claims Preparation Points

8/18/2019 Claims Preparation Points

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ABSTRACT

Claim management is an essential skill required by the Contract and Project Management

Professionals, especially due to the increase in both number and value of claims in construction

projects. A claim must be presented in a professional manner with sufficient details including the basis, calculations and evidences in order to save time, cost and effort of the Claimant and

efendant.

!his !echnical Paper describes the importance and meaning of claims, method of evaluation, and preparation of a successful claim presentation. !he relationship between the contract base lines,

i.e., Contract Price, "cope, "chedule and Conditions are established here along with the head of

claim due to change in conditions, delay and disruption. Methodology for the calculation of #ead$ffice $verhead and Profit is also discussed with their relative importance and interrelations.

!his Paper further discusses about some of the common terms in claim. As the final output of the

evaluation process is the claim presentation, this paper describes the structure and requisites of it.

1. INTRODUCTION

Claim is a request for a benefit for which the Claimant believes or contends he is entitled, but

agreement has not been reached. !he construction industry is witnessing an increased numbers of

claims in both domestic and international sectors and the claim presentation is important in claim

related issues in Project Management. !he Project Management and Contract ManagementProfessional should have basic knowledge about the meaning, evaluation and preparation of

claim.

Claim leads to wastage of money, time and efforts, especially due to unprofessional presentationof it. A survey conducted with %& construction projects in 'estern Canada, demonstrated that thetotal amount of claims contributed to a &() increase in project cost and total delays to &*). !he

study also revealed that more than half of the claims led to a cost increase of at least +() of the

original contract value.

!he unfortunate reality is that construction claims are often resolved by people who were not

directly involved in the construction project. n the courtroom, it is settled by lawyers and

judges- or in conference room often by corporate, vice presidents, or financial officers with little

construction eperience. #ence, it is critical to provide a simplified, graphically driven presentation of claim issues. !oo much information and not enough information are two main

pitfalls of claim presentation, and should be avoided in claim presentation.

A well prepared claim presentation helps all the involved in settling the issues in an early stages,

before going to arbitration and litigation, which are epensive and time consuming. A claim must be presented in a professional manner with sufficient details including the basis, calculations and

causations. f the claim presentation is transparent and reasonable, it is easy for both parties to

reach in agreement in an early stage itself and this requires a professional claim presentation,which is the rationale of this Paper.


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2. MEANING OF ‘CLAIM’

A claim is a demand, request or application for a benefit for which the Claimant believes or

contends he is entitled, but agreement has not been reached. n other words, claim may bedefined as a failure to fulfill obligations under the contract or law by either of the parties. Change

order claims can be defined as, written authori/ation provided to a Contractor that approves achange from the original plans, specifications, or other contract documents, as well as a changein the cost. A claim may be for money, for time, or both- however it should be noted that a

successful claim for time etension does not automatically honor a valid claim for money, and

vice versa.

'hen the liability of the discovered change is easily attributable and the consequences of thechange can be ascertained 0cause and effect1 by evaluation- then a formali/ed variation orders

will be the result. "ometimes the liability of the change cannot be easily attributed or for which

liability is disputed, then it will lead to claims. Claim is usually caused by defects- conflicts orambiguities in the "cope or "chedule- 2clusion clauses- or 2ndeavour to avoid un3quantified

risk. n order to successfully justify such claims, it is usually necessary to carefully analy/e thescope and the schedule, particularly the contract documents and the provisions of the law.

Claims unde C!n"a#" and La$

A contractual claim is an entitlement under the contract itself where specific provisions or

implied conditions of the contract can be invoked to support the entitlement. A Claim under law,

sometimes referred to as an 4etra3contractual5 claim is where the entitlement accrues from the provisions of the law.

N!"i#e !% Bea#& ! Claim

!he injured party 0Claimant1 shall give notice of breach to the defending party 0efendant1,

immediately upon discovering the breach- and such notice should specify the nature of the breach in most of the jurisdictions. Most of the Construction Contracts contain a requirement of

notice to submit a claim both for time etension and for money. !he purpose of the notice is to

enable the other party to be aware of and to mitigate the effects of the breach causing the claim.

6ailure to give prescribed notice is a breach of the contract conditions and while such breachmay not deprive the Contractor of his rights under law, such breach may lead to a defense by the

2mployer that lack of knowledge about the breach had prevented actions to mitigate the effects

of the breach and had also prevented proper evaluation of the effects of the breach.

E'alua"i!n

2valuation is the process of assessing the quantum in money value and for the etension of time.

As 7urden of Proof is on the claimant, the claimant must show that there is a direct link 0causal

link1 between the breach 0cause1 and the loss 0effect1 thereby sustained. 'hen there is more thanone competing causes, then it is necessary to ascertain and define such competing causes and


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responsibility, the timing and effect, and losses actually and properly sustained. 8enerally a

claim can only comprehend the losses actually incurred, possibly with the addition of an agreed

or ascertained element for overheads and profit.

(. ‘CONTRACT BASE LINES’) T*E BASIS OF CLAIM

E+ALUATION

6irm 6ied Price 066P1 or lumpsum contracts are most common and are more vulnerable toclaim due to its inherent natures. 'hile lumpsum contracting provides the lowest possible

financial risk for the 2mployer, it provides the highest risk for the Contractor, because any

variance in scope, schedule, or conditions affects the Contractor5s costs. 'hen the work ischanged, the Contractor is epected to perform the work as a result of which he may sustain

additional costs. $bviously, the Contractor will attempt to seek additional compensation based

upon each such change, and often etensions of time, within which will lead to claims and

disputes. All changes in the scope, schedule or conditions under which the Contractor9s work will

be performed, which result in delay or time3related claims, should be considered in terms of their deviation from the 4baseline5. As illustrated in the 6igure below, the contract defined scope,

schedule, and conditions constitute the 4baseline5.

"cope "chedule

Contract

Price

Conditions

6igure: !he Contract 7ase ;ines

"chedule is the most easily affected element of the lumpsum contract baseline, because any

delay, acceleration, disruption, or distortion of performance constitutes a change which mayentitle the Contractor and obligate the 2mployer to pay additional compensation. 4!ime is

money5, is a factual reality, and the failure by either or both the 2mployer and the Contractor to

recogni/e this relationship can lead to substantial delay and subsequent time3related damageclaims.

!he Contractor9s right to obtain time related compensation must be proven against the contract9s

4baseline5, which should be accurate and verifiable with the contract scope, schedule, andcondition. !he 2mployer, on the other hand, must ensure that he has a clear idea of the effect ofits actions upon these three 4baseline5 elements.

A claim consisting of a request by the Contractor for money or time, due to a change in any of

the three basic elements of the contractual baseline, given that each change is beyond the control

of the Contractor, may affect his cost and thus decrease his profit unless an appropriateadjustment is made to the contract.


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,. E+ALUATION -ROCESS

2valuation is the process of quantifying the amount or etent of the additional costs sustained

due to the breach, and establishing that the subject losses were actually and properly sustained asa result of the breach. As the Contract Price of the lumpsum contract is equated to the elements

of 4baseline5, each of the three basic elements should be priced to aggregate to the 4ContractPrice5.

!he basis of the pricing is usually referred to as the 4Price Analysis5, given that the ContractPrice usually aggregated from the total of a 7ill of


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Materials approval register

>equest for information register

"ite nstructions register

Correspondence and minutes files

"ite diaries

"ite instructions

?ariation orders

Additional works register

Contract program

@pdates of contract program

As3built program

Photographs and video

Agreed measurements of 4covered5 works

elay notifications

Claim notifications

Materials orders and invoices

Any other project documents related to schedule, cost, risk or quality including correspondence

between various stakeholders can be used as etailed and 2tensive >ecords in the evaluationand preparation of claim.

. *EADS OF CLAIM

Most of the construction projects are unique by their very nature and have varyingcharacteristics- however certain heads of claim that occurs frequently, can be grouped into threemain categories as follows:

Ne$ ! #&an/ed #!ndi"i!ns ! #i#ums"an#es


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Any change in conditions or environment, where the contract is operating has a corresponding

change in other factors and may be measured in money terms, i.e., cost. !his change can be

adjusted with a different factor or factors without changing the cost. !he following are the mainconstituent of changed conditions:

8round conditions, obstructions etc.

$ccurred >isks not mentioned, not quantified or ecessive

ew or changed laws, regulations, duties, taes etc.

@nforeseen problems of supply andBor delivery of resources

;oss due to carrying out work at a time of the year involving special factors

Particular climatic conditions

-!l!n/a"i!n #!s"s due "! dela0

t may be identified that the act of postponement is the 4cause5, and hindrance is the 4effect5 of

delay. Primarily construction activities may be delayed but not disrupted i.e., duration ofactivities may be postponed in commencement, hindered or slowed down in achieving regular

progress, and hence prolonged in completion. !he following are some of the epenses due to

delay:

>emuneration of site staff and incidental traveling epenses

Plant and scaffolding retained on site

!emporary power distribution and lighting

!emporary office and storage accommodation

@tility accounts for the delay period

!elephone account for the delay period including rental and calls

Additional insurance and 7ond premiums

Attendances on sub3Contractors over a longer period

ncreased costs due to inflation of labor, plant and material

Profit and overheads on increased costs reimbursed during the etended period

'atching, lighting and protection


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"afety and welfare measures

"ite clearance and maintenance of temporary roads

!ime3related temporary works

;ost opportunity due to overdraft facility

2tended equipment warranties

ncreased maintenance period risk

#ead office overheads

6inance charges

;oss of profit.

Disu"i!n ! L!ss !% -!du#"i'i"0

elays and prolongation are time related, but disruption is resource related. Constructionactivities may be disrupted in regular progress or logical sequence but the eperience of

disruption of progress may not result in a delayed completion of activities. t is often that more

resources are committed to the activity to achieve completion in time. !he following are some ofthe eamples of disruption:

6ragmented working: lack of utili/ation of resources

>educed production for planned resources

Planned production from increased resources

$ften delay equates to prolongation which invariably requires an Award of 2tension of !ime for

completion of the contract in due time. !he 2mployer5s award of 2tension of !ime by keepingalive the Penalty or ;iquidated amages clause will not automatically entitle the Contractor for

additional money.

Another term for disruption is 9fragmented working9, in which the claimant contends that the

actions of the other party have prevented or hindered the claimant from eecuting the affectedworks, reduced output level andBor enforced the same output for an increased level of resources.

ue to the burden of proof, and the requirement to show causal link substantiating claims for

disruption can be very tedious and difficult.

C!s"s !% Disu"i!n


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n order to make claim for the costs of disruption, it must be evident that some planned or

orderly sequence of work had been affected by an act of the 2mployer, of the 2ngineer, andBor by

a variation or variations. t is often the case that individual sections of work may be affected in away, which does not cause prolongation by themselves. dle time of plant, tools and equipment-

and ;oss of Productivity are the two main heads of costs of disruption.

Finan#e C&a/es and In"ees"

Certain breaches of the contract conditions would normally entitle the Contractor to obtaininterest. !he cost of finance should be calculated on the basis of charges by the Contractor5s

bank i.e., using the same rates and compounding accrued interest at the same intervals. 'here

the Contractor is self3financed or financed from within its corporate group the appropriate rate of interest is that earned by the Contractor 0or its group1 on monies it has placed on deposit.

. O+ER*EADS AND -ROFIT

Si"e O'e&eads

"ite overheads cover all of those site costs that are not directly related to particular items ofwork, which may include:

"alaries and wages of all indirect staff

$ffice facilities cost

"ecurity

Provision of stores, workshops, latrines, etc.

Construction, maintenance and removal of site access roads

!ransportation of plant to and from site

Contract insurances, performance bond, guarantees etc.

Provision and maintenance of small tools

"ubsistence and traveling costs and allowances

!he majority of the above items are of a time3related nature, but there are a few with lumpsum

nature. !he latter must be ecluded when calculating the weekly site on cost, which may becalculated separately.

*ead3O%%i#e O'e&eads


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#ead $ffice $verheads are the costs incurred by the Contractor in maintaining his head office

establishment, and include the cost such as, head office staff, rent of head office premises,

Contractor9s all risk insurance, tendering for new projects etc., together with all other globalcosts. 6rom historical data a Contractor can identify the cost of #ead $ffice $verheads, and his

gross turnover 0revenue1 for the same period. #ead $ffice $verheads can be allocated at the

same percentage of historical data in estimation.

-!%i"

!he percentage included for profit in a tender is entirely a management policy decision of a

Contractor only. !he profit is a function of revenue, where #ead $ffice $verheads is a function

of time. 4;ost opportunity5 is the philosophy behind claims for profit because the Contractor has been denied the opportunity to generate further revenue and profit from other projects by

utili/ing the resources for the additional time. !o claim for this item, the Contractor will show

that he would have probably undertaken other contracts by utili/ing these resources.

*ead3O%%i#e O'e&eads and -!%i"

7ecause of the similarities of #ead $ffice $verheads and Profit, as they are both related to the

value recovered by the Contractor over a particular period of time, they may be considered

together. !here are two main methods of calculating #ead $ffice $verheads and Profit0#$$#P1, i.e.- by using details of actual additional costs, and by using formulae. "ince the true

basis of the value of a claim is on 4actual costs5, then actual method is preferable. 7ut it is not

practical for Contractor to record and allocate their head office costs in sufficient details andaccuracy to specific project and task.

ifferent 6ormulae for calculating the #ead $ffice $verheads and Profit, as follows:

!he #udson formula

!he 2mden formula

!he 2ichleay formula.

2rnstrom 6ormula

Manshul 6ormula

Carteret 6ormula

Allegheny 6ormula

T&e *uds!n F!mula


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!he #udson formula states that the loss suffered by the Contractor as a consequence of

additional time spent on "ite is equivalent to:

Claim ?alue for #$$#P P D C? D P B 0E(( D CP1

'here, P 3 Planned #$$#

C? 3 Contract ?alue

CP 3 Contract Period in weeks

P 3 Period of ecusable delay in weeks

Emden4s F!mula

2mden9s 6ormula is similar to the #udson formula ecept that instead of using the percentage

included in the Contract for #ead $ffice $verheads and Profit the percentage used is for thecompany identified from audited accounts, generally the average of the percentage for overheads

and profit for the previous % 3 + years is used.

Ei#&lea04s F!mula

!he 2ichleay 6ormula, although once again following a similar concept to both the #udson

formula and 2mden9s formula, is a more sophisticated formula and amount claimed are

calculated on the basis of a number of calculations.

#$$#P allocated in $riginal Contract, $AC ?CP D !$C B !$

'here, ?CP 3 ?alue of work invoiced during the contract period

!$ 3 !urnover of the company during the contract

!$C 3 !otal overheads of the company during the contract period

Claim ?alue for #$$#P $AC D P B CP

'here, $AC 3 #$$# allocated in $riginal Contract

CP 3 Contract Period in weeks

P 3 Period of ecusable delay in weeks

5. GLOBAL CLAIMS


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!he correct way of presenting a claim to the 2ngineer or before a Court or Arbitrator is by using

causation, i.e., rational and logical linking of the effect with the cause. f the 2ngineer is E& days

late in issuing the drawings for the foundations and as a result the completion of the work isdelayed by E& days, will illustrate cause and effect linkage.

owadays, the Contractors and "ubcontractors are practicing a method known as the global or4>olled up5 claim by giving less importance to the classical cause and effect linking. All causes

of loss andBor delay under the global claim method are compiled together and one overall delaygiven as a consequence. n this global claim method, the classical method of linking each effect

with its cause ignores the synergic effect of additional cost andBor delay.

'hile such rolled up claims may be acceptable in respect of financial claims, cause and effectwill still have to be linked in respect of delay claims, as a matter of evidence. 'hile it is

impractical to assign individual cause to a particular effect, the principles of global claim method

can be used successfully. f a rolled up claim is appropriate, the events on which it was evolved

should be described in sufficient detail to indicate how they might be causative of the entitlement

claimed and why the other party was responsible for them.

!o avoid a great deal of argument over a global claim, Contractors and "ubcontractors are

advised to establish the linkage between cause and effect of every event, which may lead to a

claim, at the time of occurrence itself. As well as producing the cause and effect matri, it will beappropriate to highlight major delaying events in the tet of the claim by making reference to

progress of works and effect on other trades. Particulars about the implied link between cause

and effect also shall be given with sufficient details such as:

!he unwritten assumptions on which such a claim is often based

!he reasonableness of the original tender price, program and resources

!he absence of other eplanations for the delay and disruption suffered.

A rolled up claim is unlikely to succeed unless detailed factual evidence is available to eplain

the disruptive nature of the events on which it is based, and the 2ngineer or !ribunal is satisfiedthat there are no other eplanations, such as over optimistic programming, unrealistic pricing,

and a Contractor9s inefficiency for the resulting delays, disruption and loss, etc.

T!"al #!s" me"&!d !% #laim

4!otal cost method of claim5 is an etreme form of a 8lobal claim, consisting of evidence offered by the Contractor, often from internal sources, as to the total cost of eecuting the contract, and

then claiming the difference between that total cost and the contract price. !his is very frequently

used in support of perfectly ordinary breaches of contract or variations, where disruption is

alleged.

A claim so presented dispenses with the requirement of identifying precisely the breaches or

causes of action relied on, or of connecting the amount claimed, as a matter of causation, to the


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individual causes of action. A total cost claim may be advanced in relation to the performance of

the contract as a whole, or used as the basic underlying principle, subject to adjustment, of the

computation of the damages for a particular individual part of the contract. As a matter of first principle, the obvious objections to the use of the total cost computation are as follows:

"tanding by itself, an over3run of cost is evidence of nothing, and certainly not of a change or breach of contract by the owner

Coupled with convincing evidence of a breach or change, it is still not evidence that any damageor additional cost has been caused by that breach or change

Coupled with evidence of a change or breach, and evidence that at least some damage or

ependiture must have been incurred as a result of the change or breach, it is not evidence as to

what that damage is, since there are so many other possible eplanations of the cost over3run

f there is more than one cause of action involved, or one cause of ependiture for which the

owner cannot be responsible, the owner9s advisers, and any tribunal, have no material for valuingor eamining the case on those parts of the claim which they are disposed to accept or concede

A function of such claim is to impose an absolute upper limit on any claim or group of claimswhich a Contractor may wish to bring, since a total loss claim represents the maimum

theoretical damage or additional ependiture attributable to all proven changes or breaches

affecting the performance of a contract.

6. -RE-ARATION AND SUBMISSION OF CLAIM

@sually, the Contractor or the "ubcontractor will produce a claim document to the 2ngineer,

2mployer or Main Contractor. A claim presented in a tidy and professional manner will oftenresult in a better settlement than an unprofessional one. t shall be structured logically into

sections, and each one can be divided into subsections having sufficient details. !he followingare the most common sections in a general sense:

ntroduction

Contractual basis of the claim

!he details of the claim

!he evaluation of the claim

Appendices

In"!du#"i!n


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As the person, who is responsible for the final assessment may not be totally familiar with the

contract, it is important to give background details in order to make the document a complete

entity in itself. !he minimum required details should be as follows:

ames of the parties to the contract and the consultants

etails of the conditions of contract governing the contract

!he tender date

!he original contract sum

ates for possession and completion

etails of etensions of time claimed

etails and amounts of money claimed

etails of etensions of time awarded

etails of amounts certified

Basis !% "&e #laim

t is important to state precisely about contractual basis of the claim. !he claim will fall under

one or both of the following categories:

A claim for loss and epense or etra costs or epense flowing from a remedy contained withinthe conditions themselves

A claim for damages resultant upon a breach of the epress or implied terms of the contract or

the law

t is essential to state clearly the event or events pertaining to the claim. t is also good practice inthis section of the claim to make reference to notifications which have been made during the

contract.

De"ails !% "&e #laim!his section of the claim should provide the complete details as much as possible of all delayswith reasons, responsibility and effect on progress as a whole. Assistance can be gained to prove

this cause and effect by the use of critical path method 0CPM1 or any other graphical method.

E'alua"i!n !% "&e #laim


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n most cases the evaluation will fall into two sections, i.e., costs associated with prolongation

and costs associated with disruption. Methodology of heads of claim has been described earlier

in this Paper.

Aendi#es

A well prepared claim usually has a large volume of backup documentation to substantiate the

case such as correspondence, records, photographs, video and programs. nclusion of all the

details in the main body will make the presentation bulky and distract the reader. #ence it isadvisable to attach as appendices.

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Claims Preparation Points

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