Clearing up changes, claims, and disputes

When properly implemented, the process for claims and disputes supports the orderly, timely resolution of construction issues on which the owner and contractor disagree. Conversely, when claims and disputes are improperly implemented or when their contractual procedures are ignored, the project can become very challenging; attorneys inevitably become involved, costs increase, profitability plummets, and relationships and reputations—not to mention the stress level of the individuals involved—can suffer. When one claim or dispute follows the next, bad feelings can ensue, making the balance of the project even more difficult.

Fortunately, when the rules are understood and followed, difficult matters will be successfully resolved faster, for less cost, and with less stress.

Location in the contract documents
CSI’s MasterFormat does not include any document number/title assignments in the Specifications Group (Divisions 01−49) for claims and dispute resolution procedures. Instead, the processes for filing and resolving claims, and for dispute resolution, are set forth in the construction contract’s General Conditions, which may be modified or augmented in the Supplementary Conditions.

The standard contract documents of the American Institute of Architects (AIA), Engineers Joint Contract Documents Committee (EJCDC), Design Build Institute of America (DBIA), and others are so organized. This is further supported by AIA A521/EJCDC N-122, Uniform Location of Subject Matter.

The progression from a change to a claim to a dispute
The journey to a dispute on a construction project usually starts simply—when an issue arises that prompts a change in the work or a difference of opinion between the parties (owner and contractor). This usually results in a ‘change issue,’ which often arises as a contractor-prepared ‘change proposal’ submitted to the architect or engineer (A/E) for review, negotiation, and ultimately a recommendation to the owner on whether to accept the change.

The result is typically a change order—a contract document that, when executed by the parties, changes the contract price, contract times, or both, and makes other changes to the contract. Unless stipulated in the specifications, the contract documents typically do not place restrictive time frames on change issue and change order processes.

Either party may file a ‘claim’ against the other. Claims often arise from failed efforts to reach an amicable, negotiated settlement of a change issue, but can happen without an initial change proposal. The matter becomes a claim when the parties have a substantial disagreement and submit it for resolution via a formal process established in the contract documents. Claims resolutions typically have stipulated time limits in which the claim is to be submitted, evaluated, and a decision rendered on entitlement (i.e. who gets what in the resolution of the claim).

Claims should typically escalate beyond the project manager level in the contractor’s, owner’s, and A/E’s organization. Often, higher-level personnel with more experience will become involved to resolve the impasse. The end of the claims process is a written decision on entitlement.

Should either party (owner or contractor) decide not to accept the decision on entitlement, the claim may be escalated to become a dispute. By this time, each party typically has its attorneys and executives involved and the dispute resolution process becomes more expensive, stressful, and challenging. Like claims, dispute resolution typically proceeds in accordance with a process indicated in the contract documents, which often require using the rules of a particular, industry-recognized dispute resolution procedure. However, there are various alternative approaches to dispute resolution.

Claims and most types of alternative dispute resolution are performed within contractually stipulated times so they can be resolved as promptly as possible based on the merits of the particular claim or dispute. Often, the longer a claim or dispute goes unresolved, the potential increases for other issues to crop up and muddy the waters around the claim or dispute, reducing the potential to resolve the matter on its own merits.

To summarize, a matter can arise initially as a change issue, escalate to a claim, and then become a dispute.

Consistently complying with the contractual procedures is always important. Casting the processes aside for convenience, or due to ignorance, may result in a later inability to enforce other provisions, particularly those that would normally allow rejection of a claim for procedural non-compliance.

Change issues
Until the release of the 2013 edition of EJCDC C-700, Standard General Conditions of the Construction Contract, the process for the parties to amicably negotiate a change issue was not memorialized in the standard General Conditions widely used in the industry. Such procedures, when specified at all, were usually in the Division 01 Specifications, such as Section 01 26 00−Contract Modification Procedures. More typically, they were merely assumed and some type of change order process was usually ‘common knowledge’ on many projects across the industry.

EJCDC C-700 (2013) established a procedure, largely at Paragraph 11.06, for the parties to resolve change issues without incurring the stigma of a ‘claim.’ Among other requirements of this provision, change proposals are to be submitted by the contractor within 30 days of the event giving rise to the change, and the engineer is to evaluate the change proposal impartially and render a written decision within 30 days.

EJCDC’s change process is similar to that formerly used for claims in EJCDC C-700 (2007 and earlier) but is implemented by the owner’s, contractor’s, and engineer’s day-to-day project personnel, typically without the involvement of attorneys. As of this writing, no other standard General Conditions in wide use in the industry have a detailed procedure for resolving change issues at the project team level.

The claims process
The process of submitting and resolving a formal, written claim is addressed in:

• AIA A201, Standard General Conditions of the Contract for Construction (2007), in Sections 15.1 and 15.2;
• EJCDC C-700 (2013), Article 12; and
• DBIA 535, Standard Form of General Conditions of Contract between Owner and Design-Builder (2010), Sections 10.1 through 10.2.3.

How does the receiving party know when it’s a claim, rather than correspondence continuing the difference of opinion on a change issue? A claim should be clearly identified as such, preferably including in its opening paragraph words such as:

This is a Claim submitted in accordance with Paragraph [citation] of the General Conditions.

Using such wording puts the receiving party and other stakeholders, such as the A/E, clearly on notice.

When the receiving party is uncertain whether a written demand for a change in price, time, or other relief under the contract is, in fact, a formal claim, the intent should be clarified immediately in writing, such as requesting the claimant to specifically indicate in writing whether the item is a “claim in accordance with Paragraph [citation] of the General Conditions”. This will reduce the potential for misunderstandings and help ensure the claim is handled in accordance with the contract’s requirements. Properly identifying the matter as a claim is an important first step in the claims process.

Claims are typically a ‘notice’ under the contract documents, and thus are to be submitted in accordance with the notice provisions of the General Conditions (i.e. AIA A201 [2007], Section 13.3; EJCDC C-700 [2013] Paragraph 18.01, and DBIA 535 [2010] Section 13.8). Such provisions require notices be delivered in one of a few specified ways, including the options of certified mail/return receipt requested, and in-person delivery at the recipient’s business address indicated in the owner-contractor agreement. However, claims are also commonly delivered by means other than the contract’s notice requirements, and care should be taken to deliver such notices properly lest they be considered invalid due to the technicality of their delivery method.

The 2007 (and earlier) editions of both AIA A201 and EJCDC C-700 stipulated similar approaches for resolving claims, whereby the claimant submits its claim notice, usually within 30 days of the event giving rise to the claim, to an initial decision-maker (IDM). In AIA’s 2007 documents, the independent third-party person or firm serving as the IDM is to be identified in the owner-contractor agreement; otherwise, the architect serves at the IDM. EJCDC’s documents have never used the term ‘initial decision-maker,’ although prior to the 2013 edition of EJCDC C-700, the engineer served in the same role as AIA’s IDM in the claims process.

The IDM essentially serves as investigator, judge, and jury in the claim and renders a written decision on entitlement. The time limit for the IDM to issue its decision is usually 30 days after the receipt of the information submitted by the claimant.

For the claims process to be fair and to reduce the potential for expensive disputes, it is very important the IDM render its decisions impartially, which can be challenging when the IDM is the A/E and the owner is its client. Such circumstances can set up expectations by the owner that, in its decision on the claim, the A/E will look more favorably on the owner’s position (possibly even being pressured to do so)—potentially introducing bias into the decision on entitlement.

To provide a playing field that is more-slanted in the owner’s favor, some owner-prepared, non-standard contracts set up the owner itself as the IDM, which many contractors understandably consider to be unfair. (Such provisions are often drafted by the owner’s attorney, and attorneys typically champion their client in a partisan manner because it is their job to do so.)

In an effort to reduce the architect’s inherent, potential conflict of interest, AIA’s 2007 documents created the option for the IDM to be an independent third party, although the potential for the IDM to be pressured by the owner still exists.

EJCDC C-700 (2013) took a more-radical approach to resolving such potential conflicts of interest by removing the IDM (i.e. the engineer) altogether from a formal role in the claims process, and requiring the owner and contractor to negotiate the claim directly and in good faith. EJCDC’s approach allows the engineer to continue to advise and assist its client, the owner, in the claim without any inherent conflict of interest. The claims resolution process under DBIA 535 (2010) is similar to that of EJCDC, but such arrangements for claims resolution are fairly common in design-build contracts.

Given the 2013 EJCDC C-700’s claims process does not stipulate a time limit in which the claim must be resolved, the negotiation between the parties may take as long as the parties mutually desire. However:

• at any time after initiation of a claim, by mutual agreement, the parties may submit the claim for the first form of dispute resolution (i.e. mediation);
• at any point in the claims process, the receiving party may reject the claimant’s claim and thus set the stage for the claimant to file for dispute resolution; and
• if the receiving party does not respond to the claim within 90 days, in accordance with the General Conditions, the claim is deemed to be denied in whole, unless the claimant submits written notices for dispute resolution.

Optimally, the individuals in the A/E’s organization that reviewed and rendered a decision on the change proposal that led to the claim should not be the only people serving as the IDM or assisting or advising the owner on the claim for the same issue. Claim resolution assistance may be enhanced by involving one or more of the A/E’s experienced staff members or executives who are not part of the A/E’s project team on a daily basis. Alternatively, either party may elect to retain the services of a claims consultant, which is a specialized form of consulting practice in the construction industry. Claims consultants assist their clients in evaluating claims and eventually reaching settlements.

Dispute resolution
Dispute resolution may be initiated by either party on completion of the claims process. Notice of intent to pursue dispute resolution is to be filed with the other party within a set time (usually 30 days of the end of the claims process) and must be transmitted in accordance with the notice provisions of the contract.

Typically, A/Es have has no formal role in dispute resolution, although they may continue to provide technical services to the owner in relation to a dispute. Such services, when performed, are typically ‘additional services’ entitling the A/E to additional compensation, although the potential of recovering such costs is certainly reduced when the dispute arises from alleged design negligence.

There are several alternative forms of dispute resolution, broadly grouped into two types: non-binding and binding. The further down the road an issue progresses (i.e. change to claim to dispute), the process of resolving the issue becomes progressively more expensive, with litigation in court usually being the most-costly approach. For this reason, many entities, including AIA, EJCDC, and DBIA (via their respective standard General Conditions), favor non-binding methods as the first step in dispute resolution by requiring mediation (which is non-binding) as a condition precedent to initiating binding dispute resolution.

Mediation entails an independent third-party facilitator who endeavors to discover the facts about the claim and works to help the parties achieve a negotiated solution. Standard General Conditions typically stipulate mediation is to be concluded within a specified time, usually 60 days. Mediation is conducted in accordance with established rules, which are typically referenced (but often not repeated) in the construction contract documents. The construction documents should indicate how the parties will share the costs of the mediator’s services. A separate agreement will need to be executed between the mediator and the party hiring the mediator.

EJCDC C-700 (2013) does not stipulate a particular mediation process and model language for mediation is not included in EJCDC C-800 (2013), Guide to the Preparation of Supplementary Conditions. Thus, either the specifier (as directed by the owner) may indicate the required mediation rules in the Supplementary Conditions using project-specific language, or the approach can be left for mutual agreement by the parties when and if necessary.

AIA A201 (2007) requires using the Construction Industry Mediation Procedures of the American Arbitration Association (AAA). DBIA 535 (2010) allows the parties to agree on mediation rules but requires that, should such an agreement be impossible, AAA’s Construction Industry Mediation Procedures are to be used. As noted below, entities other than AAA also provide mediation services.

If the dispute is not resolved through mediation, depending on the requirements of the contract documents, final (binding) dispute resolution can be accomplished by any of the following means:

• implementing the final dispute resolution procedures specified
  (if any exist) in the contract’s Supplementary Conditions;
• implementing another form of final dispute resolution acceptable to both parties; or
• litigating in a court of competent jurisdiction.

Binding dispute resolution is a process in which the dispute is resolved without appeal by the parties—it is the last stop on the change issue-claims-disputes railroad. The contract documents will often stipulate a binding form of final dispute resolution. EJCDC C-700’s (2013) provision on final dispute resolution merely refers to the approach (if any) specified in the Supplementary Conditions, and EJCDCC-800 (2013) includes model language for binding arbitration.

AIA A201 and AIA A503, Guide for Supplementary Conditions (2007), as well as DBIA 535 (2010), allow the parties to either agree on the method of final dispute resolution or to use AAA’s Construction Industry Arbitration Rules.

AAA recently published its updated Construction Industry Arbitration Rules and Mediation Procedures, which became effective on July 1, 2015, and is now available online for free. While AAA is possibly the most commonly used mediation and arbitration services provider in the United States, other entities providing similar services include Judicial Arbitration and Mediation Services (JAMS), the CPR Institute for Dispute Resolution, and other local dispute resolution service providers. Those evaluating alternative providers of such services may find fees to be a differentiating factor.

Aside from mediation and binding arbitration, other processes are available for dispute resolution, including disputes review board (DRB), non-binding arbitration, mini-trial, and, where enabled by law, judicial reference. DRBs—a non-binding form of dispute resolution—appear to be increasingly popular, especially on larger projects. A DRB is a panel of experts, usually three in number, retained by the owner and contractor to meet periodically (often, monthly) during the construction phase to review change issues and claims and offer independent opinions that help the parties to reach agreements.

No entity provides model language for all possible dispute resolution options. A recent addition to the industry’s model language arsenal is ConsensusDocs 200.4, DRB Addendum Specification (2013), used for requiring a DRB as the means of resolving disputes, and ConsensusDocs 200.5, Three-party Agreement for Dispute Review Board (2013), used as the basis for the owner, contractor, and DRB members to enter into an agreement for DRB services.

Although litigation in court is a type of dispute resolution, it is frequently viewed as the least-attractive option because it can be protracted due to the various levels of appeal, is very expensive, has the greatest potential for undesirable publicity, and results in the parties losing control of the outcome. However, some public owners may prefer litigation in their local court, hoping for more-favorable outcomes from local judges and juries.

On multiple occasions, this author has encountered contractors who threatened a lawsuit upon denial of a change proposal—essentially proposing to bypass the claims process and non-binding forms of alternative dispute resolution. In such cases, the owner and A/E should keep their cool and remember to enforce compliance with the claims process and dispute resolution procedures in the contract documents. This can help keep emotions in check and contribute to the timely and proper resolution of disagreements.

Conclusion
This article has presented the basic process by which a change issue can become a claim and, subsequently, a dispute. The standard contract documents of AIA, EJCDC, and DBIA deal with claims and disputes in ways that are generally similar, but nevertheless allow differing levels of flexibility for the parties.

When implementing a construction project, it is important to understand the differences between
a change issue, claim, and dispute. One must be aware of, and comply with, contractual procedures for filing and resolving such matters, and to involve others outside the day-to-day project team as the matter escalates. cs

Kevin O’Beirne, PE, CSI, CCS, CCCA, is a principal engineer and manager of standard construction documents at ARCADIS in Buffalo, New York. He is a professional engineer licensed in New York State and Pennsylvania with 28 years of experience designing and constructing water and wastewater infrastructure. O’Beirne was the FY2014−2015 chair of the Engineers Joint Contract Documents Committee (EJCDC) and is a member of CSI’s MasterFormat Maintenance Task Team. He can be reached via e-mail at kevin.obeirne@arcadis.com.