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CONTRACTS & CLAIMS MANAGEMENT

TRAINING WORKSHOP
SESSION - II

September 17, 2011

Conducted By:
General Manager Contracts
Engr. Tahir B. Mirza
Email: berlas.lhr@gmail.com
Highlights of Previous Presentation:
Following topics were discussed:
1- Rules of Engagement for Project Execution & Construction Claims:
Introduction. The Contractors Rule of Engagement. Read and know the Contract
documents. Develop comprehensive schedule. Prepare daily construction progress
reports. Notify the Owner of issues. Keep track of costs. Maintain inclusive
documentation. The construction claims. Conclusion.

2- Construction Claim Identification & Record Keeping Guidelines:


Introduction. Claim identification. Source of dispute–changed conditions.
Additional work. Delays. Extension of time. Claim notification. Reserving rights.
Record keeping. Typical set of records. Site set A,B,C,D,E,F,G,H.I,J. Original
records. Instant memos. Project diaries. Photographs. Managing records.

3- Construction Claims Documentation Guidelines:


Purpose. How to establish entitlement & amount of claim. General format for a
construction claim. Cover sheet. Executive summary sheet. Actual claim analysis.
Summary of claims. Underlying facts. Entitlement analysis. Quantum. Factual
support for claims. Attachments. Conclusion.
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Objectives of Training Workshop:
1. Exchange of knowledge for practical purposes.
2. Capacity building through exchange of knowledge to meet
futuristic challenges.
3. 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 cases.
5. To implement proactive management practices rather than
reactive responses.
6. To achieve systematic data tracking & report generation on
organizational basis.

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 Guidelines for Effective Claim Resolution.

 Process Model for Systematic Claim Event


Screening for Administering Construction
Claims.

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Guidelines for
Effective Claim Resolution

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Purpose of Guidelines:
 WHAT IS A CLAIM?
A 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.
 PARTIES INVOLVED IN A CLAIM
1. The Employer Directly Involved
2. The Contractor
3. The Engineer Indirectly Involved
4. The Arbitrator
 The Contractor may make claims that addresses changes to work
schedule/work methodology & default of the Employer.
 Alternatively the Employer claim may concern the Contractor’s failure to
perform the work in accordance with contract or Contractor’s lack of
performance.

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 CLAIM PROCESS
a) That ”Construction Claim “is a process.
b) This process begins with dispute among the parties involved.
c) Claim is more complex process than a dispute over a monetary relief
d) Claim involves three things i.e. facts, contract wordings &
applicable law.
e) Topics of claim may include changes & delays, Impossibility of
performance, defaults, etc.
 TYPES OF MOST PREVALENT CLAIMS
1. Delays.
2. Directed Changes.
3. Constructive Changes.
4. Project Crashing.
5. Differing Site Conditions.
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 OTHER CLAIM TYPES
This may include:
1. Defective & deficient contract Documents.
2. Employer “Furnished Items”.
3. Impossibility of performance.
4. Interference with performance.
5. Miss-Interpretation of contract.
6. Superior Knowledge/Miss-Representation.
7. Strikes.
8. Weather.
9. Suspension.
10. Default/Non-Payments.
11. Termination.
12. Warranties.
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 DELAYS:
1. Recognized as most common occurrence.
2. Can upset project schedule.
3. Delay becomes claim only when the activity is enacted by the other
party.
4. Items involved in delay which includes the following:
 Actual cause, specific work activities, impacted delay duration.
 Once delay occurs the delayed party should give notice to
the other.
1. Document the impact of delay.
2. Contractor shall submit request for time extension and
compensation of delay cost.
3. Delay in any event may create confusion or disruption.
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 DIRECTED CHANGES:
1. Directed change includes any situation, when the Employer directs the Contractor
to perform works i.e. different than works defined in contract & specifications of
original scope of work.
2. Thus directed change may include the following:
1) Addition of work items
2) Deletion of work items
3) A change in method of construction
4) Change in material type
5) Change in design
2. Directed changes are normally managed through variation orders.
3. Directed change, dispute or claim for compensation may arise regarding the
Contractor request for the compensation.
4. The Contractor must notify the Employer in writing that the instruction issued is
considered as a directed change.
5. Accepting the directed change by the Contractor without Employer’s approval can
jeopardize the Contractor’s ability for compensation.
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 CONSTRUCTIVE CHANGES:
1. This type of change is caused by the factors other than Employer’s
instructions.
2. Method of constructive change includes:
1) Differing site conditions
2) Deficient & defective contract documents
3) Defective inspections
4) Miss-Interpretation of contract
5) Interference or disruption
3. Contractor's failure to recognize constructive change or to give timely notice
to the Employer may lead to difficulties in resolving the claims.
4. Vigilance is required by all parties to effectively manage the constructive
changes.
5. The challenge is to recognize the change in time to effectively lodge the
claim.
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 PROJECT CRASHING & CONSTRUCTIVE PROJECT CRASHING:
1. It normally occurs when a Contractor must have to expedite the pace of
project construction (academic buildings, manufacturing plants,
stadiums, military installations etc.).
2. It may occur when a delay occurs but the schedule end date isn’t modified.
3. If Contractor causes the delay the cost of acceleration is non-
compensable.
4. When Employer directs acceleration to offset delays that are not
Contractor’s fault, then it is a directed change and Contractor is entitled
for re-imbursement.
5. The cost of such claim may include the following items:
1) Cost of additional equipment.
2) Premium payment for overtime work.
3) Loss of efficiency due to excessive working hours.
4) Loss of efficiency due to working hours in crowded work sites.

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 PROJECT CRASHING & CONSTRUCTIVE PROJECT CRASHING
(Contd.)
6. Constructive project crashing occurs when;
1) The Contractor is delayed for reason entitling him the time
extension.
2) The Contractor requests the time extension.
3) The Employer refuses to grant time extension.
4) The Employer directs the Contractor to complete the work as
per original schedule.
5) The Contractor accelerates & incurs cost.
6) All of above reasons must occur from a Contractor to adopt
project crashing techniques.

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 DIFFERING SITE CONDITIONS:
1. Commonly known as changed conditions, frequently involves
variations from sub surface or under ground conditions
2. When the contract doesn’t contain a differing site condition
clause, the Contractor still have valid claim against the
Employer
3. Knowledge of contract provisions & site conditions can
provide considerable rewards to the Contractor & the
Employer
4. If differing site conditions are not dealt promptly expensive
claims for constructive changes/delays are likely to follow.

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 DEFECTIVE AND DEFFICIENT CONTRACT DOCUMENTS:
1. When the Employer provides detailed plans and specifications
for a construction contract, the Employer is considered to have
given an implied warranty of those plans & specifications to be
correct.
2. Under this implied warranty the Contractor without making
an independent investigation expects that project completed
by time will produce the results desired by the Employer
3. If the second assumption isn’t true the Contractor is not at
fault and may claim extra compensation for any corrective
action required
4. This principle is known as the “Spearin Doctrine” after a
decision by the US Supreme Court in 1980. It is widely
accepted decision.

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 IMPOSSIBILITY OF PERFORMANCE:
1. It may entitle Contractor to relieve from performance of
contract.
2. The burden of proof of impossibility is on Contractor.
3. It may arise from erroneous design, specifications describing a
performance requirement i.e. beyond the capability of present
technology.
4. To prove absolute impossibility Contractor must show that no
other Contractor have done the work & that no method would
have worked regardless of cost.
5. The commercial non-viability the Contractor must establish
that the contract can be performed only at an
excessive/unreasonable cost e.g. a tomb made of spotless
marble.
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 INTERFERENCE WITH PERFORMANCE:
1. This type of claim can result from Employer’s
actions/Inactions.
2. May involve third party constraints
3. Claim of interference may arise when more then
one Contractor share the site e.g. common in
multi storey buildings and multi- faceted works.

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 DEFECTIVE INSPECTIONS:
1. Employer inspector may require a standard of the
workmanship in excess of standard practices.
2. If a Contractor feels that he is held to an in-correct and
exceptional standard, he must refer to referenced
standards/codes and especially to tolerance limits.
3. The Contractor must be aware of implied industry
standards before questioning inspection report.

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 EMPLOYER FURNISHED ITEMS:
1. The Employer may have sound economic reasons for making
such purchases directly, however these items have the
potential for causing claim situations.
2. These claims arise when the Employer furnished items :
 Are delivered late.
 Are defective.
 Are different in nature from the items specified in the
contract.
3. Close coordination is imperative to prevent project schedule
interruptions.
4. The Contractor needs to notify the Employer about the
situation encountered and his intention to claim for
compensation.
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 SUPERIOR KNOWLEDGE/MIS-REPRESENTATION:
1. Such claims relate to allegations that Employer knew facts
but were not disclosed at tender stage.
2. These hidden facts could have significant effects on the
Contractor’s bid or the Contractor’s performance.
3. In other words there is duty on part of the Employer to
abstain from inducing a party to enter into contract
through use of fraudulent misrepresentation.
4. Before proceeding to lodge claim on the pretext of superior
knowledge, the Contractor must demonstrate that this
failure to share knowledge had detrimental effects on the
project cost & time.

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 STRIKES:
1. Labor strikes are treated as situations beyond the control
of both parties (excluding project site) and are considered
as FORCE MAJEURE events.
2. Such strikes entitle the Contractor to the extension of time
but rarely grant additional compensation.
3. Contractor is bound to inform the Employer of the project
disruptions resulting from labor strikes.

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 WEATHER:
1. Coverage of weather varies from contract to contract.
2. The working days are defined as day in which Contractor has
ability to work during major part of the day.
3. When rain or Inclement weather prevents the Contractor from
working a full day, the day isn’t counted as working day.
4. Carefully written contracts defines the contract duration in
calendar days, and contain a table of weather days (non-
working days), anticipated for each calendar month.
5. And provides for time extension if these extends weather days.
6. In routine contract documents risk of weather is placed simply
on the Contractor and in such a case the Contractor may obtain
time extension only for extra ordinary weather such as
tsunamis, floods, torrential rains, etc.
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 SUSPENSION:
1. It is generally self-evident
2. Rights of parties in case of suspension are typically established
by contract conditions.
3. Contractor can claim a constructive suspension when work is
stopped because of action/inaction of Employer, which is not
an explicit suspension.
4. Constructive suspension occurs where Contractor is
totally prevented from continuing its work.
5. Should the constructive suspension occurs the Contractor
must notify the Employer immediately to preserve its rights.
6. Work suspension clause is normally included in all the
construction work contracts.
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 DEFAULT/NON-PAYMENT/MATERAIL BREACH OF
CONTRACT:
1. Default occurs when either party fails or refuses to perform to
a contract.
2. Employer written contracts, this coverage is typically
restricted to default by Contractor.
3. In PEC/FIDIC supported contracts, Contractor can claim
default when payment isn’t made in accordance with contract.
4. As with suspension of contract, the Contractor must provide
timely notification to allow Employer to cure the cause of
default & vice versa.
5. There are remedies available in the contract Act of 1872 to
deal with the breach of contract and its remedies.

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 TERMINATION:
1. Contracts may be terminated for cause in the case of default of
Contractor or Employer.
2. Contracts may be terminated for convenience as when an Employer
decides that facility is no longer needed.
3. In either case contract document should address party rights in event of
termination.
4. If contracts are terminated by the Employer by default of the
Contractor. Generally the Employer can recover cost to repair defective
works, discovered after default as well as cost to complete original
works.
5. If cost to complete balance works is more than the balance amount of
the contract, defaulted Contractor is usually liable to the Employer for
additional cost or vice versa.
6. If the project is bonded, then language stipulated in the bond governs
the provisions to complete the works.
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 TERMINATION (Contd.):
7. In termination for Employer convenience, the Contractor
is entitled to:
1) Payments for the executed works.
2) Cost of works associated with Demobilization.
3) Cancellation of purchase orders.

4) Closing out sub-contracts.


5) Retrenching of manpower.

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 WARRANTY:
1. Warranty claims are made by the Employer and are
typically governed by the conditions of contract.
2. During defects liability period which is a sort of
contingent contract, Contractor is bound to repair and
remedy all the defects and replacements of parts.
3. However, if nothing happens the Contractor will not
return the sum allocated for this purpose to the
Employer.

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 CLAIMS FROM EMPLOYER’S PRESPECTIVE:
Employers have contractual rights to claim damages against
Contractor and it includes the following:
1) Failure to pay for labor wages
2) Labor, material & equipment utilized at project
3) Completion & repair of defective works
4) Liquidated damages for delay in completion of project

5) Cost associated with suspension of works


6) Failure to perform works in accordance with contract i.e.
specifications.

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 DOCUMENTING CLAIMS:
1. Documentation is vital construction management function.
2. If the claimant has no authentic records, the world’s best consultants & lawyers can’t
create them for defense purposes.
3. Likewise if claimant has the record but the documentation, organization, quality are
poor , the cost of compiling suitable information for the purpose of claim may be too
high.
4. Most important point to remember about documentation is that “it must be created
at the time of disruption” e.g.
 Letter must be written to record compliance with COC.
 Confirm verbal requests in writing.
 Record disagreements with statements written by others.
 Serve timely notice of request for additional time & compensation.
5. It is imperative to maintain sound record keeping & project documentation system.
6. Proving of the events & consequences of events and causes of problems are essential
in resolving change order, issues to avoid construction claims.
7. It is crucial for Contractors to maintain all documentation as historic record
of the project.
8. Courts & Arbitrators tends to give greater credence to written documentation
than testimonials. 2929
 EFFECTIVE DOCUMENTATION GUIDELINES:
1. Effective documentation result from the following guidelines & maintaining
organizational discipline,
2. Project manager must establish a minimum checklist of records for retention
3. In best scenario organizing the documentation is the rule not the
exception
4. The benefits of documentation are multi faceted,
5. Effective documentation provides data for future project planning;
1) Provides inputs for estimating similar projects.
2) Produces systematic record retention policy.
3) Provides documentation necessary to obtain resolution when dispute
arises
6. A standardized format for organizing the files is beneficial for maintaining
effective documentation & was discussed in 1st training session under title of
Construction claim identification & Record keeping guidelines
7. It is important to remember that the ability to retrieve documentation is
almost as important as creating & retaining records.
8. Documentation management can produce a document that is worth
substantially more than its weight in Gold.
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 CONCLUSION REMARKS:

Knowing the types of claims and how to


document, prepare & present, and evaluate
them is of paramount importance to
“Effective Claim Resolution”.

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Purpose of Guidelines:
 This process identifies the major information-gathering and decision-making
milestones as well as the notice and substantiation compliance checkpoints,
which are critical to the development of defense arguments as claims are
addressed.
 It further emphasizes the use of tools such as scheduling, productivity, and
economic analysis and other modeling techniques in judging the level of
justifications and reasonableness of submitted claims.
 Claims for additional costs and time extensions result from a variety of events
occurring during the course of construction.
 To enhance the chances of success, Contractors submitting claims must closely
follow the steps stipulated in the contract conditions, provide a breakdown of
alleged additional costs and time, and present sufficient documentation.
 On the other hand, project owners need to follow an overall comprehensive step-
by-step procedure for tracking and managing the claims submitted by
Contractors.

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Introduction:
 Construction projects are becoming more and more complex due to new standards,
advanced technologies, and owner desired additions and changes.
 Problems and disputes have always erupted due to conflicting opinions as to the
various aspects of design and construction.
 With the introduction and widespread application of contemporaneous period
analysis CPM scheduling, it became easier to point out where the delays are occurring
and how delays in one activity affect others, and possibly the project as a whole, thus
allowing objective judgments as to whether Contractors should be entitled to time
extensions.
 On the other hand, the increased complexity of construction processes, documents,
and conditions of contracts has been contributing to higher possibilities of disputes,
conflicting interpretations, and adverse attitudes.
 The exhausting and expensive process of litigation has not been making things easier,
as unsettled claims that have developed into disputes can take a very long time to be
resolved.
 All the above factors have made ‘‘claims’’ an inevitable burden in implementing
today’s construction projects.

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Difficulties with Claims :
 In the construction industry, where contract documents
define rights, obligations, and procedures, a claim is a
request by the Contractor for an extension of time and/or
additional cost and can evolve into a disagreement that may
not be amicably resolved by the parties concerned.
 In any construction project, significant additional costs can
be experienced by the Contractor, the Owner, or both, due to
the actions of the other party or parties involved.
 Disputes over the right to a compensation as well as over the
amount of time and/or money to be given often necessitate a
resort to litigation, arbitration, or other forms of dispute-
resolution methods for settlement.

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Analyzing a claim presented by the Contractor based
upon following highlights:
 Were the contract requirements met?
 Did the Contractor refer to the proper clauses in the
contract?
 Does the Owner or Consultant bear part of the
responsibility?
 Was the situation predictable at the time the contract was
signed?
 Were the specifications defective?
 Was the contract misinterpreted? and, if so, which
competing interpretation will rule?

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Claims-Tracking Process Model :
 A need for an overall step-by-step procedure
for claims analysis and administration is
therefore crucial for achieving proper
resolutions and for preventing claims from
developing into disputes.
 Figure No. 1 shows the sequence of events and
procedures that any claim would have to pass
through before being resolved.

Fig.1. Claims administration model


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Occurrence of a
What is the list of
cause for a claim
What was the direct
possible claim causes? action causing the
claim?
Does the Contractor
intend to submit a claim?
Yes
Contractor informs Owner of
his intention to file a claim

The Contractor uses established methods of analysis


in substantiating his claim
 Cost
 Direct Labour
 Direct Equipment
 Materials Contractor may lose the
o Site and head-office overhead right to claim any extra
o Productivity Loss cost or extension.
 Time (CPM techniques)
Contractor to update
information and value of
claim on a cumulative basis Yes
Does the Subject of the claim Does the
have a continuous effect? Contractor accept?

Yes
Contractor submits final
Conditions to be amount and time claimed
No Recovery
with breakdown and details
respected within the specified period.
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Occurrence of Cause for Claim:
 This event is mainly affected by two things:
 Recognition of the possible categories of claims
causes and directs actions on site that initiate the
claim. That is, awareness on the part of the
Contractor of work aspects that are susceptible to
claim shall first exist.
 While the claim is only initiated when it is
perceived by the Contractor that a triggering
action on the part of the owner or Engineer has
taken place.
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Does Contractor Intend to Submit Claim?
 Following the occurrence of a claim triggering event, the Contractor makes a
careful analysis of the situation and weighs its options.
 The Contractor may decide not to pursue the claim for following reasons:
o The grounds for the claim may be shaky.
o Contractor may want to preserve good relations with the Owner
o May feel that the subject of the claim is of little significance and can be
managed informally.
 On the other hand, the Contractor may decide to go ahead with the claim.
 This decision requires that notification requirements be met.
 This is vital, although the Contractor may not have had a chance to assess the
amount of time and/or money he intends to recover.
 The notification shall make a clear reference to the clause(s) of the contract under
which time or cost recovery is sought.
 Failing to fulfill the notice requirements, the Contractor may loose its
right.
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According to the Contract, who is responsible for settling the claim?
Engineer Others
Yes The Owner is to decide
Does the Engineer bear Resort to the
part of the responsibility
on the extent of the
Engineer’s method(s) of dispute
for the claim?
responsibility resolution allowed
under the Contract
The Engineer
Notice Requirements Submodel
analysis the claim
by its type and
causes
Suitable Claim Submodel
o Variation Orders
o Differing Site Conditions
o Defective Specs. Yes According to the
o Conflicting Interpretations Contract, is the
decision binding?
The Engineer formally
notifies the Contractor Quantification
of his final decision Methods Yes Does the
Contractor accept
the decision?

Is the Contractor
satisfied with the Final Settlement is
Yes
Engineer’s decision? reached Resort to litigation
Yes
Fig. 1. „Continued 4141
Methods of Analysis in Substantiating Claim:
Generally speaking, the items claimed by the Contractor fall under two major categories:
Time and Cost:
 In the first category, the Contractor requests a modification of contract delivery dates
and milestones to offset the delays that it did not cause.
 In the second category, the Contractor asks for reimbursement to cover the
following items:
o Premium time,
o Increased equipment cost (rental or ownership),
o Increased financing costs,
o Increased site overhead,
o Increased head office overhead,
o And decreased labor productivity.
 Time and Cost categories are very much interrelated.
 Any delays are apt to cause an increase in all cost items.
 Any productivity drop causes an increase in the duration required to complete the work.
 Hence, the Contractor may claim any combination of the above factors, or possibly all of
them.
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Productivity-Loss Estimation Methods:
 Claims for productivity losses are generally a cause of tension between
the Contractor and the owner.
 This is due to the great difficulty involved in quantifying disruption effects.
 The situation is further complicated when the Contractor’s claim includes
the ‘‘RIPPLE EFFECT,’’ that is, a request for compensation for activities
whose productivity suffered indirectly due to the owner’s actions.
 The owner is usually reluctant to accept the existence of this ripple effect
because it is not readily seen and because it may be used to cover up the
inefficiency caused by the Contractor’s mismanagement.
 In order to quantify the loss in productivity, the Contractor can resort to
any suitable method.
 Productivity loss estimation methods serve a dual purpose. Not only are
they useful in claim analysis, but, if conducted in a timely manner, they
also allow the Contractor to utilize the available float to mitigate the effects
of the disruption (by re-scheduling of activities, reassigning crews, and so on).
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Estimating Cost Items:
 Compared to delay analysis and productivity-loss estimation,
the quantification of ‘‘direct cost items’’ is a relatively simple
issue.
 By direct cost items, we mean those cost categories in which
the increase in cost can be easily proved and valued.
Increased equipment and financing costs are examples of
such items.
 On the other hand, some items that are not so easily
quantifiable such as head office overhead. This section
presents the different cost categories that may be the subjects
of alleged claims and the means to substantiate such costs.

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Increased Labour Costs:
 These are divided into DIRECT and INDIRECT labor costs.
 An increase in direct labour costs usually refers to those
activities directly influenced by the owner’s disruption. This
increase can be obtained from actual labor work records
(which show the increase in work duration) by applying the
labor rates used by the Contractor.
 The Contractor is also entitled to compensation to cover any
increase in wage rates that may occur during the delay period.
 By indirect costs, we mean the costs associated with activities
indirectly affected by the disruption i.e. ripple effect. These
costs are estimated by using any of the productivity loss
estimation techniques.

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Increased equipment and material costs:
 The increase in equipment cost is calculated from the
delay period and the rates paid / charged by the
Contractor for the use of different equipment.
 Equipment idle times are derived from equipment work
records, which show the number, type, capacity, and
usage of equipment on a daily basis.
 Estimating increases in material costs is also
straightforward and can be done by comparing actual
and revised drawings and by referring to materials
records, which give the quantity and description of
materials brought to site.
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Increased Financing Costs:
 Due to delays, the Contractor suffers increased financing
charges on the overdraft accounts secured to finance the
construction process (as the case maybe).
 To justify its claim, the Contractor should disclose all its
trading accounts, so that the quoted interest may be
accepted. Otherwise, the current rate of borrowing is
adopted (KIBOR +2% adopted by PEC).
 Also, the Contractor may claim inflation costs if the
delay period was of such length as to warrant it.

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Increased overhead costs:
 This includes both site overhead and head-office overhead.
 An increase in site overhead expenses is usually easier to quantify. It
requires the Contractor to disclose its buildup of site preliminaries,
showing detailed costs for all items considered as general site items (site
infrastructure, cranes, and other general site equipment).
 Quantifying the head-office overhead, on the other hand, is a tedious
business.
 There is no clear-cut method to quantify head-office overhead, but
researchers have come up with many estimation formulas.
 In general, while pricing a tender, the overhead cost for head-office is
assumed as a percentage of the project cost and in M/s. ICPL, a percentage
of four to five (4 to 5) percent is considered as the norms.
 This matter has been discussed in detail in the instructions for overhead
cost evaluation documents prepared by the Contracts department which
has already been distributed to all the concerned for implementation.
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Continuous Claim Effect?
 It is necessary to note if the subject of the claim has a continuous
effect.
 If the effect on the program and budget can be directly assessed after
the occurrence of the cause for a claim, there will then be no
continuous effect.
 On the other hand, if the consequences resulting from the claim are
not foreseeable or cannot be measured at the time the Contractor
notifies the owner, the claim in this case has a continuous effect.
 Here, the Contractor is asked to give an account with details of the
amount claimed and the grounds upon which the claim is based.
The Contractor shall at intervals, as the Engineer may reasonably
require, send further interim accounts stating the accumulated
amount of the claim and any further grounds upon which it is based.

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Timely Substantiation Submittals:
 The Contractor has to submit the total amount of time and/or money claimed
within a period specified in the contract from the end of the effects resulting from
the occurrence of the cause for the claim.
 The claim should be presented in a clear and logical manner.
 An introduction providing details of the parties involved in the claim and all
relevant dates and information;
 A description of the claim events as they occurred and their effects;
 A description and reference to the steps already taken by the Contractor, such as
notices given;
 A calculation of the cost impact based on a breakdown of actual direct and indirect
costs incurred; and
 A determination of the claimed extension of time based on an analysis of critical
and noncritical delays;
 The documentation usually required for claim analysis has already been
discussed in the Training Session-I under the title of Construction Claims
Identification & Record Keeping Guidelines.
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Was the variation order
issued due to default on the Yes
The Contractor is to bear any
Contractor’s part?
additional time and cost

Is it a written or an oral change order?


Oral Written
Does the changes clause
cover the disputed work? The Contractor is to
Yes
submit a notice of
Yes additional price for
Do regulations and law specifically
varied works, with a
require a written order?
breakdown of price?

Was the Owner aware of the


changes being performed? Yes
Yes
Did the Owner explicitly or
implicitly agree to
reimburse the Contractor?
Yes
Yes
Did an authorized agent of the
Owner issue the change order?

Owner is to continue
No recovery Was the written change-order his assessment
requirement waived? Yes

(a) A
Fig. 2.Variation orders sub-model 5151
A

Does the Contract


include rates or prices
applicable for the varied
works?

Yes
The Engineer is to Does the percentage
agree with the Yes change in total
Contractor on new contract price affect
rates / prices the existing rates in
Quantification the contract?
Agreement reached
Techniques
Failed to agree

The Engineer fixes The variation order


new rates/prices for
is to be valued
on-account payments

The Contractor is
notified of the
(b) valuation result
Fig. 2.Variation orders sub-model 5252
Table 1. Alternative Dispute Resolution Methods:
Method Major participants How it works
Representatives negotiate a settlement to
Direct negotiation Representatives of parties
the dispute .
Mediation Disputing parties, mediator Mediator goes back and forth between
parties in order to bridge differences .

Nonbinding Disputing parties, arbitration board Parties present their cases, arbitration
arbitration board makes nonbinding
recommendations .
Mini-trial Top managers of disputing parties, Managers present their cases and engage
neutral member (three-member in negotiation, neutral panel member
panel) acts as advisor
Hire-a-judge Disputing parties, judge One Judge (active or retired) presides over
Dispute resolution representative for each side, third informal trial where parties present their
boards member chosen by other two(three- cases Panel is formed at onset of project
member panel) and is thus familiar with project details
and work progress. Panel looks into all
arising disputes and passes nonbinding
judgment .

5353
According to Contract, Who is Responsible for Settling
Claim?
 The party responsible for giving the final decision should be
clearly specified in the contract.
 Usually the Engineer or a Consultant designated by the
Owner is responsible for deciding the outcome of the claim.
 Often, it is stated in the contract that if amicable
settlements are not achieved, other dispute resolution
methods can be used, such as arbitration, mediation,
dispute resolution boards, and litigation.
 In Pakistan, the Contract Act of 1872, Law of
Arbitration 1940, Code of Civil Procedures 1908 are the
applicable legal documents for reference purposes.

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Does Engineer Bear Part of Responsibility for Claim?
 The owner has to address the following questions carefully:
o Was the cause of the claim linked to the part of the Engineer?
o Was the design defective or incomplete?
 The owner is usually bound by the actions of the Engineer on site.
 That is why the Engineer has to make sure that any action he takes is consistent
with the terms of the contract.
 If any of the Engineer’s actions prove inconsistent with the contract terms, the
Contractor may become entitled to the appropriate compensation, which will
then have to be paid by the Owner.
 The Owner, however, has to decide if the Engineer was responsible.
 Ultimately, it is the Owner who will pay any extra amount.
 If the Engineer turns out to bear part of the blame, the owner can make the
Engineer pay for any mistakes he made.
 In extreme cases, the Owner can even relieve the Engineer of its obligations and
call upon the Engineer’s professional liability insurance provider to pay
for damages resulting from the Engineer’s default.
5555
Engineer Analyzes Claim by Its Type and Causes:
 In all cases, the Engineer is expected to make an independent,
objective judgment of the situation.
 The Engineer should act impartially, whatever the outcome of
the claim may be, and he or she is obliged to recommend that the
Contractor be given whatever it is rightfully entitled to under the
contract.
 Once the Engineer has the claim, he will proceed with the analysis
based on the claim’s type and its causes.
 The tools used for the analysis are the ‘‘notice requirements’’ sub-
model, sub-processes for analysis of the most common types of
claims, such as differing site conditions, defective specifications,
conflicting interpretations, and variation orders, and quantification
methods for estimating cost and time entitlements.

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Notice Requirements, Sub model:
 This model stipulates that the Contractor loses the
right to claim if any of the following conditions is met:
o The Engineer was not formally notified of the
occurrence of the cause for a claim;
o The Contractor did not submit its notice within
the allowed duration;
o The Contractor did not state that its expects extra
time or money; and
o The Owner was biased (unfair) due to lack of
notice.

5757
Differing Site Conditions, Sub-model:
 Any of the following conditions, if satisfied, would negate
recovery of cost and time.
 The contract documents were fairly accurate in
representing site conditions.
 The contract documents do not portray site conditions, but
those site conditions do not differ materially from
conditions ordinarily encountered in work of similar
character.
 The Contractor relied blindly on the described
conditions when a simple site visit would have shown
discrepancies between actual and depicted conditions.

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Defective Specifications, Sub-model:
 Depending on the way the specifications were written, two cases arise:
 Where the specifications describe the performance for the work to be achieved, the specifications
are said to be of the performance type.
 In this case the Contractor has the choice of the method it wants to use and bears a great risk in
producing the desired end result.
 If the Contractor can show that the described performance was impossible to achieve by any
reasonable method and that it did not assume the risk of achieving the specified performance,
either through a clause in the contract or through its own actions, then the Contractor is likely to
recover any additional cost for the correction of the work.
 On the other hand if the specifications clearly stated the method to be used in performing the
work, the specifications are said to be of the method type.
 If the failure occurred before the completion of construction, then the Contractor is unlikely to
recover any costs since it is usually responsible for protecting the works during the construction
phase.
 In this case, where the defect was obvious, the Contractor should have brought it to the owner’s
attention. If not, recovery of cost by the Contractor is unlikely.
 If the Contractor deviated from the specifications due to an observed defect, then he or she
should have secured the owner’s approval of such deviation. Finally, the Contractor might not
recover if it assumed the risk of defective specifications under the contract conditions.

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Conflicting Interpretations, Sub model:
 Four issues are checked:
o If the terms used have a plain meaning or a trade meaning, then
that meaning is adopted;
o If the documents were so vague and ambiguous that the Contractor
should have inquired about their true purpose, then the owner’s
interpretation prevails;
o If the past actions of the parties convey a mutual understanding, then
this mutual agreement prevails over the written requirements;
o If the contract is read as a whole, so as to understand the purpose of
each section and the interrelationship between different sections,
and more than one logical interpretation can be reached, then the
‘‘order-of-precedence’’ clause is checked to determine which of the
conflicting documents govern. Otherwise, the ‘‘construed against the
drafter’’ rule applies; that is, the Contractor’s interpretation governs.

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Variation Orders Sub-model:
 Variation orders are formal requests by the
owner to change the scope, quantity and/or the
quality of part(s) of the works constituting the
contract.
 The claim in this case will result from two
possibilities:
o Disagreement over whether an extension of
time is due for performing the varied works;
o Disagreement on the rates to be applied to the
varied works.
6161
Quantification Methods:
 If the analysis shows that the Contractor has valid
grounds for a claim, the Engineer now has the
task of quantifying the amount of compensation,
in terms of cost and time that the Contractor is
entitled to.
 To achieve this purpose, the Engineer has to
resort to the quantification methods proposed
earlier for the use by the Contractor to
substantiate the claim.

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Engineer Formally Notifies Contractor of Final
Decision:
 The Contractor, however, is not ultimately bound
by the Engineer’s decision.
 Usually, the Contractor can dispute the
Engineer’s decision and has the right to resort to
arbitration, litigation, or other dispute resolution
methods, as stipulated by the Contract / the
Contract Law.

6363
Resort to Alternative Dispute Resolution Methods allowed under the
Contract:
 It is useful at this stage to present the alternatives that the Contractor
may resort to in order to challenge an Engineer’s decision.
 Traditionally, Contractors used to take their grievances directly to court.
 Litigation is beneficial in that it is not a hasty process.. However, the increasing
legal fees and inordinate long trial periods, coupled with the Contractor’s
desire to maintain good relations with the Owner, have made this alternative
considerably less desirable.
 Binding arbitration presented itself as a cheaper and faster means of resolving
claims; however; it suffers many disadvantages, most notably the slowness of
the process ,due to the busy schedules of the arbitrators.
 Alternative dispute resolution (ADR) methods are means of resolving claim
cases quickly and painlessly. They enjoy a number of advantages over
litigation and binding arbitration, informal atmosphere, easier
communications, less cost and time, maintaining a working
relationship among the parties, confidentiality of proceedings, and
nonbinding decision.
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Concluding Remarks:
 This guideline has presented a process model aimed at addressing
the stages through which construction claims evolve.
 The outcomes from such a systematic claim event-screening
exercises are likely to be more acceptable to all parties involved
and thus reduce the likelihood of claims eventually developing
into disputes, which can be costly to resolve.
 The model is characterized by a number of major stations of
tracking and analysis.
 These include satisfying notice requirements, claims degree of
substantiation and adopted methods of analysis and
documentation, and the integration of developed, structured
approaches for achieving decisions along technical grounds.

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