AMERICAN UNIVERSITY OF BEIRUT

ADMINISTRATIVE PROCEDURES FOR THE MANAGEMENT OF CONSTRUCTION CLAIMS

by

MUSTAFA MOHAMAD HASAN EL-SAADI

A project submitted in partial fulfillment of the requirements for the degree of Master of Engineering Management to the Engineering Management Program of the Faculty of Engineering and Architecture at the American University of Beirut

Beirut, Lebanon October 1998

AMERICAN UNIVERSITY OF BEIRUT

ADMINISTRATIVE PROCEDURES FOR THE MANAGEMENT OF CONSTRUCTION CLAIMS

by

MUSTAFA MOHAMAD HASAN EL-SAADI

Approved by:

Dr. Mohamad Asem Abdul-Malak, Associate Professor Engineering Management

First Reader

Dr. Toufic Mezher, Associate Professor Engineering Management

Second Reader

Date of project presentation: October 13, 1998

AMERICAN UNIVERSITY OF BEIRUT

PROJECT RELEASE FORM

I, Mustafa Mohamad Hasan El-Saadi

authorize the American University of Beirut to supply copies of my project to libraries or individuals upon request.

do not authorize the American University of Beirut to supply copies of my project to libraries or individuals for a period of two years starting with the date of the thesis defense.

Signature

Date

ACKNOWLEDGEMENTS

Special thanks are for my father, my mother, and my sisters for their love and support. Special regards are for my friends who are always by my side. My recognition and gratitude are addressed to Dr. Mohamad Asem Abdul-Malak and Dr. Toufic Mezher for their assistance and encouragement.

AN ABSTRACT OF THE PROJECT OF

Mustafa Mohamad Hasan El-Saadi for

Master of Engineering Management Major: Engineering Management

Title: Administrative Procedures for the Management of Construction Claims

In modern day construction, owners must accept the fact that no construction project is guaranteed to be free of changes and claims. Claims for added costs and extended time result from a variety of events during the course of construction. To enhance his chances of success, the contractor submitting a claim must closely follow the contract conditions, provide a break down of added costs and time, and submit a sufficient documentary proof. Project owners need, therefore, to follow an overall comprehensive step-by-step procedure for managing the claims submitted by contractors. A process for the management of construction claims is presented for the use of project owners. The process helps the owner check issues such as notice requirements, sufficient information and records, and relevant clauses in the contract. In addition, some aspects of the above-mentioned process are further developed into sub-models. Procedures for analyzing claims resulting from delay, variation orders, differing site conditions, and defective specifications are also presented, as well as definitions of alternative dispute resolution strategies. The presented process and sub-models help both the knowledgeable and unknowledgeable owners to deal better with claims submitted by contractors, and to understand the meaning and better appreciate the relevance of clauses in the contract conditions document.

TABLE OF CONTENTS
Page

ACKNOWLEDGEMENTS ..v ABSTRACT

....vi

LIST OF ILLUSTRATIONS ..ix

Chapter

1. INTRODUCTION .........1 2. CAUSES OF CONSTRUCTION CLAIMS ...................................... 4

2.1. Variation Orders Requested by the Owner ...................................................... 4 2.2. Conflicting Interpretations ............................................................................... 7 2.3. Differing Site Conditions ................................................................................ 8 2.4. Delays ............................................................................................................ 11 2.4.1. 2.4.2. 2.4.3. 2.4.4. Excusable vs Non-excusable Delays ................................................. 13 Compensable vs Non-compensable Delays........................................ 13 Concurrent vs Non-concurrent Delays .............................................. 14 Critical vs Non-critical Delays .......................................................... 16

2.5. Acceleration, Disruption, and Other Effects on the Program ....................... 16

3. PROCESS FOR MANAGING CONSTRUCTION CLAIMS 19

3.1. Occurrence of Cause for a Claim .................................................................. 19 3.2. Intention to Submit a Claim .......................................................................... 24 3.3. Meeting the Notice Requirements and Collecting Information ..................... 23 3.4. Continuous Effect of the Claim ..................................................................... 24 3.5. Submitting the Final Amount Claimed ......................................................... 25 vii

3.6. Responsibility of the Engineer ...................................................................... 26 3.7. Settling the Claim .......................................................................................... 27

4. SUB-MODELS FOR MANAGING CLAIMS ............................... 29

4.1. Notice Requirements ...................................................................................... 29 4.2. Collecting Information .................................................................................. 32 4.3. Claims Resulting from Variation Orders ....................................................... 33 4.5. Claims for Delays........................................................................................... 36 4.5. Claims due to Differing Site Conditions ........................................................ 39 4.6. Claims due to Defective Specifications ......................................................... 43 4.7. Claims Due to Conflicting Interpretations of Contract Documents............... 46 4.8. Alternative Dispute Resolution Methods ....................................................... 47

5. CONCLUSION ............................................................................................... 50
5.1 5.2 5.3 Summary of the Project.................................................................................. 50 Conclusions .................................................................................................... 51 Future Work .................................................................................................. 53

REFERENCES ..54

viii

LIST OF ILLUSTRATIONS

Figure

Page

2.1. Types of delays ...12 3.1. Process of managing construction claims ...20 4.1. Procedure for checking the notice requirements .31 4.2. Procedure for claims resulting from variation orders .34 4.3. Procedure for claims for delays ..37 4.4. Outcomes of claims for delays 38 4.5. Procedure for claims due to differing site conditions .42 4.6. Procedure for claims due to defective specifications ..45 4.7. Alternative dispute resolution methods in the settlement of claims ...49

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CHAPTER ONE INTRODUCTION

New construction projects are becoming more and more complex due to new standards, advanced technologies, and owner-desired additions and changes. While the successful completion of projects has been thought to mainly depend on the cooperation between the contractor, consultant, and owner, problems and disputes have always erupted due to conflicting opinions as to the various aspects of design and construction. With the introduction and widespread application of CPM scheduling, it became easier to point out where the delays are occurring, and how delays in one activity affect others and, possibly, the project as a whole, thus allowing objective judgements as to whether contractors shall be entitled for time extensions. On the other hand, the increased complexity of construction documents and conditions of contracts have been contributing to higher possibilities of disputes, conflicting interpretations, and adversarial attitudes. The exhaustive and expensive process of litigation has not been making things easier, as disputes can take a very long time to be resolved. All the above factors have made claims an inevitable burden in implementing todays construction projects. In any construction project, significant additional costs can be experienced by the contractor, the owner, or both, due to the actions of the other party or parties involved. Disputes over the right to a compensation as well as the amount of time and/or money to be given often end up in resorting to litigation, arbitration, or other forms of dispute resolution methods. Construction participants often do not realize that 1

a proper analysis of the situation and its background will often lead to an objective understanding of the reasons. Claims and disputes arise from a number of cases, namely: defective specifications, differing site conditions, increase in scope of work, restricted access to site, owner-caused disruptions or delays, what constitutes a substantial completion, site instructions, and enforceability of liquidated damages, among others. It is important for an owner, when analyzing a claim presented by the contractor, to objectively ask the following questions: Were the notice requirements met? Did the contractor refer to the proper clauses in the contract? Does the owner or consultant bear part of the responsibility? Was the situation predictable at the time the contract was signed? Were the specifications defective? Was the contract misinterpreted? And, if so, which interpretation will rule? A need for an overall step-by-step procedure for claims analysis and management is therefore crucial for proper dispute resolution and future claims prevention. The objective of this work is to present a procedure for claims management addressing an owners standpoint. The work will attempt to (1) list the causes of claims, (2) point out the relevant contract conditions and clauses, and (3) find the proper compensation method if any is required. The three main parties usually involved in construction claims are the Owner, the Engineer, and the Contractor. The Owner is the person, group of persons, or organization that own and operate the project after the completion of its construction. The Owner chooses the Engineer who is responsible to develop the design. The Owner signs a formal agreement with the Contractor, who will execute the project. 2

The Engineer is usually involved in the three phases of planning, design, and construction. He assists the Owner in evaluating the feasibility of the project and in establishing an estimate of the cost. The Engineer also develops the plans and specifications that define the scope of the works, and might assist in the selection of the Contractor or manage the competitive bidding process. During construction, the Engineer monitors the Contractors progress, examines his work, assures quality, and authorizes release of payments, among other duties he might have under the contract. With the presence of a Project Manager acting on behalf of the Owner, the Engineer might be relieved of some of the monitoring and administrative duties, but he remains, nevertheless, the party responsible for checking the conformance of executed works to the design plans and specifications. The Contractor is the party responsible for the completion of the project in accordance with the plans, specifications, and by respecting the terms and conditions of the contract. The Contractor does not however perform all the work with his own work force. He may subcontract part of the works to specialty sub-contractors and usually has the responsibility to purchase the materials required through suppliers. The Contractor bears all the responsibility towards the Owner on behalf of all his sub-contractors and suppliers. The role of the Contractor is easy to state but sometimes may be very hard to accomplish. A claim, as defined in this paper, is a request by the Contractor for an extension of time and/or additional cost. A closer look at how a claim is submitted and how the Owner deals with it follows.

CHAPTER TWO CAUSES OF CONSTRUCTION CLAIMS

A claim, by definition, is a demand of a right or an alleged right for a time or monetary allowance. In the construction industry where contract documents define the rights, obligations, and procedures, a claim is a request by the Contractor for an extension of time and/or additional cost and can reflect a disagreement that cannot be resolved by mutual consent under the existing clauses. A claim should be studied through a formal process that includes several steps that will be discussed in Chapter Three. Claims that are unresolved often end up as disputes that can only be settled by litigation or alternative dispute resolution methods. As implied in the common literature, causes for claims can be generally divided into five major interrelated categories with each individual claim being the result of one category, or a combination of some or all of them. A detailed list of claim types and classification will follow.

2.1.Variation Orders Requested by the Owner These are changes from the original contract issued by the Owner, or the Engineer on behalf of the Owner, requesting formally certain variations to the works whether it be a deletion, addition, or alteration of the existing design. Variation orders are acknowledged by the Owner as a change and therefore the Owner is either ready to pay for a negotiated additional reimbursement, or will be claiming savings on items deleted. Variation orders however can be the cause of claims

by the contractor regarding the valuation of the extra cost of implementing a variation order and/or the extra time required. The value of the works to be done can be specified based on existing rates in the contract, rates of similar items, prorated rates depending on the quantities changed, or market rates assessed by the Engineer. It is usually the Engineer who is responsible for setting or fixing the final rates and therefore quantifying the value of the varied works. The FIDIC (Federation Internationale Des Ingenieurs-Conseils) 51.1 clause on variations states that: The Engineer shall make any variation of the form, quality or quantity of the Works or any part thereof that may, in his opinion, be necessary and for that purpose, or if for any other reason it shall, in his opinion, be appropriate, he shall have the authority to instruct the Contractor to do and the Contractor shall do any of the following: a) increase or decrease the quantity of any work included in the Contract, b) omit any such work (but not if the omitted work is to be carried out by the Employer or another Contractor), c) change the character or quality or kind of any such work, d) change the levels, lines, position and dimensions of any part of the Works, e) execute additional work of any kind necessary for the completion of the Works, or f) change any specified sequence or timing of construction of any part of the Works. No such variation shall in any way vitiate or invalidate the Contract, but the effect, if any, of all such variations shall be valued in accordance with Clause 52. Provided that where the issue of an instruction to vary the Works is necessitated by some default of or breach of contract by the Contractor or for which he is responsible, any additional cost attributable to such default shall be borne by the Contractor. (5)

The FIDIC 52.1 clause on the valuation of variations states that: All variations referred to in Clause 51 and any additions to the Contract Price which are required to be determined in accordance with Clause 52 (for the purpose of this clause referred to as varied work), shall be valued at the rates and prices set out in the Contract if, in the opinion of the Engineer, the same shall be applicable. If the Contract does not contain any rates or prices applicable to the varied work, the rates and prices in the Contract shall be used as the basis for valuation as far as may be reasonable, failing which, after due 5

consultation by the Engineer with the Employer and the Contractor, suitable rates or prices shall be agreed upon between the Engineer and the Contractor. In the event of disagreement the Engineer shall fix such rates or prices as are, in his opinion, appropriate and shall notify the Contractor accordingly, with a copy to the Employer. Until such time as rates or prices are agreed or fixed, the Engineer shall determine provisional rates or prices to enable on-account payments to be included in certificates issued in accordance with clause 60. (5)

The second issue causing claims is whether or not the Contractor is allowed an extension of time to perform the varied works. The Owner often formally asks, when issuing a variation order, for an assurance that the execution of the works will not affect the overall completion date of the project. The Contractor may either give such an assurance, formally, or otherwise reserve his right for an extension of time. The Contractor cannot be asked to execute all variation orders with no implication on the schedule of completion of the project. Even in the presence of floats in some activities, incorporating the change may require time to order materials, time for preparation of materials and shop drawing submittals, and time for approval of these submittals. However, some changes do not actually require extra time and can easily be accommodated by the Contractor in his schedule since they could interfere with noncritical activities only. The Contractor should not be credited an extension of time in these cases, since he might use this extension to catch up with his delay on other items. Again, it is usually up to the Engineer to determine the Contractors entitlement to extra time, and this should be clearly stated in the contract documents. Variation orders are treated individually and are expected not to increase the original construction cost by more than10 or 20 percent. If they do, however, a revised contract value should be negotiated based on the new scope of work and newly

negotiated unit rates. When all parties agree to the change its value is formally added to the original contract sum. The FIDIC 52.3 clause on variations exceeding a certain percentage states that: If, on the issue of the Taking-Over Certificate for the whole of the Works, it is found that as a result of (a) all varied work valued under Sub-Clause 52.1 and 52.2, and (b) all adjustments upon measurement of the estimated quantities set out in the Bill of Quantities, excluding Provisional Sums, dayworks and adjustments of price made under Clause 70, but not from any other cause, there have been additions to or deductions from the Contract Price which taken together are in excess of 15 per cent of the Effective Contract Price (which for the purposes of this Sub-Clause shall mean the Contract Price, excluding Provisional Sums and allowances for dayworks, if any) then and in such event (subject to any action already taken under any other Sub-Clause of this Clause), after due consultation by the Engineer with the Employer and the Contractor, there shall be added to or deducted from the Contract Price such further sum as may be agreed between the Contractor and the Engineer having regard to the Contractors site and general overhead costs of the Contract. The Engineer shall notify the Contractor of any determination made under this SubClause, with a copy to the Employer. Such sum shall be based only on the amount by which such additions or deductions shall be in excess of 15 per cent of the Effective Contract Price. (5)

2.2. Conflicting Interpretations Claims due to conflicting interpretations of contract documents and specifications result mainly from issues such as: (1) ambiguities in the specifications, (2) contradictions between different documents (drawings, specifications, addenda to tender documents, general conditions, supplementary conditions), (3) omissions, or (4) errors. The effect of the above could be greatly reduced if proper care is taken in the design and the preparation of the contract documents and if contractors or construction managers are invited early on to have constructibility and value engineering incorporated at the early stages of the project.

Claims can arise due to ambiguity in the description of one item of the works to be done. There would be no discrepancies in relation to the item between the different documents, but, rather, the item might not be described properly with all its parameters fully mentioned. Or it could be specified based on a performance basis that might lead to subsequent conflicting interpretations during the construction phase. The second case where claims might arise in this category is the discrepancy between contract documents. The same item in the works might be shown on a drawing, with a description of the item stated also in the specifications. The question is which document is to supersede in the case of a difference or a contradiction existing between the requirements of the various contract documents. A third case under this category that might be the cause of claims is when the Engineers representatives pass to the Contractor their opinion on the execution of the works. This might be by a verbal advice, a written remark on a site instruction, a recommendation on the method of construction, or remarks on returned shop drawings and material submittals. These various remarks might represent to the Contractor an addition to the scope of his original contract while the Engineer sees them as constructive remarks for the proper execution of the works.

2.3. Differing Site Conditions This is a very common cause of claims encountered in almost every engineering project. Causes of this type could be subsurface soil conditions, existing utilities and services, existing physical conditions, or a combination of the above. There is no agreement among Owners and Engineers about who should bear the responsibility of unforeseen physical conditions encountered during the project. Some 8

Owners try through the contract language to assign all the risk to the Contractor. In other contracts, differing site condition clauses are introduced to clearly state the responsibility of the Contractor and Engineer and the steps to be taken if unknown or materially different physical conditions are encountered on site that may affect the Contractors cost, time, or performance. A typical differing site conditions clause adopted from the Florida Department of Transportation states that: The contractor shall promptly, and before such conditions are disturbed, notify the engineer in writing of (1) Sub-surface or latent physical conditions at the site differing materially from those indicated in this contract, or (2) unknown physical conditions at the site of an unusual nature, differing materially from those normally encountered and generally recognized as in work of the character provided for in this contract. The Engineer will promptly investigate the conditions, and if he finds that such conditions do materially so differ and cause an increase or decrease in the Contractors cost of, or the time required for, performance of any part of the work under this contract, whether or not changed as a result of such conditions, an equitable adjustment will be made and the contract modified in writing accordingly. The equitable adjustment mentioned above is defined as the price increase that will leave the Contractor in the same financial position he would have been in but for the conditions encountered. This means that the Contractor will recover his costs and be made whole, but he will not be allowed to profit from the problem (6). A revised version of the FIDIC 12.2 clause on differing site conditions states that: It is fully acknowledged by the Contractor that he has taken into account in the lump sum Contract Price the full responsibility for any unforeseen physical obstructions or conditions associated with or related to the execution of the Works, and that no extensions of time or additional costs will be granted in respect thereof, provided that if, during the execution of the Works the Contractor encounters physical obstructions or physical conditions, above ground in the existing structures only, (other than climatic conditions on the Site), which obstructions or conditions were, in his opinion, not foreseeable by

an experienced contractor, the Contractor shall forthwith give notice to the Engineer, with a copy to the Employers Representative. (5)

In order to avoid possible differing site conditions due to the nature of the soil or sub-surface material encountered, a thorough soil investigation should be done prior to the tendering stage of the project. Further surveys and investigations could proceed during design development. It is usually the Engineers responsibility to make sure that the soil investigation report contains enough information for the tenderers to have a reasonable idea of what conditions to expect, in order to estimate their prices and propose preliminary programs. In some complex projects, the Owner and Engineer might choose to establish a sort of a reference range for the conditions to expect (soil type, size of aggregate, specific gravity, extent of cracks, etc.). The Owner then accepts the risk for conditions deemed to be outside the referenced range, while the Contractor accepts full responsibility to perform under conditions falling within the referenced range. It is the tenderers responsibility to visit the site and its surroundings, if the tendering period allows, to benefit from observations that might help in their assessment of the nature of the subsurface conditions. Such observations include conditions encountered in nearby sites, landslides, and water level, among others. Contract clauses can state that any interpretations or evaluation of the subsurface investigation report made by the bidder shall be at the sole risk of the bidder. However, it cannot be requested from each tenderer to do his own large scale soil investigation during the tendering stage. That is exactly why the Owner and Engineer should not withhold relevant information in their possession.

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Once the contract is awarded and works start, the Contractor should promptly notify the Engineer and Owner of any conditions that are materially different from those listed in the tender documents. The differing site condition clause, whenever present, should state how to determine the material difference and who is to judge that (usually it is the Engineer). The same applies to the case of existing utilities, services, and physical conditions. The tenderer should be provided with all available information such as the as-built plans, municipal utility maps, etc., and he should be allowed a reasonable time to acquaint himself with the site. If, however, elements are uncovered only after the start of the works, then the Contractor should promptly notify the Engineer. One should ask the following questions: Were as-built plans available? Were they conveyed to the Contractor? Were these different from the actual conditions? And, what if a utility line was damaged because no one knew it was there? Whose responsibility is it to reconnect it? Who will bear the cost? These questions should be addressed in the contract in order to prevent future confusion and disagreement between the parties involved.

2.4. Delays The main issue in this case is the entitlement of the Contractor to an extension of time, and possibly to extra payment. The delays themselves can result from any of the previously mentioned categories of design-related issues or differing site conditions. Claims for delay are cases where one party is claiming that he has been delayed in the performance of his work due to the action of others. The party involved can claim for an extension of time, extra cost, or both. Delay claims are usually raised by the general 11

contractor, trade contractors, or subcontractors. In the case where the Owner feels that one party is delaying the execution of the project, he should point that out and demand that the party concerned take remedial action to put the program back on track. Delays can be either excusable or non-excusable. Excusable delays are further broken down into compensable or non-compensable. Any excusable or non-excusable delay can be concurrent or non-concurrent (Figure 2.1). Finally, the construction program is a tool that can help judge whether the delay is critical or non-critical.

Delays

Excusable Delays

Non-Excusable Delays

Compensable Delays

Non-Compensable Delays

Concurrent Delays

Non-Concurrent Delays

Figure 2.1. Types of Delays

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2.4.1. Excusable vs. Non-excusable Delays Excusable delays are due to unforeseeable events outside the control of the Contractor, including: general labor strikes, fires, Force Majeure, Owner directed changes, differing site conditions, unusually severe weather conditions, intervention or lack of action by governmental agencies, etc. Non-excusable delays are events which are within the Contractors limits of control and that are probably due to his actions, such as: late performance of subcontractors, poor workmanship, untimely availability of equipment, labor, or material on site, etc. In this case, the Contractor is neither allowed an extension of time nor an extra compensation, and if he cannot catch up with the program, he might even end up paying liquidated damages to the owner.

2.4.2. Compensable vs. Non-compensable Delays If the delay is excusable and is classified as compensable then the Contractor is entitled to an extra payment and an extension of time. Whether a delay is compensable or not depends on the wording of the contract documents. Usually fire, floods, and acts of God are considered non-compensable, while differing site conditions, changes and alterations, late delivery of owner furnished items, late approval of material or shop drawing submittals, and owner directives to stop work are compensable. In some contracts, we might find clauses such as a no-damage for delay clause which indemnifies a party (the owner) from all liabilities. Such a clause should describe the applicable situations in order to be readily upheld by courts.

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2.4.3. Concurrent vs. Non-concurrent Delays A simple statement/definition would be to say that if two delays occur at the same time they are concurrent, if they dont then they are non-concurrent. While this might seem to be a simple distinction, decisions about concurrent delays are not so easily made. The general concept is that: if a project experiences two concurrent delays, one of which is compensable and the other is non-compensable, then the non-compensable generally takes precedence over the compensable one. The same applies if the concurrent delays are excusable and non-excusable; the non-excusable takes precedence over the excusable. It is worthwhile to re-state at this point that a compensable delay entitles the contractor to a time extension and an extra reimbursement, while the non-compensable entitles the contractor to a time extension only. Whenever two compensable and noncompensable delays overlap but do not have the same duration, the ruling party will make an apportionment between the two. Complications arise because there might not always be a clear-cut definition of what is compensable, and because sometimes it is hard to show specifically when the delay actually occurred. An Example on two cases of concurrent details is presented as follows: Case I Delay 1 caused by an Owner-initiated work suspension order Effective date: Order lifted on: Total of delay 1: August 1, 1998 August 30,1998 30 days

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Delay 2 caused by a labour strike Effective date: Strike lifted on: Total of delay 2: August 1, 1998 August 30,1998 30 days

Outcome: The Contractor is entitled to a 30 day time extension, but no additional compensation since delay 1 is excusable and compensable, while delay 2 is excusable and non-compensable.

Case II Delay 1 caused by an Owner-initiated work suspension order Effective date: Order lifted on: Total of delay 1: August 1, 1998 August 30,1998 30 days

Delay 2 caused by a labour strike Effective date: Strike lifted on: Total of delay 2: August 1, 1998 August 25,1998 25 days

Outcome: The Contractor is entitled to a 30 day time extension, and to five days additional compensation since from day 1 to 24, delay 1 is excusable and compensable, while delay 2 is excusable and non-compensable; and starting day 25, delay 1 is excusable and compensable.

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2.4.4. Critical vs. Non-critical Delays It is always important to remember that when delays are discussed, the main concern is about the overall progress of the entire project. Non-critical delays do not necessarily affect the project completion date. To clearly distinguish between the critical and non-critical delays, the contractors program of work, the requirements in the contract for sequencing and planning, and the physical constraints of the particular project at hand should be investigated. Before concluding on the nature of the delay based solely on the above definitions, one must refer to the construction documents that might give different interpretations to some cases. For example, a contract may not allow for any time extensions caused by weather conditions, regardless of how unusual, unexpected, or severe. Another contract may consider supplier delays as excusable if the contractor can prove that the material was ordered on time. Again, a contract might specify the unusually severe weather as being a condition, which exceeds the historical data recorded for a particular area.

2.5. Acceleration, Disruption, and Other Effects on the Program Time is of essence in any engineering project since the financial consequences of a late completion could be devastating. It is therefore required to establish a program for the works to be executed which states the start, end, and duration of the job. The duration may be specified as a period of time or a number of calendar working days. As for the start, it may be the actual day the contract is signed, or more commonly it is the day the Contractor receives a notice to proceed. It is not always clear how to determine the date of completion. Usually, when the Owner can occupy and use the 16

project and its facilities, it is then considered that the contractor has reached the project substantial completion date. The Contractor is the party responsible for scheduling of and planning for his activities, i.e., for establishing the construction program. Upon signing the contract, the Contractor is required to submit his detailed As-Planned program for completing the job. It should satisfy the start and end dates and specifies the working days required. The FIDIC 14.1 clause on the program to be submitted states that: The Contractor shall, within the time stated in Part II of these Conditions after the date of the Letter of Acceptance, submit to the Engineer for his consent a program, in such form and detail as the Engineer shall reasonably prescribe, for the execution of the Works. The Contractor shall, whenever required by the Engineer, also provide in writing for his information a general description of the arrangements and methods which the Contractor proposes to adopt for the execution of the Works. (5)

As work goes on, and changes occur, the activities scheduling may change as well as their duration. This is when the Contractor updates his schedule to an interim As-Scheduled program. When the Owner initiates a change or causes a disruption, the Contractor can show its effect by incorporating the changes into what becomes the AsImpacted program. He then either goes on with this program, or may accelerate some activities or sequence them in a different way before he continues. More specifically, an Owner-initiated change or directive could cause the Contractor to deviate from his original program even though the change may not necessarily cause some of the subsequent activities or the project to be delayed. This is accomplished by the Contractor accelerating the progress of some activities by either assigning more people or working overtime at extra monetary entitlement. The use of an activitys float can affect the Contractors resource allocation in a way that will make it hard to finish other

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activities on time. This is not because their start or end dates are affected, but because they now coincide with other activities sharing their resources under a resource-driven program, or because now two or more activities have to compete for the same space. Neither Owner nor Contractor owns the float of an activity. The float should be used to the best interest of the project. Therefore, an Owner shall not claim that he can interfere in and use an activitys float, and the Contractor shall not claim that an activitys float cannot be used by anyone other than him. It may be necessary sometimes to clearly state in the contract conditions how the float is to be shared or traded. That is, as suggested in the literature, one can even specify that the Contractor owns the float and can sell it to the owner; i.e., the Contractor will give up the float, in part or in whole, for a certain price. In this case, the contract may indicate that the parties agree that the float period is for the benefit of the Contractor, and that the Contractor has the absolute right to administer and use it for each construction activity in any manner and in any way that the Contractor sees fit, provided, however, that the Contractor agrees, and hereby incurs the obligation, to trade or otherwise sell to the Owner the float in the circumstances specified in the contract (4).

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CHAPTER THREE PROCESS FOR MANAGING CONSTRUCTION CLAIMS

In this chapter, a process is presented which can be used to analyze claims submitted by the Contractor to the Owner under the conditions of contract. Although the process is general to a certain extent, each particular node can be further developed based on the particularities of each claim and project. Some of the nodes are processes by themselves, and these are named sub-models and will be presented in the next chapter. The proposed process involves a number of different steps. A series of questions will be addressed with the possible consequences listed. This whole chapter should be read in close relation to figure 3.1.

3.1 Occurrence of a Cause for a Claim First, the occurrence of a cause for a claim is observed. This is affected mainly by two major items: the existence of any of the possible categories of claims causes, and the direct actions on site that cause the claim. The first item is the background necessary for the occurrence of the cause for a claim, while the second item is the direct action causing it. The categories of possible claim causes were discussed in detail in chapter two. The category that applies to any claim should be noted, observed, documented and studied in detail.

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What is the list of possible claim causes?

Occurrence of a cause for a claim Does the Contractor intend to submit a claim? YES Are the Notice Requirements met? YES

What was the direct action causing the claim?

NO

NO

The Contractor uses established methods of analysis in substantiating his claim

Engineer to inspect records, site diaries, and all available information

Contractor loses the right to claim any extra cost or extension of time

YES

Is Contractor required to submit further records? NO

Does the Contractor accept? YES No Recovery

NO

Contractor to update information and value of claim on a cumulative basis

YES

Does the Subject of the claim have a continuous effect? NO

Figure 3.1. Process of managing construction claims

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(continued)

(continued)

Conditions to be respected

Contractor submits final amount and time claimed with breakdown ands details within the specified period

The Owner is to decide on the extent of the Engineers responsibility

YES

Does the Engineer bear part of the responsibility for the claim? NO Is the Engineer the party responsible for settling the claim? YES

NO

The Engineer analyzes the claim by its type and causes

Resort to the alternative dispute resolution methods allowed under the contract

The Engineer formally notifies the Contractor of his final decision

Is the Contractor satisfied with the Engineers decision?

NO Final decision is reached

YES

Figure 3.1. Process of managing construction claims

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The direct actions on site that might cause the claim are numerous ranging from a simple verbal comment by the Engineers site representative to a formal written request by the Owner. The action causing the claim can therefore be either informal or formal. The informal actions, meant by the Engineer to be constructive for the process, include verbal remarks made on site by the Engineers personnel regarding workmanship, materials, process, etc. Formal actions include remarks made by the Engineer on submitted shop drawings and material samples. These remarks are sometimes regarded by the Contractor as a change and therefore could be the cause for a claim. Owner remarks during site visits on executed works and his will to change a few items especially in the finishes is one common cause for claims, especially when the Owner does not consult the Engineer on the possible consequences on time and cost.

3.2. Intention to Submit a Claim In all cases, the Contractor has to proceed with the works whether he intends to submit a claim or not. The Contractor has to notify the Owner of his intention to claim any extra time and/or money in a written form directly after the occurrence of the cause of a claim although he may not yet at the time have assessed the amount of time and/or money he intends to claim. If the Contractor does not give notice of his intention to claim, he may lose his right to any claim of extra time and/or money under the contract. It is very important that the Contractor notifies the Owner in time in order to give the owner the chance to reassess the situation and, if needed, ask the Contractor to discard the supposedly constructive remarks. In the case where a compromise might be reached, the Contractor might opt not to submit a claim. He will perform the work as requested by the Owner or Engineer; in
22

return, other items of the work will be dealt with some flexibility (not meeting dates of material or shop drawing submittals for example).

3.3. Meeting the Notice Requirements and Collecting Information The next thing to look at when the Owner receives a claim from the Contractor is whether the notice requirements have been met by the Contractor. These are usually explicitly stated in the contract and will be discussed in detail in the next chapter. If the notice requirements are not met, the Contractor loses his right to claim any extra time and/or money. If, on the other hand, the requirements are met, we can then proceed with the assessment of the situation. The Contractor is responsible to use established methods of analysis in substantiating his claim. Such methods include: simulation of as-planned vs. asimpacted situations, Updated Critical Path Method schedules, affected productivity levels and learning curve effect, as well as modeling techniques for the affected works and processes. The next step would be collecting the information relevant to the claim at hand. This is usually done by the Engineer or the Owners representative. The records to be inspected include site diaries and all sort of correspondence. The Contractor may be asked to submit further records until the Owner is satisfied with the information available to him. The next chapter includes a list of possible ways to collect the needed information. The FIDIC 53.4 clause on failure to comply with requirements states that: If the Contractor fails to comply with any of the provisions of this Clause in respect of any claim which he seeks to make, his entitlement to payment in respect thereof shall not exceed such amount as the Engineer or any arbitrator or
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arbitrators appointed pursuant to Sub-Clause 67.3 assessing the claim considers to be verified by contemporary records (whether or not such records were brought to the Engineers notice as required under Sub-Clauses 53.2 and 53.3). (5)

The FIDIC 53.2 clause on contemporary records states that: Upon the happening of the event referred to in Sub-Clause 53.1, the Contractor shall keep such contemporary records as may reasonably be necessary to support any claim he may subsequently wish to make. Without necessarily admitting the Employers liability, the Engineer shall, on receipt of a notice under Sub-Clause 53.1, inspect such contemporary records and may instruct the Contractor to keep any further contemporary records as are reasonable and may be material to the claim of which notice has been given. The Contractor shall permit the Engineer to inspect all records kept pursuant to this Sub-Clause and shall supply him with copies thereof as and when the Engineer so instructs. (5)

3.4. Continuous Effect of the Claim Once all the relevant information is collected and documented, it becomes necessary to note if the subject of the claim has a continuous effect. If the effect on the program and budget can be directly assessed after the occurrence of the cause for a claim, there will then be no continuous effect. On the other hand, if the consequences resulting from the claim are not foreseeable or cannot be measured at the time the Contractor notifies the Owner, the claim in this case has a continuous effect. Here, the Contractor is asked to give an account with details of the amount claimed and the grounds upon which the claim is based. The Contractor shall at intervals, as the engineer may reasonably require, send further interim accounts stating the accumulated amount of the claim and any further grounds upon which it is based. The FIDIC 53.3 clause on substantiation of claims states that: Within 28 days, or such other reasonable time as may be agreed by the Engineer, of giving notice under Sub-Clause 53.1, the Contractor shall send to the Engineer an account giving detailed particulars of the amount claimed and
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the grounds upon which the claim was based. Where the event giving rise to the claim has a continuing effect, such account shall be considered to be an interim account and the Contractor shall, at such intervals as the Engineer may reasonably require, send further interim accounts giving the accumulated amount of the claim and any further grounds upon which it is based. In cases where interim accounts are sent to the Engineer, the Contractor shall send a final account within 28 days of the end of the effects resulting from the event. The Contractor shall, if required by the Engineer so to do, copy to the Employer all accounts sent to the Engineer pursuant to this Sub-Clause. (5) 3.5. Submitting the Final Amount Claimed The Contractor is then to submit the final amount of time and/or money claimed within a period specified in the contract from the end of the effects resulting from the occurrence of the cause for the claim. The claim should be presented in a clear and a logical manner, and it should be well prepared and documented. The final claim submitted by the Contractor should include: an introduction providing details of the parties involved in the claim and all relevant dates and information; a description of the claim events as they occurred and the effects they had; an analysis of the facts showing the grounds upon which the claim was based and referring to the relevant provisions and clauses in the contract; describing and referring to the steps already taken by the Contractor such as notices given; calculation of the cost impact based on a breakdown of savings and extra items; and calculation of the claimed extension of time based on critical and non-critical delays. The conditions to be respected by the Contractor are a summary of what has been discussed up to this point. These include meeting the notice requirements, providing the Engineer with all the needed information to analyze the claim, submitting
25

the details and breakdowns, referring to the proper clauses in the contract, and not disrupting the progress of work due to the occurrence of the cause for the claim.

3.6. Responsibility of the Engineer At this point, the Owner has to check and decide whether the Engineer is responsible in part for the occurrence of the cause for the claim. The Owner has to address the following questions carefully: Was the cause of the claim linked to a deficiency on the part of the Engineer? Was the design defective? Was the design incomplete? The Owner is usually bound by the actions of the Engineer on site. Thats why the Engineer has to make sure that any action he takes is consistent with the terms of the contract. If any of the Engineers actions prove to be inconsistent with the contract terms, the Contractor may become entitled to the appropriate compensation, which will then have to be paid by the owner (6). The Engineer is reluctant to admit mistakes such as defects in the design or unforeseen conditions. As a remedy to such situations, he might issue site instructions, verbal remarks on site, or indicate notes on the Contractors submittals in an attempt to correct or complete the design. The Owner however has to decide if the Engineer was responsible. Ultimately, it is the Owner who will pay any extra amount, and it is the Owners project that may be delayed if the claim involves a request for a time extension. However, the Owner can make the Engineer pay for his mistakes by either asking him to redesign certain items at no extra fee, reducing his premium, or in the extreme cases relieving him of his

26

obligations and calling upon the Engineers professional liability provider to pay for damages resulting from his actions.

3.7. Settling the Claim The party responsible for settling the claim and giving the final decision should be clearly specified in the contract. Usually, it is the Engineer or a consultant designated by the owner who is responsible to decide on the outcome of the claim. Sometimes, it is stated in the contract that if amicable settlements are not achieved, other dispute resolution methods can be used such as arbitration, mediation, dispute resolution boards, and litigation. These methods are discussed in Chapter Four of this paper. The FIDIC 53.5 clause on entitlement to payments states that: The Contractor shall be entitled to have included in any interim payment certified by the Engineer pursuant to Clause 60 such amount in respect of any claim as the Engineer, after due consultation with the Employer and the Contractor, may consider due to the Contractor provided that the Contractor has supplied sufficient particulars to enable the Engineer to determine the amount due. If such particulars are insufficient to substantiate the whole of the claim, the Contractor shall be entitled to payment in respect of such part of the claim as such particulars may substantiate to the satisfaction of the Engineer. The Engineer shall notify the Contractor of any determination made under this SubClause, with a copy to the Employer. (5)

The Engineer is always expected to make an independent objective judgment of the situation. The Engineer is therefore asked to act as a neutral arbitrator whatever the outcome of the claim may be, and he is obliged to recommend that the Contractor be given whatever he is entitled to under the contract. Once the Engineer has the claim fully documented in hand, he will proceed with the analysis based on the claims type and its causes. Processes for the analysis of the most common types of claims such as

27

differing site conditions, defective specifications, delays, and variation orders are presented in the next chapter. When the Engineer reaches his final decision on the situation, he has to formally notify the Contractor of the result. The Contractor, however, is not ultimately bound by the Engineers decision unless it is clearly stated in the contract that he cannot resort to other alternatives. Usually, the Contractor can dispute the Engineers decision and has the right to resort to arbitration, litigation or other dispute resolution methods that are listed in the next chapter.

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CHAPTER FOUR SUB-MODELS FOR MANAGING CLAIMS

This chapter presents procedures outlining the steps to be followed and the points to be checked in examining the right of a Contractor to claim and the reasonableness of any possible entitlements. Various sub-models are covered that together form a comprehensive approach to understanding the different reasons for and types of claims that may be encountered.

4.1. Notice Requirements This is the first item to check when analyzing a claim. Failure by the Contractor to meet the notice requirements will lead to losing his right to claim any extra time or money.A procedure (Figure 4.1) for checking whether or not the notice requirements are met is discussed in the literature (14) and is summarized by the following set of questions: Does the notice clause apply in the case of the submitted claim? The circumstances under which the claim arises may be excluded from the notice requirement clause. For example, if the notice requirement applies only to extrawork, then a directive by the Owner to improve workmanship is excluded and therefor the notice requirements cannot be enforced by the Owner on this type of claims. If the notice requirement clause applies, then, did the Contractor satisfy the requirements? Was a formal letter or notice delivered to the Owner stating that the

29

Contractor is expecting to be compensated? The letter should identify the problem, refer to the applicable contract provisions, and state that the Contractor expects to be compensated, and that he will submit the details as soon as it is practicable. Of course, the notice should be given within the time stated in the contract from the date of the occurrence of the cause for the claim. Was the Owner prejudiced or not? Did the delay in notifying the Owner in a timely manner prevent him from mitigating any possible damage? If the Owner can prove that the delay in notifying him of the occurrence of what is considered by the Contractor to be a cause for a claim prevented him from minimizing or avoiding extra expenses, or obscured important information about the claim, the Contractor might then lose his right to claim. Did the Owner waive the notice requirements? Cases exist where the notice requirements may be waived i.e. the Owner releases the Contractor from the obligation of strictly complying with the contract requirements. It is important to note that only the Owner or his representative can, at their own discretion, waive the contract clause requiring written notice. Once the Owner waives his right to be formally notified, he cannot reassert this right at a later time.

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NO

Was the Engineer formally notified of the occurrence of the cause for a claim? YES

NO

Did the Contractor submit his notice within the specified duration? YES

NO

Does the Contractor state that he expects extra time or money?

YES

Did the Owner waive his right of being notified? NO

YES

Owner to continue his assessment of the submitted claim

No recovery for the Contractor

Figure 4.1. Procedure for checking the notice requirements

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4.2. Collecting Information Actual and accurate records and information are necessary to establish the costs incurred as a result of the events leading to a claim. The Engineer is responsible for collecting and assessing the information relevant to the submitted claim. This information is obtained from a number of sources including, but not restricted to: The Contractors original and updated construction programs; the site diaries kept by the Contractor, Engineer, and Owners representative on site based on the observance of the way work is progressing, which include remarks on productivity, workmanship, procedures, and progress; remarks made by the Engineer on the Contractors shop drawings and material submittals; records submitted by the Contractor; photographs and videos recording the activities on site with the date of recording as well as the location specified; the drawing register showing details of amendments and revisions; approved minutes of meeting including names of people in attendance, problems discussed, instructions issued, and conclusions reached. Contractors records may include: (1) labour records showing the number and description of the work force employed each day, (2) material records showing the quantity and description of all materials delivered to site, (3) equipment records showing the number, type, and capacity of all contractors equipment employed daily, and (4) daily work records showing activities performed and locations in which work has been carried out. Other Contractor-submitted records include wagebooks, time

32

charts, climatic conditions, and information about subcontractors on site with their respective crews, equipment, and performance records. Also presented are Contractors records of the names of all visitors to the site. The site diary is one of the most important sources of information. The Engineer is responsible of performing daily visits to site in order to inspect work in progress in all locations and trades. The Engineer is to note his remarks on issues such as schedule, labour, material, workmanship, delays, or other items of interest (1). It is also important to note material delivery dates together with any delays, shortages, or damages incurred. The site diary is a historical record of the daily events that take place on the job site (3). The information to be included is a matter of personal judgment. Complete diary information is necessary for extra work performed and is always needed for any work that might involve a claim. The site diary should include a description of the encountered problems and the steps taken to correct them.

4.3. Claims Resulting from Variation Orders Variation orders are formal requests by the Owner to change the scope quantity or quality of some of the works to be done in the contract. The claim in this case will result from two possibilities: whether the Owner allows for an extension of time for performing the varied works, or whether a disagreement on the rates to be applied to the varied works has prevailed. The process for dealing with claims resulting from

variation orders presented in figure 4.2 does not however cover the issue of claimed extension of time.

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The Engineer issues the variation order based on the Owners approval

Clauses relevant in the contract

The Contractor is to vary the works

Was the variation order issued due to default on the Contractors part? NO Did the Contractor or Engineer give a notice of the cost, with breakdown, of the varied works? YES Does the contract include rates or prices for the varied works? YES Does the percentage changed affect the existing rates in the contract? NO The variation order is to be valued

YES

The contractor is to bear any additional time and cost

NO

No extra payment for the varied works. Omitted works to be credited to the Owner.

NO

YES

The Engineer is to agree with the Contractor on new rates/prices

Figure 4.2. Procedure for claims resulting from variation orders

(continued)

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(continued) Is an agreement reached regarding the breakdown and the rates of the varied items? NO The Engineer is to fix the rates and notify the Contractor of his decision Apply the rates to the varied works

YES

Does the Contractor accept the engineers judgment? NO Dispute leading to other alternative dispute resolution methods

YES

The Engineer is to certify interim account payments based on the fixed rates until the dispute is settled At the end of the project, study all varied works. Is the percentage specified in the contract exceeded? NO No further adjustment needed YES Adjust the value of the contract

Figure 4.2. Procedure for claims resulting from variation orders

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Usually, the Owner requests confirmation from the Contractor that the variation order shall not affect the completion dates of the project. The Contractor may give such an assurance but might claim for the cost of applying more resources. If, however, the Contractor sees that he cannot perform the varied works and still abide by the schedule, he can claim for an extension of time. This will be considered as a delay caused by the Owner and will be discussed in the next part of this chapter.

4.4. Claims for Delays The categories of delays in construction projects were listed in Chapter Two of this paper. In figure 4.3, a process is presented for dealing with a claim for an extension of time due to certain delays caused by any of the parties involved in the project (2). The first thing to determine is whether the delay was the Contractors fault. If true, then the delay is non-excusable and the contractor is not allowed any extension of time. Moreover, the Contractor is required to take necessary corrective steps to catch up with the schedule and bear any additional costs that result from applying these steps. If the delay is not the Contractors fault, a check is to be done as to whether the notice requirements have been met, whether sufficient information was presented with the claim, and whether the delay had a continuous effect. At this point, and after checking all of the above, the Engineer is to review the circumstances and determine whether or not the Contractor is entitled to an extension of time. Three cases are to be analyzed; and these are presented in figure 4.4.

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Contractor submits claim for extension of time due to delay by one or more of the project participants The Contractor is required to take all necessary corrective steps

Was the delay the Contractors fault? NO Were the notice requirements met? Was the submitted information sufficient? Did the claim have a continuous effect?

YES

Additional cost as a result of steps taken to be paid by the Contractor

The Engineer is to review the circumstances and determine if the Contractor is entitled to an extension of time

The Contractor cannot claim for any extension of time

The Engineer is to notify the Contractor of his decision YES Does the Contractor accept the Engineers judgment?

Claim is settled

NO

Dispute leading to other alternative dispute resolution methods

Figure 4.3. Procedure for claims for delays

37

Delay caused by an action of the Owner, Engineer, or other project participants

No claim can be made Was the action in breach of contract provisions? NO

YES

Time extension and extra cost

Delay caused by the implementation of a variation order issued by the Owner

The Engineer and Contractor may agree to an extension to the contract duration

Delay caused by labour strikes, disputes, or other reasons beyond Contractors control

Was the delay compensable under the contract conditions?

YES

Time extension and extra cost

NO

Time extension only

Figure 4.4. Outcomes of claims for delay

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In order to decide on the duration of the delays caused by any of the parties involved, the Engineer has the difficult task of going through the available information including the updated and the as-built programs. One way is to identify the delays caused by all the parties on the as-built program, then remove the delays of a particular project participant. The resulting program allegedly shows when the project would have been completed but for the delays caused by that participant (9). The main question is whether the Contractor could have finished his work earlier if the delays in question had not occurred. The outcome of such analysis however could be different from one analyst to another since a number of assumptions have to be made. These assumptions include deciding which part of the work was critical at a particular point in time and what constitutes a delay that should be pulled out of the as-built program to do the analysis. Another method of analysis would be to use the updated CPM programs done while the work was in progress to help identify which part was critical and to measure the impact of delay events as they occurred. However, before using these updated programs, one should wait until the information contained in them is verified through other forms of documentation and correspondence.

4.5. Claims Due to Differing Site Conditions Differing site conditions were introduced in Chapter Two of this paper as one of the major categories of causes for claims. In this part, we will rely on the work of Thomas H. R. (12). It is important for all parties to understand that using a differing site conditions clause in the construction contracts reduces the cost of construction because the Contractors do not have to include contingencies to cover the costs of unforeseeable

39

subsurface conditions. Whenever a differing site condition clause exists, the Contractor must show that the actual conditions were actually materially different from those indicated or suggested in the contract in order to have an acceptable claim. In figure 4.6 we present a process for analyzing claims based on differing site conditions (12). As a start, we present the Federal differing site conditions clause that is commonly used in the United States: The Contractor shall promptly, and before the conditions are disturbed, give a written notice to the contracting officer of (1) subsurface or latent physical conditions at the site that differ materially from those indicated in this contract; or (2) unknown physical conditions at the site, of an unusual nature, that differ materially from those ordinarily encountered and generally recognized as inherent in the work of the character provided for in the contract. The contracting officer shall investigate the site conditions promptly after receiving the notice. If the conditions do materially different cause an increase or decrease in the Contractors cost of, or the time required for, performing any part of the work under this contract, whether or not changed as a resultof the conditions, an equitable adjustment shall be made under this clause and the contact modified accordingly. No request by the Contractor for an equitable adjustment to the contract under this clause shall be allowed, unless the Contractor has given the written notice required; provided, that the time prescribed here for giving written notice may be extended by the contracting officer.

40

No request by the Contractor for an equitable adjustment to the contract for differing site conditions shall be allowed if made after final payment under this contract. The first thing to check is whether the contractual documents and the soil investigation report gave any indication of what conditions would be encountered on site. In the case where the conditions encountered by the Contractor while performing the works turned out to be materially different from those indicated in the contract, the differing site conditions clause would allow the Contractor to recover the additional cost of performing the work. A question remains as to whether the contractors blind reliance on the described conditions could be justified. A simple site visit by the experienced Contractor could help reveal that the apparent conditions on site contradicts the contracts indications. Here, the Contractor is held responsible for blindly relying on these indications. This also applies when the Contractor is explicitly asked to visit the site and therefore is held responsible for any apparent local or neighboring conditions. On the other hand, if there was no indication whatsoever in the contract of what conditions would be encountered, the first question to be addressed is whether the conditions on site differed materially from conditions ordinarily encountered in work of similar character. If the conditions are unknown and different from what could have been expected in the work described in the contract, then we should check if the Contractor relied blindly on the contractor description.

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YES

Did the Contract give any indications of what conditions would be encountered?

NO

Determine what the contract documents and soil report indicated regarding conditions on site

NO

Were the conditions encountered materially different from those ordinarily encountered in the described works?

Were the conditions encountered materially different from those indicated?

NO

YES

YES

Contractor unlikely to recover additional costs YES Did the contractor rely blindly on the contract description? NO Contractor likely to recover additional costs

Figure 4.5. Procedure for claims due to differing site conditions

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4.6. Claims Due to Defective Specifications In this section, a process is presented for dealing with claims resulting from a failure due to defective specifications and design. These imply that the end product failed to perform up to the owners expectations or to fulfill its intended purpose and the specifications were defective in some aspects. An example is when the Contractor fails to achieve the required performance level although he strictly followed the method specified in the contract. Contracts rarely contain clauses dealing with defective specifications. Article 3.2.1 from the General Conditions of the Contract for Construction by the American Institute of Architects is one example: The Contractor shall carefully study and compare the contract documents with each other and with information furnished by the Owner pursuant to Subparagraph 2.2.2 and shall at once report to the Architect (Engineer) errors, inconsistencies, or omissions discovered. The Contractor shall not be liable to the Owner or Architect (Engineer) for damage resulting from errors, inconsistencies, or omissions in the contract documents unless the Contractor recognized such error, inconsistency, or omission and knowingly failed to report it to the Architect (Engineer).

The process for dealing with this sort of claims presented in figure 4.7 is based on the work of Thomas H. R. (13). After the occurrence of the failure, whether it be a performance failure or Owner dissatisfaction with the results, the nature and extent of the failure should be determined and the apparent as well as the root causes of the failure should be identified. Depending on the way the specifications were written, two cases arise. Where the specifications describe the performance for the work to be achieved, it is said that the specifications are of the performance type. In this case the Contractor has the choice of the method he wants to use and bears a great risk in producing the desired end result. If the Contractor can show that the described performance was impossible to achieve by any reasonable method and that he did not

43

assume the risk of achieving the specified performance either through a clause in the contract or through his own actions, then he is likely to recover any additional cost for the correction of the work. On the other hand, if the specification clearly stated the method to be used in performing the work, it is said that the specifications are of the method type. If the failure occurred before the completion of the construction, then the Contractor is unlikely to recover any costs since he is usually responsible to protect the works during the construction phase, unless he can prove that the failure would have occurred even if the construction was complete. In this case, where the defect was obvious, the Contractor should have brought it to the Owners attention. If not, recovery of cost by the Contractor is unlikely. If the Contractor deviated from the specifications due to an observed defect, then he should have secured the Owners approval of such deviation. Finally, the Contractor might not recover even if he secured the Owners approval for any deviation he made in the case he had already assumed the risk of defective specifications under the contract conditions.

44

Occurrence of a failure

1. Determine the nature and extent of the failure 2. Identify the apparent cause of the failure 3. Identify the root cause of the failure Method Type Performance Type

What was the type of specification?

Did the failure occur YES during the construction of the works? NO Did the Contractor notify the Owner of any obvious defects? YES NO Did the Contractor deviate from the specifications to correct the defects? YES Did the Contractor secure the Owners approval on his action? YES Was there a clause in the contract stating that the Contractor assumes the risk of defective specifications? YES NO NO NO

NO

Was the performance impossible to achieve by any reasonable method? YES

YES

Did the Contractor assume the risk? NO

Contractor unlikely to recover costs

Contractor likely to recover costs

Figure 4.6. Procedure for claims due to defective specifications

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4.7. Claims Due to Conflicting Interpretations Causes for claims resulting from conflicting interpretations of contract documents were presented in Chapter Two of this paper. The interpretation of contract clauses is usually based on experience and common sense. This may eventually lead to disagreements, disputes, and possibly litigation. In this section, a set of rules used to interpret the various construction contract clauses is presented. These rules can be used whenever two parties involved in a construction project have conflicting interpretations of a term or clause. This section is based on the work of Thomas H. R. (11). The first rule of interpretation to be applied is checking whether the terms and clauses have a plain meaning. Any term or phrase may be the cause for a dispute; therefore, it should be interpreted using the technical meaning adopted by the industry. The second rule of interpretation applies in the case where the ambiguity was patent/obvious. In such case, the Contractor is obliged to inquire about the Owners intentions. If the Contractor knew that the Owner had an obviously different interpretation than his own, and yet he did not bring it to the Owners attention, then this implies bad faith on the part of the Contractor, and the Owners interpretation rules. The third rule of interpretation applies when a mutual understanding is expressed during the performance of the works, where one party consents, and acts based on, the other partys interpretation of terms or clauses. In this case, the mutually adopted interpretation rules. The fourth and last rule of interpretation has to do with reading the contract as a whole. Whenever a conflict occurs within a single clause, the following steps have to be taken:

46

resolve any conflicts in the clause by identifying the main purpose of the clause and reviewing each part of it to be certain it is interpreted as to what it says; compare the headings with the purpose to check consistency; and make sure the interpretation of the parts of the clause is consistent with its purpose. In the case were a conflict exists between different clauses or contract documents, the order-of-precedence clause should apply whenever it is included. This clause establishes an order of priority between the various documents when an ambiguity or conflict occurs between them. The clause might state that one should always give preference to the documents issued later in time. If such a clause does not exist, then the only solution left for any conflict is to rule against the drafter, i.e., the Engineer/designer.

4.8. Alternative Dispute Resolution Methods Alternative dispute resolution methods are used to resolve disputes between project participants when the Engineer is not the party responsible for settling claims, or when the Engineer gives his decision on claims but such a decision is not binding under the contract (Figure 4.7). Due to the rising cost, delay, and the overall risks of litigation and the variations from one legal system to another, alternative resolution dispute methods are proving to be more effective in settling construction disputes (10). In this section, some of these methods are presented from the simple two party negotiations to the binding arbitration. Negotiation: This is the simplest form of alternative dispute resolution methods used in construction contracts and involves a direct communication between the two parties or their representatives. The parties attorneys may further develop negotiation

47

into a sort of voluntary pre-hearing. Any resolution can only be achieved by mutual agreement of both parties (8). Mediation: This is simply an extension of the negotiation process between any two parties. The difference is in the presence of a third party who is the mediator. The mediator is a trained, neutral professional who facilitates the negotiation process. He only directs the negotiations, and his objective is to look for ways to overcome barriers and assist in reaching a settlement that both parties would perceive as fair (7). Boards (known as Dispute Review Boards or Dispute Adjudication Boards): Boards are created by contractual agreement. The Board is designated at the beginning of a project. Its members meet on a regular basis and are updated on the course of construction (8). The Board usually consists of three members. The Owner and Contractor each select one member, while the third is mutually agreed upon. All members, however, must be acceptable to both parties. Disputes are submitted to the Board for review with all the necessary documentation. The Boards decision on disputes is non-binding, but the parties are normally reluctant to reject it because the professional opinion of the Board members is usually significant in court (7). A revised FIDIC 67.1 clause on Dispute Adjudication Board states that: If a dispute of any kind whatsoever arises between the Employer and the Contractor in connection with, or arising out of, the contract or the execution of the Works, including any disputes as to any opinion, instruction, determination, certificate or valuation of the Engineer, the dispute shall initially be referred in writing to the Dispute Adjudication Board for its decision. Such reference shall state that it is made under this Sub-Clause The Board shall comprise suitably qualified persons as members, the number of members being either one or three, as stated in the Appendix to Tender etc. (5)

Arbitration: This is considered the last resort before going to court, after all other alternative resolution methods have failed. As in litigation, the parties in

48

arbitration find themselves in an adversarial position and endanger the future relationship between the two parties (10). But arbitration remains less time consuming and less expensive than litigation. When resorting to arbitration, the parties present their claim and an informal proceeding occurs before an arbitrator, or a panel of arbitrators, who examine the documentation, question the witnesses, and then give a decision that is binding in most cases.

A claim is made

Does the Owner or Engineer acknowledge the claim? NO Under the contract, is the Engineer responsible for settling the claim? NO Are there alternative dispute resolution methods specified under the contract? NO

YES

Claim is settled

YES

Is the Engineers decision acceptable by the contractor? NO

YES

YES Is a settlement, reached through these methods? NO

YES

Resort to litigation Figure 4.7. Alternative dispute resolution methods in the settlement of claims

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CHAPTER FIVE CONCLUSION

5.1. Summary of the Project The first chapters of this project introduced the topic of construction claims, their possible causes, and their effect on the projects cost and schedule. Five major categories of causes for claims were introduced and developed: variation orders requested by the owner, misinterpretation of construction documents, differing site conditions, different types of delays, and any acceleration or disruption that might have an effect on the program or cost. A process for dealing with construction claims was next introduced. This process guides the Owner through the various steps needed to handle a claim submitted by the Contractor. The process includes items such as: a list of the causes of the claim, notice requirements for submitting the claim, collection of information needed for the analysis of the claim, checking the continuous effect of the claim, the responsibility of the Engineer, alternative dispute resolution methods available, the analysis of some types of claims, and the notification of the Contractor of the final decision. Various questions are asked as to actions taken by the Owner, the Engineer, or the Contractor that might have affected the occurrence, analysis, or final decision about the claim. Finally, some of the items mentioned in the process are further discussed while others are developed into processes.

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5.2. Conclusions Claims are an inevitable aspect of todays construction projects. The effect of claims can be major on the cost and schedule of the project. That is why every project Owner must be completely aware of the background and possible causes of claims. The Owner must also have guidelines as to how to deal with a claim when it is submitted. The presented process helps the Owner to know what his rights and responsibilities are in these cases. The process can be used as a subjective analysis of any submitted claim by a Contractor to the project Owner. The process highlights the importance of including the right clauses in the contract documents. It helps Owners who have no knowledge in construction to know what clauses can be possibly included in a contract and what is the possible effect of using any of them. The Owner can then choose the clauses that are relevant to his particular project. For example, a highway project must include a differing site condition clause because of the usually large scale and unknown conditions of such a project. In a renovation or upgrading project on the other hand, the contract would possibly have to include details on differing site conditions as well as variation orders requested by Owner. An Owner should also realize and understand all the possible outcomes of claims. He should be able to assess whether or not the Contractor is entitled to compensation and whether this compensation is an extension of time, extra cost, or both. In order to help the Owner prevent and better deal with claims, the following guidelines are presented and are grouped into three major categories: the contractual aspects, the administrative aspects, and the supporting tools required. 51

The contractual aspects to be taken care of are summarized by the following: care should be taken to secure the completeness of the clauses and to make sure each clause has a single purpose; clauses should not be poorly structured, and terms must have a plain meaning; all the possibly relevant clauses should be included (differing site conditions, variation orders, etc.); the mechanisms for applying the requirements of each clause should be clear and specific; clauses should state the rights and responsibilities of all parties, and clearly indicate the party responsible to rule in case of disagreement; the contract should state the order-of-precedence between the various documents; clauses should address the risk-allocation issue; and clauses should be complimentary and not contradictory. The following administrative aspects to be followed during the actual execution of the project include: Keep logs of all submittals; keep site diaries for all daily events on site; record productivity levels; continuously update the as-planned construction program; make sure notice requirements are respected; verify that the appropriate rates are applied in the case of varied work; and check the submitted break downs of quantities and cost.

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The tools that might help in the analysis of claims include: Critical Path Method scheduling; simulation techniques; knowledge of the local laws and regulations; engineering economy principles (book value of equipment, depreciation, inflation, interest on loans, etc.); and inventory planning and control.

5.3. Future Work This paper relied on existing conditions and clauses in commonly used contracts. The references also covered research done on particular items of interest, such as disputes over notice requirements, or analyzing claims due to defective specifications and differing site conditions. Future work on this topic could include the introduction of more specific steps in the process of dealing with construction claims, or the further development of any of the existing steps. In addition, more claim types can be introduced and processes developed for each. In order to make the presented process accessible and effective to use on all projects and claim types, it could be developed into a decision analysis tool, where each item or node has several outcomes. The outcomes would have varying probabilities depending on each projects particular aspects and the accompanying contract language. The outcomes of the developed decision platforms would be the possible compensation for the Contractor.

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REFERENCES
1. Barrie, D. S., and Paulson, B. C. 1992. Professional Construction Management. McGraw-Hill. Bubbers, G., and Christian, J. 1992. Hypertext and Claim Analysis. Journal of Construction Engineering and Management, ASCE 118(4). Clough, R. H., and Sears, G. A. 1979. Construction Project Management. Wiley. De La Garza, J. M., Vorster, M. C., and Cordell, M. P. 1991. Total Float Traded as Commodity. Journal of Construction Engineering and Management, ASCE 117(4). Federation Internationale des Ingenieurs Conseils. 1992. Conditions of Contract for Works of Civil Engineering Construction. FIDIC. Jervis, B., and Levin, P. 1988. Construction Law. McGraw-Hill. Keith, F. S. 1997. Alternative Dispute Resolution Methods. Journal of Management in Engineering (September/October). Muller, F. 1990. Dont Litigate, Negotiate. Civil Engineering (December). Schumacher, L. 1997. Defusing Delay Claims. Civil Engineering (March). Steen, R. H. 1994. Five Steps to Resolving Construction Disputes without Litigation. Journal of Management in Engineering (July/August). Thomas, H. R., Smith, G. R., and Mellott, R. E. 1994. Interpretation of Construction Contracts. Journal of Construction Engineering Management, ASCE 120(2).

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Thomas, H. R., Smith, G. R., and Ponderlick, R. M. 1992. Resolving Contract Disputes Based on Differing-Site-Condition Clause. Journal of Construction Engineering and Management, ASCE 118(4). Thomas, H. R., Smith, G. R., and Wirsching, S. M. 1995. Understanding Defective Specifications. Journal of Construction Engineering and Management, ASCE 121(1). Thomas, H. R., Smith, G. R., and Wright, D. E. 1990. Resolving Disputes over Contract Notice Requirements. Journal of Construction Engineering and Management, ASCE 116(4).

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