A claim is a demand for something due or believed to be due, usually as a result of a change in basis in the project execution; a variation or deviation in risk allocation; an action, direction, or requested change order against the agreed-upon terms and conditions of a contract or a part of the construction, which has failed or is not performing properly and cannot be economically resolved between the parties. Claims can also arise due to contract omissions, unclear language, and consequential misinterpretations. In construction, the demand is usually made for additional compensation for work deemed to be outside of the contract, or an extension to the completion time, or both. There are a number of situations for claims to take place and these should be viewed from two perspectives: the party making the claim and the one defending against it. However, the distinction between a claim and a change is the element of disagreement between the parties as to what is due. If agreement is reached, the claim transitions to an approved change request or, as more commonly referred to in construction, an approved change order, which modifies the contract. In the absence of an agreement, the claim may proceed to formal negotiation, mediation, arbitration, or litigation before it is resolved.
Litigation in most countries is the worst alternative, followed closely by arbitration, but may be the only way in which a claim can be resolved. It is far better to resolve the claim situation, even if the proposed resolution is not the most advantageous to the disputing parties, than to hope for a more favorable judgment through litigation. Often, claims are thought of in terms of a contractor making claims against an owner or other prime party and by subcontractors against a contractor, but claims can also originate with an owner who believes that a contract requirement is not being met or completed on time or in some form has caused undue damages to the stakeholder. Unresolved issues can escalate into a claim and ultimately a dispute among the contractual stakeholders.
Although agreed-upon changes to the contract documents occur frequently, disputes among the stakeholders of a project also occur frequently, so the contract should include clauses to prevent claims and to manage and mitigate their effects. Special attention should be paid to the management of project agreements in order to mitigate potential disputes that could arise. An international project involving parties from different countries raises the possibility of claims and it is necessary to establish, very early, the legal conventions and common rules for a good working relationship. Claims management describes the processes required to prevent claims, to mitigate the effects of those that do occur, and to manage claims quickly and effectively. This annex presents an outline for claims management, including appropriate dispute resolution methods. It is intended to stimulate a careful approach to contract preparation, contract management, project documentation, and expeditious resolution of claims, when applicable.
A1.1Claims Management in the Construction Industry
Generally, a construction claim is not necessarily a negative endeavor and does not necessarily reflect a bad project; it is the administrative process in which to settle a financial or cost disagreement and sometimes involves the contractual time for completion. When a buyer and seller cannot reach an agreement on compensation or cannot agree that a change has occurred, a contractual dispute may result, which may have a negative impact on the project and the relationship of its participants. Nowhere else is the motto “time is money” more prevalent than in the construction industry.
A1.1.1The Construction Environment Is Complex
Practically all project work performed involves an agreement or contract among the organizational participants. The organizational influences and project life cycles are a testament to the integration complexity. For example, the integrative nature of these projects is understood by a new roadway that disrupts exiting traffic flow, crosses existing infrastructure, passes through the natural environment, requires the acquisition of property, and even forces the relocation of communities. Consider the thousands of components that make up a finished tower, the transition between these materials, and the fact that they all are procured through written contract documents. To a further extent, construction may involve the unforeseen elements encountered when constructing a marine harbor, dredging waterways, or tunneling through mountains or beneath existing infrastructures. All of these elements dictate the scope of a project that is initiated in response to the needs and requirements of the stakeholders. It is for this reason that special attention should be paid to the management of those agreements in order to mitigate any potential disputes that may arise.
A1.1.2 Claim Prevention as a Priority
Construction activities are generally carried out in complex, highly sensitive, and changing environments. Perfect conditions and control are nearly impossible to obtain. Clearly, the best way to prevent claims is to eliminate the unknown areas to maximize what is known, and resolve changes to avoid potential disputes. Thus, the emphasis is on keeping issues in focus, prioritized, and resolved and to prevent them from becoming claims. Construction project management processes and properly documented outputs of these processes help considerably toward mitigation of a majority of possible claims. Further, research has shown that contracts based on sound and proven principles, internationally established contract guidance documents, and formalized construction project management methodologies lead to a considerable reduction in claims. A defined mechanism for claim resolution should be present in the contract agreement along with prioritization for resolution.
Having a well-developed plan is critical—one that provides for flexible implementation consistent with the plan as well as thorough communications with all stakeholders. Lack of follow-through, random changes to performance or schedule, unknown conditions, resource problems, and slow decision making are all factors that can negatively affect the project. Early recognition of potential problems, and open communications regarding possible alternatives or changes to the plan create a collaborative environment in which claims are less likely to occur.
Being proactive, such as keeping project documents in order, traceable, and retrievable in a timely manner, is a sound approach toward claims prevention and is the least invasive and least costly route in resolving potential claims and contract disputes. The practices described in this annex can mitigate and often eliminate the occurrence of claims.
A1.2 Claims Management Planning
The rise of a claim, its documentation, and its development by a plaintiff can be very expensive. Similarly, the defense of the claim can be equally expensive and both are without any guarantees of a favorable outcome. Therefore, from the stakeholder's perspective, the goal for claims management is to prevent claims entirely and, if not, to resolve them at the earliest opportunity for the least cost and least disruption to the project. To do so, one should first be able to recognize potential claim situations, either contractual or performance-based. Recognizing potential claim situations starts with sufficient knowledge of the project scope and contract requirements. This awareness helps identify the potential risk that may arise with changes in scope or a potential modification to the contract. The environment of potential claims begins with the planning processes, not only in the Project Procurement Management Knowledge Area but also in Project Risk Management, Project Stakeholder Management, and Project Communications Management. These influences form the basis for an agreement between parties as the seller and buyer. The interpretation of the contract documents from a legal perspective is beyond the scope of this Construction Extension but is a necessary requirement for contractual stakeholders. In-house or retained professional resources skilled in law and legislation are common in design and construction. Outputs, particularly from the planning processes, may prove invaluable to the legal professionals if and when their services are needed.
Having a thorough project management plan is a fundamental component and the most important factor in claim prevention. A clear and carefully described scope of work, a reasonable schedule, an appropriate method of project execution tailored to the type of project, and an acceptable degree of risk involved contribute to the elimination of claims. An assessment of the construction works encompassing all requirements of the project plan should be satisfied in conjunction with the major stakeholders to the project plan. Up-front partnering and team-collaboration opportunities are techniques that build consensus and collaboration among the team members. These techniques help reduce the perception of distrust and improve the interfaces that may have an effect on timely decisions, both at the site and at administrative levels.
A well-written contract with fair contract terms provides a basis for minimizing claims when it comes to scope changes and unknown site conditions, force majeure delays and fortuitous events, and timely reporting and fair-notice provisions. Having a detailed review of the dispute resolution clauses before addressing a dispute can help alleviate uncertainty and ambiguity on these matters and keep the dispute from escalating to a full claim. Legal advisors may also be called upon to help interpret contractual language that may be ambiguous.
Claims can be minimized by the use of a risk management plan that allocates the risk between the parties on the basis of which one has the most control over the risk factor involved. Unfairly shifting the maximum amount of risk and the ability to control that risk to a contractor is an invitation to claims. The up-front understanding of regular schedule updates and incorporating delay activities as agreed between the owner and the contractor contributes significant importance in addressing time impacts. Project Integration Management addresses change control along with the generally recognized good practices for managing changes. In addition, construction changes and the perception of a change or changed condition require an effective strategy to avoid hard lined positions, which only serve to escalate a claim situation. The change control process should designate levels of authority for the decision-making process, and for incorporating all efforts to eliminate or reduce the potential for a dispute.
A1.2.1 Planning Activities for Claim Prevention
All contract documents should be written in clear, unambiguous terms. Pre-tender meetings between stakeholders prior to contract finalization help to clarify the details, requirements, and expectations for the project. Declarations from the contracting parties regarding bid quantities can also prevent claims arising from project scope. Further, requirements for cost, schedule, scope, and specifications should be clearly stated, reasonable to accomplish, and mutually agreed upon by stakeholders. Effective and qualitative reviews by all parties increase clarity around the schedule, planned work, progress, and as-built project documentation.
The use of a constructability review can avoid field errors and unnecessary changes in construction methods, all of which can lead to claims. This review, along with effective procedures for additional qualifications and clarifications, is vitally important. The request for information (RFI) procedure is a common component for clarifying the intent, design details, or instructions for the construction contractor.
Contracts requiring designer and owner approval for shop drawings, materials for construction, RFI responses, and similar documents should contain a clause that states a reasonable time frame for a response to be given. If this deadline is not met, the contractor may unintentionally be impacted and may have grounds for a claim for extra contract time and/or added costs. The general and special conditions along with project performance reporting requirements describe other process and system tools that contribute to effective communication and reporting on project progress, events, and administrative processes, such as change order logs, change order proposals, submittal tracking, and progress meetings. Many, if not all, of these project documents and tools may be associated with a future claim; thus, prescribing clear expectations of their use can help with documenting factual circumstances and conditions.
Prequalification of designers and contractors has the benefit of dealing with experienced and qualified organizations that are less likely to enter into a wishful contractual relationship to pursue claims, thus reducing or avoiding the risk of a situation that could quickly and frequently be driven to frantic claim activity. These organizations usually have a higher standard of professional conduct and one in which the focus is on resolving situations that lead to claims. Several of the contract delivery methods are geared specifically for this purpose.
A1.2.2 Project Partnering
Projects that use a project team collaboration technique for project-specific partnering are often less susceptible to claims because of the mutual dedication and commitment that partnering promotes. Processes and systems can be established that lead to better communication, timely turnaround of submittals, prompt decision making, and often a practical form of issue escalation when a potential situation is discovered. Partnering can be a contract requirement; however, it is most often an optional provision for the contractor and the owner. Partnering strives to optimize the written and unwritten commitments of the stakeholders to reach an early understanding of how to conduct business professionally and within a code of conduct, thus making committed efforts toward project success (see also Figure A1-1). This technique is considered an alignment of the project management Knowledge Areas and relationships among the primary stakeholders. The following are some of the beneficial drivers for an effective partnering relationship:
Good practices and sound business habits of partnering are vital to its success. The following may be considered components of the partnering team's business plan:
A1.2.3 Specific Claim Litigation Prevention Techniques
The construction industry has made great progress in creating proactive alternative techniques for resolving claims and contractual disputes. It should be noted that contracts often stipulate a minimum period for amicable resolution between the parties as a prerequisite to the formal litigation process. Some of the more prevalent techniques that can be used during the project and prior to claim litigation include:
A1.2.4 Joint Recognition of Changes and Documentation
The preferred practice for reducing potential claims is for the parties to recognize that a change has occurred and that both parties are realistic in assessing the potential cost and time impacts. A clear change order process should be implemented and incorporated in the contract to manage both in-scope and out-of-scope changes. This change process requires timely and appropriate documentation that can lead to quick acknowledgment of a change. Poor, untimely, or inadequate documentation will only prolong an argument between the parties. Good documentation is also a primary component for defense of claims. The tools and techniques for performance reporting are effective mechanisms that lead to good documentation and factual analysis, which are essential to timely and successful claim resolution. It matters that the intention of either party is not to damage the other party, which only leads to further negative impacts on project completion and costs. Also, the project management information systems, configuration management, change management, and work authorization systems, which collect and distribute information, all contribute to the recognition and documentation of changes and change requests.
The facts and truthfulness in data collection and reporting are important. With current and emerging technologies (e.g., building information modeling [BIM], dashboards, photo and video, and immense data storage capacity and retrieval), the capability to share and exchange factual project data is almost limitless. The results of effective and timely claim prevention yield approved change requests for compensation or requests for extensions of time, or both, which eliminates claims. Disputes and fighting through litigation are not in the best interest of either party. Stakeholders who have successfully prevented or resolved potential claims, without the added time and expense of experts and attorneys, generally develop an appreciation for trusted relationships and a respect for one another. This, in turn, can lead to future collaborative working relationships and projects.
A1.3 Claims Management Monitoring and Control
It is rare that a stakeholder plans for a claim or contract dispute. For the most part, stakeholders are optimistic toward their contracts and seek to avoid claim situations. In the event that a claim situation arises, the stakeholder should be prepared to identify the situation in a timely manner and be forthright in its evaluation to determine if the potential claim is justified. Owners should require a project management plan that details systems, policies, processes, procedures, and documentation. Such a procedure, if followed diligently, makes document processing effective and efficient and has proven to mitigate delays and decrease disputes and subsequent claims.
A1.3.1 Claims Identification and Initial Justification
Many claims are the result of an unresolved request for a change order, conflicting contract document interpretation, or changed or unknown conditions. A contract that is not administered in a timely manner causes time and cost impacts on the project. Project performance is another area where claims may arise due to either the quality of work performed or the progress of the work not being obtained to meet the contract completion date.
Regardless of the origin of the potential claim, the claims identification process should start with a clearly understood project scope and contract and include a written description of the claim, time and cost impacts, prompt payments, capability gap analysis, expert judgment, documentation, pending claim file, and statement of claim as follows:
The owner team should have the ability to analyze and resolve delay claims. Likewise, owners should ensure that their project staff deals with the time extension requests promptly, objectively, and in accordance with the terms and conditions of the contract. Cost impacts are the most common type of claim involving the payment or lack thereof for claimed extra work or changed conditions that made the work more difficult and costly to perform. Accuracy in time reporting and documenting the actual changed condition with supporting documentation is a key to identifying and justifying the claim.
An initial quantification of the value of cost damages should be made. To further elaborate, the types of time impacts are often described as critical/noncritical delays, excusable/nonexcusable delays, compensable/noncompensable delays, and concurrent delays. Sellers should comprehend these types of delays and buyers should recognize the differences so as to augment the discussions and better understand delay consequences in relation to the overall project timelines.
Analyzing time and cost overruns often requires a technical forensic analysis that can withstand formal dispute resolution forums, such as litigation or arbitration. Generally, forensic analysis specialists are brought in for several reasons: the need to choose a methodology and develop a forensic schedule analysis that will stand up under scrutiny, the need to provide an objective expert opinion, and the need to support negotiations.
A1.3.2 Claims Quantification
Once an issue has been reviewed and internally justified to have merit as a potential claim, a decision should be made to determine if a claim is truly worthy of pursuit. An adequate assessment should be made of the possible stakeholder consequences, positive and negative, when a claim is to be submitted. The next step is to quantify the potential claim in terms of additional compensation, a time extension to the contract completion, or both. Claims often tend to create barriers for prompt resolution due to the differences in the cost and time impact perspectives between the stakeholders. Nevertheless, there are proper and logical ways of determining the cost of the extra activity, added work, or consequential damages in terms of time and money. The process is best served by using a cause-and-effect approach that specifically identifies the cause, the circumstances surrounding it, and its effect on the specific work item and possibly other items that have been indirectly affected. Certain claims can have an effect on other aspects of the construction project, making such works more costly and causing disruption to work sequencing or delaying activities. To the extent that these indirect effects can be justified and quantified, they are part of the total impact of the claim.
The statement of claim forms the foundation for further analysis and quantification. First, a specific component of the contract prescribes cost items that can or cannot be claimed by means of a thorough contract and legal counsel review. Jurisdictional or international laws regarding reimbursement may also affect the claim elements related to cost reimbursement. Second, project time and cost records should be analyzed for factual and substantiated documentation. Careful control and management of project documents cannot be overemphasized should a claim be destined for remedy via a judicial court system. All stakeholder documents and records, including corporation records, may be discoverable through the court of law. The additional effect on or consequence of the balance of the contract work caused by the claimed activity should be treated in the same manner as data collected for the claimed activity itself. Careful and explicit documentation should be maintained to fully support these types of activity impacts, including the use of the project schedule to demonstrate the claim impact. Contemporaneous documentation far outweighs documents created after the fact. With the increasing use of new technology, the ability to capture and index real-time data should not only make substantiating the claim more efficient, but also serve to more quickly disprove or support alleged claims.
Documentation should include the following information:
The home office overhead (HOOH) is an indirect cost due to a project delay and is one of the more difficult impact costs to demonstrate and justify. Judicial courts have gone back and forth on this justifiable cost to the point that many buyers attempt to disallow it in the contract general and special conditions, but not always successfully. Sometimes the claimed work has an effect on other project work and home office operations that can result in additional cost. Usually, this cost is estimated, since the cause-and-effect relationship is not obvious. Often, though, the justification for this indirect cost is difficult to prove to the satisfaction of the opposing party. In some situations, given quantifiable work performance, a measured-mile-cost approach is used. In this comparative analysis approach, the actual costs and work efforts for a similar, unaffected work are recorded and used to determine the cost impact of disrupted and impacted work activities. In addition to direct project costs, the project owner can also be impacted by a delayed occupancy. The contractor could be affected by unavailability of contract labor and equipment resources to perform work on other projects, or by additional or extended general administrative costs to manage the project. Most contracts include a liquidated damages clause, should the project not be completed within the contract requirements. Although difficult to demonstrate and prove, the contractor can also be hurt by projects that limit its ability to perform other projects, current or prospective, and these damages are sometimes claimed as lost opportunity costs.
One of the most common ways of assessing the schedule effect of changes and claims is to compare the as-planned schedule with the as-built schedule in order to support time extension requests. Other forensic schedule analysis techniques, several of which are commonly referred to as time impact analysis (TIA) techniques, each with its own advantages and disadvantages, include:
Since time management practices can vary widely, the preferred practice is to support the actual activity events with consistent schedule documentation through monitoring and controlling during project execution. The prevalence of daily diaries becomes a key component in substantiating work progress and delay disruption. The discussion of Project Schedule Management in Section 6 provides examples of schedule status and updating techniques. The effect on the critical path of the project schedule can be difficult to isolate because of all of the factors, often simultaneous, that affect construction schedules. Such delays to the project may be due to owner actions or inactions, such as late or partial access to work areas, information, or decisions. Further, when both parties cause delays, a separate analysis may be required for each case in order to properly allocate project delay responsibility. The Practice Standard for Scheduling [8] and CPM Scheduling for Construction: Best Practices and Guidelines [9] can serve to enhance the time management practices that are critical within the construction industry.
A1.3.3 Claims Resolution
Even with a concerted effort to prevent claims, they still may occur. There may be an understandable disagreement as to whether or not the claim in question is a change to the contract, or whether the claimed amount of compensation or time requested is actual or perceived. When a claim situation arises to the point of a contract dispute, a step-by-step process is set in motion. Most all formal contracts contain a prescribed claim process that will dictate the method of resolution. It is axiomatic that the longer this process takes, the more expensive and disruptive it is to both parties. Therefore, the goal is to settle these issues quickly and at the lowest level of authority in the organization as practical. The process begins with negotiation, perhaps involving some level of senior management that has contractual and financial authority. Subsequently, the claim moves along to mediation, arbitration, or litigation, depending upon the remedies afforded by the contract. Alternative methods of resolution have been increasingly used because of the potential proliferation of claims and the expense of litigation. These alternative methods, referred to as alternative dispute resolution (ADR), may include mediation, arbitration, mini-trials, DRBs, or other global alternatives.
Examples of the method of resolution for a contract dispute are:
Regardless of the prescribed resolution method, settlement should always be an option to the parties and they should remain open to this dialogue. There are many recorded legal cases in which the sellers and buyers have faced judgments that were not in their favor.
A1.3.4 Contract Law Interpretation
For sellers conducting business across international borders, an awareness of contract law precedents can be particularly important in learning how contract legal challenges may be decided. In a common law system, law is interpreted and thus “written” by judges hearing the cases. Decisions become the “rule of law” for all future cases that are factually similar. In civil or codified law, the law is written into statute or code books and is strictly interpreted by the courts of that country. Stakeholders involved in construction projects across international borders are encouraged to become familiar with these precedents or acquire the proper legal representation of that country.
A1.3.5 Bid Protests
The number of bid protests has been gradually increasing due to the increasing size of projects in the public sectors; the varying contract delivery methods; and perceived discrepancies, subjective evaluations, and sometimes unfair selection. Bid protests most often originate from the procurement side of public contracting. Some industry experts point to the ease in which a protest can be made due to changes in some government policies that allow protests for certain types of contract procurements. Protesting is one thing—winning a protest is another. Contractors invest large sums of money in preparing contract proposals. When agencies do not follow the procurement criteria or make arbitrary contractor selections, the promotion of fairness is challenged. However, other industry experts claim that protests can promote a form of voluntary corrective action by agencies in the public contracting arena.
A1.3.6 Ethics in Construction
It is unfortunate that unethical problems exist in both the corporate and operational levels within the construction industry. From falsifying quality control reports, to inappropriate labor mark-ups on direct cost contracts, to knowingly enforcing an unfair risk or site condition on a contractor, ethical issues in construction are an ever-present situation. Many organizations have created, adopted, and continue to use codes of ethics. However, having an ethics code does not necessarily mean that the organization's entire personnel and business practices uphold ethical standards. With the advent of more transparency between buyers and sellers through technology, ethical behavior can be improved; however, organizations should continue to focus on the factors within their control. The PMI Code of Ethics and Professional Conduct for project manager practitioners is a good place to start.