Best Practices: How to Minimize Construction Claims

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While sometimes a claim is inevitable, there are steps you can take to minimize them

Major construction projects are somewhat notorious for generating conflicts and causing disputes that may lead to claims. These claims can involve any of the project’s participants—from owners, architects, and engineers, to general contractors and subcontractors—as either the claimant or the party who receives the claim. While sometimes a claim is inevitable, there are steps you can take to minimize them.

Construction Claims Defined

A claim is defined as a demand for damages or for specific performance under a legally binding contract, which was not anticipated under the original terms of the contract. These damages may include compensatory or monetary compensation, time, or other compensation necessary to make the claimant whole. A claim is also simply something that one party believes is owed by another party. For example, a change order is not a claim, but a disputed change order can be a claim.

The Cause of a Construction Claim

Construction claims may arise from a number of events or aspects of a construction project including:

  • Failure to follow the terms of the contract or receive payment for services rendered
  • Failure to utilize appropriate lien waivers or to carefully read lien waivers before signing them
  • Unforeseen circumstances, such as site conditions, weather related events, labor strikes, or a significant downturn in the economy
  • Delays related to obtaining elements critical to the project’s progress, such as project drawings, key permits, access to the construction site, building materials, or specialized construction equipment
  • Missing, poorly developed, or non-executed contracts, as well as contracts that transfer significant risk to the contractor, such as fast-track or schedule-driven projects
  • Overly aggressive construction schedules and failure to meet targeted dates and milestones
  • Unapproved, unauthorized, and/or non-communication of changes to the scope of a project
  • Inadequate drawings or technical specifications
  • Outside interference in the construction work, errors and/or omissions, and performance or quality related issues
  • Poor project management and/or lack of owner involvement in the project
  • Projects with aggressive costing that is significantly less than current market norms and other profit pressures on contractors

Proactive Steps to Minimize Claims

Successful deal, male architect shaking hands with client in construction site after confirm blueprint for renovate building.

While the events and project features that can lead to construction claims aren’t always preventable, there are a number of strategies and best practices that may minimize the likelihood of a construction claim arising. At a minimum, these best practices can reduce the time and complexity required to resolve the claim. These claim reduction strategies include both proactive measures to implement during the planning of the construction project, as well as project management strategies to utilize throughout the construction process:

  • Utilize functionally integrated project teams throughout the project timeline, including the contracting process, so that all parties are on the same page before construction begins—reducing the likelihood of errors and oversights
  • Define a project’s scope in an unambiguous and detailed manner to encourage more accurate bidding, cost, and time estimates, along with fewer changes to a project’s scope during construction (therefore reducing the number of events that could lead to claims)
  • Utilize appropriate legal expertise to tailor key contract clauses to the construction project at hand and to help establish a clear understanding of each clause’s impact and meaning to all parties. These important contract clauses could include:
    • Changes to the contract (scope, cost, time, approval authority, or communication process)
    • Scheduling of the project and key dates (method of scheduling, level of detail, project milestones, project completion date, progress reporting, incorporation of changes, frequency that the schedule should be updated, and communication process)
    • Process to extend the timeline for key dates and milestones as the project progresses (notification of a delay, substantiation of the delay, and liquidated damages)
    • Dispute resolution process (notification of a dispute, negotiation within the project team, identification of a neutral third-party, arbitration, mediation, and other alternative methods to litigation)
    • Force majeure (definition of events, process for when an event occurs, suspension of work, and relevant time period)
  • Devote ample time and resources up front to the planning of the construction project
    • Utilize qualified professionals
    • Require detailed design, specifications, and drawings, including percentage of completion
    • Establish a thorough understanding of site conditions at the onset of the project
    • Create, implement, and utilize a logical and user-friendly schedule with significant detail that links back to the project estimation and bid documents
  • Clearly outline and define the roles and responsibilities of the parties involved in the construction project, including who can submit, authorize, and approve change orders; grant extensions of time to the project schedule; make decisions; resolve disputes; and more. This makes the administration of the project more efficient and can potentially minimize claim occurrence
  • Contractors should implement clear controls and detailed frequent reporting in a logical understandable format to the project owner’s satisfaction

Project Management Strategies to Minimize Claims

  • Contractors can send a preliminary notice to the owner shortly after work starts that includes information about who is working on the site, the work performed, any materials provided, an estimated value of the work, and when work started
  • Submit accurate and appropriately detailed payment applications and invoices in a timely fashion. Pay applications are often rejected when they contain incorrect completion percentages, incorrect math, or lack documentation. Follow the schedule set forth in the contract for frequency of payment requests (usually weekly, bi-monthly, or monthly)
  • Management of change orders
    • Clearly identify the scope of the change and assess the impact to schedule and budget
    • Follow the details in the contract for processing and acceptance of change orders, then process, approve, and execute change orders in a timely manner
    • Do not move forward with the work called for in the change order without written authorization
    • Create and manage a change order registry, which documents all change orders received, accepted, and executed
  • Active management and use of the construction schedule
    • Utilize a single project schedule for a consistent, reliable source of project information for all involved parties
    • Derive the schedule directly from the contract and its provisions
    • Utilize a logical orderly process for schedule updates derived by any change orders, changes in dates, construction sequence, or others.
  • Maintain and logically organize all project documentation for facilitation of prompt payments and quick dispute resolution and claim avoidance. Documentation maintained should:
    • Include all project documents and communications organized in a logical fashion (such as by party name, document type, date, etc.)
    • Confirm conditions encountered and directions received
    • Document expressed objections, as well as action required, contemplated, and taken
    • Include notifications sent per the contract, extra work and change orders, including requests and approvals, requests for extensions of time or accelerations thereof, and the owner’s formal complaints and the respective party’s responses thereto
  • Clear and frequent communication and effective coordination between the parties involved
    • While frequent, clear verbal meetings are important and should be attended by all parties, do not rely on verbal communication alone; make sure every verbal communication is paired with a formal communication method to document attendance and confirm all decisions made and information provided
    • Utilization of and insistence on active participation in formal communication methods regardless of participation in or preference for informal methods
    • It is important to remember that many claims begin with a miscommunication event
  • Owners should implement continuous monitoring and early identification of red flag warning signs along with a prompt response to any identified. These warning signs may include:
    • Missing project milestones
    • The receipt of significant change orders either in volume or dollar amount
    • Job site morale issues and tension between the parties
    • Requests are not answered in a timely manner or are not taken seriously
    • Approved project changes are not implemented in a timely manner or are ignored
    • Significant changes to the approved work sequence and scheduletwo contruction workers shaking hands with a smile on their face and helmets on their heads

Ultimately, minimizing disputes and construction claims involves the adoption of a proactive, multifaceted approach beginning with project planning and continuing throughout the construction process. Closely following the terms of the agreed-upon contracts is a good starting point. In addition, maintaining a collaborative environment with clear lines of authority and frequent communication, while utilizing a logically ordered working database of all project documents and communications will go a long way towards reducing the incidence of claims in most construction projects.

To learn more about minimizing your risk of a construction claim, contact our team.

This publication contains general information only and Sikich is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or any other professional advice or services. This publication is not a substitute for such professional advice or services, nor should you use it as a basis for any decision, action or omission that may affect you or your business. Before making any decision, taking any action or omitting an action that may affect you or your business, you should consult a qualified professional advisor. You acknowledge that Sikich shall not be responsible for any loss sustained by you or any person who relies on this publication.

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