1991 AlicE

9!RAusAcT1ous

Improve Your Profits by Understanding Claim Analysis

by Ignacio Manzanera, CCE and Khaled A. Bubshait

construction projects environment In today*8 contractors are facing the ultimate challenger 6 4 Attain itive Achieve quality budget. a profitable market. customer's job within situation in a highly compet-

Identification of those circumstances may become an easy task if the project management team has been trained to recognize them. If support of this the facts revealing additional costs do not a claim for additional compensation, recovery hidden burden may become impossible. support the claim but the addressed and presented, is still unlikely.

satisfaction the owner's

by producing a time frame and

e
l

Maintain goodwill that will bring more business to the house by avoiding unnecessary disputes.
Recover

However, if the facts claim itself is not properly a significant cost recovery

changes

additional created all expenses in design or construction methods.

by

The accomplishment of this challenge requires a great deal of organization, planning, scheduling, cost control, personnel training, public relations and a very good knowledge about construction claims. related 0
l l

Success of project management efforts is directly to a combination of factors including: technical and administrative and

Documentation needed to support a construction claim should be made available at all times during the This should not be construed as a contract's life.. justification to bid a contract low to secure award and then hope to make a profit out of disputes fabriHowever, a contractor who properly estimated cation. and managed a contract should have the right to recover costs caused by actions of others, and this may not be possible if documentation is not kept dispute-oriented from the start of the project. The main objective of this paper is to outline the areas where project management can improve its financial performance just by ascertaining its awareThis ness about well-known controversial issues. paper has been organized following subjects which are considered as the essential knowledge required by those entering the construction business arena: typical typical tors, construction construction claims claims of against against owners, the contracpath method

project teamRs proficiency, project public cost

control

procedures,

relations

acumen.

However a contractor who properly considers all the above mentioned factors may find it difficult to explain why sometimes expected profits are not accomplished. Assuming a competitive market is forcing all contractors in a determined area to plan for tight profit margins, the situation can only be improved by proper project management personnel training on selected issues about construction disputes administration which, in turn, will ensure cost recovery form issues impacting planned performance. Project engineers, planning and scheduling engineers, cost estimating engineers, cost engineers and the rest of the project management team personnel may be well prepared to perform as expected from them by technical standards, but today's'market is unfor9iVinq to those who are unaware of hidden costs brought on by a number of circumstances usually found when working within construction environments.
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implications legal schedules, record legal planning management, relationships, and cost

critical

and estimating. CLAIIGAGAINSTOWENRS to file a claim

TYP1catcO3sTRucT1oB

The most frequently found reasons . against the owner of a project are;
l

poor project

planning,

0 scope changes, 0 constructive 0 errors

c o contract change
orders,

and omissions, acceleration and expediting,

work suspension access

and stoppages,

0 site
o other

or availability, interferences of God. and delays, and

contractors and acts flying

When owners or their authorized representatives give or fail to give directions that interfere with the normal contract development without acknowledging cost and schedule implications, what is usually called by contraca "constructive change" may be disputed constructive changes are sometors. Additionally, times found after the fact, when reviewing schedules, letters and minutes of meetings. This does records, not negate the contractor's right to recover additional expenses. tion this loss Contractors are advised to train their constructeams to recognize constructive changes since can make the difference between a profit or a situation. 5nd Cmissi.onia

0 strikes
Poor Project

Lack of adequate attention to front-end of the project usually ends up in:

0 0

planning

Errors

inadequately incomplete

defined and/or

scope of work, design.

and

incorrect

fast
0

Most of the time, poor planning is attributed track projects that bring about: shortened limited bid periods, site investigation, construction construction staffing. periods, materials, and

to

0
0

A potential for claims arises when the contractor questions plans and specifications given by contractual terms, and the owners or their representatives fail to recognize it as a valid change order. Constructive change orders may be generated by absence of agreement Even if the contractor is forced to on this issue. proceed as directed by the owner and contractual recovery of additional costs may be obligations, pursued at a later occasion. Contractors are advised to document these cases as closely as Possible for future identification of additional costs. CoxltractzJcce1eration andlXXpE&t~ to accelerate of it within This date. contractual the right to

unreasonable badly specified

c 0

inappropriate

Whatever the reason is, claims are abundant when planning is not taken seriously enough to produce an adequate environment to develop a project. Moreover, this situation is seldom acknowledged by owner representatives for obvious reasons. Only well-trained project'team personnel will be able to ascertain it before it develops into a costly problem. 8cope cllangea Scope changes are usually initiated by a change order, letter of intent, or a field directive. They may direct changes, work deletions or additions to the original scope of the contract. Change orders are just part of everyday business in construction environments. To think that a project or a construction contract can be executed without them is a fallacy unsupported by experience. An effectively organized effort to eliminate cost and time impact as a result of processing work outside the original scope of the contract should be high on the list of priorities of every management team since change orders are the usual reason for cost and time This is especially true for contractors overruns. wanting to realize their planned profits. Scope changes are often narrowly and poorly and estimates of the associated cost and defined, schedule impact are usually lacking accuracy in orderof-magnitude estimates. Contractor, designer and owner may agree on the fact that something should be done, but they may not be so agreeable on its full description and associated cost implications.

Contractors are frequently directed performance of the contract or a portion the original or adjusted completion direction constitutes a change in the and the contractors have obligations, pursue compensation for it.

Furthermore, contractors may expend extra effort in response to a directed increase in work without an This constitutes a constructive increase in time. acceleration which should be carefully analyzed, docuValidation of this kind of mented and decided upon. claims is, of course, difficult and requires the contractors to prove their case. rork Su~sion and Stoppaqee

When contractors are notified to suspend work due to reasons out of their control, they have the right to be compensated for the time and cost involved in the susp&nsion or part of the suspension even if the contract document calls for "work-around" directives. Contractors are compelled to keep detailed data related to cases like these to be able to recover related expenses. Site Access or i2maiiardbility

When the contractors' scheduled activities have the need for a right of way and/or a location to proceed and the owner fails to provide them on time, the contractors should pursue a compensation for the time and cost of the resources scheduled and not being able to perform productively.

When the contractual obligation forces the contractor to joint-occupancy, interference by other owners' contractors' actions or lack of progress in the area may hamper performance and a justifiable

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1991 AlLcB Tlzm~Iws claim arise. for compensation over productivity levels may Defective
Work

Productivity or the lack of it is not an easy Regardless of how controversubject to be justified. sial these issues may become, contractor6 are urged to substantiate their facts while they are actually happening. Strikes aadActeof God

Contractors, are responsible for the quality of their work as specified in contractual terms. This is not always easy to establish, since by definition, defective work is difficult to spot and decide upon. Defective work may be blamed on the designer due to lack of adequate specifications or on the owner for disturbing the original design or on the contractor It is not for lacking the Ski.116 needed for the job. difficult to see why 60 many claims'are generated over this issue.

Time delay6 due to fact6 beyond a contractor86 Control such a6 Strikes, boycotts, UnUSUal weather, and floods are excusable delays, earthquakes, fires, and the contractor should be entitled to a time extension. The following checklist for usual owner actions impacting contractual performance may become handy when managing,projects: 0
l l l

Property damage claim6 sources, 'including:

l

may result

from

several

improper tions, failure

assumption to grant

of directionof

field

operasite,

damaging owner's the contract, damaging neighbor'6 work, violating right6 the construction violating

installation6 installation6

when performing when performing to

access to the construction delays,

e 0

procedures arbitrary

approval

or unreasonable

actions, 'information contractual and needed payment e

of property owner6 adjacent battery limits, and area regulations.

e e 0
l

failure to expedite/disclose to perform, failure schedule, excessive poor to comply with

government

number of change Orders,

Even though contractual the owner harmless in all of happen that law suits may before the blame can placed contractor. Contractor'6 Late Completion

clauses call for holding the above cases, it may be settle by the owner on and accepted by the

communications. CLAIHSAWIRSTTRBcoaTBBcloa to recover from issues Usual claims by the

TYPICU

Owners also have the right that may harm them economically. Owners, among others, are:
l l

out-of-specification defective property contractors' low-ball work, damages, late bidders.

materials!,

Contract6 usually call for a completion date on the assumption that the owner is in need of the A contractor finishing late facility by that date., may bring inconvenience to the owner and/or financial include clauses where penalties 1066. Some contracts are considered against the contractor in the event of but regardless of the contract completion 'delays, having or not having that clause, the owner may claim damage6 due to late completion. Uw-&allBidders

e
l

completion,

and

Oat-of-Specification

Materials

Contractors sometime6 come up'with extremely low them to be excessively CO6t bids which may force conscious in their effort6 to recover from their tight Their low bids are due to a number of situation. circumstances, such as: 6
l l l

Discrepancies may result due.to differing interpretations about contractual material specifications. Contract specification omissions/clarity are frequent with the undesirable result that decision6 have to be waited for or direction6 given on-the-run at the job site with the consequent confusion, 'delay6 and usual increase in scope work. The main problem comes while supplying materials where it is known that there are numerous competitive manufacturers which may substitute for one another. The contract' language is usually followed but when the issue is material specifications, complication6 may arise since every owner wants to save money by competitively bidding prices from different manufacturers while still getting maximum functional efficiency. I

failure

to understand technical and

the scope of the job, requirements,

misunderstood bid mistakes, desire

to improve

the competitive.edge. for almost every other i66ue period should be expected.

Dispute6 'and claims during the contractual

Critical path methods have become the most useful and practical tool to negotiate contractual disputes. Properly designed schedule6 include:
l

total ',

scope of the job,

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organized sequence perform the job, for all

of

activities involved,

needed and

to

O duration O resources

activities

Job staffing and layoff schedules are contractual and lack of compliance constitutes obligations, a breach of the contract. Inspections be performed and approval6 from the owner should according to the schedule.

needed to accomplish

each activity.

In other WOrd6, critical path method schedule6 depict what has to be done, when it haS to be done, how it ha6 to be done, who has to do it, and where. Contractual obligation6 usually include: O approval O procedures O procedure6 of an original to update to revise CPR, the CPM periodically, the CPM, and the CPN as a tool provide6 a valuable administration: a progress approval for tool claim for

o Any deviation from the schedule should be settled as per contractual procedure6 involving schedule revisions.

O procedure to utilize settlements. The following checklist planning and scheduling O Establish SyStX?m.

Good, accurate records are the best assistance anybody can get when negotiating change6 and diSpUtesa This is particularly important for the contractor6 since they usually have the burden to prove the impact any issue under dispute had on their performance. The record6 usually needed to Substantiate a Claim are8 0 0 0 progress daily schedules, reports,

and maintain

measurement a6 soon a6

and weekly log,

change order purchase

O Gain construction possible. O Establish routines.

schedule

0 0

orders

and delivery

receipts,

correspondence

from and to the contractor,

and maintain

planning

and scheduling O photographs, indexes and their with 0 schedule filing proposed interminutes of daily and weekly meetings. Performance is usually documented through periodic reviews and revisions of the project approved schedReport6 Showing scheduled v6 actual performance ule. determine the project Status St any tima SO anybody can visualize the work completed to date, the rate at which the work was performed, and the costs incurred. Daily and weekly reports should include8 0 0 0 0 0 issue staffing equipment material6 date, weather conditions, O job diary, 0 plan and schedules revisions, and

O Agree upon planning/scheduling meaning. 0 RStabliSh schedule revision6 minimum turnover time.

approval

O Establish change order/approved face System. O Create O Insist 0 Promptly ances. a scheduling on detailed revisions backup for

system. changes. vari-

notify/process/document

schedule

If properly included in the contract, some general legal implications of an approved critical path method schedule may be summarized a6 follows: 0 0 Roth parties specifications. are bound to follow the schedule

levels, used and idled, utilized and future requirements,

subcontractors detail6

performance, matters,

There is an implied warranty they will not hinder, delay party. Labor level6 and crew sizes schedule have to be followed duly authorized.

by both parties that or disrupt the other established in the unless Change6 are

0 o

on controversial work, and

change orders safety.

Equipment utilization incorporated in the schedule is binding, and failure to follow it constitutes a breach of the contract. Materials, tool6 and consumable a6 specified the schedule are equally binding. Contractors are liable for productivity than that allocated by the schedule. in

Since change order6 of claims, it iS important them including: 0 initiations, and time

are one of the major causes to maintain good record6 of

0 o

O cost lower 0 0

estimates,

approvals, current status,

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1991 A&cB ~sAc!rIoars 0 6

l

requests
daily interface

for

project and current

completion

revision,

Contractor

with

Inmrance

Companies

progress, with

approved

schedule.

Contractors and insurance companies usually have a complex relationship. It should be remembered that bonds required by and furnished to the owner of a project are for the protection of the owner. Additionally, bond6 required to secure performance in most instances come separated as performance and payment bonds, but in some circumstances the bond is combined into a single bond guaranteeing both performance and payments. The insurance company is not intended to sustain The insurance's right of indemniany ultimate loss. fication by the contractor is intended to place the ultimate responsibility for loss upon the Contractor. Contractor with Designer

Furthermore, keeping the correspondence well organized by subjects will provide the mean6 of understanding claim arise. what happened, should an after-the-fact It al60 help6 in relating new problems to old ones.

Project management teams require a good working and common law developed knowledge of statutory through the year6 to be able to cope with every situation they may find when developing their proNew technology, project complexity, creation jects. of new legal concepts according to the working area and a host of other circumstances are forcing the construction industry to become aware of legal relationships and their usually dear implications. Some of these relationships are discussed in this paper as follows: Contractorwith Owner

Historically speaking, designers have been immune from claim by the contractor or any of his subcontractors arising from alleged negligence or error on the part of the designer because of the lack of close relationship of contract between the designer and the contractor or any of his subcontractors. Recently settled court cases have brought new light to the concept of liability. A designer may be found liable to the contractor due to deficiency in the performance of the designer's professional function. All the above mentioned legal relationships are analyzed and in critical need of being studied, expanded to maintain a desirable level of expertise within the young engineer6 and, through courses and seminars, within the project management community. PIAREIBG ARB COST BSTIHXl!ING ProjectHanagenu3ntPlanning

The docUment6 constituting the agreement between the contractor and the owner are, of course, the basic instruments from which the rights and obligations of the parties are determined. The pattern of organization of these docUment6 established by their author -usually the owner's contracting representative -varies in some respects but, generally speaking, an accepted organizational pattern is followed in assembling the total agreement by including the following documents:
l l l l l

general special standard technical drawings.

conditions, general conditions,

specifications, specifications, and

If a contractor recognizes from the beginning of the project that the ultimate settlement determination Of similar issues in previously decided cases is the foundation from which a body of interpretive law has been developed, the need for a current sophisticated awareness on the part of the project management team of the general concepts of contract law as applied to construction and engineering is apparent. ~hraotor with Sub-contractors

Planning may be seen as drafting future intended actions. It is usually an inexpensive activity when comparedwith other operational costs, yet Substantial Plansavings may be accomplished by emphasizing it. They tend to ning is often misunderstood by people. believe plans are cast in concrete, not to be departed from under any circumstances. Plan6 are A plan is just that, no more no less. drawn to guide organizations in general and individuals in particular, but they are there to be reviewed and revised as circumstances dictate. There may be even occasions where plans must be completely canceled or superseded and new plans drawn. A meaningful plan has to define its purpose It has to be based on correct premises and clearly. information from the area where the project is going to take place. Furthermore, good planning come6 from a mixture of information, knowledge and experience on the area where project management ha6 to perform. Planning requires common sense, communication and charisma. The first two may be taught by institutions, the third one is an inborn human characteristic which may be define as the art of working miracle6 associated with some individual's personality. People usually mistrust plans mostly due to lack of communication between planner6 and those concerned by their plans. Good intentions are not enough ground to make plans work. Sufficient and continuous means of interface among bUSine66 participant6 cannot be overemphasized.

The classically drawn sub-contract incorporates by reference the terms and provisions of the prime contract, and by general language the sub-contractor agrees that such terms and provisions as are contained in the Pri.me"contract Shall apply to the work to be Performed by the sub-contractor. Nevertheless, this contractual relatiOnShip may become an exceedingly difficult one. Special care should be given to recordkeeping and other aspects of reporting to avoid serious complications usually brought about by lack of communications on the job.

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Project management communications, creativity, flexibility and accuracy are substantially improved by rather simplistic planning rules. Planning will work for you if you believe on it, make others in your team realize it6 benefits and, above all, make it an extension of your project cost and schedule control philosophy. abat matimat~g

Construction law in the area of project management. is an ever-changing issue which must be constantly reviewed and revised to maintain the project team's potential to overcome difficult situations. There is a great deal of money to be saved day in and day out when involved in a construction endeavor by fostering the project team.6 knowledge about issues impacting performance and the best approach to solving them. A simple workshop on claim related Subjects, given to the project team at the inception of the projector contract can help improve dramatically your chances of accomplishing profitable goals.

Cost estimating is one of the essential area6 of project management and usually the basis t0 SUbStantiate contractual disputes. Cost estimates for a contract in general and for project changes in particular are often Used as the basis to substantiate claim entitlements. Cost estimates should be detailed enough to allow later comparison with actual costs, thereby providing evidence of errors, misinterpretations or construction changes. A project chart of accounts for breaking costs down to identifiable work package6 is the best tool to organize a cost estimate and at the same time gather actual cost6 in a consistent manner. Changed job conditions can be easily segregated and coded for further analysis against the schedule and made relevant daily, weekly and monthly reports for possible cost recovering. Labor cost estimate6 should be closely related to working schedule6 and crew arrangement6 to be able to identify planned against actual productivity and their relative weight should a claim situation arise. material and equipment procurement cost estimates and schedules should allow tracking of escalation factors and productive utilization respectively. Even in the event of having a contract development free of disputes, cost estimates, if approached as mentioned above, can provide an exceptional amount of information for project management future endeavors.

1. 2. 3.

ricbhrn iFlmduction 1965. Buffa, E. Wew York:John Wiley hi Sons. Cleland, D. clanegaw!6nt. J., Daniels, Isternational ing Co. Levin, Banag-t Hill. Lock, D. R. . &mlyd.!sl 1975. sgew Wew York:RcGraw-Hill.

cleaagi~t. and IPrcjene

1983. E. Ogram, and L. Radebaugh. lBusiness. Addison Wesley Publish@JRmntitateJiwe Lipp-omche% ec 1975. C.A. Kirkpatrick. Wew YorkrWcGrawProject .mnagwt. Gower Press. EaWmm. IzaimgBt DP

4.

5. 6. 7. 8.

1966.

Lucey, T. 1984. Publications. lanzanera, iRlEfamCS5.

Qmmtitatiwe

I., ed. Dhahran:

1990. Prcjcact Saudi Aramco.

Roder, J. and C. Phillips. Tsnagex6nt with 6XZ.l and Part. Wostrand Reinhold. O'Brien, rz.amig-t J.

lmojmt 1982. New Yorkrwan

9. Project management is responsible for preparing bid cost estimates, construction schedules, contract documents, change orders, material6 procurement, labor and other resources schedules on daily, weekly and monthly basis. If all this effort is performed by personnel having a clear awareness of how essential these information may become as evidence when contractual specification6 are changed, dispute6 and claim6 may be avoided and, more importantly, additional cost Furthermore, project management particirecovered. pants should have a good working knowledge of the maze in recent of statutory and common law developed decade6 to be able to handle profitably project6 continuously increasing in size and complexity. legal Project teams around the world relationship between different Seldom address the entities involved 10. 11. 12. 13. 14.

1971. con~ac~r'e and R. Zilly. m%ndbcoIs. Wew York:McGraw-Hill. cbdern Cobrst IXngineerhg~ lZommica. New New

POpper, H. 1979. York:RcGraw-Hill. 1977. Rigg6, .J. York:RcGraw-Hill. Specthrie, Englewood S. Cliffs,

Engimserimg Indnstrial 1959. WJ:Prentice-Hall.

Aooounting. Pinaace .

Weston, J. and E. Brigham. Dryden Press.

l%nageriel

Classification System for Economic Ap1963. praisals, Coet Eegineer's E!otebooIs. Section D-3. AACErMorgantown WV.

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Ignacio Hanzanera, Saudi Aramco PO Box 10089 Dhahran 31311 Saudi Arabia

CCE

Dr. Khaled Bubshait King Faud University of Petroleum and Minerals PO Box 950 ,Dhahran 31261 Saudi Arabia

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