Contractor & The Construction Claims
The effective means of minimizing construction claims
The three most important factors in property value are Location, Location, Location! In construction, the three most important factors to successful resolution of issues are Documentation, Documentation, Documentation! If you are a contractor, good documentation is required to present a successful claim, if you are an Owner, good documentation is required to successfully defend against inappropriate claims. The value of the dispute is dependent on the quality of the supporting contemporaneous documents.
What is the effective means of minimizing construction claims?
Project managers tend to listen intently when informed that we have guaranteed method for avoiding claims on their next project. Our “No Claims” method simply requires:
- The Owner provides PERFECT construction documents at bid. Complete, correct and coordinated.
- The Owner makes NO changes to the project after the contract documents are issued.
- The Contractor and all Subcontractor’s work diligently and make no mistakes.
In the real world, however, we are aware that designers do not have the time or budget to produce drawings that are complete, correct, and coordinated. Changes of scope are inevitable in any project due to unforeseen conditions, human error, budget considerations, and/or owner choice.
Many times the owner issues the plans for bid, or construction, when they are not complete, correct or coordinated. This is usually based on the owner’s need to start the project within a certain time constraint, either for fiscal or political reasons. The owner has a right to issue drawings which are incomplete or to request scope changes during the project. However, the owner also has the obligation to pay for such changes.
When you enter a contract to buy a house, or a car, or an appliance you expect to get what you are paying for at the agreed price, end of deal. However, if half way through the construction of your car you decided to change from vinyl to leather seats, you should expect the total price of the car to increase accordingly. Construction contracts anticipate such changes to the work during the course of the project.
Even with a fixed price contract, the total cost of construction unsurprisingly ends up higher than originally agreed, when a change to the scope of work entitles the Contractor to more money.
There are only three reasons for any change to the construction contract after award:
Owner requested changes.
Architect errors (mistakes) and omissions (missing).
With new construction, once you get above the foundation there should be no unforeseen site conditions. If the architectural team has done a good job, owner changes are minimal, and there are no major unforeseen conditions, the final cost should be less than five percent (5%) over the awarded contract price.
However, with a renovation/remodel project, every time you open a wall you risk finding changed conditions. It is impractical and unlikely that the owner has allowed the architect enough time and money to thoroughly investigate all existing conditions. Therefore, unforeseen conditions arise and can significantly impact the project.
Why blame the Contractor? He didn’t design the project. He didn’t know about the concealed conditions. He is not responsible for the concealed conditions. When the Contractor notifies the architect about a newly discovered concealed condition he expects a prompt response with direction on how to proceed.
Often the Contractor has to wait too long to get an answer, and sometimes the answer is inadequate. In the meantime he reassigns that crew to other tasks on the project and tries to minimize the disruption and impact. Is it any wonder that they turn in claims?
It is frustrating that many Contractors, if they are entitled to compensation for a claim, do not do an adequate job of clearly and persuasively presenting their request for an equitable adjustment of the contract price. They invariably fail to provide adequate contemporaneous documentation. Thus, while they may have a right to additional compensation, the claim they submit fails to achieve a threshold level of credibility and their request is denied.
Restraint Effect Analysis (REA)
The Restraint Effect Analysis (REA) Claim is based on establishing a clear documented cause-effect relationship to explain cost overruns experienced on a project.
A Restraint Effect Analysis of events which occurred on the project and their associated related impact to the Contractor’s operations, both directly and indirectly, should be done in the interests of meeting the needs of both the Owner and the Contractor, to resolve the claim situation of the project to the satisfaction of both parties.
The Restraint Effect Analysis is performed by analyzing detailed schedule activities and activity for work performed consistent with the applicable production reports. This material is reviewed relative to all available documentation and facts pertaining to the activities and accounts being analyzed. Following this, the Contractor determines the Restraint Effect factors as a percentage adjustment of the affected base work. This mathematical approach produces the impact values for the restrained work (impacted work). In addition, the Contractor applies percentage allowances for tools and equipment as well as other related cost factors.
The Restraint Effect Analysis identifies events beyond the Contractor’s control which caused specific cost overruns. However, a credible analysis requires relevant, contemporaneous documentation.
Contract administration is systematized and paper-oriented. This is why construction people, who are typically can-do people, generally dislike it, and avoid it. However, we emphasize so strongly its importance, because it is critical to presenting a persuasive and credible claim.
The Contractor should implement an organized program of documentation which permits the Contractor, and the Owner, to establish a baseline against which progress can be measured and the construction process controlled.
The Contractor must extensively document, on a continuing daily basis, all events relative to interferences, instructions to the Contractor, changes to the work, impact by others and all issues which have an effect on the Contractor no matter how minor. The objective here is to provide all the necessary documentation for developing a position both as the project unfolds as well as upon the completion of the work. The Contractor’s most favorable approach to preserving its’ rights is by giving the Owner appropriate notice to be followed up with details when the effect of potential impact events can be evaluated.
Job site superintendents and field engineers should each prepare a daily log of job events with relevant site photos. On a daily basis the Contractor’s field claim documentation person should review these daily logs and speak to these people to assure all problems encountered by the Contractor are recorded.
The Contractor’s Cost Control in the field should be recording costs charged to the various activities and particularly identify those events and costs which result from impact of the problem areas. Problems would of course include acceleration and other current cost overrun conditions resulting from the acceleration schedule.
In addition, the Contractor’s claim documentation person should make extensive use of tape recording notes including conversations and discussions with management personnel, superintendents and field engineers. These notes should be transcribed on a daily basis and be sufficiently extensive to reflect the comments of the Owner field management. These should be read and signed off by the appropriate individual.
In presenting a credible construction claim, it is essential that the Contractor identify impact on an ongoing basis and to be able to account for all costs including base contract work costs, impact related to contract base work, extra work and impacts related to extra work as well as impacts and costs due to other special conditions. The key element persuasively presenting such a claim is contemporaneous documentation!
If you have questions about construction documentation, or any other general legal questions, please contact us.