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
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