by Jeffrey C Kadlowec, Architect

Abstract

Contract claims result from a wide variety of issues that arise throughout the lifecycle of construction projects. Conflicts and dispute should be resolved expeditiously to avoid additional costs and delays that adversely affect profitability. Contract errors, inaccurate estimates, changing conditions, and stakeholder involvement account for the majority of problems. Claim management procedures address issues with proper negotiation being the key to quick and fair settlement. Alternate dispute resolution methods provide ways of resolving claims before engaging in court litigation. Understand contributing factors and establishing a cooperative environment will improve performance.

Keywords: construction claims, contract conditions, dispute resolution, project performance

Contract Claims

Introduction

Construction delays, cost overruns and quality issues continue to threaten the successful completion of projects, leading to labor disputes and contract claims that can result in litigation and add further costs for the parties involved. Conflicts are to be expected in the complex environment involving various stakeholders with different objectives which are not always overcome by managerial practices. Requests that are rejected by either party become claims that are slow to resolve, significantly impacting contract performance [Antoniou 2024]. Identifying the causes and effects on cost, quality and duration will improve project performance (see Fig 1). Utilizing a probability impact matrix through the analytical hierarchy process (AHP) and artificial neural network (ANN) models provides better understanding of these issues.

Figure 1. Cause of Claims Breakdown [Antoniou 2024]

Construction Claims

The increasing size and complexity of construction throughout the world is leading to a greater number of claims primarily related to poor management. These projects are dependent upon thousands of related documents and the interrelationship between owners, architects, engineers, general contractors, subcontractors, specialty contractors, material and equipment suppliers, manufacturers, and governing agencies [Zaneldin 2020]. Change orders, owner delays, material and labor cost escalation, variations in quantities, and late payments are the leading causes of claims. The claims process requires contractors to follow detailed procedures stipulated by the conditions of contract, while owners must track, manage and process these claims which makes resolution difficult. The high cost and long duration of litigation has led to development of the alternate dispute resolution (ADR) process. Better methodologies and techniques are needed throughout the industry to prevent and reduce construction contract claims, including the public-private partnership (PPP) concept for cooperative problem-solving and a risk-sharing philosophy.

Construction claims are a written demand seeking additional payment or extension of time as compensation for damages resulting from a breach of contract. Project managers consider claims to be the most disruptive and unpleasant event to occur in construction, indicating deviation from planned execution that adversely affect organizations by increase time and cost [Kikwasi 2021]. Completing projects on schedule and within budget is difficult given the uncertain and dynamic environment of construction, though claims typically arise from deficiencies in contract documents, failure of parties to adhere to contract provisions, and exercising powers not in-line with the nature of the contract. Understanding the causes aids in reducing and avoiding claims in construction. Client-initiated change requests, additional scope of work, and delayed contractor payments are the leading causes of delays and disruptions.

Correlation between two variables exists when there is an observable cause and effect relationship, however correlation does not imply causation. Two conditions for causation must be present in stochastic context: 1) temporal precedence, the independent variable preceded the dependent variable; and 2) non-spuriousness, there is no other plausible alternative [Zhao 2023]. The critical path method (CPM) is a technique for modeling the schedule activities, tasks and events in an operable table to illustrate time sequence, logic ties and dependency for tracking personnel assignments and progress. The CPM schedule provides a forward-looking timeline of events and duration of activities, maintains an as-built record of tasks and relationships, and is a reliable way of determining causation of delay claims based on factual information (see Fig 2). Loss of productivity (LOP) claims can be demonstrated as a deviation from the planned schedule or failure to achieve key milestones in operational procedure.

Figure 2. Hypothetical example of causation inference [Zhao 2023]

Claim management coordinates resources to process claims through identification, notification, evaluation, and documentation for presentation, negotiation and settlement. Predicting potential claims is essential part of the process since most are related to changes that affect time and cost which can impact the work to follow, leading to further disruptions. Changes by the owner to project requirements or the design post-tender, short timeframes without adequate site investigation, ambiguity in project scope and specifications, and incomplete or uncoordinated designs are the leading causes of claims [Hayati 2019]. Preventing claims by reducing risks or eliminating threats and quickly resolving issues as they occur is crucial to successful project completion. Project teams that are knowledgeable and prioritize quality through accurate information, accessible documentation, good communication, proper instruction, and clear direction will avoid cost overruns and schedule delays.

Contract Documents

Claims are defined as a demand by one of the contracted parties seeking adjustment or interpretation of terms, payment of money, extension of time, or other relief. Disputes arise when claims are submitted then opposed, denied or prohibited by another party [Demachkieh 2020]. Successful claims require contractors to prove the defendant is accountable for the event(s), the loss or expense experienced by the claimant, and a causal relationship between the event(s) and associated damage. Lack of sufficient detail and adequate facts will result in claim failure.

Standard form contracts developed by professional bodies and government organizations have evolved to communicate the rights and obligations of stakeholders through terms and conditions. Construction managers and project administrators possess a ‘duty-to-read’ under doctrine of contract law, though lack of clarity and readability due to the increasing size and complexity of construction projects continue to result in conflicts, claims and disputes [Rameezdeen 2014]. Standard contracts have been in use for a long time and are intended for use on various types of projects to fairly allocate risks while embodying common practices and customs. Modifications to standard agreements generally make the document more difficult to read, creating unintentional problems or technical and legal consequences.

Claims Process

The majority of disputes are due to contract document errors, inaccurate cost estimates, changing conditions, and stakeholder involvement. Identifying claims requires accurate and timely detection through awareness of job factors [Kululanga 2001]. Claim notification alerts parties of potential problems in a non-adversarial manner. Examination of claims establishes legal precedent and factual information including an estimate of recovery. Claim documentation provides a history of records as evidence of cost. Presenting the claim should be logical, organized and emphasize facts to be convincing. Negotiation of the claim involves understanding weaknesses, foreseeing problems and anticipating opposition. Implementing total quality management (TQM) tools during each phase of construction should reduce costs and save time on the project, with benchmarking as the primary method to improve development.

The current claim management process involves recognizing changes and identifying causes, notification of all parties involved, accurate and organized documentation, analysis of impact to time and cost, negotiation procedures, and dispute resolution or settlement. The legal framework of contracts should be improved by reducing ambiguous, incomplete and inadequate terms to prevent misinterpretation that leads to claims and disputes. Claims negotiation is difficult and time consuming due to the potential for financial gain or loss, many internal and external factors, and the negative influence of human behavior [Ren 2001]. Understanding terms of the contract—either expressed or implied—will differ based on the perspective and experience of parties. Negotiations should avoid a stubborn style and win-lose strategies, fixed objectives with lack of concessions, and unclear authority from the wrong team members. Agent-based claims negotiation is recommended to improve efficiency and achieve faster resolution.

Developing and preserving ongoing relationships provides more opportunities, enhances cooperation, and establishes cohesive bonds of trust. Negotiators utilize a functional set of decisive values and legal strategies to aid in resolution of claims and disputes without straining interactions between parties. Distributive tactics are employed to obtain resources for an individual on one side the negotiation, while integrative practices offer trade-offs to the fulfill interests of both parties [Yiu 2017]. Although coercive action seeks to maximize benefits and disregard counterparts often through threat and domination, information sharing involves mutual disclosure to identify and examine problems then formulate appropriate solutions. Maintaining and strengthening relationships between parties through mutual trust and respect is a greater benefit towards project completion and long-term success in business.

Alternative methods to litigation for claims resolution are advantageous in terms of shorter times and lower costs. These procedures involve arbitration, mediation, third-party negotiators, mini-trials, early neutral evaluation (ENE), and dispute review board (DRB). Resolving claims through litigation requires performance by the courts to achieve efficient performance in meeting the needs of the public [Hayati 2017]. Courts must decide on fair outcomes through duty and accountability that support all citizens in the community, especially when persons are seeking justice. Procedural law should consider the lack of understanding by most people and be improved through the use of technology in processing cases.

Contractor Perspective

The construction industry is a major economic contributor employing over 10% of the population and another 30% in related manufacturing and service sectors. Recent developments in technology have significantly affected operating procedures over the past decade and begun to change traditional methods. These modifications have resulted in more claims in an environment already heavily burden by conflicts and disputes. Different interpretations of contracts, uncontrollable and unpredictable delays, and weak performance by firms have been the main cause jeopardizing profitability and project success [Enshassi 2009]. Avoiding claims requires better understanding of contractual terms and conditions along with mitigating factors caused by owners involving design decisions, change orders and payment delays.

Construction claims occur on nearly every project with significant effect on time and cost. Research by inquiry and review of questionnaires provides a ranked list of the most common types (see Table 1) and reasons (see Table 2) for construction claims. The main problems with identification include lack of awareness by personnel, inadequate knowledge and training, and insufficient time due to high workload. Inaccessible documents, ambiguous procedures and poor communication lead to issue at both the notification and examination stages. Documentation and presentation requires accurate information, effective record keeping and skilled staff. Failures during negotiation result from disagreements, not enough evidence and adversarial relationships [Azmi 2018]. Scrutiny over contract provisions, promoting cooperation between parties, and improvements to relevant standards, regulation and laws will aid in reducing claims and increasing efficiency of the claims process.

Properly managing the contract by understanding the terms and conditions protects the interests of contractors and serve as recommendations to avoid potential claims and enhance overall profitability. Maintaining accurate and organized records is essential part of construction project management. Capturing progress with digital photographs and documenting issues through digital videos provides valuable evidence as problems arise. Preserving rights during execution involves the work provided in drawings and specifications, anticipated means or methods, and planned schedule or sequencing. Variations in the scope, disruptions of work, congested jobsites, late deliveries of materials, poor quality equipment, and accelerated performance must be documented as qualified change orders [Jergeas 1994]. Following a proactive approach when requesting extension of time and additional payment will prevent future claims.

Claims Negotiation

Change orders are prevalent throughout the construction industry, impacting project performance and risking contract disputes. Construction change order (CCO) clauses can be found in most standard form agreements outlining the causes and procedures for claims (see Fig 3). This process begins with a proposal by one party with evaluation of the design and estimate of time, cost and technical aspects of the work. The CCO is reviewed by the construction management (CM) team and if approved, the contractor submits a price quote. Clarification and negotiation proceed to reach an agreement, followed by the contractor submitting request for payment as a contract addendum [Hansen 2024]. Negotiation has significant impact towards successful claims requiring analysis of technical documentation, preparation of structured presentations with supporting evidence, and the skills and strategy necessary to reach an agreement.

Figure 3. Construction change order procedure [Hansen 2024]

Though claims are unavoidable in construction contracting, negotiation is the most efficient method of resolution. Human behavior which is framed by subconscious nature when addressing problems is an important factor to consider. There exist three cognitive dimensions in conflict situations: 1) task versus relationship, 2) emotional versus intellectual, and 3) win versus compromise [Lu 2016]. The process of negotiation is influenced by that behavior in predictable ways. Negotiators should be aware that behavior affects this process in a probable manner, using it to benefit situations and hasten decisions. Research recommends promoting rational and cooperative relations that benefit subjective value over focusing solely on task-oriented objectives through competitive behavior which is harmful to economic outcome.

Most construction projects and claim negotiations involve some level of risk, creating opportunities to act conservatively or take chances with positive or negative outcomes. Risk attitude is defined as the chosen approach by decision makers when faced with uncertainty and the related consequences. Power is considered the relative capacity by which one party can influence the other over control of resources, rewards or penalties [Lu 2014]. Negotiation attitude positively correlates with power allowing the high-power party to take greater risks and the conservative party adopting obliging behavior that jeopardizes their position. Collaborating behavior on both sides is more effective and favorable in achieving ‘win-win’ results.

Conclusion

Rework is an underlying cause of many contract claims and disputes resulting in substantial cost overruns and significant schedule delays. Human resource factors are the leading cause of rework attributed to lack of education, training and experience; insufficient skills, inadequate manpower, inappropriate personnel, and poor supervision. Poor quality materials, substandard products and prefabrication errors; damage, defects and deviation due to improper handling; untimely delivery of materials and equipment, and non-adherence to specifications are next likely causes. Inadequate planning, inaccurate scheduling, inefficient management processes and practices, time pressure and acceleration, and poor communication contribute to the third most common factors. Incomplete design; changes, modifications and revisions; errors in construction, and poor execution are the remaining factors in process management [Asadi 2023]. Effective management should include decisions to prevent rework by reducing errors and omissions in design and construction to improve project performance.

The rising number of contract claims and payment disputes caused by changes in conditions and additional work have led to ADR as a cost-effective and time-efficient method towards reaching settlement. General conditions of contract (GCCs) include clauses for an adjudicator or dispute resolution board (DRB) member to be appointed to provide a written decision pertaining to the project and issue in question [Kisi 2022]. Resolving issues outside of court is accomplished through a neutral third party for negotiation, conciliation, mediation, and arbitration; though unsatisfactory decisions can be appealed in district court to challenge the award. Owners and contractor should strive to avoid mistrust, prevent misunderstanding, and encouraged to operate fairly under the conditions of the contract.

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