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Claims in Construction – Practical Issues

In a construction industry where people or participants with varying opinions, abilities, expectations, and knowledge of the process of construction work together in a competitive environment, conflicts are bound to arise. Conflicts, if not handled well, give rise to disputes, which in turn hinders the successful completion of a project.

Claim management is hence an unavoidable and essential process when it comes to construction project management as it continuously needs the practices of effective management all through the project’s life cycle.

A thoughtful early settlement on concerns involving two parties is cheaper, leading to a win-win result. Large scale construction projects require the need to avoid strain in the relationship or any sort of disputes that carries with it the possibility of any arbitral or litigious action from either party.

Contractual Problems in the Construction Industry

The agreement agreed upon by the construction project owners or contract issuing parties and construction enterprises or contractors is called constructional project contracts. These contracts are laid as per the basic construction procedures to fulfill specific construction and installation projects and also to define both parties’ obligations and rights. Both parties mentioned in the contract are not competitors but associates with varying functions to perform in order to achieve a common end result. Despite this, the difference of interest and opinion still arise, which in turn leads to conflict due to the fact that both parties try their best to protect their personal and financial interests.

One cannot always predict all things that may come up during the course of a contract. The difference of opinions and misinterpretation of various clauses in contracts is responsible for most contractual problems. A few of the reasons for contractual problems under these include:

  • Amendment in contract work
  • Work suspension
  • Damage due to climatic conditions and natural disasters
  • Termination for client benefit
  • Vagueness in drawings and specifications

Types of Construction Claims and the Issues

Construction claims occur upon disagreement on one or more clauses between the client and the contractor. Types of construction claims depend on the legal basis, rights claimed, and the characteristics of claims. Listed below are a few usual construction claims:

  • Acceleration Claims

When the contractor senses a delay in project completion, he/she accelerates the work by spending more to catch up on the project. Conflict and dispute occur over the cost of acceleration. While the contractor files a claim for additional payment from the client, the latter is unwilling to bear the acceleration cost. Both parties hence blame each other for the project delay.

  • Delay Claims

Delay in the completion of a project leads to the client filing a claim against the contractor for the loss occurring due to late completion.

  • Additional Work and Change Order Request

There can be disagreement, conflict, and dispute when during the course of a project, the clients without a written request demand more work to be completed. Problems usually arise when there is disagreement over the point of whether the request falls within the scope of work or not.

  • Damage Claims

If a contractor damages a client’s property, they may choose to file a claim to recover the loss.

  • Disagreement On-site Conditions

    The contractor may file a claim if the site condition turns out to be different from what has been specified in the contract. For example, if the soil is mentioned as clay in a project, and the contractor, after the ground investigation concludes that the soil is not clay but rocky, the contractor may file a claim to increase the excavation unit price.

Few other common construction claims include non-payment claims, cost overrun claims, defects, and loss of labor productivity claims.

Claims Management and Dispute Resolution

Both parties involved must put in place a good construction claim management process to effectively handle claims. Issue identification, ascertaining the cost impact, and time of the claim are a few of the major issues in disputes and claims. The person or party who has raised the claim must notify them once they are identified. It is then upon the person raising the claim to validate or authenticate the facts. The claim will then be settled cordially or disputed, depending on what the other party decides. The claim management process from the viewpoint of a contractor is as follows:

  • Claim Prevention

Claim prevention process is meant to reduce the number of claims and is activated at contract formulation and pre-tender stages of a project. All requirements and aspects related to the project must be mentioned in the project plan, contract documents, and scope of work since there would not be any chance to prevent a claim after the establishment of a contract. Claims prevention is about being receptive to probable claim situations and taking necessary action to prevent them.

  • Claim Mitigation

Claim mitigation happens when the insured undergoes a loss and has to do all that it takes to reduce or minimize the damage. Construction activities take place outdoor. It is advisable to reduce or prevent the chances of occurring claim throughout the course of the contract, and that can be achieved through the clearly defined scope, responsibilities and risks involved. Moreover, risk management plans have a key role to play when it comes to the phase of claim mitigation.

  • Claim Pursuance

No two parties are willing to take additional financial and other responsibilities in a contract. The process of claim pursuance enables parties to successfully pursue a claim in a contract. When it comes to construction projects, many such natural eventualities are wasted due to improper approach that puts the party at risk. The claim pursuance process has two key areas – claim identification and claim quantification.

  • Claim Identification

Claim identification begins with having necessary and accurate knowledge of the responsibilities and scope as stated in the contract. Accurate identification includes the interpretation of what the contract needs and also a documented description of the activity seen as additional to that needed by the contract. If you are able to identify a claim early, you will find more options to mitigate potential risk linked to it. All claims irrespective of whether it is submitted by the owner of the contractor needs a distinctive and unique solution and technique. Claim identification can be achieved by evaluating the contract provisions and the work scope. Inputs of the claim identification process include contract terms, work scope, the definition of additional time requested, and additional work.

Claim Quantification

The reason a claim is quantified is to provide the contractors and the project owners clear information of all the additional costs incurred due to the change in contract. The comprehensive cost description gives both parties the chance to understand, estimate, negotiate and work out additional contract costs.

When there is a change in the claim, there will be many direct, indirect, and overhead costs. Moreover, there will also be costs incurred due to delays in the delivery of the project. Both parties need to understand, calculate and substantiate the different pricing elements carefully.

Claim Resolution

Despite the best effort to avoid claims, there still may be disagreement between two parties and raises questions of whether the claim is a change to the existing contract or whether the claimed compensation or time requested is proper. This is the time when a step-by-step process is devised to resolve these questions. If this process takes longer than anticipated, it will cost a lot to both parties. The aim hence is to resolve these issues as soon as possible and at the lowest point in the firm. The contract, negotiation, arbitration, and litigation processes will be conducted on the basis of the terms of the resolution.

 Take Expert Advice to Avoid and Resolve Claims

Disputes between two parties in any construction project can make or break the project. Mismanagement of construction claims leads to costly wastage and damages. The contractors and the clients must hence establish a strong claim management system in their companies. It is important that both parties must be aware of the causes of conflicts to be able to successfully complete the project without compromising on the quality and without exceeding the set budget.

A team of established and well-trained professionals who understands the nuances involved in contract management can prove very handy for a better understanding of the contract. MSK Consultants is one of the leading project management consulting service providers that helps organizations in risk assessment, claims identification, prevention, and resolution.

With specialized BIM, MEP, and project management consulting services, MSK can assist your team in managing any construction disputes, whether it is the prevention of disputes, settlement in the early stage, or binding resolutions in big and complex projects. We work in close tandem with the top management and legal counsels to arrive at the best possible solution. Contact us for expert advice to avoid and resolve critical construction claims.

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Comment (1)

  1. praneeth gandi
    March 27, 2021

    This paragraph gives the clear idea on Practical Issues on Claims in Construction

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