Mitigating construction claims: Part three

by Carly Midgley | April 3, 2017 10:07 am

by Norman F. Jacobs, Jr.

Construction claims are becoming increasingly prevalent and expensive, and many are delay- or impact-related. Contractors are claiming cost due to increases in overhead, escalation, and overtime, as well as lost efficiency due to acceleration and out-of-sequence construction. Likewise, owners are counterclaiming for the increased cost of extended overhead and loss of income from the facility. This article, the third in a four-part series[1], delves into how the project manager can reduce claims by mitigating delays and monitoring project risk.

[2]

One way of reducing delay claims is not to build. Another is to build on schedule. A third way is to closely monitor progress, issuing excusable time extensions in a timely manner and carefully documenting non-excusable delays. Key elements relating to schedule and cost should be analyzed for inclusion in the contract specifications, as they can serve as a mechanism for determining responsibility for delay and calculating related damages. All schedule activity leads and lags should be similarly scrutinized.

The project manager is required to minimize delay through visibility of the critical path method (CPM) schedule. The greater visibility a schedule has, the more likely it is a spurious delay-related claim for extra costs may be successfully denied. Likewise, the murkier a schedule is, the greater the possibility is a claim will be put forth and an award for additional costs made.

Contract administration and claims avoidance

Construction project managers must take to heart recommendations on contract administration procedures if they are to help a project team successfully bring or defend against change order requests, RFI difficulties, claims, and litigation. These recommendations include guidance on document management[3], schedule analysis, cost control, and negotiation. During the bid phase, a contractor generally documents its approach to the project through an estimate breakdown, correspondence with subcontractors and suppliers, preliminary schedules, and site visits.

During the construction phase, documentation should be kept in the regular course of business. It is most important to create and maintain a record-keeping system—staff should keep daily records fully and accurately documenting project progress in the field and any significant problems. Project managers should ensure they have all agreements, changes, and directed extra work in writing, and make sure the individual directing any additional work is authorized to do so. All correspondence should be uniquely and consecutively numbered and maintained in a log, to facilitate analysis in the event of any schedule change or dispute.

This log must track everything, including:

• letters;
• e-mails;
• telephone reports;
• submittals;
• RFIs;
• change orders;
• proposals;
• time extension requests;
• payment requests; and
• CPM schedule updates.

Project managers should be aware the CPM schedule monthly update may necessitate major changes to the project schedule. To ensure proper documentation, the project manager should daily record actual start and completion dates of each CPM schedule activity, providing timely and adequate input. All change orders and time extensions should be added to this update, which must also record change orders, out-of-sequence starts, the status of RFIs, and the dates of any delay or impact occurrence.

The CPM schedule can help a project manager manage, plan, schedule, monitor, and control project time. It may also be used to define delays and impacts, when properly updated. Projects typically consist of a network diagram of activities, some of which must be completed sequentially and others concurrently. Every project has its critical path—the longest continuous ‘path’ of sequential activities, representing the total elapsed duration of the project. The activities on the critical path must be completed as scheduled, or a delay will occur, preventing on-time completion.

Daily reports, another important document generated during the construction phase, may be used to create an as-built CPM schedule. They should report the details of all activities worked on during the day, and must be factual, unbiased, legible, clear, comprehensive, and written in an objective, professional tone avoiding any statements that could discredit or embarrass the writer when read from an adversarial perspective. A submittal log should track the date any shop drawing was submitted and when it was approved, and meeting minutes should also be kept.

[4]

Project managers must critique all CPM schedule data, including the monthly updates, with their narrative report. It is also important to retain any hand-drawn schedules used by field personnel to explain how a particular portion of the work is to be constructed. Project managers should review all records of schedule input provided by consultants, subcontractors, owners, and architects, and any delay to or impact on the CPM schedule must be added to the schedule at the monthly update and explained in the narrative report.

These additional activities should be logically tied to the schedule activities they affect. One way to incorporate a delay to a schedule activity that has started would be to split the affected activity up, with the delay added in the middle, then perform a time impact analysis (TIA) showing the delay in a fragnet (i.e. a fragment of a CPM network).

The construction project manager must have administrative power allowing prudent negotiation of all changes and claims related to his or her project. Changes are inevitable on most projects, but the contract governs the timeframe and procedures for recovering cost and time. It is the contractor’s responsibility to prove the merits of a change-related claim, so he or she should prepare change order requests seeking all known impacts on cost and time. All too often, contractors put off doing detailed time extension analyses when preparing change order requests, generally because of a lack of qualified staff. This is not best practice, and often leads to disputes. Proving entitlement to a time extension is a prerequisite to recovering extended project overhead and other cost impacts.

To fulfill the responsibility of contract administration when involved in change management, the construction project manager must create and follow a methodical and systematic plan. Generally, change order claim negotiation will not be resolved in just one meeting, and a detailed negotiation schedule should be set when it becomes obvious more than one meeting is needed, including deadlines for any deliverables. If an impasse is reached in the negotiations, one should escalate the issues to the next resolution level immediately.

CPM schedule updates and cases

It may be helpful to consider construction change order claims and their impact on CPM schedules. In Watson Electric Co., v. City of Winston Salem, 109 N.C. App. 194, 426 E. 2d 420 (1993), the prime electrical contractor sued the city and general contractor for breach of contract. The construction had to be completed within 24 months of the notice to proceed, but was ultimately completed five months late. The general contractor was responsible for coordinating the work schedule of the various prime contractors to assure compliance with the project CPM schedule, but after the notice to proceed was issued, the city changed the work order protocol and began using an independent contractor to provide and maintain the CPM schedule instead.

[5]

The plaintiff alleged the city’s change in work orders and its failure to coordinate and administer the project delayed the work of the general contractor, which in turn delayed the plaintiff and necessitated time extensions. This required the plaintiff to incur acceleration costs for additional resources and overtime. The court held the city’s refusal to grant time extensions could support a finding the contract had been breached.

Similarly, in Daley Construction, Inc. v. Garrett, 5 F. 3d (Fed. Cir. 1993), the contractor appealed the decision of the Board that denied its claims for a delay of 518 days, attributable to the government’s defective specifications. A CPM schedule analysis was provided, but was improperly conducted by the project manager, causing the court to affirm the denial of the claims. (Also see Westhold v. U.S., Fed. Cl. 172 [1993].)

Finally, in Arnold M. Diamond, Inc., v. Dalton, 25 F. 3d 1006 (Fed. Cir. 1994), the prime contractor was awarded a contract for renovations of a pier at a naval station, and a portion of the work was performed by a subcontractor. All contract parties used a CPM schedule to manage the project. Many delays were incurred and change orders were issued, but no time extensions were approved. The prime contractor was awarded damages.

Project risk and constraints

Human beings are a complex mixture of rationality and irrationality, but when it comes to making decisions and managing risk, we seem to favor thinking over feeling. Decision-making and risk management should be a structured process to reach a result that can be fully justified and defended, yet excluding the non-rational can deny us an important source of information, particularly when dealing with uncertainty. Is there a place for intuition in decision-making or risk management?

Risk management refers to the art of identifying, responding to, and controlling project risk in the manner that best achieves the objectives of all participants. This can be done by making a complete analysis before responding to any risk, and by fully critiquing all contract documents to define contractual liability.

Although the judicious project manager should manage project constraints and document their inherent risk, reviewing a plan to detect problems and make improvements generally ought to be a brief exercise done toward the end of initial planning. It should not involve obsessively applying every single project management practice in an endless quest for the flawless plan—a process sometimes called ‘analysis paralysis.’ The topic here is realistic, common-sense project analysis regarding constraints. The principal objective of reviewing the plan is to find defects and omissions, deal with unmet constraints, and quickly seek an improved plan using what is currently known about the project.

This begins with reviewing and examining all contract documents to determine where project risk is allocated. When most people think of risk, they tend to relate it only to highly hazardous things, but many risks are so commonplace they are easily overlooked. The project manager must critique all exculpatory clauses in the contract documents to evaluate who has the risk on a particular project.

Analysis is a risk management process step involving the quantification of the effect of all uncertainty on a project. This is usually done by first identifying risks, then quantifying each one’s probability of occurrence and potential severity of impact.

Risk analysis methods include:

• qualitative models, which are based on project characteristics and historical data;
• risk models, which assess the combination of risk assigned to the total project; and
• probabilistic models, which combine risks from various sources and events.

Risk management

[6]

Contractual risk transfer is one form of risk management, and has been employed in the construction industry for many years. It involves the allocation or distribution of the risk inherent to a construction project among contracting parties.

Risk allocation in the construction industry is established by the construction contract, so the importance of this contract cannot be over-emphasized. Ideally, the parties in the contract will assign risks and liabilities to the party best-equipped to manage and minimize them. The contracting process provides the vehicle for each party to negotiate, define, and limit its rights in accordance with its goals. The risk and responsibilities associated with a specific project must be clearly allocated within the contract, which serves as a legal framework between the parties and will establish which party has assumed or negated a particular risk in connection with the project.

A number of factors are key to successful risk management:

1. Risk identification.

Prior to negotiation, each contract party should assign an experienced person to identify areas of contractual risk.

2. Impact analysis.

Given risks influence all aspects of a project, each party should quantify the impact a risk will have on the project cost, schedule, quality, and profit.

3. Response system.

Each party should develop a process for formulating risk management, mitigation, deflection, and contingency planning strategies.

4. Application of risk management systems.

The contract parties’ risk management strategies and goals should be reflected in the language of the contract. In risk transfer negotiation, parties should remember if they ask for nothing, they get nothing.

The risk management plan is the product of risk mitigation. It should include a list of action steps to:

1. Eliminate or reduce the probability of a threat occurring.
2. Mitigate the impact of the threat if it does occur.
3. Assure or increase the probability of an opportunity occurring.
4. Increase the impact of an opportunity if it does occur.

In addition to action steps, the plan should include ‘trigger points’ indicating when each step is to be executed. It should also define what to monitor to determine the trigger points, and may require action to reduce, transfer, or eliminate risk.

One of the key places to examine risk in the contract documents is in any indemnification clauses. Indemnification, also known as an agreement to hold harmless, may be defined as the obligation of one party (i.e. the indemnitor) to reimburse another party (i.e. the indemnitee) for the losses the latter incurs or damages for which it may be held liable. Indemnification issues arise frequently in construction litigation. Their impact can be significant, because indemnification often shifts the burden of loss or responsibility from one party to another.

Although the contract serves as the principal risk management vehicle, parties should begin managing and minimizing risk long before the contract is signed. To avoid inequities, all parties should come to the negotiating table with some idea of their risk management goals. Unfortunately, most construction contract parties pay insufficient attention to risk management process requirements. This process requires a systematic and practical methodology, and contract parties must acquaint themselves with the risks they are to manage, as well as developing specific mitigation strategies. A good place to begin with contract documents and risk management is AIA A201, General Conditions of the Contract for Construction. Project managers should evaluate each word related to risk.

The next and final article[7] in this series discusses the project manager’s role and responsibilities as an expert witness.

[8]Norman F. Jacobs, Jr. formed Jacobs Consultant Services in 1981 to provide a variety of construction services including cost management, schedule control assistance, project management, and claims preparation and negotiation. Prior to this, Jacobs provided design-build, construction management, and general contracting services for over 30 years, in a variety of capacities ranging from estimator to president and board member. He has chaired Virginia’s Associated General Contractors (AGC) Documents Committee, has presented seminars on construction legal subjects with the Virginia Bar Legal Committee, and is a past president of the CSI Richmond Chapter. Jacobs can be reached via e-mail at JCSCPM@aol.com[9].

Source URL: https://www.constructionspecifier.com/mitigating-construction-claims-part-three/

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