The Anatomy of a
Construction Claim
The South Dakota Chapter of
ASHRAE
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
Avoiding Adversarial
Relationships
You’re angry. So you shoot a hole in
my boat. Only trouble is, we are in
the same boat.
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
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



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….”
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 Claims

Risk Management



Identify the risk
Measure the risk
Account for the risk
Know the Risk/Reward Ratio

Be wary of “soft” risks
or risks that are difficult
to quantify

Consequential damages
Strategies for Avoiding
Construction Claims

Develop and implement a strategic “Go/No
Go” process prior to bid
Go/No Go Decision Making

Thorough investigation of:






Owner
Architect
Contractors
Vendors
Project scope
Project risks
Go/No-Go
Decision Making
• Have a process!
– Checklist form for
project risks
•
•
•
•
Financial
Operational
Hazards
Strategic
– Calculation form
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
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
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
Great Management as a Claims
Avoidance Strategy



Documentation
Scope letters
Schedules
Documentation as a Strategy

Avoid claims and improve productivity

Prompt written notice (a contractual duty)



Gives the owner/GC/CM as much time as possible to
solve the problem
Creates more options
Prove you mitigated the damages


Legal duty
Relationship building
Documentation as a Strategy
to Avoid Claims




Job log or diary
Site visit report
Change order log
Photographs, video,
etc.
The Documentation Dial
MEDIUM
HIGH
LOW
36
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
Short Interval Schedules (SIS)
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

1/
1
1/ 4/0
2
1/ 1/01
28 1
2 /0
2/ /4/0 1
1
2/ 1/01
1
2/ 8/01
25 1
3/ /01
3/ 4/0
1
3/ 1/01
1
3/ 8/01
25 1
4/ /01
1
4 /0
4/ /8/01
1
4/ 5/01
2
4/ 2/01
29 1
5/ /01
5/ 6/0
1
5/ 3/01
2
5/ 0/01
27 1
6/ /01
6/ 3/0
1
6/ 0/01
1
6/ 7/01
24 1
7/ /01
1
7 /0
7/ /8/01
1
7/ 5/01
2
7/ 2/01
29 1
8 /0
8/ /5/0 1
1
8/ 2/01
1
8/ 9/01
26 1
9/ /01
2
9 /0
9/ /9/01
1
9/ 6/01
2
9/ 3/01
30 1
/0
1
What Does This Manpower
Loading Chart Say?
You are in the 8th month of this project
25
Actual Manpower
Estimated Manpower
Letter from CM
demanding more
w orkers
20
Tariffs
removed
15
10
5
-
SIS (2-Week Look Ahead)
Conclusion


Avoid claims at all costs
Avoiding claims and good management
practices often go “hand in hand”