CONSTRUCTION JOURNAL

How to manage the risk of construction claims

Opinion: claims are common on construction projects, and are often made unscrupulously. What steps can you take to minimise risk – and how do you deal with them when they do arise? One professional shares their views

Author: Merryn Stoyle

17 September 2021

Aerial view of construction site, houses under construction

For the first five or so years that I spent working in the construction industry, beginning in 1999, I saw an average of two or three claims per project. These claims were most often about disputed additional works, or extensions of time, and occurred for a number of reasons.

While there were exceptions, these claims were usually relatively considered and had some substance, even if the contract entitlement was not always explained correctly. In addition, such claims could usually be managed by the relevant quantity surveyor, or contracts administrator, in conjunction with the project manager, without major incidents occurring.

Over the past 10 years, which I have spent working internationally on major projects in the engineering, procurement and construction field, I have observed that the number of claims per project is increasing. Dedicated claims managers are employed on a long-term basis – at times in excess of a year – both during and after a project has been completed in order to deal with these claims.

With the rise in outsourcing, and the fact that most contractors and subcontractors no longer hold resources in-house to execute works, making them dependent on suppliers, each party has to protect its own commercial interests.

For all involved parties – employers or owners, contractors, and subcontractors – this often means hiring the cheapest bidder following an intense and increasingly lengthy procurement process. Due to this increased competition, and consequent pressure on the price, risk margins are often limited, or even non-existent. This, in turn, prompts greater focus on achieving planned profit from variation orders, or indeed claims.

I have also observed an increase in claims made without a clearly defined premise, where the contract provisions relied on are not set out – or often cannot be found – and where the time and cost effects of this claim have also not been substantiated or are grossly over-inflated.

'Over the past 10 years, I have observed that the number of claims per project is increasing'
Reasons for claims

In my experience, claims arise for a number of reasons, including the following.

  • The contract specification or other key provisions – such as completion dates, any preconditions or other processes set out in the contract – have been badly thought out, are vague and open to interpretation, or are too impractical to be implemented.
  • The contractually agreed timescales for the execution of works are getting shorter, meaning that contracts or subcontracts are being let while the design is still under development.
  • Real or perceived access issues are caused by multiple parties working simultaneously at the site.
  • One or more parties did not read the subcontract or fully understand it, including both the general terms and the technical specification.
  • Parties have often cut costs to the minimum during the tender process, and seek to recover these by other means.
  • Businesses' commercial strategies often conflict with their own contractual obligations. In other words, the strategy to achieve planned profit margins conflicts with the provisions of the contract. This may be due to how the contract determines that variation orders, or similar, are to be valued, or it because the actual scope of the contract states that items are in the subcontractor’s scope, rather than variation orders.

While it is inevitable, particularly where there is limited or insufficient float for unplanned or unforeseen expenditure, that business goals – the need to achieve or exceed the envisaged profit margin – will conflict with the contractual requirement – the obligation to complete the works which have been contracted for – the effects of such conflict become greater as project timescales become shorter. Less time increases the pressure on all parties involved in the execution of the works.

There are some companies that are simply greedy, and will exploit any means to increase their profit margin. Unscrupulous parties often rely on the fact that it is usually cheaper for a contractor, or indeed a client, to pay them for extras such as disputed variation orders, or inflated rates to which there is often no entitlement.

In other cases, they may threaten to stop work if they don't get payment and if the alternative is that the contractor or client has to find a replacement subcontractor or contractor – often a lengthy process liable to cost more in the long-term.

Reducing the risk of a claim

While issues such as the conflict between commercial strategy and contract obligation cannot always be avoided, the following measures can, among others, be taken to reduce the chance of a claim.

  • Maintain clear and defined lines of communication to prevent exploitation of statements, instructions or discussions by another party.
  • Confirm that contract provisions are understood by the whole team, not just those who negotiated the contract.
  • Ensure that engineering works – for example drawings or technical documents – are free of mistakes, clear, unambiguous and issued on time. The relevant design interfaces should be analysed to prevent drawing issues from affecting progress on site.
  • Arrange for regular photos to be taken, proving that access is available when this is stated.
  • Ensure there are sufficient staff with appropriate skills and qualifications to deal with the type of claims arising. Employing additional staff at the start of the project can often lead to longer-term gains.
  • Maintain good records, supported by other relevant documentation such as photos, test protocols, daily reports and invoices. These should back up not just the principle of a claim but also the amount being requested.

It is important that matters are addressed robustly when they occur and are not allowed to accumulate or remain unresolved. Development of a contingency plan against potentially unscrupulous parties will also help with the smooth execution of projects.

This contingency plan can include use of an alternative or second subcontractor, as well as implementing robust project management tools to manage an unscrupulous party – particularly one that is threatening to stop or suspend its works if their claims are not met – including the provision of sufficient staff to handle the extra work this creates.

Clients or contractors often rely on fulfilling conditions precedent when defending a claim, such as compliance with relevant timescales for notification and the submission of substantiation. However, this will often not be enforceable either morally or contractually, especially if this client or contractor has caused events that prevent this timescale from being complied with by the contractor or subcontractor, or where the relevant jurisdiction does not recognise nor enforce the conditions precedent.

Additionally, a claim may trigger more correspondence, which will then cause an even greater burden on the project management staff. Unscrupulous companies will often seek to inundate the other party with documentation to create the impression of a solid case. This documentation will be used later, in more formal dispute resolution hearings, and the company will then exploit the lack of answer or meaningful answers from the other party, irrespective of the strength of the claimant’s case.

This contingency plan can include use of an alternative or second subcontractor, as well as implementing robust project management tools to manage an unscrupulous party – particularly one that is threatening to stop or suspend its works if their claims are not met – including the provision of sufficient staff to handle the extra work this creates.

While there is no clear path when dealing with claims, given the increasing claims culture among companies it is important that robust procedures are implemented in conjunction with clear contract provisions, and that these are properly communicated to all affected. The opportunity for claims should be minimised; but procedures and personnel should be in place to deal with claims when they do arise in order to avoid a costly final account.

'It is important that matters are addressed robustly when they occur and are not allowed to accumulate or remain unresolved'

Merryn Stoyle FRICS is a claims professional and an RICS assessor

Related competencies include: Communication and negotiation, Contract practice

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