Contracts & Claims Management Workshop (Session-1)

CONTRACTS & CLAIMS MANAGEMENT TRAINING WORKSHOP

SESSION-1

AUGUST 06, 2011

Conducted By:General Manager ContractsEngr. Tahir B Mirza

OBJECTIVES OF TRAINING WORKSHOP

1. Exchange of knowledge for practical purposes2. Capacity building through exchange of knowledge

to meet futuristic challenges3. To evolve & implement strategic approach on all the

projects across the organization.4. To prevent drain of hard earned revenues due to

time barred claim cases5. To implement proactive management practices

rather than reactive responses6. To achieve systematic data tracking & report

generation on organizational basis

TOPICS PRESENTED1. RULES OF ENGAGEMENT FOR PROJECT

EXECUTION & CONSTRUCTION CLAIMS

2. CONSTRUCTION CLAIM IDENTIFICATION & RECORD KEEPING GUIDELINES

3. CONSTRUCTION CLAIMS DOCUMENTATION GUIDELINES

RULES OF ENGAGEMENT FOR PROJECT EXECUTION & CONSTRUCTION CLAIMS

INTRODUCTIONThere are always certain assumptions that both the contractor and the owner possess when entering into a construction contract. These assumptions do not necessarily coincide with one another.

THE CONTRACTOR'S SIX RULES OF ENGAGEMENT1. Read and know the contract documents2. Develop a comprehensive and accurate construction schedule3. Prepare accurate and comprehensive daily construction

reports4. Notify the owner of issues5. Keep track of costs6. Maintain precise documentation


THE CONSTRUCTION CLAIM1. A Contractor’s claim may be defined as a legitimate request for

additional compensation of cost and time as per terms of the contract and the relevant contract act.

2. Even if both the contractor and the owner follow their respective rules of engagement, the resulting project is not assured to be claim free. A construction claim, on the other hand, does not necessarily result from disputes among the parties.

3. A claim can develop concurrently with an event that disrupts the construction progress, or it can develop after the results of the disruption are thoroughly reviewed and all cost impacts are evaluated.

4. Claims can develop from both the contractor's perspective and the owner's perspective. An owner's claim against the contractor is somewhat unusual, but it can occur.


4. There are many different approaches for administering a construction contract from both the owner's position and the contractor's position. If both the contractor and the owner follow their respective rules of engagement, the process of claim evaluation can be simplified.

5. A concise strategy to administer a construction contract is important and should support a successful project. Knowing and understanding this strategy can support or challenge construction claims.

6. The basic theory behind construction claims remains simple; the claims, however, have become extremely complex. Successfully proving and pricing claims requires an extensive knowledge of key elements of the claim and the ability to illustrate the facts and/or position persuasively.

7. Successfully challenging a claim also requires an extensive knowledge of key elements of the claim, the ability to illustrate the facts, and the ability to respond persuasively to the pricing of the claim.


POTENTIAL HEADS OF CONTRACTOR’S CLAIM1. Site Establishment Cost2. Overhead Costs

A. Head office overheadsB. Site overheads

3. Profits4. Inflation5. Loss of Productivity or acceleration cost6. Finance Charges 7. Interest on Delayed Payments8. Cost of Preparation of Claims9. General, 2nd Learning Curve Expenses10. Variations


PRELIMINARIES (ON SITE ESTABLISHMENT)1. Set up costs2. Running Costs3. Demolition or clearing costs

VARIOUS ITEMS CONSTITUTING THIS COST HEAD ARE AS FOLLOWS;4. Site Management expenses5. Plant, equipment & Scaffolding6. Power for lighting & use in works7. Temporary hoardings site offices & storage sheds8. Local authority charges for the temporary hoarding & other costs9. Water for the Works10. Telephone services11. Insurance for works & third party12. Performance bonds & guarantees13. Supervision of nominated subcontractors14. Site security watching lighting15. Site safety, sanitation & welfare measures16. Program & progress schedule17. Site clearance & maintenance of temporary roads


CONCLUSIONSIf the previously discussed rules of engagement are followed, the contractor will have a thorough and complete knowledge of the contract requirements and will have preserved its contractual rights. Any disruption in the construction schedule would have been described comprehensively and accurately in the updated construction schedule and daily reports.

CONSTRUCTION CLAIM IDENTIFICATION & RECORD KEEPING GUIDELINES

CONTRACTOR’S CLAIM DEFINATIONA Contractor’s claim may be defined as a legitimate request for additional compensation of cost and time as per terms of the contract and the relevant contract act.

COMPENSATION FOR LOSS OR DAMAGE CAUSED BY BREACH OF CONTRACTWhen a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it.


CLAIM IDENTIFICATION1. The state, of economy and high interest rates have made project

owners much more anxious to hold down original capital outlay, and avoid additional costs.

2. Revisions have been made to owner-consultant agreements designed to take control of funds out of the consultant's hands.

3. Revisions are made to standard contract forms intended to transfer increased liability to the contractors and sub-contractors, as well as require more burdensome warranties.

4. Stiffer competition prevails for reasons noted earlier. 5. All of these give rise to a greater possibility for disputes and

claims. 6. It is prudent to recognize the situation and deal with it in a

realistic, positive and sensible manner. 7. This is much better than trying to brush things under the carpet

until the end of the job - for fear of upsetting the friendly, contractual relationship.


CLAIM NOTIFICATION1. A claim should be made only after careful

consideration, in a formal and objective manner, 2. Precisely on contractual and Lawful grounds, 3. And the corresponding time extension to the

contract, if appropriate.


RECORD KEEPINGObviously, the extent of record keeping required for a particular construction job will depend on the type of contract. However, some record keeping will be required in any case because it is:

1. Required by law 2. Required by the terms of the contract 3. Needed to control the on-going work 4. Needed as data for estimating future work 5. Needed for preserving the contractor's rights under

the contract


TYPICAL SET OF RECORDSA good set of records that might be kept on a fair sized construction project could well include the following files. Note that these files are assembled into blocks of like subject matter. This approach greatly facilitates ease of filing and subsequent retrieving of the requisite information.

SET-A Original Contract Tender Documents Issued for Construction set of drawings, and all subsequent revisions Instructions to the contractor Contemplated Change orders issued by the owner, Change Estimates, and

Change Orders received record.SET-B Sub-contractor quotes, contracts, purchase orders and correspondence Shop drawings original, all revisions and re-submissions Shop drawings transmittals, and transmittals log


SET-C Daily time records Daily equipment use records Daily production logs, e.g. concrete pours etc. Material Delivery and Use Records, including expediting reports.SET-D Accounting records: pay-roll, accounts payable and receivable, etc. Progress Payment Billings under the contract Daily workforce Account Records, pricing and billings.SET-E Contract Milestone Schedule or Master Schedule Short Term Schedules and up-dates Task schedules and analyses


SET-F Original tender estimate Construction control budget Actual Cost Reports, weekly or monthly including Exceptional Reports. Forecast-to-Complete Estimate up-dates Productivity Reports/Analyses Site Overhead cost analysis as compared to the value of workdone. Overall overhead cost analysis as compare to value of workdoneSET-G Inter-office correspondence, including memos and faxes (all filed by topic) Contract correspondence Minutes of Contractual Meetings Minutes of Site Coordination Meetings Requests for information Notice of claims for delays and/or extra cost by contractorSET-H Government Inspection Report Consultant Inspection Reports Accident Reports


SET-I Daily Project diary or journal entries Notes of telephonic conversations Progress Reports, weekly, monthly or quarterly Progress photographs Any other reports, such as material testing reports.SET-J Data of all the Record Files that are being maintained Focus on the Last Two Groups That's quite a healthy list, and needs the administrative staff to

support it. Most of the list is automatic and self explanatory. However, the last six items are often overlooked and therefore are

worth elaborating


OTHER RECORD KEEPING GUIDELINESOriginal Records 1. As noted earlier, for the prudent Contractor anxious to stay solvent,

records are required for estimating future work, And for protecting his contractual rights.

2. Both of these require some form of post-contract review. However, there can be little argument that reliable data cannot be extracted from records created after the fact. Even the best of memories are imperfect and the written record serves to provide the solid reminder. Data may be extracted, analyzed and presented in a different light, but satisfactory records cannot be created later.

Instant memos For example, all verbal directives should be committed to writing immediately and exchanged with the other party. This serves to keep the other party properly informed, clarify understanding if the instructions were not clear, and, of course, to preserve contractual rights.


Project diaries 1. Diaries can provide a wealth of information. Unfortunately, they tend to

be overlooked, either because the pace is so hectic that there is not time to keep these updated, or alternatively, there seems to be so little of importance going on that it hardly seems worth writing!

2. In any case, what should be recorded are solid facts such as the make-up of various crews, sub-contractors and equipment on site, work re allocation and for what reasons, delivery problems, and weather conditions, visitors to the site, discussions, and visitors comments about the work. Needless to say, what should be avoided, are personal opinions and derogatory remarks.

Photographs For record purposes, these must show what is actually going on at the time with the location and view point identified, as well as the date and photographer's name. A camera which prints the date on the negative is a great start and well worth the expense. Also the photographer should realize that it is the content, and not the artistic effect, that is the most important.


Computer Application 1. As we have seen, the road to contract documentation

is long and arduous. The worst part is trying to find that vital piece of information amongst the morass of paper, which is now so urgently required.

2. However, the secret is to get data organized as early in the job as possible, and then commit to consistent maintenance, regular backup and off-site storage. If this is done meticulously, the subsequent saving in time through search and find, or through spread sheet and database design and use, can be invaluable.


Managing the Records As well as managing the files, the records themselves also need managing. Some simple rules can help as follows:

1. Determine what records are to be kept, and how. Establish logs of the records, so that they can be found, referred to and/or followed up as required. Well organized contractors establish standard reference lists and coding for all their contracts. This greatly facilitates managing, analyzing and comparing contracts.

2. Once the records have been identified, ensure that they are in fact set up, maintained and used for managing the job.


3. Review the record keeping system from time to time, because records have a habit of growing in unexpected ways - like half the correspondence showing up under Miscellaneous, and the other half under General. In addition, some records may become obsolete or redundant, and should be discontinued. Unnecessary record keeping can waste a lot of time and money.

4. Records also take up space and equipment. Determine the useful life of the different components, and take a systematic approach to record disposal.

5. Take steps to ensure accuracy, reliability and hence credibility. Unreliable records can be quite useless, as well as a waste of money, and possibly even detrimental.

CONSTRUCTION CLAIM DOCUMENTATION GUIDELINES

HOW TO ESTABLISH THE ENTITLEMENT & AND AMOUNT OF CLAIM

1. Firstly, it is necessary to discuss what must be established to prevail on a claim. A construction claim is a demand for payment of additional compensation, or extension in time to complete the project works, adjustment of the parties' respective contractual obligations, or any other change in the contract compensation or terms.

2. In presenting a disputed claim to the party with whom the contract agreement has been signed it is necessary to establish the other party's liability for the claim (often referred to as "entitlement") and that the amount of the damages sought (often referred to as "quantum") as correctly as possible.

3. Generally, if the Contractor is unable to establish both aspects of the claim it will not prevail. Thus, establishing liability and damages are of equal importance. Nonetheless, many claimants focus on the entitlement issues with the end result being that the damages are not properly established.


4. Proving entitlement to prevail on a claim is generally a matter of making a correct legal interpretation of whether the facts as applied to the relevant contractual provisions allow the recovery of additional compensation or not.

5. As a practical matter the provisions of the construction contracts incorporate the general conditions and specifications. Therefore, the proper legal interpretation of the general conditions and specifications is essential.

6. The actual analysis of the facts that entitle a claimant to recover the extra costs/time typically includes an objective review of the scheduling, general conditions, specifications, building codes and standards of the industry.

7. Obviously, the application of the facts to the relevant contract provisions must be made on a case-by-case basis.


8. Establishing the quantum aspect of the claim also requires an objective analysis of the costs associated with the additional work. If the contract does not establish a method for determining the additional costs, the claimant should rely on cost accounting principles to quantify the damages.

9. The type of claim will generally dictate the method for calculating damages. However, the types of costs that are considered include: home office overhead, job site overhead, material costs, labor costs and equipment costs, insurance costs, bank charges, deactivation & reactivation charges in case of work suspensions, amounts corresponding to losses incurred in cancellation of material procurement orders, workers & staff lay off payments, inflation, change in interest rate


GENERAL FORMAT FOR A CONSTRUCTION CLAIMIt includes the following

1. Cover Letter supported by Conditions of Contract2. Executive Summary sheet3. The Actual Claim Analysis4. Summary of Claim5. Underlying facts6. Entitlement Analysis7. Quantum (amounts claimed) Calculation Analysis8. Factual Support for Claim9. Attachments


CONCLUSIONS1. The claim format set forth in this guideline is a general outline

of what should be included in a claim. The actual format should be modified to present the claim in a persuasive manner.

2. Since many contracts require the claim to be submitted in a particular format at a particular time and updated on a particular, set schedule, therefore review of the relevant contract to determine what contractual obligations exist is imperative.

3. Failure to follow the contractual mandates relevant to the claim presentation may result in barring the claim processing. Therefore, if the contract agreement mandates the format for preparing the claim than those requirements have to be strictly complied with.


4. For preparing a claim document the guidance of competent consultants who specialize in construction and have experience preparing and advocating the claim should be sought.

5. Irrespective, of other matters the claim preparation process shall start by preparing a ring binder with sections based on the aforementioned claim format as soon as the event causing a claim is recognized.

6. As the claim is refined it should be supplemented by adding new supporting documentation and refining the claim analysis. The sooner the effort is started in organizing the claim and gathering the supporting documentation, the easier it is to prepare the final claim documents.

THANKS