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7/23/2019 Claim Construction

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ProjectAberrationsCost Overrun, Change Orders, and Time Delay

Claims and Disputes

Samuel Labi and Fred MoavenzadehDepartment of Civil and EnvironmentalEngineeringMassachusetts nstitute of !echnolog"



CLOSEOUTDEVELOPMENT OPERATIONSDESIGN,PLANNING

FEASIBILITY

Actual Start of Project

Organization

EstimationPlanning

Finance

Evaluation

Monitoring & Control

Project AberrationsChanges & Claims

Quality & Reviews

CLOSEOUT

Recall: The 5 Phases of ProjectManagement



CLOSEOUTDEVELOPMENT OPERATIONSDESIGN,PLANNING

FEASIBILITY

Actual Start of Project

Organization

EstimationPlanning

Finance

Evaluation

Monitoring & Control

Project AberrationsChanges & Claims

Quality & Reviews

CLOSEOUT

Recall: The 5 Phases of ProjectManagement

This Lecture



What is a ProjectAberration?

“Aberration” the act of departing from the right,normal, or usual course. (Merriam-Webster)

Cost Overruns Time DelayPerformance deviationsChanges in or! scope

Can lea to

! Change Orers

! Claims an "is#utes



Cost

Overruns



Cost Overruns

Original pro"ect cost # $%&' (inal cost )at completion* # $%+'

Cost overrun amount # $+' Cost overrun rate # %&&)+%&* # +&-

ahren and Ashe /%00&1 and 2!rit3a and 4abi/+&&51 found that cost overruns are causedmostly by6 pro"ect si3e difference beteen the selected bid and the



Cost Overruns

The larger the pro"ect, the larger theamount and rate of cost overruns

9hy: The larger a pro"ect, the greaterthe comple;ity



Change

Orders



Change Orders

A ritten agreement that reduces, adds or modifiesthe or! from that set in the contract documents

<tandard practice allos the Oner the right to ma!echanges, as follos6 Addition or deletion from scope of or! )impact time and price* Alteration of methods, materials Changes in contract time or order of or! Correct errors

Contractor can re8uest a change Contractor suggestion to improve 8uality or or! progress =;cusable problems



Change Orders

Changes contract scope of or!schedulecost

Often start as informal re8uest from Oner, butshould alays have clear paper trail Often contractor does not ait for formali3ation Often it is contractor that re8uest changes to recover poor

performance )not alays alloed>>>*

Contingency in budget often designed to fund COs

?nilateral and bilateral



Change Orders Causes

Caused by OnerA= DefectsAmbiguities in

plansspecs <copedesign changes Delayed access to site <lo submittal approval

Caused by Contractors

4ate start @nade8uate resources <ubcontractorsupplier

failures Poor or!manship <chedule delay

=;ternally caused ?nforeseen site conditions egulatory changes

B oning

B Code

B =nvironmental

4abor disputes Third party interference



O!ner "A#$% &nitiated Change Orders:'irected vs( Constructive

DIRECTED CHANGE ORDERS (SCOPE CHANGE) (ormal re8uest by oner to perform or! differing from that

specified in contract )modificationadditiondeletion* o 8uestion that a change occurred. Disagreement can center on

financial compensation

CONSTRUCTIVE CHANGE ORDERS Change order proposal is evaluated by oner ho authori3es

modificationB 'ust be claimed in riting by the contractor ithin specified time

B Claim is that something has implied a “de facto” change in contract re8uirementsB =;amples6 Defective plans E specifications, ambiguous plans, impossibility of

performance

'a"or source of dispute. Disagreement centers around theinterpretations of contract re8uirements, plans and specs



Change Orders – Ho the! start

and ho the! end

Formal

Protest!



Ch O d



Change Orders )As*mmetries

@n many construction contracts, Oner alloed to ordercontractor to continue or! under modified terms even ifcontractor does not agree to the change order6

B “Proceed ithout hesitation”B Contractor may “or! under protest”

Contractors in favorable pricing positionB Oner may appoint “on call” contractor for changes

(or bidded pro"ects, oner in favorable contract position

B “Contract of adhesion” F ta!e it or leave it



'o all Change Re+uests end asChange Orders?

Change re8uests can result in Change orders: Gilateral agreement to modify contract

terms

Construction change directives: ?nilateralcontract modification in the absence of complete agreement

Ho long does it ta!e:

$nitiation o%

change reuests

Agreement o%

Change reuests

Time

'y#ically (ery )ong'ime $nterval



Are Change Orders Al!a*sCalled ,ust That?

T!"e o# $ontra$t%od&#&$at&on

Pr&vate

' Nonedera*Pu+*&$

edera*

,&*atera* Change Order “Contract Amendment”

“<upplemental Agreement”

Un&*atera* “9or! ChangeDirective”

“ConstructionChange Directive”

Change Order

T!"e o# $ontra$t

Part&es Invo*ved &n CO

Con#icting !erminolog"

ange r er ocumen s



ange r er ocumen s )-am.les



) )/..er Portion



) )0o!er Portion

Ch 'i ti ' t



Change 'irective 'ocument )A -am.le



)-am.le /..er Portion



)-am.le1 0o!er Portion



T&M$ '$0A2



'ela*

Caused by:

Contractor

Owner

Designer

Subcontractors

Suppliers

Labor Unions

Utility Companies

Nature

Causes:

Differing Site Conditions

Changes in Requirements or Design

Inclement eather Una!ailability of Labor" material" or

equipment

Defecti!e #lans or Specifications

Owner Interference

Time during hich some part of the construction pro"ect hasbeen e;tended or not performed due to an unanticipatedcircumstance.

<chedule used to estimate implications



$3cusable 'ela*s

Causes of Excusable Delays:

Design problems

$mployer%Initiated Changes

Unanticipated eather

Labor Disputes&ire

Unusual Delay in Deli!eries

Una!oidable Casualties

'cts of (od )&orce ma*eure+

Delay that ill serve to "ustify an e;tension of thecontract performance time. @t e;cuses the party frommeeting a contractual deadline.



4one3cusable 'ela*s

Nonexcusable Delays:

Una!ailability of personnel

Subcontractor failures

Improperly installed wor,

$quipment problems

Delay for hich the party assumes the ris! ofdelayed performance and its conse8uences to itson performance and the impact upon others.

bili 6



oreseeabilit* 6$3cusabilit*

one;cusable6 4ate Delivery due to <tri!e <tri!e clearly foreseeable and contractor did not plan for it.

Pro"ect <tri!e one;cusable6 ?nfair labor practice of contractor can be

corrected by the contractor

=;cusable6 ?nfair labor practice of subcontractor can bebeyond the control of the contractor

m.ac s o one3cusa e



m.ac s o one3cusa e'ela*

'ay be considered breach of contract

'ay "ustify the termination of the contract

4i8uidated damages may be assessed

ormally, e;tensions are not granted

=;pected to absorbed into the schedule



Compensable Delay

Delay that could have been avoided by due care ofone party is compensable to the innocent partysuffering in"ury or damage as a result of the delay.

Goth cost and time may be compensable butsometimes only additional cost is Compensable.

A variety of approaches to estimate indirect costimplications



Critical 'ela*s

=;tend the Pro"ect Completion

ot necessarily lin!ed to recovery ofcosts of delay

@mpact to cost of performance



7Ri..le thru8 "-no!ball%e9ects of 'ela*

Often a delay has many indirect effects that are difficultto clearly 8uantify Poor coordination )e.g. ithin site E ith subcontractors* (atiguemorale problems

'ista!es due to overor! 4ost opportunities for or! elsehere @ndirect effects can cause costs, further delays,I

CP' Diagrams can7t 8uantify these effects F moresophisticated dynamic models are needed



C0A&M- A4'

'&-P/T$-



Claims 6 'is.utes

Can have ma"or impact on all aspects of pro"ectperformance and 8uality

2roing problem

eed to focus on many components of pro"ect Prevention 'anagement )for or! to continue during dispute* esolution

Has pervasive influence on pro"ect Trust'orale<peedAtmosphere



Common &ssues aboutProject Claims

OnerBcaused delays )e.g. slo revie of submittals*

OnerBordered scheduling changes

Constructive changes

Differing site conditions

?nusual eather conditions

Orders to accelerate or!

4oss of productivity <uspension of or!

(ailure to agree on change order pricing



Claims Progression

Claims begin as disagreements beteen Oner and Contractor )Contractor vs. subs*

Contractor must notify oner of disagreement Often done through formal letter of “protest”

B <ubmitted according to contract conditions

B (ormally responded to by oner or representative

@f cannot or! out mutually agreeable course of action,proceed to formal claim

l i b id d



Can Claims be avoided?Minimied?

Oner should sho responsibility

Pro"ect manager should be fair and competent

=nsure good 8uality of the design

=nsure that Contract is ellBdesigned

<elect supplierssubcontractors ith care



Minimiing Claims Res.onsible O!ner

<hould clearly conceive the pro"ect features upBfront

<ingle point of responsibility

Appropriate attention during construction <hould promptly and effectively revies contractor7 submittals

<hould ma!e realistic demands about schedules,costs, and product 8uality =.g., realistic tolerances and specs



Minimiing Claims Com.etent1air PM

(air treatment of contractor during or!

'anagement of communication among parties

apid processing of paperor! 2ood supervision )via superintendents*

Careful documentation

Proactive detection of and resolution of disputes 'inimi3ation of adversarial inclinations



;ualit* of the 'esign1 'esignollo!u.s

Plans and specifications should be Complete

?nambiguous

Consistent Coordination of oner E C' E A= responsibilities

esponsiveness of A= to submittals

egular site monitoring to ensure compliance iththe design

Juality inspections of <hop draings

Mi i i i Cl i C t t



Minimiing Claims Contract'ocument 'esign

is!Bsharing )clauses in general conditions+ (loat onershipsharingK subsurface conditionsK damages due to

delaysK 8uantitiesK change processK ha3ardous materials

Contingencies listed

Dispute resolution strategy

Choice of delivery system 4ength of time to revie plans E specifications Degree of input into negotiating Designing contract

Mi i i i Cl i C t t



Minimiing Claims Contract'ocument 'esign

<election mechanism @f alays selecting loest bidder, can be problem Gidding conte;t particularly !ey L of bidderscompetitors

Payment mechanism

Aggressiveness of delivery schedule

4i8uidated damages ellBreasoned

Claims for latent defects

Minimiing Claims Additional



Minimiing Claims Additional-uggestions

Develop internal mechanisms to minimi3e ris! of disputes Draing a good contract document is most critical

B (igure out contingencies that may occur

Develop mechanisms to allo construction to continuehile disputes are being resolved Construction change directive

Avoid delays in communication

Confirm all oral agreementschanges in riting

'aintain daily record of or! in progress Date Time of arrival of materials =8uipment <ubs =.g. ?nit cost of material



'is.utes

A formal disagreement beteen the contractor andthe oner

'is.ute ResolutionThree general approaches

Common sensee.g. notification of oner before claim filed

ContractBspecified termse.g. “Construction industry mediation rules”

Public case la

-.eci<c Mechanisms for 'is.ute



-.eci<c Mechanisms for 'is.uteResolution

egotiation

<tandBin neutral

'ediation

Arbitration Dispute esolution Goards

4itigation



4egotiation as a mechanism for dis.ute resolution

@nformal discussion

o costs

=fficient

'ay be brief



-tandin 4eutral as a mechanism for dis.ute resolution

Mrd party ith relevant e;perience

Paid by both parties

Provides e;pert advice onBbinding )parties can still refuse to accept

the advice from the third party*

Mediation as a mechanism for dis.ute



Mediation as a mechanism for dis.ute

resolution

Officially trained, recogni3ed mediator helps resolve Choice of mediator agreed upon by both parties

Typically voluntary )nonBbinding* Parties in dispute must come to agree on isdom of solution o authority to enforce verdict

'ediator adopts acti!e role 4ess formal meetings for counseling parties 'ore formal proceedings assist

2athering facts Clarify discrepancies

=conomical

Typically confidential



Arbitrationas a mechanism for dis.ute resolution

Can be legally binding and enforceable @mposed on parties 'ore “final” than courts F no appeal possible in most cases, no e;planation of

aard re8uired*

(re8uently publicly !non

Typically “passive” F depend on formal presentations byparticipants

Advantages vs. litigation Arbitrator is e;pert in construction area (aster )months vs. years*

5 step process Agreement to arbitrate <election of arbiter Preparation for hearing Hearing Aard )ithin M& days of close of hearing*



'is.ute Resolution =oards

'ore common for subsurface or!

M members )e;perienced constructionprofessionals* Oner appointee Contractor appointee A Mrd appointee mutually agreed by both parties

'eet regularly F already up to speed on pro"ect



0itigationas a mechanism for dis.ute resolution

Typically a last resort

Public

=stablished case la

=;pensive

4engthy )5N years to reach trial*

resolution alternatives

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