1991 AlicE 9!RAusAcT1ous

Improve Your Profits by Understanding Claim Analysis by Ignacio Manzanera, CCE and Khaled A. Bubshait

In today*8 construction projects environment contractors are facing the ultimate challenger

6 Attain a profitable situation in a highly compet- itive market.

4 Achieve customer's satisfaction by producing a quality job within the owner's time frame and budget.

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

l Recover all additional expenses created by changes in design or construction methods.

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.

Success of project management efforts is directly related to a combination of factors including:

0 project teamRs technical and administrative proficiency,

l project cost control procedures, and

l public 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 accom- plished.

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 adminis- tration which, in turn, will ensure cost recovery form issues impacting planned performance.

Project engineers, planning and engineers,

scheduling 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 unfor- 9iVinq to those who are unaware of hidden costs brought on by a number of circumstances usually found when working within construction environments.

Identification of those circumstances may become an easy task if the project management team has been trained to recognize them.

If the facts revealing additional costs do not support a claim for additional compensation, recovery of this hidden burden may become impossible.

However, if the facts support the claim but the claim itself is not properly addressed and presented, a significant cost recovery is still unlikely.

Documentation needed to support a construction claim should be made available at all times during the contract's life.. This should not be construed as a justification to bid a contract low to secure award and then hope to make a profit out of disputes fabri- cation. However, a contractor who properly estimated 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 aware- ness about well-known controversial issues. This paper has been organized following subjects which are considered as the essential knowledge required by those entering the construction business arena:

typical construction claims against owners,

typical construction claims against the contrac- tors,

legal implications of critical path method schedules,

record management,

legal relationships, and

planning and cost estimating.

TYP1catcO3sTRucT1oB CLAIIGAGAINSTOWENRS

The most frequently found reasons to file a claim . against the owner of a project are;

l poor project planning,

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0 scope changes,

0 constructive change orders,

0 errors and omissions,

c contract acceleration and expediting,

o work suspension and stoppages,

0 site access or availability,

o other contractors interferences and delays, and

0 strikes and acts of God.

Poor Project flying

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

0 inadequately defined scope of work, and

0 incomplete and/or incorrect design.

Most of the time, poor planning is attributed to fast track projects that bring about:

0 shortened bid periods,

0 limited site investigation,

0 unreasonable construction periods,

c badly specified construction materials, and

0 inappropriate staffing.

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 repre- sentatives 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 overruns. This is especially true for contractors wanting to realize their planned profits.

Scope changes are often narrowly and poorly defined, and estimates of the associated cost and schedule impact are usually lacking accuracy in order- of-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.

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 a "constructive change" may be disputed by contrac- tors. Additionally, constructive changes are some- times found after the fact, when reviewing schedules, records, letters and minutes of meetings. This does not negate the contractor's right to recover addition- al expenses.

Contractors are advised to train their construc- tion teams to recognize constructive changes since this can make the difference between a profit or a loss situation.

Errors 5nd Cmissi.onia

A potential for claims arises when the contractor questions plans and specifications given by contractu- al 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 on this issue. Even if the contractor is forced to proceed as directed by the owner and contractual obligations, recovery of additional costs may be 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~

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

Furthermore, contractors may expend extra effort in response to a directed increase in work without an increase in time. This constitutes a constructive acceleration which should be carefully analyzed, docu- mented and decided upon. Validation of this kind of claims is, of course, difficult and requires the con- tractors 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 for compensation over productivity levels may arise.

Productivity or the lack of it is not an easy subject to be justified. Regardless of how controver- sial these issues may become, contractor6 are urged to substantiate their facts while they are actually hap- pening.

Strikes aadActeof God

Time delay6 due to fact6 beyond a contractor86 Control such a6 Strikes, boycotts, UnUSUal weather, earthquakes, fires, and floods are excusable delays, 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 improper assumption of directionof field opera- tions,

l failure to grant access to the construction site,

l procedures approval delays,

l arbitrary or unreasonable actions,

e failure to expedite/disclose 'information needed to perform,

e failure to comply with contractual payment schedule,

0 excessive number of change Orders, and

l poor communications.

TYPICU CLAIHSAWIRSTTRBcoaTBBcloa

Owners also have the right to recover from issues that may harm them economically. Usual claims by the Owners, among others, are:

l out-of-specification materials!,

l defective work,

e property damages,

l contractors' late completion, and

e low-ball bidders.

Oat-of-Specification Materials

Discrepancies may result due.to differing inter- pretations 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 sub- stitute 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

Defective Work

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 for lacking the Ski.116 needed for the job. It is not difficult to see why 60 many claims'are generated over this issue.

Property damage claim6 may result from several sources, 'including:

l damaging owner's installation6 when performing the contract,

e damaging neighbor'6 installation6 when performing work,

0 violating right6 of property owner6 adjacent to the construction battery limits, and

e violating government area regulations.

Even though contractual clauses call for holding the owner harmless in all of the above cases, it may happen that law suits may be settle by the owner before the blame can placed on and accepted by the contractor.

Contractor'6 Late Completion

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

Uw-&allBidders

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

6 failure to understand the scope of the job,

l misunderstood technical requirements,

l bid mistakes, and

l desire to improve the competitive.edge.

Dispute6 'and claims for almost every other i66ue during the contractual period should be expected.

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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0 organized sequence of activities needed to perform the job,

0 Job staffing and layoff schedules are contractual obligations, and lack of compliance constitutes a breach of the contract.

O duration for all activities involved, and 0 Inspections and approval6 from the owner should

O resources needed to accomplish each activity. be performed according to the schedule.

In other WOrd6, critical path method schedule6 depict what has to be done, when it haS to be done,

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

how it ha6 to be done, who has to do it, and where. revisions. Contractual obligation6 usually include:

O approval of an original CPR,

O procedures to update the CPM periodically, Good, accurate records are the best assistance anybody can get when negotiating change6 and diSpUtesa

O procedure6 to revise the CPM, and This is particularly important for the contractor6 since they usually have the burden to prove the impact

O procedure to utilize the CPN as a tool for claim any issue under dispute had on their performance. The settlements. record6 usually needed to Substantiate a Claim are8

The following checklist provide6 a valuable tool for 0 progress schedules, planning and scheduling administration:

0 daily and weekly reports, O Establish and maintain a progress measurement

SyStX?m. 0 change order log,

O Gain construction schedule approval a6 soon a6 0 purchase orders and delivery receipts, possible.

0 correspondence from and to the contractor, O Establish and maintain planning and scheduling

routines. O photographs,

O Agree upon planning/scheduling indexes and their O job diary, meaning.

0 plan and schedules revisions, and 0 RStabliSh schedule revision6 approval with

minimum turnover time. 0 minutes of daily and weekly meetings.

O Establish change order/approved schedule inter- Performance is usually documented through periodic face System. reviews and revisions of the project approved sched-

ule. Report6 Showing scheduled v6 actual performance O Create a scheduling revisions filing system. determine the project Status St any tima SO anybody

can visualize the work completed to date, the rate at O Insist on detailed backup for proposed changes. which the work was performed, and the costs incurred.

Daily and weekly reports should include8 0 Promptly notify/process/document schedule vari-

ances. 0 issue date, weather conditions,

If properly included in the contract, some 0 staffing levels, general legal implications of an approved critical path method schedule may be summarized a6 follows: 0 equipment used and idled,

0 Roth parties are bound to follow the schedule specifications.

0 There is an implied warranty by both parties that they will not hinder, delay or disrupt the other party.

0 Labor level6 and crew sizes established in the schedule have to be followed unless Change6 are duly authorized.

0 Equipment utilization incorporated in the sched- ule is binding, and failure to follow it consti- tutes a breach of the contract.

0 Materials, tool6 and consumable a6 specified in the schedule are equally binding.

0 material6 utilized and future requirements,

0 subcontractors performance,

0 detail6 on controversial matters,

o change orders work, and

0 safety.

Since change order6 are one of the major causes of claims, it iS important to maintain good record6 of them including:

0 initiations,

O cost and time estimates,

o Contractors are liable for productivity lower 0 approvals, than that allocated by the schedule.

0 current status,

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0 requests for project completion revision,

6 daily progress, and

l interface with current approved schedule.

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

Project management teams require a good working knowledge of statutory and common law developed through the year6 to be able to cope with every situation they may find when developing their pro- jects. New technology, project complexity, creation 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 rela- tionships and their usually dear implications. Some of these relationships are discussed in this paper as follows:

Contractorwith Owner

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 organiza- tion 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 as- sembling the total agreement by including the follow- ing documents:

l general conditions,

l special general conditions,

l standard specifications,

l technical specifications, and

l drawings.

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

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.

1991 A&cB ~sAc!rIoars

Contractor with Inmrance Companies

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 perfor- mance 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 any ultimate loss. The insurance's right of indemni- fication by the contractor is intended to place the ultimate responsibility for loss upon the Contractor.

Contractor with Designer

Historically speaking, designers have been immune from claim by the contractor or any of his subcontrac- tors 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 func- tion. All the above mentioned legal relationships are in critical need of being studied, analyzed and 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

Planning may be seen as drafting future intended actions. It is usually an inexpensive activity when comparedwith other operational costs, yet Substantial savings may be accomplished by emphasizing it. Plan- ning is often misunderstood by people. They tend to believe plans are cast in concrete, not to be departed from under any circumstances.

A plan is just that, no more no less. Plan6 are drawn to guide organizations in general and individu- als 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 clearly. It has to be based on correct premises and 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 institu- tions, 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 communi- cation between planner6 and those concerned by their plans. Good intentions are not enough ground to make plans work. Sufficient and continuous means of inter- face among bUSine66 participant6 cannot be overempha- sized.

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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 exten- sion of your project cost and schedule control philos- ophy.

abat matimat~g

Cost estimating is one of the essential area6 of project management and usually the basis t0 SUbStanti- ate 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 fur- ther 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 informa- tion for project management future endeavors.

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 contrac- tual specification6 are changed, dispute6 and claim6 may be avoided and, more importantly, additional cost recovered. Furthermore, project management partici- pants should have a good working knowledge of the maze of statutory and common law developed in recent decade6 to be able to handle profitably project6 continuously increasing in size and complexity.

Project teams around the world Seldom address the legal relationship between different entities involved

in the area of project management. Construction law 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.

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E.5.6

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

E.5.7