The pathway to documenting successful contract claims..

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The Pathway to Documenting Successful Contract Claims

April 22, 2013By: Mohamed Hassanin’ PMPE-mail : [email protected]

It is Important to Recognize

A. Requirements of a Successful Claim

B. The Main Reasons for Disputes Arising on a Construction Projects

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Claims

Claims arise on many construction projects. A great deal of emotion is wasted by parties to a construction dispute because claims are often not fully and fairly documented and properly presented.

The purpose of this presentation is to provide practical tips in organizing, documenting, negotiating and resolving construction claims.

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A. Requirements of a Successful Claim

Many contractors harm their credibility in providing verbose, complicated, emotionally charged and over reaching claims without addressing the primary requirements for a successful claim. What Are The Requirements of a Successful Claim???1. Recognize when a potential claim arises and provide timely notice;2. Determine the facts; 3. Establish entitlement/identify the applicable contract provision or

law/establish liability; 4. Establish causation; 5. Calculate damages in accordance with the contract; and 6. Negotiate or adjudicate the claim.

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1. Recognize when a potential claim arises and provide timely notice

It is quite common that at the commencement of construction, both parties wish to remain in a non-adversarial relationship. No one likes to give notice of a claim at the early stages of a construction project

Early notice of claim has the advantage of avoiding surprise and enables the parties at an early stage to consider solutions to avoid and minimize the impact of any potential claim.

Timely notice of a claim is critical to the claim’s ultimate success.

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When Notices Can Be Sent ???• Changes, (Changing In Scope, Specifications, Quantities….) • Unknown Site Conditions (discovers subsurface conditions )• Delays (Delayed in the performance of the work)• Force Majeure In the event that force majeure has prevented (or will

prevent) a party from performing an obligation.• Terminate the Contract by Owner or Contractor • Dispute Resolution If a dispute arises between the parties• Damages• Waiver of Claims If any party waives and releases the other party from all

claims • Warranty The owner is obliged to provide a notice in writing of defects

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2. DETERMINE THE FACTS• Often contractors are unsuccessful in presenting a claim because the

historical account is unclear because of poor contract administration.

• It is extremely important that a proper program of record be implemented in order to successfully capture all facts.

Suggestions for Proper Contract Documentation:• Establish effective estimating cost accounting systems and procedures • Record and track both budgeted and actual work quantities, costs, labor

hours and productivity• Track the cost of all changes, • Use photographs , daily diaries and other data collection techniques .

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• Develop standard forms for costing information, allocating labor and materials to extra work.

• Daily report which includes basic project information, weather information, site conditions, activities, use of equipment, work performed, man-power and material deliveries.

• Communication and Correspondence must be clear and concise. Limit each letter to one topic.

• Maintain logs for change order and submittals.

If these records are properly maintained, they should be an excellent collection of information to form the factual basis of a claim.

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3. ESTABLISH ENTITLEMENT

• A claim will have no chance of success if it is not grounded in the contract

• There must be a breach of an obligation by a party to the contract or a change in the scope of the work or a delay under the contract as a basis for a claim.

• Contracts on large projects contain many volumes of specifications and often consist of a confused assembly of general conditions, special provisions, special conditions, specifications, etc

A detailed familiarity with the terms and conditions of the contract is essential to the success of a claim. In order to be successful, the contractor must be familiar with the Dispute Resolution Clauses.

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A. Requirements of a Successful Claim (Count.)

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In establishing entitlement, the following information should be collected:

• Identify the issue and establish a claim file• Provide notice of claim with specific contractual references• Define the scope of the problem, change, delay, impact, etc.;• Maintain proper records of costs;• Base Line Schedule and updated schedule;• Prepare an estimate of the costs .

Document the change order or delay request describing the scope of the work, the proposed cost and time, direct costs, indirect costs, overhead costs and profit – use a standard cost estimating form to price out the costs.


4. CAUSATION

•Without establishing causation, there is no basis of a claim.

•Writing a lot of letters and pointing an finger does not establish causation.

•Causation is established by the injured party demonstrating that its loss due to an act or omission of the other party or by Force majeure event.

•The most important requirement is a proper analysis of the facts.

Whatever evidence is presented there must be a clear understanding of what it is meant to establish and the evidence must be in a form which can be readily understood by parties.

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5. CALCULATE DAMAGES

Many contractors spend a great deal of effort in documenting the claim and establishing causation but pay little attention to the calculation of damages.

Calculating damages can be one or more of following:

Extra Work: This claim should include the direct labor hours, equipment and subcontractor costs incurred in performing extra work. It should also include supervision, overhead and profit as agreed in the contract.

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Delay Costs: These costs should include the additional labor hours, additional equipment time and supervision costs incurred beyond the planned completion date for the contract. These costs should also include a component for site indirect costs as well as home office overhead for the extended period.

Acceleration: This claim includes the premium overtime hours incurred by a contractor in accelerating the work in order to meet a completion date.

Subcontractor Claims: This claim usually involves subcontractor claims of delay, productivity or acceleration and should be documented in detail by each subcontractor.

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Overhead: This claim usually involves a claim for head office or site office overheads for the incurred losses.

Profit: Profit may be claimed on the basis of the rate planned at the time of bidding of the tender for the project.

Financing Costs: This is a claim for the costs of financing or other bank interest charges.

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6. NEGOTIATE THE CLAIM

•A properly documented and presented claim is much easier to negotiate the claim.

•Negotiation is a much more profitable result for the resolution of a claim than arbitration or litigation.

•Preparation for negotiations is key. In order to be successful,

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CONCLUSION

•The proper organization and presentation of a claim takes time and a great deal of care.

•More often than not, the claim reviewers must answer to corporate or governmental managers whether or not a claim is valid and should be paid.

•Well prepared and documented claims are much more successful in getting paid than ill prepared claims that lack foundation, analysis and justification.

If you follow the recommendations set out above, you will have a much greater chance of success in having your claims

paid.

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What are the most important causes that lead to claims?Causes of claims

1. The increased complexity of projects

2. The effects of high inflation and decrease in profits

3. The high speed of construction and materials technology

4. Decreased capital availability

5. Withdrawal of governmental support to the contractors

6. Contractors have become more sophisticated

7. The economy's impact on the construction industry

8. Force Majeure

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Types of claims

A. Contractual claims.

B. Delay claims.

C. Acceleration claims

D. Change claims

E. Extra work claims

F. Different site conditions claims

G. Different measurement pricing claims

H. Damage claims

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Claims Factors Groups

1st Group: Poor planning• Delay caused by owner

• Change orders

• Financial problem

• Delay in payment

• Planning errors

• Bad communication between parties

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2nd Group: Errors or Incomplete Documentation

• Design errors or omissions

• Poorly written contracts

• Variation in quantity and measurements

• Inconsistency of specifications and drawing

• Sub-contracting problem

• Constructive changes and Oral change orders

• Termination & Suspension of work

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3rd Group: Scheduling and Estimating Errors

•Changes in material and costs (Escalation)

•Delay caused by contractor

•Scheduling errors

•Subsurface problems

•Estimating errors

4th Group: Execution Deficiencies

•Execution errors

•Changes in material types

• Poor quality of the contractors work

• Accidents

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5th Group: Construction Environment• Contractors not well organized

• Owners personality

• Government regulation

• Non-permitted contractors

• Low price of the contracts

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What are the Most Frequent Causes?• Changes claims• Delay claims• Extra work claims• Contractual claims• Damage Claims

Changes claims: Depending on the contract and its terms, such changes might have an effect in value addition to or deletions from the contract, modifications of the work.

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Delay Claim: This category is subdivided into three main types as follows:

Excusable delays: These are delays for which neither the owner nor the contractor is responsible (Force Majeure).

Compensable delays: for which the contractor is entitled to compensation.

Inexcusable delays: these delays represent problems in the contractor’s organization such as lack of management or financial capability.

Extra Work Claims: Extra work is any work that is ordered by the owner after construction has started that was not included in the original contract.

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Contractual Claims: •Contractual claims concerns matters with regard to the contract itself. This includes any disagreement on the responsibility or liability of some parts that are not included in the contract documents.

•The main reason of these types of claims is poorly written contracts.

Difference in Pricing Claims: •These types of claims deal with the disagreement regarding measurements at the final stage in the construction.

•Difference pricing by the contractor and the owner of some of the materials.

•The scope changes and the extra work usually create some differences in pricing.

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Damage Claims: •Property damages may occur due to the act of the owner or safety related problems. •This type of claims is very rare because usually contractors have the total responsibility for the site.

Finally We Can SayCareful preparation of the contract documents will help to avoid

disputes. The scope of the project should be clear, correct and concise. Also, the contractor should ask the owner to write the

change orders instead of giving verbal change orders.

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Thank You for your attention

The pathway to documenting successful contract claims..

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