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The Anatomy of a Construction Claim

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The South Dakota Chapter of ASHRAE * I. Exclusion A. ... 1997 Edition Claims 15.1.1 4.3.1 A claim is a demand or assertion by one of the parties seeking, ... – PowerPoint PPT presentation

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Title: The Anatomy of a Construction Claim


1
The Anatomy of a Construction Claim
  • The South Dakota Chapter of ASHRAE

2
Goals
  • Understand what a claim is and how it evolves
  • Develop strategies for anticipating and avoiding
    claims
  • Eliminate the adversarial environment that
    creates claims

3
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

4
Avoiding Adversarial Relationships
Youre angry. So you shoot a hole in my boat.
Only trouble is, we are in the same boat.
5
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

6
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
7
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)
8
Claim Components
  • Claim Components
  • Entitlement
  • Damages
  • Relief
  • Entitlement
  • A change occurred
  • The change was unexpected
  • The risk is borne elsewhere

9
Types of Changes
  • Non-excusable Non-compensable
  • Examples?
  • Excusable and Non-compensable
  • Examples?
  • Compensable
  • Examples?

10
Example 1 on Entitlement
  • Replacement of a cooling tower
  • Owner selected equipment
  • 64,000 base contract
  • A/E drafted conceptual plan for owner.

11
Common Causes of Claims
  • Contracts that have claims built in
  • Owners/Projects that are living, walking claims

12
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

13
Strategies to Avoid Construction Claims
  • The best strategies revolve around great
    management

14
Strategy to Avoid Claims
  • Read the contract
  • Read the contract
  • Read the contract

15
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.

16
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.

17
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.

18
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.

19
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

20
Strategies for Avoiding Claims
  • Risk Management
  • Identify the risk
  • Measure the risk
  • Account for the risk

21
Know the Risk/Reward Ratio
  • Be wary of soft risks or risks that are
    difficult to quantify
  • Consequential damages

22
Strategies for Avoiding Construction Claims
  • Develop and implement a strategic Go/No Go
    process prior to bid

23
Go/No Go Decision Making
  • Thorough investigation of
  • Owner
  • Architect
  • Contractors
  • Vendors
  • Project scope
  • Project risks

24
Go/No-Go Decision Making
  • Have a process!
  • Checklist form for project risks
  • Financial
  • Operational
  • Hazards
  • Strategic
  • Calculation form

25
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 Owners obligations under the
    Contract.

AIA-201A, Paragraph 2.2.1, 1997 Edition
Significant Changes in AIA-201, 2007 Edition
26
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

27
Liquidated Damages
  • Limit the financial interest in a claim
  • Turning soft costs into hard costs

28
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

29
Payment Clauses
  • How to deal with cumulative impact
  • Forward pricing

30
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

31
Change Order Impact
32
Forward Pricing
33
Great Management as a Claims Avoidance Strategy
  • Documentation
  • Scope letters
  • Schedules

34
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

35
Documentation as a Strategy to Avoid Claims
  • Job log or diary
  • Site visit report
  • Change order log
  • Photographs, video, etc.

36
The Documentation Dial
MEDIUM
HIGH
LOW
37
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 -

38
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39
Project Schedules
  • Overall project schedule
  • Manpower loading schedules
  • Short Interval Schedules (SIS)

40
When Schedules Go Bad
41
When Schedules Go Wrong
  • Underfloor cooling system
  • Mechanical Contractor required to certify that
    duct plenums were adequately protected

42
When Schedules Go Wrong
43
Manpower Loading/Resource Leveling
44
Manpower Loading/Resource Leveling Charts
45
What Does This Manpower Loading Chart Say?
  • You are in the 8th month of this project

46
SIS (2-Week Look Ahead)
47
Conclusion
  • Avoid claims at all costs
  • Avoiding claims and good management practices
    often go hand in hand
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