Resolving Construction Contract Claims and Disputes
In construction, claims and disputes are almost inevitable. However, there are effective ways subcontractors can minimize the likelihood of disputes and resolve them quickly when they do arise. Here are some strategies to help subcontractors navigate these challenges.
A Real-World Example
Imagine you're a mechanical subcontractor working on an extensive piping project for a new addition to an existing manufacturing facility. Things are going well—you’re ahead of schedule, under budget, and the quality and safety of your work are excellent.
Then, on a Friday afternoon, the Project Director from the Owner’s Main Contractor mentions that he doesn’t see the pipe connections from your work to the adjacent facility in your schedule. You respond that those connections aren’t included in your scope of work.
Suddenly, you’re facing the potential start of a costly claim or dispute. If it’s a minor task, you might decide to complete the work as a gesture of goodwill. But if it involves major, high-strength welded pipe connections requiring special procedures, the costs and schedule delays could be significant. What was once a successful job could now turn into a nightmare.
The Importance of Scope of Work
The scope of work is the most critical part of any construction contract. It defines what each party is responsible for and minimizes misunderstandings that lead to disputes. A well-defined scope of work is your first line of defense.
A great tool to achieve this clarity is the scope of work matrix—a detailed line-by-line listing of all work items, specifying which party is responsible for each. This helps avoid confusion over responsibilities at work interfaces and clarifies that certain tasks, such as the pipe connections in the example, fall outside your scope.
Subcontractors should also include clarifications and exceptions in their proposals and final contracts to ensure everyone is on the same page. Taking the time to ensure the scope of work is well-documented can prevent claims and disputes before they arise.
Watch Out for the "Reasonably Inferred" Clause
Words like "reasonably inferred" can be a subcontractor’s worst enemy. Here's an example from a typical construction contract:
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.”
While it’s reasonable for clients to expect small, unlisted items to be included, the problem arises when they use "reasonably inferred" to push significant, unexpected work onto the subcontractor. In our earlier example, the Main Contractor could claim the pipe connections were "reasonably inferred," leading to a costly dispute.
Subcontractors should try to remove or clarify such vague language from contracts and ensure that all responsibilities are clearly defined in writing.
Keep Good Records – The Subcontractor’s Daily Log
Not all claims arise from scope issues. Delays, changing site conditions, or extra work requests from the Main Contractor or Owner can also lead to disputes. Keeping a detailed daily log of job activities, progress, and any developing issues is critical. This documentation will be invaluable if you need to justify a claim for additional costs or schedule extensions.
Consider investing in project management software to streamline daily reporting and ensure everyone in your company is aware of any potential issues. At progress meetings, make sure potential claims or disputes are noted in the minutes and keep pushing for resolution until the issue is addressed.
Remember: document everything—the sooner you raise an issue, the better your chances of resolving it.
Resolving Disputes – The Best and Worst Options
The best way to resolve claims and disputes is negotiation. It’s fast, cost-effective, and keeps relationships intact. Ensure your contract includes a disputes clause that requires both parties to attempt negotiation first.
If negotiation fails, mediation is a good next step. A mediator facilitates discussions but doesn’t make a final decision. Mediation works well when both parties genuinely want to resolve the issue and can often lead to a mutually acceptable outcome.
If negotiation and mediation don’t work, have a senior executive from each side step in to resolve the dispute. Again, this process should be required in the disputes clause of your contract.
The worst options? Arbitration and litigation. These methods are expensive, time-consuming, and unpredictable. The decision may be made by someone with little or no construction experience, and the result is often a lose-lose situation for both parties. The mere threat of arbitration or litigation can sometimes bring reluctant parties back to the negotiating table, but it’s rarely the best path to resolution.
Conclusion
Claims and disputes are an unfortunate reality in the construction world, but with proper preparation, they can be minimized or resolved before they become costly. Clear scope of work, diligent record-keeping, and strong negotiation skills are your best tools to avoid disputes. When issues arise, aim for negotiation or mediation to reach a resolution—arbitration and litigation should always be last resorts.
