Resolving Construction Contract Claims and Disputes.
Claims and disputes are never going to go completely away
in construction contracts; here’s a few ideas for subcontractors on
how to minimize the possibility of them arising and if they do, how
best to resolve them.
By Kit Werremeyer
President, Southernstar Consultants, LLC
You are a
successful mechanical subcontractor and you have a very good job
performing some extensive grade level and elevated pipe work on a
new addition to an existing manufacturing facility. You’re ahead of
schedule, your quality and safety records are great, and you’re
beating your cost estimate in the firm price contract, so things are
looking pretty good that the job will finish out as a winner for
you.
Friday afternoon, the Project Director for the Owner’s
Main Contractor stops by and says: “I was looking over the schedule
of your work activities and I didn’t notice that you have planned
for making all the pipe connections from your work to the piping in
the adjacent facility. When do you plan to do these?”
You
take in for a moment what the Project Director just said and reply:
“What pipe connections? Those connections aren’t included in our
scope of work.”
There you have it: the classic beginnings of
a claim and/or dispute. In the above example, if only a few
small diameter, carbon steel pipe
connections are involved and the cost and schedule impact is small,
maybe the subcontractor will just do the work and get on with the
project and chalk the whole episode up to experience.
But
what happens if there are 150 welded pipe connections to be made in
high strength material Schedule 160 pipe in diameters from 8” to
24”. All connections have to be pre-heated before and during welding
and all finished welds have to be ground flush and then examined by
either full ultrasonic inspection or 100% radiography. Not only will
it cost the subcontractor a fortune to do this work, his schedule
will likely be significantly extended and, to make matters worse,
the contract has a big time liquidated damages clause in it for
failure to meet schedule.
All of a sudden a really good job
looks like it might turn out to be a really bad one.
So, how
do you stay out of situations like this?
Scope of Work – The
First Line of Defense
It does not matter what all the US and
international contract lawyers tell you,
the most important part of any construction contract is the scope of
work. That is what you and
all others have agreed to do in the construction contract.
Remember, minimizing the possibility of claims and disputes arising
in a construction contract starts prior to the contract being signed
with agreement to a detailed and very well defined scope of work
document.
A useful tool is the scope of work matrix. This is
a line by line listing of all the individual work items that are to
be performed under the contract. The scope of work matrix then notes
in separate columns who is responsible for doing all the line items
of work: the subcontractor, the main contractor, the owner, other
subcontractors, material suppliers, the architect, the third party
inspectors, and all others involved in the project. The “others” or
“other subcontractors” column is a great reference to define who
does work at the interfaces between one subcontractor’s work and
another subcontractor’s work. It also makes it clear that certain
items of work (like the pipe connections in the above example) are
to be done by someone else.
If an Owner hires a Main
Contractor for a project, that Main Contractor should take the time
necessary to carefully and fully define the scope of work for
everyone that is involved in the project. After all, it is what the
Owner is paying him to do.
But, it is still important for the
subcontractor to make his own further clarifications or exceptions
to the scope of work he is quoting on. Taking the time to clarify
the scope of work in writing in the subcontractor’s proposal, and
subsequent final contract, is an important first step in minimizing
the possibility that claims and disputes will arise during the
course of a construction contract.
Words to Avoid –
“Reasonably Inferred”
“Reasonably inferred” are two words
commonly found in references to the subcontractor’s scope of work
that may unreasonably relieve the subcontractor of his hard earned
money.
Take a look at the example wording shown below that
might typically be found in a construction contract’s commercial
terms and conditions regarding the scope of work.
Article 5 –
Scope of Work
Subcontractor shall perform the Work as shown
in the attached Plans and Specifications and as may be reasonably
inferred from those Plans and Specifications.
It’s certainly
understandable that an Owner or his Main Contractor wants a complete
project and that there are likely to be lots of very small and
miscellaneous scope of work items that are done just in due course
of finishing a project. No problem with that concept; all
subcontractors know you can’t describe every single small nut and
bolt item in a project’s scope of work, and that the Owner or his
Main Contractor expect all that small stuff to be included without
any hassle.
The problem arises with who is responsible for
making a decision on what’s “reasonably inferred”? If a
subcontractor thinks he will make this decision, well, good luck,
get out the checkbook.
“Reasonably inferred” are code words
for: “we overlooked this in defining the scope or work but, Mr.
Subcontractor, you have to do it anyway and at your cost and
schedule, not ours.” Do you think the subcontractor in the example
about the pipe connections will win that dispute if the Main
Contractor says those connections were “reasonably inferred.”?
Try to get the words “reasonably inferred” struck from the
commercial terms and conditions. It is the responsibility of the
Owner and/or his Main Contractor to do a first rate job of carefully
and completely defining everybody’s scope of work on a construction
project.
If the scope of work needs further clarification,
then the subcontractor should carefully describe it in his proposal
and insist it be included in the final contract documents.
Everybody benefits from a well-defined scope of work; the Owner, the
Main Contractor, the Subcontractor, and all others performing work
on a construction project.
Keep Good Record –
The Subcontractor’s Daily Log
Not all claims and disputes
arise out of poorly written scopes of work.
Delays to
subcontractor’s schedule caused by other subcontractors or the Owner
or the Main Contractor, and changing site conditions can give rise
to legitimate extra costs and schedule extensions.
Refusal by
the Owner or Main Contractor to pay Subcontractor these extra costs
or grant schedule extensions, or both, can give rise to a claim or
dispute.
A semi-sage once said: “In God we trust. Everyone
else bring data.” On a construction project, this should be revised
to read: “In God we trust. Everyone else bring data, and a lot of
it!”
A key role of a subcontractor’s site superintendent is
to keep a daily record of what’s going on in addition to the general
progress of the job. The superintendent always has plenty to do, and
doing some routine paperwork comes with the territory, regardless of
how meaningless it may seem.
Consider investing in some project management software. One of
the features will be that daily job reporting is done so online so
other managers in the company can view progress and/or developing
issues.
Is the job being slowed down by
the Owner, the Main Contractor, another subcontractor? If so, jot it
down. Keep the details.
Are changing site conditions
developing? If so, jot it down. Keep the details.
Is the Main
Contractor demanding extra work that’s not part of the scope? If so,
jot it down. Keep the details.
At the periodic progress
meetings with the Owner and/or Main Contractor, get all this
information on possible or actual extra costs and issues that may
cause a claim or dispute to arise noted in the minutes of the
meeting. If it isn’t resolved by the next meeting, get the
information noted again and that it wasn’t resolved. Keep pressing
until it is resolved.
Sound tough and hard-headed? Perhaps.
But it’s a heck of a lot better than losing money on a legitimate
extra or claim. There’s nothing wrong with keeping these issues well
documented and on the table with the Owner and/or Main Contractor
until they are resolved.
If you wait until the end of the job
to resolve, it’s too late.
Resolution Options – the
Good and the Bad and Fairy Tales
Negotiation is by far the
best way to resolve claims and disputes. Both parties should be
obligated to do this in the disputes clause in the contract.
Mediation is another
good way. A mediator is a facilitator and not a decider. He/she
tries to facilitate a resolution. Mediation is a good option when
both the subcontractor and Owner or Main Contractor honestly wants to
find a resolution to a claim or dispute. A mediator can be selected
who has extensive experience in the construction industry. Both
parties should be obligated to do this in the disputes clause in the
contract.
If negotiation or mediation doesn't result in a resolution then both parties should nominate a senior executive to try and resolve the dispute. Both parties should be obligated to do this in the disputes clause in the contract.
There isn’t much difference between arbitration and litigation. Both
are terrible options to resolve claims or disputes. Both methods are
expensive, time consuming, resource devouring and the outcome is
unpredictable. The decision is likely to be made by an arbitrator or
a judge with little or no construction experience beyond having Home
Depot build a lawn mower shed in his back yard.
The best
benefit of the threat of arbitration or litigation is that the
threat might drive a reluctant Owner or Main Contractor to the
negotiating table.
So-called “win-win” and “lose-lose”
scenarios are fairy tales; resolution is all that matters, and the
best way to achieve resolution is through negotiation.
Need
help with Claims, Disputes, Extras? Contact Southernstar Consultants
at: www.southernstar-consultants.com
©2007 Southernstar
Consultants, LLC. Revised January, 2014
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