CONSTRUCTION CLAIMS, DISPUTES AND PROJECT CLOSURE

ByT . Srinivasa Rao

During the execution of a project, several issues arise that cannot be resolved among project participants.

 Such issues typically involve contractor requesting for either time extension or reimbursement of an additional cost, or sometimes both.

Such requests by the contractor are referred to as ‘claim’.

f the owner accedes to the claim of contractor and grants him extension of time or reimbursement of additional cost, or both, the issue is sorted out.

 if the owner does not agree to the claim put out by contractor and there are differences in the interpretations, the issue takes the form of a dispute.

Claims are becoming an inevitable and unavoidable burden in modern projects involving new technologies, specifications and high expectations from the owner.

The claim mentioned above can also be put up by the owner.

It is, therefore, imperative for all the parties to be fully acquainted with the procedures and systems, including recourse to certain preventive actions as found necessary and required.

SOURCES OF CLAIMS As mentioned, the claim may arise due to the

owner or the contractor. The claim may be on account of any one of the following causes: There may be defects and loopholes in the

contract document. For example, the contract document may not be clear, may have dual meanings at different places, or may not have sufficient details.

There may be delay in release of areas as per contract. Besides, site conditions differ to a large extent from those described in the contract document.

The owner may desire to get the work done at a faster pace than is required by the contract document.

There may be delay in supply of power, water and other materials from the owner.

There may be hold on works due to delay in release of drawings and other inputs.

There may be delay in release of payments to the contractor.

The scope of work may be substantially modified by the owner.

There may be levy of liquidated damages (LD) on the contractor. Other recoveries from bills may also lead to contractor raising the claim.

There may be delay on the part of contractor in completion of works due to inadequate mobilization of labour, material and plant.

There may be loss of profit and investment to the owner due to delays caused by the contractor.

Construction claims can also arise on account of inclement weather.

CLAIM MANAGEMENT The major issues in claims and disputes are

identification of issues and the party responsible for the claim, and ascertaining the time and cost impact of the claim. The party raising the claim has to notify the

claims once they have been identified.  it is the responsibility of the party raising the

claim to substantiate the facts. Depending on the decision of the other party

against which the claim is made, the claim may be settled amicably or it may take the form of a dispute.

CLAIM NOTIFICATION After it is established by the contractor that it

is an extra work, the contractor is required to inform the engineer within the time frame stipulated and clarify his intention to claim extra rates for the same. This is very important because failure on contractor’s part regarding this shall entail its rejection by the engineer.

CLAIM SUBSTANTIATION The contractor has to fully establish the claim

including his entitlement under the contract, giving reference to the relevant clauses.

The claim is supported by necessary backup calculations.

Backup documents like letters, vouchers and drawings are also enclosed.

For period-related claims such as extended stay costs and interest on delayed payments, it is required to revalidate the claim at periodic intervals and submit the same to the engineer until the end of the relevant period.

DECISION OF ENGINEER/OWNER The owner/engineer is supposed to convey

his decision on the claim to the contractor within a time frame specified in the contract.

If the claim is not allowed, the same needs to be stated along with reasons.

FURTHER ACTION BY CONTRACTOR The contractor has to refer the claim for

adjudication if provided, within a specific time frame after receiving the decision from the engineer, if the same is being disallowed.

The adjudication process is carried out as per the provisions set out in the contract.

GUIDELINES TO PREPARE THE CLAIMS It is always preferable to link the claim to

contractual provisions. Prepare the base for its establishment. Indicate intention and submit it within the

time frame provided in the contract. Submit with all backup documents,

calculations, etc. Be fair in projecting the figures and do not

inflate.

DISPUTE

Because of the uncertainties involved in a construction project and the magnitude of funds involved, it is only natural to have disagreements between parties.

most of such day-to-day differences are resolved in an amicable manner

However, it is some times not possible to resolve disputes in such fashion.

In such situation construction and legal laws become helpful for resolving disputes.

“Technically, a dispute implies assertion of a claim by one party and repudiation thereof by another.”

Thus, neither a mere claim without repudiation, nor a pair of claim and counterclaim, can be called a dispute.

CAUSES OF DISPUTES The geneses of many disputes often lie in the

contract document itself. It is often observed that tenders are hastily made

and sufficient attention is not paid to ensure that  all the required information and details are

appropriately incorporated in the tender document the documents are internally consistent, i.e., there is

no contradiction in the provisions of general conditions, special conditions and drawings

 specifications, where required, are available  incompleteness, inaccuracy and inconsistency of

information are only part of the reasons for disputes in a construction project.

CAUSES OF DISPUTES Incorrect Ground Data:

Such data includes information about ground conditions, depth of groundwater table, rainfall and temperature data, availability of power and water, etc.

The estimates of a contractor are based on the ground data provided with the tender documents

Any difference between the ground reality during execution and the conditions provided in the contract could easily be the reason for disputes

Use of Faulty and Ambiguous Provisions and/or Language in Contracts: The language of the contract should be clear and

such that it is not open to different interpretations. Use of ambiguous language and/or provisions could

open a floodgate of avoidable litigation. It is also important that the contract clearly lays

down specific procedures that are to be adopted in the event of contingencies.

 absence of appropriate provisions to handle technical inspections by the client or owner, or third parties, could become a source for litigation

 ill-defined or a vaguely defined hierarchy of documents that will be deemed to prevail in the event of a dispute could be a cause for dispute

Deviations The contract should be so designed that there

are as few extra items and/or deviations as possible.

the scope of work in any contract should be unambiguously defined

Unreasonable Attitudes It should be borne in mind that in order to complete

the work professionally, it is important that the parties involved resort to unilateral action to preserve an environment of mutual trust.

both the client and the contractor need to have a professional approach to the project, including areas where there could be disagreement on interpretation, etc.

Measures such as suspension of the contract or invoking of clauses related to imposition of liquidated damages should be resorted to only in the most extreme cases.

Delays in payment of bills should also be avoided to ensure that the contractor does not get cash-strapped, which will obviously affect his ability to perform.

Contractor Being of Poor Means It is important that the contractor identified to do

a job possesses the required human, financial and technical resources.

In the absence of any of these, it is very likely that the contractor will look for an escape route for leaving the project, and may try to force a suspension or determination (termination) of the contract, or take the matter into arbitration/litigation to cut his losses.

Unfair Distribution of Risk This could be a major reason for not only

avoidable litigation but also increase in the cost of the project.

Indian contracts typically are heavily loaded against the contractor, who obviously tries to cover the risks he is ‘forced’ to take by either hiking the rates, or taking an approach of ‘crossing the bridge when we come to it’,

DISPUTE AVOIDANCE VS DISPUTE RESOLUTION an appropriate strategy for dispute

avoidance and dispute resolution needs to be drafted, and put in place even before the onset of works in a project.

Given that the client or the owner usually takes the lead in drafting contracts, the onus is largely on him to ensure that both dispute avoidance and dispute resolution are adequately addressed in the contract.

the important reasons as listed above are appropriately taken care of, the possibility of disputes can be largely minimized.

Contracts need to be drawn up with a professional mindset, and a fair distribution of risk between the contractor and the owner.

Special care needs to be taken in drafting dispute-prone clauses and identifying potential neutral agencies, which could be called upon to mediate any dispute.

It may be considered advisable to provide for a binding mechanism for alternate dispute resolution (ADR), which could include constitution of dispute review board (DRB), comprising persons drawn from the contractor’s and the owner’s sides, which should meet periodically to review any pending or potential dispute. 

MECHANISMS OF DISPUTE RESOLUTION Apart from the normal legal process,

emphasis here is on the alternative dispute resolution mechanisms generally available in construction contracts. 

Such mechanisms could include Negotiation Mediation Conciliation Arbitration

Negotiation This could refer to a focused discussion on the

dispute among the engineers from all interested parties, with the intention of resolving differences without the involvement of third parties,

this is an informal process in the legal sense if an agreement is reached through the process,

it may have the usual legal significance The negotiation process is fast and does not

involve additional expenses The discussions are held between the parties

across the table in a cordial and peaceful atmosphere.

Mediation and Conciliation Mediation and conciliation are essentially an

informal process in which the parties are assisted by one or more neutral third parties in their efforts towards settlement. 

These mediators do not sit in judgement but try to advise and consult impartially with the parties with the object of assisting in bringing about a mutually agreeable solution to the problem. 

They have no power to impose an outcome on disputing parties.

Mediation and conciliation are voluntary in the sense that the parties participate of their own free will, and a neutral third party simply assists them in reaching a settlement.

The process is private, confidential and conducted without prejudice to any legal proceedings.

The process is non-binding unless an agreement is reached

once an agreement is reached, and the parties have signed it, the document (or the understanding) is as binding as any other agreement would be.

Although the process is largely informal, the following could be identified as parts or stages in a mediation process.

In the pre-mediation stage, there has to be a basic agreement among the parties to the mediation process, including the identification of a mediator

Mediation could be direct or indirect, and could involve meeting(s) with parties, presentation(s) being made by them, putting together of facts, negotiations and a settlement

mediation is an informal process, it has certain inherent advantages over the more formal and legal process.

it could be a lot less time-consuming involve lesser costs the outcome could be more satisfying to the

parties  It also opens channels of communication, and

could contribute greatly to preserving or enhancing a professional relationship.

Arbitration Arbitration is perhaps the most commonly used

mechanism for settlement of technical disputes in a construction project.

It is a quasi-judicial process to the extent that legal protocol is largely observed

In India, the Arbitration and Conciliation Act, 1996, provides the legal framework for the arbitration process.

In principle, collection and interpretation of evidence, examination and cross-examination of witnesses, etc., are some examples of essentially legal matters

Arbitrator should be able to guide and provide a direction to the proceedings.

As far as the number of arbitrators is concerned, much like the judicial system, technical disputes can also be resolved by single arbitrators, or a panel of several arbitrators, and though the parties are free to determine the number of arbitrators, it should be ensured that the number is odd, so that a situation of a ‘tie’ in an award is preempted.

Often, one arbitrator each is nominated by the contractor and the owner, and these individuals together choose a third colleague (brother) arbitrator, to complete the constitution of a bench of arbitrators.

CAUSES LEADING TO ARBITRATION Incorrect ground data Contracts containing faulty and ambiguous provisions Faulty administration of contract Deviations Suspension of works Contractor being of poor means Default by contractor No publicity involved Unreasonable attitude adopted by contractor Overpayment Levy of compensation for delay Delay in payment of bills Observation arising out of technical examination of

works

ADVANTAGES OF ADR OVER LEGAL PROCEEDINGS IN A COURT Alternative dispute resolution (ADR) has clear merits over

formal legal proceedings in a court of law, and is often preferred over the latter.

 the process is less formal and quasi judicial which allows a certain degree of flexibility and ease to the parties

the arbitrator works on a lesser number of cases at any given time, the settlement of cases is quicker and less expensive.

place of a hearing are fixed based on the mutual convenience of parties.

Since the hearings are not open to the public, the overall relationships are less affected.

This aspect is important considering the fact that the parties often want to avoid needless publicity as it adversely affects their professional standing and relationships.

SOME DOS AND DON’TS TO AVOID DISPUTE When contractors are faced with lack of work and

idle overheads, they tend to under-quote and take up jobs at cutthroat rates, which often land them in a soup. Thus, it may be said that ‘contractors are so afraid of dying that they commit suicide.’

Good claims-management practice means: eliminating risks to the extent possible before entering

into contract, and during the course of work, to have variation orders

settled without elevating them to the status of claims. ‘Be careful how the law of the land interprets ‘no

damages clause’ in favour of the owner.’ ‘Don’t throw good money after bad money in

pursuing bad claims.’

‘Don’t set up ego barriers in settling disputes during the course of work.’

Negotiated contracts have fewer claims than lump-sum contracts. Most owners’ engineers tend to assume that the contractors have covered all risks while quoting. Highlight the areas not covered in the quotation.

Study contract conditions and local laws thoroughly. Educate and train staff to act early at the lower

level so that disputes do not escalate and rise to the highest decision-making level.

Do not pile up claims to the end, which result in the owner’s engineer also getting hemmed in. Settle them early, before the amount looks big.

Provide analysis and documentation early, and not at the end. Relate every claim to the project schedule drawn up in the

beginning. The base plan should be prepared right at the beginning of the contract, and this should not be lost sight of either mentally or physically. Keep a copy of the original schedule in your cash box or bank locker so that it is not lost.

Concurrent delays cannot be seen from bar chart. It is better to use CPM network so that the floats are known. Do the CPM network right in the beginning of the project. ‘You can build a project without CPM but you cannot build delay-claim without it.’ Update the CPM network through periodical monitoring so that you can prove delays, as the onus of proof is on the contractor.

Claim is a three-legged table: Liability, which means contractual facts Causation, which means connection Damages, which means claims presented

Submission of claims should be subject to IRAC test as follows: Issue—Are you entitled to recovery? Review—Contractual and factual right to recover Analysis—If necessary, get expert opinion and judgements available Chronology—Perspective to be drawn up

Submissions should be understandable by the arbitrator. If available, enclose periodical progress photographs, which can speak volumes.

Do not lose credibility by submitting untenable or exorbitant claims. Have the submissions examined by your own people, or experts.

‘You never have a second chance to make the first impression.’ Have your claims settled during the course of execution when you

have leverage. While negotiating international contracts, suggest a formula from

outside the country, preferably a neutral country, to settle the disputes.

Suggest a mediator from a neutral country to advise during the course of contract

PROJECT CLOSURE

This is the last phase of a construction project and is as important as any other phase in the project.

This is a process of completing and documenting all the construction tasks required to complete the project.

A poor project closure (or close-out, as it is referred to sometimes) leaves the client unsatisfied and may prove to be a cause for not getting repeat business.

Thus, project closure should be meticulously planned.

Project closure consists of a number of tasks.  the project closure phase can be divided into

the following broad headings: Construction closure Financial closure Contract closure Project manager’s closure Lessons learned from the project

CONSTRUCTION CLOSURE This involves preparation of the project

punch list, which is a list of deficiencies identified during the combined inspection of constructed facilities by the representatives of client, contractor, consultant and architect.

During the regular inspection also, deficiencies are reported to the contractor by the architect, the consultant, and the client’s representative.

The punch list is prepared usually towards the end of the project when all major construction activities are completed.

The punch list is formally handed over to the contractor, who takes steps to rectify the deficiencies thus pointed out.

There may be a situation in which some of the deficiencies pointed out in the punch list may not be part of the contract, and the contractor in such cases usually asks the owner for extra payment.

Certificate of Substantial Completion For a contractor, obtaining the certificate of

substantial completion is an important milestone event as it ends the contractor’s liability for liquidated damages (LD).

Substantial completion refers to a situation in which the project is sufficiently completed.

In other words, even though some minor deficiencies may be present (all the deficiencies pointed out in the punch list may not have been attended to), the constructed facility can now be used for its intended function.

Certificate of Occupancy This is usually issued by the municipality under

whose jurisdiction the project location falls. It indicates that the constructed facility complies

with the entire codal requirement and is safe to be occupied.

Fire- and elevator-related inspection by municipal authorities is required before the certificate of occupancy is issued.

Demobilization or Release of Resources This consists of demobilization (release) of

resources such as staff and workers, and is as important as their mobilization. 

The closure of office, removal of unused materials lying in store, and disconnecting water, electricity and sewerage lines are all part of the demobilization process

FINANCIAL CLOSURE Financial closure consists of writing applications

for final payment, release of various bank guarantees, and settlement of any change order issued by the client.

Final Payment The contractor has to apply for the release of final

payment after he has attended to all the deficiencies pointed out in the punch list. The request for release of retention money is also made.

Release of Various Bank Guarantees During the course of execution of project, the

contractor submits a number of bank guarantees to the owner. A written request is made to the client to release the bank guarantees.

CONTRACT CLOSURE Construction contract usually specifies the

requirement of contract closure and, thus, the contractor should prepare a list of requirements for contract closure as per the contract between him and the owner.

Submission of As-built Drawings During the project execution process, due to site

constraint there might be some changes in the as-built facility from that as specified in the contract drawings.

it is very important to prepare the as-built drawings by estimating the actual dimension and condition of the constructed facility. 

The as-built drawings of all the trades such as civil, electrical and mechanical disciplines should be compiled and submitted to the owner.

Submission of Operation and Maintenance Manual Modern projects involve a number of mechanical

and electrical appliances—for example, elevator, cooling tower, air-handling unit and diesel-generator set.

The manufacturers of these appliances provide operation and maintenance manual associated with these appliances

These should be handed over to the owner.

Submission of Warranties It is the duty of the contractor to collect all the

warranties and guarantees from vendors, subcontractors and suppliers, and submit these to the owner.

Submission of Test Reports During the execution of project, a number of

tests are conducted on materials, appliances and systems that are installed in the project.

The test records need to be compiled and submitted to the owner for future reference.

PROJECT MANAGER’S CLOSURE This includes tasks such as preparation of an

as-built estimate, analysis of actual cost versus estimated cost, analysis of items where cost overrun was high etc.

conduct of meetings with external agencies such as client, architect and consultants for understanding their feedback on various project management aspects. 

Meetings with own staff and subcontractor should also be held to get their feedback on various issues.

LESSONS LEARNED FROM THE PROJECT This involves collection and compilation of all records

associated with the project, and preparing archives of important project records. 

It also involves documenting the important issues faced in the project and their resolution. 

This helps in planning for such type of issues in the early stages of other projects.

This helps in planning for such type of issues in the early stages of other projects. Did the project meet its requirements and objectives? Was the customer satisfied? Was the project schedule met? Was the project completed within

the stipulated cost? Was the level of achieved quality acceptable? Were the risks identified and appropriately mitigated? What better ways can be employed to improve project execution

and its management?

THANKYOU