Claims are the number one enemy of a successful construction project. Of course, owners don’t like getting claims, and it is important for contractors to minimize claims and resolve them quickly in order to preserve profit and reputation.
Being proactive when it comes to claims management can save headaches and money for a construction business in the long run. How can contractors manage the claims process, starting on day one with bidding a job?
Bid a job realistically and carefully
Every contractor wants to bid low in order to win a job. However, it is risky to bid a job knowing that the price bid might be unrealistically low. Realistic bids lead to realistic contract prices and expectations, and less pressure to make claims at the start of the project. If owners feel they are only getting claims for truly unforeseen events, such as force majeure and unknown hazardous materials, they are more likely to be open to compromise with the contractor when resolving claims. Starting with a reasonable contract price and a contingency that is available to the contractor can reduce the risk of claims on day one.
Carefully negotiate the contract language regarding claims
It is important to study the fine print regarding the claims resolution process in a contract. Many contracts require a contractor to make claims within a certain period of time or else the claims are deemed waived. Contractors should be certain they can live within the contract requirements and have a right for an extension of the claims period where they need more time to determine the actual cost or schedule impact of an event.
It is also important to review the list of events upon which they can base a claim and ensure that it is sufficiently broad. Ideally, a list of excusable events should include language, such as “or any other event not reasonably foreseen by the contractor.” Also, be clear about whether any weather delay days are built into the contract price and schedule to avoid future disputes on that point. Finally, it is helpful to include a contractual requirement that the owner respond to claims within a certain period of time. This requirement will help ensure that claims are resolved in a timely fashion and do not result in unnecessary delays.
Know the contract and manage it well
Be sure that project management staff understands what the contract requires regarding claims. It is critical to comply with any timing requirements for making claims. Contractors should make all claims in writing, including the provision of all required backup documentation. It can be a mistake to rely on verbal discussions with the owner or the architect regarding events that are causing a delay or cost increase, because the contractor could be deemed to have waived claims that are not made in writing in strict compliance with the contract.
Additionally, if there is an allowance in the contract for events like weather delays, be sure to notify the owner each time one of those days is used, so there are no surprises when a claim is made after the allowance is exhausted. It is critical to have a good system for tracking events that trigger claims and maintaining the records that prove the cost or schedule impact that results from these events. If there is a dispute, it is more likely to be resolved in a contractor’s favor if it can quickly produce an organized file of documentation that substantiates the claims.
Don’t let claims linger
One of the challenges of resolving disputed claims is the pressure to keep the project on track. However, by pushing off claims resolution until the end of the job, a contractor may lose bargaining power or even inadvertently waive the claims. It is important to exercise discipline to require timely claims resolution. Consider including an expedited dispute resolution process in the contract to be used with claims arising during the course of the project. For example, the parties can appoint an independent expert to rule on claims, or agree to expedited mediation or arbitration processes. If claims resolution is delayed until the end of a job, be sure that the owner acknowledges it in writing and agrees that claims have not been waived.
All parties benefit from a clearly constructed claims and disputes resolution process. By delivering a fair and realistic bid at the beginning of the process, contractors are better positioned to maintain positive relationships with owners who are less likely to feel as if they are being taken advantage of based on minor claims beginning at the very start of the project. Strict adherence to the contract requirements related to the excusable events upon which contractors may seek cost and schedule relief ensures that contractors do not inadvertently waive their rights to seek future relief.
Contractors must maintain a well-documented and organized record of all claims to preserve their rights to seek relief under the applicable process. Taken as a whole, all of the steps above help preserve the contractor’s reputation and relationships by setting realistic expectations for both the contractor and the owner, and avoiding surprises during contract administration.