Claims and Counterclaims Preparation, Analysis, Assessment and Successful Settlement of Disputes

Claims and Counterclaims Preparation, Analysis, Assessment and Successful

Settlement of Disputes

What is a Contract?

A contract is a mutual business agreement recognized by law under which one party undertakes to do work (or provide a service) for a second party for a “consideration”.

A contract is an agreement between two parties, one called the contracting party or owner and the other the contracted party or the contractor to perform a previously determined scope of work for a previously determined amount of money.

Why do we need written contracts? Basic lack of trust Clearly establishes the risks and obligations of each

party Provides means by which performance can be assessed

and measured Provides means by which breaches can be identified Provides means by which default can be established Establishes the owner’s means of control Establishes the contractor’s scope of work

What does a written contract do for us? A written contract provides the document

by which risks, obligations, and relationships of both parties are clearly established, thus ensuring the performance of these elements in a disciplined manner.

Contract Language “Time is of the essence” Contract time of completion Contract milestones / Phasing Scheduling specifications (CPM or bar

chart) Notice provisions

Contract Language Time extension requests (time impact

analysis)

Time extensions / change orders Liquidated damages “No damage for delay” clause Delays by other contractors clause Disputes clause

Goals of Contract Management and Administration The effective management and

administration of contracts results in reducing risks, maximizing cost savings, minimizing claims, and improving economic return.

How do contracts minimize risks? A contract provides the means to manage and allocate

risks. You you want to “share” the risks appropriately through your contractual relationship.

Your contracting strategy needs to be built around the relationship between the terms and conditions, and the accompanying risks and cost impacts.

The type of contract and the specific language used should flow from these relationships.

Failure to manage risks in this manner can result in cost overruns, loss of market, or loss of quality.

Risk Areas

Cost - possibility of overruns and other financial losses

Time - delays in schedule and resultant loss of market

Quality - loss of desired quality of engineering and construction

Contracting Strategy Priority of project management goals

Cost, schedule, quantity Status of project definition Schedule and cost constraints

Facility startup date and availability of capital State of the economy

Market urgency for product Number of competitive bidders Workload of competitive bidders Vendor backlogs

Analysis of CostDIRECT COST INDIRECT COST

Costs which are incurred for specific

items of work

Costs which cannot be

allocated to specific jobs

Differencebetween allcosts andall income

Costs which cannot be

allocated tospecific items

The Work The Site The Firm The Motive

Profit MarginItems of Work

At the Job Operating

COST FEE

TOTAL CONTRACT SUM

OVERHEAD COSTS

Types of Contracts

Lump-sum fixed price Unit price Fixed price with escalation (price

adjustment) Guaranteed maximum price (target price) Cost plus incentive fee (time/cost goals) Cost plus fixed fee Cost plus percentage of cost

Elements of Cost

Labor Costs Material Costs Equipment Costs Overhead Costs - Direct and Indirect Profit

Fixed Price vs. Cost ReimbursableDefinitions Fixed Price

Agreement to perform the scope of work at a set price regardless of Contractor’s actual cost.

Cost ReimbursableAgreement to perform work on a reimbursable basis.

Fixed Price vs. Cost ReimbursableBasic Conditions

Fixed PriceFair and reasonable price can be established using a detailed scope of work, complete design and specifications and known environmental and business conditions.Adequate professional inspection & supervision provided by other parties.Risk: Contractor assumes maximum amount of risk, and has incentive to perform economically.

Cost ReimbursableScope & cost of work not defined sufficiently to allow fixed price quotes.Qualified contractors unwilling to accept financial risk of fixed price.Owner wishes to exert more control, develop design as project progresses, or achieve technology transfer from contractors.Owner is required to be more sophisticated in contractor selection and oversight.Risk: Owner accepts most risk

Fixed Price vs. Cost ReimbursableAdvantages Fixed Price

Less risk on the Owner, at least on the surface.Substantial amount of case law and administrative protocol.Overall cost known before project begins.Minimal Owner involvementOwner realizes price competition.Contractor has incentive to finish early.

Cost ReimbursableConstruction can be phased.Changes can be accommodated more easily.Reduces adversarial relations:Contractor & Owner are partners.Reduced Contractor contingency included in price.

Fixed Price vs. Cost ReimbursableDisadvantages Fixed Price

Adversarial relationsContractor may bear risk for conditions beyond his controlChanges more likely to end in dispute.Contractor has no direct financial motivation to provide superior quality or service.Extra time required to complete the plans and specs.

Cost ReimbursableGenerally, the construction costs are higher.Increased Owner involvement.Final cost not known until project is finished.More detailed negotiations and contractor selection process.More cumbersome administrative and bookkeeping requirements.

Fixed Price vs. Cost ReimbursableApplicability Fixed Price

Routine projects.Conditions with an abundance of qualified contractors.Public works projects.

Cost ReimbursableHigh-risk industrial or manufacturing projects (petrochemical, power, offshore).Situation where qualified contractors are scarce.R&D projects (aerospace, military).

POTENTIAL DISPUTES / CLAIMS

KEY AREAS TO ADDRESS IN CONTRACT DOCUMENTS Scope Definition & Realistic Timeline Existing Site conditions Design Errors and Omissions Specifications Drawings Contract Language Bid Documents & Q/A 19

POTENTIAL DISPUTES / CLAIMSSCOPE DEFINITION & REALISTIC TIMELINE Completeness of Scope Definition Adjoining work added after NTP Additional work added during the job Developing Realistic Timeline/durations

20© www.asia-masters.com

EXISTING SITE CONDITIONS Reluctance by owners to identify all

unknown site conditions Verifying As-Built Conditions Inconsistent/Generic Geotechnical

Reports Incomplete Site Surveys

DESIGN ERRORS & OMISSIONS Completion of Design Design criteria in conflict with Local

agencies Deferred Approvals – Fire Sprinkler Over-Design versus Under-Design Omissions Delegated Design

Example of Claim Dispute – PIPE SUPPORTS Specifications outline Spacing Requirements for Pipe Supports Drawings only show a few Pipe Supports Drawing Note specifies that “No Attempt Made to Show All Pipe Supports” Major Claim - $10 Million SOLUTION: 1) Drawing Note should have been on

the same page where pipe supportswere shown.

2) Additional note that contractor shallcalculate the loading and determinenumber of supports required.

SPECIFICATIONS Conflicting Standards/sections Unclear Hierarchy Specifications referenced to drawings Specifications in conflict with local codes Specifications not updated Specifications that state “and or equal”

material, equipment etc.

POTENTIAL DISPUTES / CLAIMSDRAWINGS Not to Scale – Misleading Lacking Specification Notations Incorrect Revision Conflict with Specs Scope omitted Detailing errors

POTENTIAL DISPUTES / CLAIMSCONTRACT LANGUAGE Lacking clarity Conflicting sections Overly onerous specs Vague conflict resolution

language

POTENTIAL DISPUTES / CLAIMSBID DOCUMENTS & Q/A No involvement by third party stakeholders

(private companies, public utilities, city planners)

Schedule of values to reflect the entire scope in the drawings

Escrow of Bid DocumentsProposed manpowerWas the complete scope bid? 27

POTENTIAL DISPUTES / CLAIMS – Conclusion

WHAT CAN THE OWNER DO TO AVOID/MITIGATE CLAIMS?1. Third Party Constructability Reviews2. Clarity and Completeness of Contract

Docs3. Develop a Risk Mitigation Register4. Comprehensive Sign Off by Stakeholders5. Have a Risk Mitigation Manager in place

early 28

Typical Claims Against Owner

Poor project planning Scope changes Constructive change orders Errors and omissions Contract accelerations and stoppages Site access or availability Other construction interference and delays Strikes and acts of God Low bidders

Typical Claims Against Contractor Late completion - liquidated damages Out of specification materials Defective work Property damage

Delays

Excusable Delay Beyond control of owner or contractor

Inexcusable Delay Beyond the control of the contractor Owner caused changes to work Differing site conditions Suspension or termination of work by owner

Concurrent Delay Two or more delays in same time frame

Claims Analysis

Brief of the case Owner’s position Contractor’s position Analysis and evaluation Recommendations

Claim Prevention Suggestions

Carefully analyze and consider exactly what you are building and precisely how it will be built so the contractor does not have to assume or guess about any aspect of the job.

Complete the project design before the contract is bid, and if some parts of the project cannot be completely designed at bid stage, clearly identify them and its possible impact.

Conduct a thorough review of the design prior to the bid stage to identify and correct any design errors or inadequacies.

Give bidders sufficient time to carry out a complete review of the bid package and an investigation of the construction site.

Allow enough construction time, remember in this context, time is not money. Do not assume that bidders will simply increase their bids to cover a short schedule.

Identify with enough anticipation what type of contract will best suite the project.

Think about every sentence included in the contract, why it is there and whether it is necessary.

Clearly identify in the contract every operation that the contractor must accomplish to complete the job.

Draft for clarity, not confusion. Use standard list of definitions, and always use the same defined word consistently.

Consider material arrival schedules as part of the contract. Identify long-lead items and possible vendors in the bid package. Avoid sole-source procurement unless absolutely necessary.

Clearly identify who will be responsible for material delays.

Analyze all potential bidders before preparing a bid slate. Examine contractors’ prior contracting experience, claims history, management capabilities and financial ability.

Carefully analyze contractors’ technical proposal paying particular attention to the proposed method of construction and the planned number of man-hours claimed necessary to execute the job.

Seriously question the contractors’ excessively low bid.

If you are forced to accept a low-ball contractor, anticipate a claim and work on it from the beginning.

Be reasonable when analyzing the contractors’ complaints about changes and omissions. Negotiate settlement as soon as possible and keep in mind that the older the issue, the more difficult it will be to settle.

Appreciate the contractors’ right to perform the contract in any fashion he deems appropriate, as long as the methods and results conform to contractually specified standards.

Keep in min that the owner has the obligation to provide: a suitable construction site, accurate plans and specifications, well-defined scope of work, and inspection without interference.

Understand how many factors can affect a contract and delay and disrupt the work. Cooperate to establish an atmosphere of understanding and mutual respect.

Keep strict control of: progress reports, daily meetings, schedule revisions, cost estimates, change orders and their justifications, correspondence.

Develop a solid document control plan.

What is a Delay Claim? In simple terms:

Contractor: A request for compensation and/or time due to owner-caused delays

Owner: An assessment of liquidated damages or a claim for actual damages due to contractor-caused delays

Types of DelaysExamples of Owner-Caused Delays Site access Differing site conditions Shop drawing approval Design errors and omissions Extra work / change orders Failure by owner to timely provide materials Changed conditions, e.g., working hour

restrictions Work suspension

Types of Delays Examples of Contractor-Caused Delays Procurement/Submittal problems (material &

equipment) Subcontractor delays Lack of adequate resources (labor, material,

equipment) Poor work sequencing Lack of productivity Rework Financial difficulties

Types of DelaysThird-Party Delays Permit acquisition

Utility relocations

Adjacent contractors

Government Actions/Inactions

Types of Delays - Analysis Excusable / Non-excusable delays

Compensable / Non-compensable delays

Force majer (Beyond either party’s control)

Concurrent delays

Change Order Administration

An organized effort to eliminate unnecessary cost and time impact as a result of processing project work outside the scope of the contract.

A Change is not a Claim.

Contract Change Clause

Fixed price contract require a change clause.

Establishes the owner’s right to make changes and provides a mechanism for their administration and resolution.

Types of Changes Formal

Via contract change clause Constructive

Action of owner that has the effect of directing a change, although not initially documented as such.

CardinalChange totally out of scope of original

contract.Should re-negotiate entire contract.

Change Orders

Virtually all project have change orders. Need to recognize their implications. Set up an effective management system to

handle them. Minimize cost/time impact and prevent

costly legal action. Modification of the contract.

Sources of Change Orders

Unanticipated site conditions Owner requested design modifications,

additions or deletions Clarification of contract documents

Disagreements

Change or design development Scope of the change Material cost Equipment rental rates Acceptable profit Overhead cost Consequential effects of the change

Change Orders

Prior approvalAdverse effect on construction

Unilateral change orderUrgent situations or conditions

After the fact

Change Order Process

Change OrderIdentification

C.O.Request

C.O.Design

Cost/Schedule Analysis

Bid Period

Bid Analysis

PrepareBid Package

Bid Closing

C.O. Award

Cost of Changes

Engineering Construction

Flexibility

Requirements for a Successful Claim

The burden of proof is on the contractor

Requirements for a Successful ClaimThree elements needed:

Liability (Entitlement)

Causation

Damages (Quantification)

Requirements for a Successful ClaimLiability Contractual duties and obligations

Notice provisions Site access, accurate plans and specs Adequate resources, workmanship

Causation “Cause and effect” Link between delay and damagesDamages Substantiating documentation for extended

costs Actual costs or daily rates

Contractor’s Delay Claim Submission

Why the owner is responsible for delays and associated costs

Schedule analysis Damages Substantiating documentation Transparency

Owner’s DefenseDetermine Type of Delay:

Excusable Non-excusable

Owner-caused Force majeur Contractor-caused

Compensable Non-compensable Non-compensable

Owner’s Defense

Identify Concurrent Delays:

Excusable

Caused by Owner and Contractor

Non-compensable

Owner’s Defense Liability Review - Contract terms Causation Review - Schedules, daily reports,

shop drawing logs, meeting minutes, etc. Damage Review

Receipts, invoices, cost reports, etc.Reasonable estimates

___________________________________________Owner Costs that Offset Contractor Damages: Overhead paid as part of change orders during

the extended period Liquidated or actual damages

Owner’s Damages / Counterclaim

Why the contractor is responsible for delays and liquidated or actual damages

Schedule analysis

Damage calculations

Substantiating documentation© www.asia-masters.com

Contractor’s Defense Contract Terms / Plans & Specs

Ambiguities, conflicts, errors & omissions

Change orders, RFI’s, etc. – Effect on schedule and costs

Schedule AnalysisOwner-caused delaysConcurrent delays

Delay ClaimCase Study

Case StudyThis is the story of a construction project that was planned to be completed in 24 months.

Unfortunately, stuff happened and it was completed much later.

Because of this, the contractor incurred extra costs and requested additional compensation from the owner.

The following describes the process that was used to resolve this delay claim.

The As-Planned Schedule(What was supposed to happen)

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24A M J J A S O N D J F M A M J J A S O N D J F M

1 Mobilize

Excavate & sheeting

Erect structural steel & pour mezzanine

Backfill & paving

Mechanical equipment

Gates & cashier booths

Elevators & escalators

Power & lighting

Finishes

Demobilize 10

Winter Winter

Case Study: Subway Station Expansion Project

Months

As-Planned

The As-Built Schedule(What actually happened)

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N

Access Delay (1 month)

1 Mobilize

Differing Site Conditions (2 months)

Excavate & sheeting

Re-design Delay (2 months)

Backfill & paving

Strike (1 month)

Power & lighting

Rework (1 month)

Finishes

Demobilize 10

Lack of Progress (1

month longer than planned)

Extended Period = 8 months

Original Contract Period

As-Built

Delays

Winter Winter

Months

The As-built Schedule shows that there were six delays that resulted in an eight month delay to the project.

P A Mobilize

Excavate

FinishesP = Planned

P Demobilize AA = Actual

As-Planned vs. As-Built

P Power & lighting

Elevators &

ANew Labor Agreement

Backfill & paving

Months

<--- 8 month delay --->

Extended Period

Winter Winter

Because the project finished eight months late, the contractor submitted the following claim to the owner:

Cause for Added Costs Months Monthly Cost

Damages Claimed

1 Field Office Overhead (trailer, supervision, etc.) Total delay of eight months 8 $ 50,000 $ 400,000

2 Labor Escalation after May 1st Labor Agreement Delays to finish trades 8 $ 5,000

3 Idle Equipment Re-design delay 2 $ 10,000 $ 20,000

4 Winter Work Winter concrete (blankets, heaters, etc.) $ 10,000

5 Constructive Acceleration No time extension issued / threat of LD's $ 10,000

6 Lost Productivity Adverse weather, out-of-sequence work, etc. $ 10,000

7 Home Office Overhead Total delay of eight months 8 $ 20,000 $ 160,000

8 Consultant Fees Claim preparation $ 50,000

9 Interest @ 5% on Delayed Payments Job financing $ 33,250

10 Bond at 1.5% Eight month delay $ 10,474

$ 708,724

Claim Item

TOTAL CLAIM

Case Study: Subway Station Expansion ProjectContractor's Claim

Before analyzing the contractor’s costs, the owner performed a Delay Responsibility Analysis as follows:

Access Delay (1 month)

1 Mobilize

Differing Site Conditions (2 months)

Excavate & sheeting

Re-design Delay (2 months)

Erect structural steel & pour platforms & mezzanine

Backfill & paving

Strike (1 month)

Power & lighting

Rework (1 month)

Finishes

Demobilize 10

Lack of Progress (1

month longer than planned)

Extended Period = 8 months

As-Built

Delays

Winter Winter

Months

Delay Responsibility Analysis

Delay TypeAccess DelayDiffering Site ConditionsRe-designStrikeLack of ProgressRe-work

ResponsibilityOwnerOwnerOwnerNeitherContractorContractor

Access Delay

1 Mobilize

Differing Site Conditions

Excavate & sheeting

Re-design Delay

Erect structural steel & pour platforms & mezzanine

Backfill & paving

Months Gates & cashier booths

Owner 5Strike

Contractor 2Elevators & escalators

Neither 18 Power & lighting

Rework

Finishes

Demobilize 10

Lack of Progress

Months

Delay Responsibility

Analysis

Delay Responsibility

Extended Period = 8 monthsOriginal Contract PeriodWinter Winter

New Labor Agreement

Based on its Delay Responsibility Analysis, the owner apportioned the contractor’s claimed costs and estimated the contractor’s entitlement to additional compensation as follows:

Months Monthly Cost

Damages Claimed Months Monthly

Cost Estimate Reason

1 Field Office Overhead (trailer, supervision, etc.) 8 $ 50,000 $ 400,000 5 $ 50,000 $ 250,000 Owner delay = 5 months

2 Labor Escalation after May 1st Labor Agreement 8 $ 5,000 5 $ 3,125 Apportioned owner delay

3 Idle Equipment 2 $ 10,000 $ 20,000 2 $ 10,000 $ 20,000 All costs substantiated

4 Winter Work $ 10,000 $ 10,000 All costs substantiated

5 Constructive Acceleration $ 10,000 $ 7,500 Some costs substantiated

6 Lost Productivity $ 10,000 $ - Causation not shown

7 Home Office Overhead 8 $ 20,000 $ 160,000 $ - Delay, not a work suspension

8 Consultant Fees $ 50,000 $ - Not part of the Work

9 Interest @ 5% on Delayed Payments $ 33,250 $ - Not substantiated

10 Bond at 1.5% $ 10,474 $ 4,359 Cost substantiated

Subtotal $ 294,984

$ (30,500) Contractor delay = 2 months

$ 708,724 $ 264,484

Owner's Estimate of EntitlementCase Study: Subway Station Expansion Project

Liquidated Damages @ $500 per day x 61

TOTAL ENTITLEMENT

Contractor's Claim

Claim Item

TOTAL CLAIM

The contractor requested more than $700,000 in additional compensation due to project delays.

The owner estimated that the contractor was entitled to approximately $260,000.

They negotiated a settlement somewhere in between . . .

. . . and everyone lived happily ever after.

The End

Claims and Counterclaims Preparation, Analysis, Assessment and Successful Settlement of Disputes

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