Given the complexity of construction projects, it’s understandable they are fraught with the possibility of claims. Actually, at least one-quarter of construction projects go through a claim. Claims equal delays, frustration, financial losses, and strained or ruined relationships. One of the major responsibilities of a project manager (from both a contractor & owner role) is construction claims management. In order to avoid construction claims, the owner’s rep and construction manager do their best to identify and handle risks.
What is a Construction Claim?
When a party in a construction project demands compensation outside the provisions of the contract, that situation is a claim. The demand is often in response to another party’s failure to meet contractual terms or actions that caused damage, such as substandard work, design errors and omissions, and material deficiencies.
The demands of a claim are typically disputed between parties of a construction project. However, it is not a claim if a change is requested in writing, negotiated, and agreed upon.
What drives claims?
Claim drivers are situations and factors that contributed to the claim but aren’t necessarily the causes of a claim. By understanding claim drivers and the risks they pose, project stakeholders are better equipped to perform effective construction claims management. When you know the weaknesses of the project, you can act preemptively to avoid claims (or at least mitigate them).
Most Common Claim Drivers
- High profit pressures on contractors
- Poorly written contracts
- Poorly executed contracts
- Increased contractor’s risk
- Poor involvement on part of the owner
- Excessively aggressive schedules
Avoiding construction claims is in large part risk management
Unmanaged risk is the largest driver of construction claims. For example, projects that have major time constraints (thus risk of construction delay) tend to have more claims than conventionally scheduled projects. It’s understandable that such projects are susceptible to claims because any external factors influencing the schedule of the project could eliminate wiggle room that contractors have.
Aggressive project costs are also linked to a higher incidence of claims. An example would be a construction project where the costs are pressured to be under a certain amount per square foot, which can pressure some parties to cut corners. Similarly, projects with highly competitive bids have also shown a higher number of claims.
In general, projects in which the risk is predominantly falling on the contractor are quite likely to develop a dispute.
Practices that reduce the risk
If owners choose to go with a design/build project, it’s important that they have a good Basis of Design. Design/build combined with lump sum Engineering-Procurement-Construction (EPC) payment is much more likely to develop a claim than a design/bid/build project.
A design/bid/build project uses a combination of reimbursable and fixed payments. Engineering and procurement are done on a reimbursable basis, whereas construction is paid a fixed fee. This route significantly reduces the risk for the contractor, so there are much fewer claims.
Integrated teams included in the project have been shown to contribute to a lower incidence of claims. Integrated teams are those that bring together individuals from various aspects of the construction environment – for example, construction managers, project managers, realtors, experts in maintenance, operations, etc. These teams serve to monitor contractor’s work from various sides so that problems are spotted early and addressed. We can perceive them as owner representation.
It has also been observed that having a thorough insight into the conditions of the site reduces the likelihood of construction claims.
When the owner and the people working on the project are involved in writing the contract (when it’s not just up to lawyers), there tends to be a lower probability of claims.
It is generally advised that owners stay involved in the whole construction process, either on their own or through a representative. Active engagement allows the owner or anyone else who monitors the contractor’s work to identify red flags in a timely manner. Early identification of potential problems allows measures to be taken to mitigate the consequences.
Do you need construction claims management?
Like all walks of life, some people would argue against the costs of managing risks until they have the painful experience dealing with a major claim themselves. Depending on your project team, the need for construction risk management may only arise in certain phases. Preventative management is always preferred to having to hire services to try to turn around projects in distress.
How Can VERTEX Help?
When you need construction claims resolution services, VERTEX is here to serve you with the experience you need. VERTEX has full-time construction claims personnel that are experts in assembling affirmative claims as well as rebutting claims asserted against sureties and their principals. In the event that the dispute is elevated to mediation, arbitration, or litigation, sureties can rely on the VERTEX team of experts to provide strong testimony.
This article was originally published by Xpera Group which is now part of The Vertex Companies, Inc.