Claims Management: The Blueprint to Success

One of the more challenging tasks that a contractor will face during a construction project is dealing with claims. Claims — and change orders, depending on where they are in the dispute resolution process — arise out of the numerous issues encountered during construction, such as scope changes, differing site conditions, and project delays.

Not only are substantial sums of money on the line, but so are a contractor’s relationships with the owner, subcontractors, suppliers, sureties, and other project stakeholders. Because of this, it’s imperative that contractors are strategically positioned to support their claims and defend them against opposition and scrutiny.

This article discusses how contractors can prepare accurate and well-supported claims, including early identification of cost impacts, employing proactive cost accounting and project control measures, and maintaining adequate documentation to support their claims calculations. Various methods of preparing claims as well as the requisite data and documentation to achieve the most favorable outcomes will also be explored.

Overview of Claims

Construction is an inherently complex undertaking. It requires the coordination and cooperation of multiple parties — many of whom have not previously worked together — that all have significant resources invested in the end product.

It also involves the conversion of a set of drawings (two- or three-dimensional) into a physical, tangible structure. There are volumes of architectural, engineering, and contractual documents to consider, as well as real-time decisions that must be made and agreed to by a consortium of project stakeholders.

Compared to other manufacturing industries, there are few opportunities to improve the final product through research and development; in construction, the prototype is the finished good. It would be incredible if all these factors and inputs magically came together at once to create a perfect product, but in reality, they usually don’t.

Changes occur on construction projects all the time. For example, these changes can be due to:

  • Design errors and omissions (intentional or otherwise)
  • Additions or deductions to the project’s scope
  • Unforeseen or discovered site conditions
  • Delays due to weather, permitting, and other issues outside of the contractor’s control
  • The availability of labor, equipment, and materials
  • Inefficient communication and coordination among project participants

Whether the changes are minor or significant typically depends on the impact to the schedule or budget. Minor changes can generally be resolved with minimal paperwork and deliberation.

Significant changes, however, will almost always result in a change order and, if disputed or unsupported, may lead to a claim. When claims ensue, the information required to prove the contractor’s entitlement to the additional costs and/or time can be substantial and daunting.

Fortunately, claims can be supported and quantified with enough foresight and preparation including the implementation of appropriate project controls and maintenance of relevant contemporaneous project documentation.

Types of Records & Documents to Maintain

Identification & Notice Documents

For a contractor to be in the best position to support its claim, it should identify change impacts as early in the process as possible and maintain adequate documentation of their origin and impact. Typically, requests for information and responses, meeting minutes, and emails are a good foundation for establishing the origin of a changed condition.

As changes progress, the architect’s bulletins and supplemental instructions, the contractor’s change order requests, and the owner’s change directives can provide further support for the contractor’s entitlement to a change order and its negotiation between parties.

Despite the convenience of verbal discussions, contractors should avoid relying solely on verbal agreements or statements. At a minimum, a contractor should always submit a written understanding of any verbal agreements made between itself and the owner or architect and request written confirmation thereof to establish a reliable documentation trail.

The contractor should also pay careful attention to notice requirements for claims in the contract and the timelines for submission and response included therein. For example, most contracts include clauses identifying notification periods due to disruptions or other events. Similarly, some contracts prohibit contractors from retaining change order requests until the end of the project.

Certain contract and payment documents (such as executed change orders or lien waivers) may waive a contractor’s rights to future recovery through the claims process. Prior to signing a change order, a contractor should consider whether the extent of the impact is fully known or whether it may potentially warrant future work.

If a contractor has not yet determined the order and magnitude of a cost or schedule impact, then the contractor may decline signing any documents that waive its rights to additional compensation or excusable delay through the claims process.

Accounting Records & Documents

One effective approach that a contractor may use to quantify its claim is the discrete pricing or specific identification methodology. This methodology identifies the link between the cause of an impact (which is necessary to establish liability) and the effect (the quantification of damages). To rely on this methodology, it’s important for contractors to begin tracking the costs associated with change impacts early in the process.

Ideally, a contractor will have the ability to set up separate cost or account codes in its project ledger to capture the additional costs incurred from the impact (sometimes referred to as extra work or force accounts). The costs captured in these accounts can be verified through a review of the contractor’s project ledger and substantiated with supporting documentation such as invoices, timesheets, and subcontract documents.

Although these types of accounts are useful for capturing the direct costs of change impacts, contractors should be cognizant of any incremental costs that the accounts fail to capture such as additional general conditions and site requirements, crew downtime, equipment standby, and productivity impacts.

To the greatest extent possible, contractors should avoid including an excessive number of transfers between cost accounts or journal voucher entries in their claimed costs. These entries may later prove challenging for the contractor’s claims experts to validate and/or for the contractor to defend as compensable costs without onerous explanation and support.

Payroll & Timekeeping Records

In accordance with best practices for discrete pricing, contractors should direct their employees (both craft and supervisory) to record time spent on tasks associated with change impacts under separate cost or activity codes on their timesheets. Contractors should ensure timesheets are signed by supervisors attesting to the crews’ classification of time and include detailed notes related to weather, unforeseen conditions, or other obstacles outside of the contractor’s control that required additional time or effort.

On some projects, a contractor may be forced to accelerate its work due to circumstances outside of its control. If acceleration is directed by the owner, either by order or constructively, then the contractor may be able to recover the costs of overtime or workforce expansion to adhere to the existing project schedule.

In these situations, it behooves the contractor to account for the additional personnel added and/or overtime incurred because of the acceleration. This is particularly true when the contractor is only able to recover the premium portion of wages and benefits paid to employees (as the straight-time portion is assumed to have already been included in the contractor’s bid). The accelerated labor costs can typically be captured and substantiated using a combination of the foreperson or superintendent’s daily reports, timesheets, and corresponding payroll data.

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