The Anatomy of a Construction Claim

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The Anatomy of a Construction Claim

• The South Dakota Chapter of ASHRAE

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Goals

• Understand what a claim is and how it evolves
• Develop strategies for anticipating and avoiding
  claims
• Eliminate the adversarial environment that
  creates claims

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Claims as an Ethical Issue

• FMI Survey of Construction Industry Ethical
  Practices (2004)
• Rank the five most critical issues you face in
  your work

• 5. Bid shopping
• 4. Change order games
• 3. Payment games
• 2. Unreliable contractors
• 1. Claim games

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Avoiding Adversarial Relationships
Youre angry. So you shoot a hole in my boat.
Only trouble is, we are in the same boat.
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Why Focus on Expectations?

• Corporate Culture and Performance by John
  Kotter and James Heskett (2005)
• Revealed that businesses that focus obsessively
  on meeting the needs of customers

• Revenues increase 4 times faster
• Job creation is 7 times faster
• Owner equity grows 12 times faster
• Profit performance is 750 higher

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Claims

• 4.3.1 A claim is a demand or assertion by one
  of the parties seeking, as a matter of right,
  adjustment, or interpretation of Contract terms,
  payment of money, extension of time, or other
  relief with respect to the terms of the Contract

AIA-201, 1997 Edition
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Claims

• 15.1.1 4.3.1 A claim is a demand or assertion
  by one of the parties seeking, as a matter of
  right, adjustment, or interpretation of Contract
  terms, payment of money, extension of time, or
  other relief with respect to the terms of the
  Contract

AIA-201, 2007 Edition (Proposed)
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Claim Components

• Claim Components
• Entitlement
• Damages
• Relief

• Entitlement
• A change occurred
• The change was unexpected
• The risk is borne elsewhere

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Types of Changes

• Non-excusable Non-compensable
• Examples?
• Excusable and Non-compensable
• Examples?
• Compensable
• Examples?

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Example 1 on Entitlement

• Replacement of a cooling tower
• Owner selected equipment
• 64,000 base contract
• A/E drafted conceptual plan for owner.

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Common Causes of Claims

• Contracts that have claims built in
• Owners/Projects that are living, walking claims

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Common Causes of Claims

• How can a contract clause create a claim?
• Creates an atypical relationship
• Offloads risk to another party
• Changes the definition of a change

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Strategies to Avoid Construction Claims

• The best strategies revolve around great
  management

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Strategy to Avoid Claims

• Read the contract
• Read the contract
• Read the contract

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Relationship Changes

• The Subcontractor shall obtain and pay for all
  necessary permits and licenses pertaining to the
  work and shall comply with all Federal, State,
  and Municipal Laws, codes, ordinances, rules, and
  regulations, whether provided for by the Contract
  Documents, or not so provided for without
  additional change or expense to the Contractor.

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Relationship Changes

• The Subcontractor shall obtain and pay for all
  necessary permits and licenses pertaining to the
  work and shall comply with all Federal, State,
  and Municipal Laws, codes, ordinances, rules, and
  regulations, whether provided for by the Contract
  Documents, or not so provided for without
  additional change or expense to the Contractor.

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What Changed?

• Subcontractor shall take all necessary action
  to prevent and avoid strikes, picketing,
  lockouts, and all other labor disputes and
  difficulties on the Project and shall do all
  things necessary to prevent and avoid any Work
  stoppage on account of any such strike,
  picketing, lockouts, or other labor disputes.
  These occurrences shall not entitle Subcontractor
  to any extension of the Contract time or any
  additional compensation or Delay Damages.

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What Changed?

• Subcontractor shall take all necessary action
  to prevent and avoid strikes, picketing,
  lockouts, and all other labor disputes and
  difficulties on the Project and shall do all
  things necessary to prevent and avoid any Work
  stoppage on account of any such strike,
  picketing, lockouts, or other labor disputes.
  These occurrences shall not entitle Subcontractor
  to any extension of the Contract time or any
  additional compensation or Delay Damages.

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Common Causes of Claims

• Owners/Projects that are living, walking claims
• Projects that are beyond the contractor, owner,
  and/or architect
• Incomplete definition of scope
• Inadequate definition of scope
• Lack of mutual understanding of scope

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Strategies for Avoiding Claims

• Risk Management
• Identify the risk
• Measure the risk
• Account for the risk

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Know the Risk/Reward Ratio

• Be wary of soft risks or risks that are
  difficult to quantify
• Consequential damages

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Strategies for Avoiding Construction Claims

• Develop and implement a strategic Go/No Go
  process prior to bid

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Go/No Go Decision Making

• Thorough investigation of
• Owner
• Architect
• Contractors
• Vendors
• Project scope
• Project risks

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Go/No-Go Decision Making

• Have a process!
• Checklist form for project risks
• Financial
• Operational
• Hazards
• Strategic
• Calculation form

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After-the-Fact Strategy

• The Owner shall, at the written request of the
  Contractor, prior to commencement of the Work and
  thereafter, furnish to the Contractor reasonable
  evidence that financial arrangements have been
  made to fulfill the Owners obligations under the
  Contract.

AIA-201A, Paragraph 2.2.1, 1997 Edition
Significant Changes in AIA-201, 2007 Edition
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Waiver of Consequential and/or Incidental Damages

• The Contractor and the Owner waive claims
  against each other for consequential damages
  arising out of or relating to this contract.
• AIA-201, 1997 Edition, Article 4.3.10
• AIA-201, 2007 Edition, Article 15.1.6

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Liquidated Damages

• Limit the financial interest in a claim
• Turning soft costs into hard costs

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Unforeseen Conditions -Exclusion

• If conditions are encountered at the site which
  are (1) subsurface or otherwise concealed
  conditions or (2) unknown physical conditions of
  an unusual nature, which differ materially from
  those ordinarily found to exist and generally
  recognized as inherent in construction
  activities
• AIA-201, 1997 Edition, Article 4.3.4
• AIA-201, 2007 Edition, Article 3.7.4

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Payment Clauses

• How to deal with cumulative impact
• Forward pricing

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Forward Pricing

• W. A. Botting example
• Process of assessing change order costs prior to
  the project
• Contractor waives their right to claim
• Owner waives their right to claim and Liquidated
  Damages

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Change Order Impact
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Forward Pricing
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Great Management as a ClaimsAvoidance Strategy

• Documentation
• Scope letters
• Schedules

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Documentation as a Strategy

• Avoid claims and improve productivity
• Prompt written notice (a contractual duty)
• Gives the owner/GC/CM as much time as possible to
  solve the problem
• Creates more options
• Prove you mitigated the damages
• Legal duty
• Relationship building

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Documentation as a Strategy to Avoid Claims

• Job log or diary
• Site visit report
• Change order log
• Photographs, video, etc.

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The Documentation Dial
MEDIUM
HIGH
LOW
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Scope Letter As A Part of the Documentation
Strategy

• Goals
• Paint the same picture for everyone
• Creates a profitable environment for both sides
• Separate you from your competitors
• Define your risk
• Positive first impression -

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Project Schedules

• Overall project schedule
• Manpower loading schedules
• Short Interval Schedules (SIS)

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When Schedules Go Bad
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When Schedules Go Wrong

• Underfloor cooling system
• Mechanical Contractor required to certify that
  duct plenums were adequately protected

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When Schedules Go Wrong
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Manpower Loading/Resource Leveling
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Manpower Loading/Resource Leveling Charts
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What Does This Manpower Loading Chart Say?

• You are in the 8th month of this project

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SIS (2-Week Look Ahead)
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Conclusion

• Avoid claims at all costs
• Avoiding claims and good management practices
  often go hand in hand