As technology enables building projects to achieve increasingly complex designs, as construction schedules continue to accelerate, and as the pricing and delivery of materials grow more volatile, one thing remains constant: construction claims.
There are numerous facets to the complete and clear understanding of a construction claim. How does one systematically determine the proper payment of money, accurate change in contract time, or other relief when analyzing a claim? The significance of the answers to these questions should not be underestimated, as it directly impacts the settlement.
Underscoring the need for clarity are the alternatives to claim settlement: dispute arbitration or litigation. These paths to resolution are costly in terms of time and money, a reality that can be appreciated by both owners and contractors. In 2015, the median timeframe from filing with the American Arbitration Association to award was 232 days; the median length of a jury or bench trial was slightly more than 2 1/4 years.
As far as the bottom line goes, the hourly or per diem fees charged by lawyers and arbitrators are considerable (and vary widely). Notably, in litigation, there is no time limit on the discovery process, while in arbitration proceedings, discovery is often limited to document exchanges and a relatively small number of depositions, if any.
In my experience, zeroing in on five key elements can help put a claim into sharp focus and expedite its analysis and, ultimately, its resolution.
1. Determine entitlement under the contract
I am surprised at how frequently the narrative of a claim does not address the contract provision that defines it. The reason that this is important is that the provisions of a change-order clause, delay clause, suspension of work clause, unusually severe weather clause, no damages for delay clause, or changed site condition clause all have different requirements for: notice, what the contractor may be entitled to for quantum, and/or what is allowed for delay.
2. Verify timely notice was given
A claim analysis must verify that timely and adequate notice was given of the claim incident. The time allotment for this can vary, depending on the nature of the claim. An example of how timely notice may differ can be seen when comparing a Notice of Claims clause (AIA Document A201 – 2017, Section 15.1.3)—which requires notice within 21 days—with a Changed Site Condition clause (Section 3.7.4), which calls for notice within 14 days.
Not observing this detail in the contract-stipulated schedule puts at risk the right to file a claim and raises the possibility that the claim could be waived altogether. Relatedly, claimants are well advised to use any contractually authorized means of delivery (a specific overnight carrier, for instance) and, if possible, obtain a proof of receipt when submitting their claim notice.
3. Calculate quantum per the contract with supporting documentation
As with the first two key elements of claim analysis, a close reading of the contract is also central to calculating quantum. The contract may allow or restrict costs when a claim is submitted. When using AIA Document A102 – 2017 Standard Form of Agreement Between Owner and Contractor, where the basis of payment is the Cost of the Work Plus a Fee with a Guaranteed Maximum Price, Article 7 identifies the costs that can be included and Article 8 defines the costs that are not to be reimbursed.
In a contract with a no damages for delay provision, no quantum is allowed for a delay event.
Under a suspension of work clause claim, it is typical to only allow increased field costs, but no additional profit on the increased costs.
Many change order clauses restrict mark-up (overhead and profit) on self-performed work or subcontractor work. Therefore, correctly understanding the basis of entitlement under the terms of the contract is critical to how the request for additional compensation is calculated.
4. Analyze delays through the lens of project schedules and contemporaneous records
The longest sequence of required construction activities to bring a project to completion is known as the critical path. Unless remedial steps (such as resequencing work) can be taken, delays to any one critical path can push the entire project past its deadline. Non-critical activities that can be absorbed by the schedule without affecting the on-time completion of the project are said to “float.”
Any request for a time extension necessitates a schedule review to ensure it is achievable within the constraints of the project. Claims that focus on delays should be analyzed to determine the specific category of the event. Determining what activities constitute the critical path, how much float is associated with non-critical activities, and the nature of the delay—is it excusable, non-excusable, compensable, non-compensable, concurrent, a critical-path impact, or consumption of float?—must be taken into account when evaluating a claim.
An excusable delay is a delay for which the contractor is entitled to an extension of the contract time for completion. Plainly put, the contractor’s late completion is excused.
A compensable delay entitles contractors to not only a time extension, but also to compensation. The compensation takes the form of an adjustment to the contract price for any added costs that flowed directly from the delay.
Unexcused delays are those for which the contractor has responsibility, and that entitle the contractor to neither a time extension nor any added compensation. If the contractor has not completed the work when required and the delay is unexcused, the owner will be entitled to its damages for the contractor’s failure to complete the project on schedule.
It is recommended that any critical-path schedule be tested with other contemporaneous project records—such as daily reports—to determine the veracity of the schedule and claimed delay.
As critical as they are, daily reports are often a weak link in the paper trail because they fall short in their level of detail. In addition to documenting weather conditions, describing the work performed, and tallying laborers and equipment on the job site, daily reports should also track the time spent—by personnel and equipment—by work categories or cost codes. Reports should present a consistent quality of information and detail on both the typical work day, and days when delays or interruptions occurred. It should be stressed to all partners on the job that keeping current with daily reports is required, as back-dated documents may not be accepted as evidence by courts.
5. Ensure there are no waiver/estoppel issues
Finally, claims need to be scrutinized to determine if there were any waiver or estoppel issues that would bar them. The most common examples include conditional and unconditional lien waivers. An unconditional waiver surrenders the right to file a lien regardless of whether one is paid or not. A conditional waiver surrenders the right to file a lien upon payment.
Beyond the contract, the language used in change orders may waive and release claims for additional costs or time, and should always be reviewed. This area of analysis—the Achilles heel of an otherwise valid claim—is frequently overlooked.
Should (or, more realistically, when) circumstances arise that call for the terms of the contract to be altered, the owner, contractor, and architect will evaluate the request for a change and attempt to reach an agreement on how it will impact the project, the budget, and the construction schedule. If consensus is achieved, the architect prepares the change order, setting forth all of the adjustments agreed to by the parties, who then sign off on the order. Once the parties execute the change order, it becomes a formal modification to the contract. Amendments of this kind—often made under pressure to complete the job—should be one of the first items to be examined in the event a construction claim is filed.
This examination may be tricky, and the potential for misreading the details can be even greater when the owner and contractor do not see eye-to-eye on the terms of a change order, raising the bar for construction claim analysis. The recourse to the situation, which is outlined in AIA documents, is for the owner and architect to issue a construction change directive (CCD). This enables the owner to change the work required by the contract documents, and prescribes how the owner can adjust the contract price because of the change.
If the contractor disagrees with the pricing set forth in the CCD, the architect has the authority to determine interim pricing based on the reasonable costs associated with listed categories of expenses associated with the changed work. The contractor must then proceed with the work and the owner must make all payments in accordance with the architect’s interim pricing. Either party may challenge that pricing by asserting a claim under Article 15 of the contract. While this procedure provides a framework for resolving change-order-related problems, it can also pose pitfalls for the unwary claim analyst.
In this article, I promised to explore the five key elements in a conscientious claim analysis process. But I am going to add a sixth point to the list: meticulous documentation. This is the bed-rock of every dispute situation, and it goes beyond having a well-written contract. From archiving emails and keeping meeting notes, to detailed project reports, maintaining a complete and thorough record of communication throughout all phases of a project is the foundation of making a credible claim. Conveying the importance of this to colleagues and clients solidifies your—and your firm’s—reputation as a fair and skilled analyst, and helps builds trust among all parties.