Construction Claims and Disputes – Causes and Strategies for Claims Avoidance
By George Jergeas, PhD., P.Eng.
Many construction projects face considerable difficulty in resolving disputes in an effective, timely and economic manner. In this article, we provide a typical list of causes of claims and disputes that counsel and clients need to consider during construction. We also propose that the clients and their counsel plan, develop and employ proactive strategies to reduce the likelihood of disputes.
Construction projects are increasingly competitive and complex, and delivered in a risky and sometimes adversarial environment. Many construction projects face considerable claims and disputes, along with increasing difficulty in resolving such disputes in an effective, timely and economic manner. Valuable resources are diverted towards the preparation of claims, settlement of disputes and participation in arbitration or litigation. The net result is time wasted in a non-value-added effort.
A claim can be defined as a request for additional financial compensation and/or a request for a time extension. Most claims are resolved at the project level by negotiation between the parties themselves. A claim that cannot, or is not, resolved by negotiation at the project level becomes a dispute. Unresolved claims can be adjudicated through adversarial techniques such as arbitration or litigation, or by using less adversarial methods such as mediation.
Typical Causes of Claims and Disputes
The first major contributor to claims and disputes is the hesitancy to spend effort clarifying the scope and terms of work during initial project phases resulting in changes to design, scope, and schedule during construction. The second major contributor is the unclear communication of contract intentions causing misunderstandings regarding the risks and responsibilities assigned to the contracting parties.
Typical causes of claims and disputes that counsel and clients need to consider include:
- Lack of project planning and inadequate design;
- Design changes, errors, omissions, and extras;
- Lack of coordination between project teams/contractors;
- Changed soil/site conditions /ground conditions;
- The combination of a fixed-price contract and fast-tracking;
- Insufficient bid preparation time;
- Inadequate bid information;
- Underestimation, mismanagement and/or bad workmanship by contractors;
- Misunderstanding of contract intentions, terms, and conditions or contract interpretation;
- Various kinds of project delays some of which are compensable, some of which are non-compensable;
- Late permits;
- Weather conditions; and
- Unforeseen events such as the current Covid-19 pandemic.
Strategies for Claims Avoidance
The Owner project management team can employ proactive strategies, taking steps at the front-end of a project and during construction to reduce the likelihood of disputes. The Owner project management team must include a plan for dispute management in their contracts, mandating a process for promptly addressing unresolved issues before they adversely impact the project.
The Owner project management team and their counsel must plan and develop strategies for avoiding disputes that should include the following (among others):
- Choose the right design professionals/consultants and contractors.
- Select the most suitable contractual and procurement models.
- Involve a contractor to provide constructability input on the design.
- Assign risks to the party best able to manage (or share) them, rather than simply trying to offload as many risks as possible.
- Use partnering to build and sustain project teams, and to address (or prevent) difficult technical, communication or relationship issues.
- Identify disputes early by including reasonable, but not impossible, timeframes for providing written notice to the Owner.
- Require the submittal of claims immediately after a disputed event is completed. Impose a deadline for fully documented claim submittals within 30–60 days of the event’s completion.
- Specify what must be included in a properly documented claim, stating that the contractor (as claimant) bears the burden of proving causation (cause and effect), entitlement, and quantification of damages.
- Require prompt claim review by mandating a specific timeframe for the Owner representative’s response to claims submittals.
- Require that once entitlement is agreed upon, settlement negotiations shall commence within 30 days. The longer it takes to proceed to the negotiation table, the larger the claim is likely to be.
- Mandate prompt elevation of unresolved issues to management by requiring the completion of project-level negotiations within 45 days of a finding of entitlement—otherwise the issue will be elevated to senior management (a conflict escalation ladder).
- Use a dispute resolution clause that meets the project’s needs in terms of timeliness, flexibility, and finality—there are creative options beyond arbitration and litigation.
- Include a dispute resolution board (DRB) in the contract; the DRB hearing, and recommendation should be a condition prior to any formal legal action.
- If a DRB recommendation is rejected, require subsequent mediation. This imposes a cooling-off period, and analysis of the recommendation by an experienced neutral party, which should help resolve the dispute.
A second Article on this theme (next quarter) will provide a detailed list of dispute management recommendations. If implemented, these recommendations should reduce the likelihood of disputes during the construction phase.
Dr. George Jergeas, P. Eng.,Professor Emeritus of Project Management, University of Calgary. George has a strong passion in collaborative relationships, claims & disputes, and project management consulting and training. George appeared as an Expert Witness before the Commission of Inquiry regarding the Muskrat Falls project. Currently he is engaged in a mediation of a construction dispute in Alberta.