The Anatomy of a Construction Claim

The Anatomy of a Construction Claim Region IX CRC Denver, Colorado Goals    Understand what a claim is and how it evolves Develop strategies for anticipating and avoiding claims Eliminate the adversarial environment that creates claims 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 Claims as a Relationship Issue 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 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 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) Claim Components  Claim Components  Entitlement  Damages  Relief  Entitlement  A change occurred  The change was unexpected  The risk is borne elsewhere Types of Changes    Non-excusable & Noncompensable  Examples? Excusable and Noncompensable  Examples? Compensable  Examples? Example #1 on Entitlement     Replacement of a cooling tower Owner selected equipment $64,000 base contract A/E drafted “conceptual” plan for owner. Common Causes of Claims   Contracts that have claims built in Owners/Projects that are living, walking claims 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 Strategies to Avoid Construction Claims  The best strategies revolve around great management Strategy to Avoid Claims  Thorough review of the Contract Documents    Read the contract Read the contract Read the contract 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….” 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….” Relationship Changes “The Owners and the Architect‟s interpretation shall govern the scope and performance of the Work and no allowances shall be made in behalf of this subcontract for error or negligence on his part in this connection.” Relationship Changes “The Owners and the Architect‟s interpretation shall govern the scope and performance of the Work and no allowances shall be made in behalf of this subcontract for error or negligence on his part in this connection.” What Changed? “Errors & Omissions: Subcontractor represents that it has examined the Contract Documents and is familiar with them and shall, prior to executing this subcontract, call to the attention of Contractor any errors or omissions contained therein.” What Changed? “Errors & Omissions: Subcontractor represents that it has examined the Contract Documents and is familiar with them and shall, prior to executing this subcontract, call to the attention of Contractor any errors or omissions contained therein.” 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.” 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.” 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 Strategies for Avoiding Construction Claims  Develop and implement a strategic “Go/No Go” process prior to bid Strategies for Avoiding Claims  Risk Management    Identify the risk Measure the risk Account for the risk Go/No Go Decision Making  Thorough investigation of:      Owner Architect Contractors Vendors Project scope Go/No-Go Decision Making • Have a process! – Checklist form • • • • Financial Operational Hazards Strategic MCAA 2006 Strategic Estimating Conference Category Inventory High Financial Risk Owner default Subcontractor default Cash flow Cost recovery Budget Material escalation Inflation Liquidated damages Actual damages Consequential damages Surety/bonding Strategic Risks Reputation Profit potential Long-term relationships Political considerations Customer satisfaction Single project distraction Constructability Operational Risks Schedule Productivity A/E performance Defective documents Codes & regulations Subcontractor performance General Contractor performance Change orders System performance Warranty Bidding format Environment Risks Bio-hazards Hazardous materials Business interuption Substance abuse Release of pollutants Insurance Safety Med. High Risk Average Med. Low Low – Calculation form 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 Owner’s obligations under the Contract.” AIA-201A, Paragraph 2.2.1, 1997 Edition Significant Changes in AIA-201, 2007 Edition Know the Risk/Reward Ratio  Be wary of “soft” risks or risks that are difficult to quantify  Consequential damages 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 Liquidated Damages   Limit the financial interest in a claim Turning “soft” costs into “hard” costs 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 Payment Clauses  How to get paid for changes without creating an adversary  Change Order payment process   Forward pricing Backward pricing Unforeseen and Unknown Conditions Strategies   Contingency fund Allowance fund 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 Change Order Impact Percent of Loss if Condition Factor 1. STACKING OF TRADES: Operations take place within physically limited space with other contractors. Results in congestion of personnel, inability to locate tools conveniently, increased loss of tools, additional safety hazards and increased visitors. Optimum crew size cannot be utilized. Minor Average Severe 10% 20% 30% 2. MORALE AND ATTITUDE: Excessive hazard, competition for overtime, over-inspection, multiple contract changes and rework, disruption of labor rhythm and scheduling, poor site conditions, etc. 5% 15% 30% Forward Pricing Backward Pricing  MCF research on cost impact of change orders  After the project is complete Backward Pricing Change order labor Total Direct Field Labor Delta Estimated labor hrs. MCAA’s Change Order Impact Calculator  Issued in 2002 Change Order Impact Calculator Change Order Impact Calculator Documentation as a Strategy to Avoid Claims    Level the playing field Persuade the Owner/G.C. of the merits of your claim Removes their defenses Documentation as a Strategy to Avoid Claims     Job log or diary Site visit report Change order log Photographs, video, etc. 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 - Project Schedules     Overall project schedule Manpower loading schedules Micro-schedules Short interval schedules When Schedules Go Bad When Schedules Go Wrong   Underfloor cooling system Mechanical Contractor required to certify that duct plenums were adequately protected When Schedules Go Wrong Manpower Loading/Resource Leveling Manpower Loading/Resource Leveling Charts Analysis of Overall Schedules with Micro-schedules Analysis of Overall Schedules with Micro-schedules Where are the windows? SIS (2-Week Look Ahead) What Changed? Building Information Modeling (BIM)    Database linked to intelligent objects Allows for the collaborative management of building design, construction and maintenance/operat ion Best viewed as a project delivery method Building Information Modeling (BIM) Issues  Blurs the dividing line between entities    What is the design? Who is the designer? Who is in „responsible charge‟? Conclusion   Avoid claims at all costs Avoiding claims and good management practices often go “hand in hand”