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ProjectAberrationsCost Overrun, Change Orders, and Time Delay
Claims and Disputes
Samuel Labi and Fred MoavenzadehDepartment of Civil and EnvironmentalEngineeringMassachusetts nstitute of !echnolog"
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CLOSEOUTDEVELOPMENT OPERATIONSDESIGN,PLANNING
FEASIBILITY
Actual Start of Project
Organization
EstimationPlanning
Finance
Evaluation
Monitoring & Control
Project AberrationsChanges & Claims
Quality & Reviews
CLOSEOUT
Recall: The 5 Phases of ProjectManagement
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CLOSEOUTDEVELOPMENT OPERATIONSDESIGN,PLANNING
FEASIBILITY
Actual Start of Project
Organization
EstimationPlanning
Finance
Evaluation
Monitoring & Control
Project AberrationsChanges & Claims
Quality & Reviews
CLOSEOUT
Recall: The 5 Phases of ProjectManagement
This Lecture
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What is a ProjectAberration?
“Aberration” the act of departing from the right,normal, or usual course. (Merriam-Webster)
Cost Overruns Time DelayPerformance deviationsChanges in or! scope
Can lea to
! Change Orers
! Claims an "is#utes
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Cost
Overruns
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Cost Overruns
Original pro"ect cost # $%&' (inal cost )at completion* # $%+'
Cost overrun amount # $+' Cost overrun rate # %&&)+%&* # +&-
ahren and Ashe /%00&1 and 2!rit3a and 4abi/+&&51 found that cost overruns are causedmostly by6 pro"ect si3e difference beteen the selected bid and the
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Cost Overruns
The larger the pro"ect, the larger theamount and rate of cost overruns
9hy: The larger a pro"ect, the greaterthe comple;ity
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Change
Orders
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Change Orders
A ritten agreement that reduces, adds or modifiesthe or! from that set in the contract documents
<tandard practice allos the Oner the right to ma!echanges, as follos6 Addition or deletion from scope of or! )impact time and price* Alteration of methods, materials Changes in contract time or order of or! Correct errors
Contractor can re8uest a change Contractor suggestion to improve 8uality or or! progress =;cusable problems
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Change Orders
Changes contract scope of or!schedulecost
Often start as informal re8uest from Oner, butshould alays have clear paper trail Often contractor does not ait for formali3ation Often it is contractor that re8uest changes to recover poor
performance )not alays alloed>>>*
Contingency in budget often designed to fund COs
?nilateral and bilateral
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Change Orders Causes
Caused by OnerA= DefectsAmbiguities in
plansspecs <copedesign changes Delayed access to site <lo submittal approval
Caused by Contractors
4ate start @nade8uate resources <ubcontractorsupplier
failures Poor or!manship <chedule delay
=;ternally caused ?nforeseen site conditions egulatory changes
B oning
B Code
B =nvironmental
4abor disputes Third party interference
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O!ner "A#$% &nitiated Change Orders:'irected vs( Constructive
DIRECTED CHANGE ORDERS (SCOPE CHANGE) (ormal re8uest by oner to perform or! differing from that
specified in contract )modificationadditiondeletion* o 8uestion that a change occurred. Disagreement can center on
financial compensation
CONSTRUCTIVE CHANGE ORDERS Change order proposal is evaluated by oner ho authori3es
modificationB 'ust be claimed in riting by the contractor ithin specified time
B Claim is that something has implied a “de facto” change in contract re8uirementsB =;amples6 Defective plans E specifications, ambiguous plans, impossibility of
performance
'a"or source of dispute. Disagreement centers around theinterpretations of contract re8uirements, plans and specs
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Change Orders – Ho the! start
and ho the! end
Formal
Protest!
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Ch O d
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Change Orders )As*mmetries
@n many construction contracts, Oner alloed to ordercontractor to continue or! under modified terms even ifcontractor does not agree to the change order6
B “Proceed ithout hesitation”B Contractor may “or! under protest”
Contractors in favorable pricing positionB Oner may appoint “on call” contractor for changes
(or bidded pro"ects, oner in favorable contract position
B “Contract of adhesion” F ta!e it or leave it
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'o all Change Re+uests end asChange Orders?
Change re8uests can result in Change orders: Gilateral agreement to modify contract
terms
Construction change directives: ?nilateralcontract modification in the absence of complete agreement
Ho long does it ta!e:
$nitiation o%
change reuests
Agreement o%
Change reuests
Time
'y#ically (ery )ong'ime $nterval
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Are Change Orders Al!a*sCalled ,ust That?
T!"e o# $ontra$t%od&#&$at&on
Pr&vate
' Nonedera*Pu+*&$
edera*
,&*atera* Change Order “Contract Amendment”
“<upplemental Agreement”
Un&*atera* “9or! ChangeDirective”
“ConstructionChange Directive”
Change Order
T!"e o# $ontra$t
Part&es Invo*ved &n CO
Con#icting !erminolog"
ange r er ocumen s
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ange r er ocumen s )-am.les
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) )/..er Portion
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) )0o!er Portion
Ch 'i ti ' t
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Change 'irective 'ocument )A -am.le
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)-am.le /..er Portion
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)-am.le1 0o!er Portion
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T&M$ '$0A2
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'ela*
Caused by:
Contractor
Owner
Designer
Subcontractors
Suppliers
Labor Unions
Utility Companies
Nature
Causes:
Differing Site Conditions
Changes in Requirements or Design
Inclement eather Una!ailability of Labor" material" or
equipment
Defecti!e #lans or Specifications
Owner Interference
Time during hich some part of the construction pro"ect hasbeen e;tended or not performed due to an unanticipatedcircumstance.
<chedule used to estimate implications
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$3cusable 'ela*s
Causes of Excusable Delays:
Design problems
$mployer%Initiated Changes
Unanticipated eather
Labor Disputes&ire
Unusual Delay in Deli!eries
Una!oidable Casualties
'cts of (od )&orce ma*eure+
Delay that ill serve to "ustify an e;tension of thecontract performance time. @t e;cuses the party frommeeting a contractual deadline.
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4one3cusable 'ela*s
Nonexcusable Delays:
Una!ailability of personnel
Subcontractor failures
Improperly installed wor,
$quipment problems
Delay for hich the party assumes the ris! ofdelayed performance and its conse8uences to itson performance and the impact upon others.
bili 6
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oreseeabilit* 6$3cusabilit*
one;cusable6 4ate Delivery due to <tri!e <tri!e clearly foreseeable and contractor did not plan for it.
Pro"ect <tri!e one;cusable6 ?nfair labor practice of contractor can be
corrected by the contractor
=;cusable6 ?nfair labor practice of subcontractor can bebeyond the control of the contractor
m.ac s o one3cusa e
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m.ac s o one3cusa e'ela*
'ay be considered breach of contract
'ay "ustify the termination of the contract
4i8uidated damages may be assessed
ormally, e;tensions are not granted
=;pected to absorbed into the schedule
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Compensable Delay
Delay that could have been avoided by due care ofone party is compensable to the innocent partysuffering in"ury or damage as a result of the delay.
Goth cost and time may be compensable butsometimes only additional cost is Compensable.
A variety of approaches to estimate indirect costimplications
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Critical 'ela*s
=;tend the Pro"ect Completion
ot necessarily lin!ed to recovery ofcosts of delay
@mpact to cost of performance
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7Ri..le thru8 "-no!ball%e9ects of 'ela*
Often a delay has many indirect effects that are difficultto clearly 8uantify Poor coordination )e.g. ithin site E ith subcontractors* (atiguemorale problems
'ista!es due to overor! 4ost opportunities for or! elsehere @ndirect effects can cause costs, further delays,I
CP' Diagrams can7t 8uantify these effects F moresophisticated dynamic models are needed
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C0A&M- A4'
'&-P/T$-
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Claims 6 'is.utes
Can have ma"or impact on all aspects of pro"ectperformance and 8uality
2roing problem
eed to focus on many components of pro"ect Prevention 'anagement )for or! to continue during dispute* esolution
Has pervasive influence on pro"ect Trust'orale<peedAtmosphere
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Common &ssues aboutProject Claims
OnerBcaused delays )e.g. slo revie of submittals*
OnerBordered scheduling changes
Constructive changes
Differing site conditions
?nusual eather conditions
Orders to accelerate or!
4oss of productivity <uspension of or!
(ailure to agree on change order pricing
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Claims Progression
Claims begin as disagreements beteen Oner and Contractor )Contractor vs. subs*
Contractor must notify oner of disagreement Often done through formal letter of “protest”
B <ubmitted according to contract conditions
B (ormally responded to by oner or representative
@f cannot or! out mutually agreeable course of action,proceed to formal claim
l i b id d
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Can Claims be avoided?Minimied?
Oner should sho responsibility
Pro"ect manager should be fair and competent
=nsure good 8uality of the design
=nsure that Contract is ellBdesigned
<elect supplierssubcontractors ith care
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Minimiing Claims Res.onsible O!ner
<hould clearly conceive the pro"ect features upBfront
<ingle point of responsibility
Appropriate attention during construction <hould promptly and effectively revies contractor7 submittals
<hould ma!e realistic demands about schedules,costs, and product 8uality =.g., realistic tolerances and specs
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Minimiing Claims Com.etent1air PM
(air treatment of contractor during or!
'anagement of communication among parties
apid processing of paperor! 2ood supervision )via superintendents*
Careful documentation
Proactive detection of and resolution of disputes 'inimi3ation of adversarial inclinations
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;ualit* of the 'esign1 'esignollo!u.s
Plans and specifications should be Complete
?nambiguous
Consistent Coordination of oner E C' E A= responsibilities
esponsiveness of A= to submittals
egular site monitoring to ensure compliance iththe design
Juality inspections of <hop draings
Mi i i i Cl i C t t
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Minimiing Claims Contract'ocument 'esign
is!Bsharing )clauses in general conditions+ (loat onershipsharingK subsurface conditionsK damages due to
delaysK 8uantitiesK change processK ha3ardous materials
Contingencies listed
Dispute resolution strategy
Choice of delivery system 4ength of time to revie plans E specifications Degree of input into negotiating Designing contract
Mi i i i Cl i C t t
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Minimiing Claims Contract'ocument 'esign
<election mechanism @f alays selecting loest bidder, can be problem Gidding conte;t particularly !ey L of bidderscompetitors
Payment mechanism
Aggressiveness of delivery schedule
4i8uidated damages ellBreasoned
Claims for latent defects
Minimiing Claims Additional
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Minimiing Claims Additional-uggestions
Develop internal mechanisms to minimi3e ris! of disputes Draing a good contract document is most critical
B (igure out contingencies that may occur
Develop mechanisms to allo construction to continuehile disputes are being resolved Construction change directive
Avoid delays in communication
Confirm all oral agreementschanges in riting
'aintain daily record of or! in progress Date Time of arrival of materials =8uipment <ubs =.g. ?nit cost of material
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'is.utes
A formal disagreement beteen the contractor andthe oner
'is.ute ResolutionThree general approaches
Common sensee.g. notification of oner before claim filed
ContractBspecified termse.g. “Construction industry mediation rules”
Public case la
-.eci<c Mechanisms for 'is.ute
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-.eci<c Mechanisms for 'is.uteResolution
egotiation
<tandBin neutral
'ediation
Arbitration Dispute esolution Goards
4itigation
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4egotiation as a mechanism for dis.ute resolution
@nformal discussion
o costs
=fficient
'ay be brief
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-tandin 4eutral as a mechanism for dis.ute resolution
Mrd party ith relevant e;perience
Paid by both parties
Provides e;pert advice onBbinding )parties can still refuse to accept
the advice from the third party*
Mediation as a mechanism for dis.ute
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Mediation as a mechanism for dis.ute
resolution
Officially trained, recogni3ed mediator helps resolve Choice of mediator agreed upon by both parties
Typically voluntary )nonBbinding* Parties in dispute must come to agree on isdom of solution o authority to enforce verdict
'ediator adopts acti!e role 4ess formal meetings for counseling parties 'ore formal proceedings assist
2athering facts Clarify discrepancies
=conomical
Typically confidential
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Arbitrationas a mechanism for dis.ute resolution
Can be legally binding and enforceable @mposed on parties 'ore “final” than courts F no appeal possible in most cases, no e;planation of
aard re8uired*
(re8uently publicly !non
Typically “passive” F depend on formal presentations byparticipants
Advantages vs. litigation Arbitrator is e;pert in construction area (aster )months vs. years*
5 step process Agreement to arbitrate <election of arbiter Preparation for hearing Hearing Aard )ithin M& days of close of hearing*
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'is.ute Resolution =oards
'ore common for subsurface or!
M members )e;perienced constructionprofessionals* Oner appointee Contractor appointee A Mrd appointee mutually agreed by both parties
'eet regularly F already up to speed on pro"ect
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0itigationas a mechanism for dis.ute resolution
Typically a last resort
Public
=stablished case la
=;pensive
4engthy )5N years to reach trial*
resolution alternatives
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resolution alternatives
resolution alternatives
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resolution alternatives