Last edited 12 Jan 2021

Contract claims in construction



[edit] Introduction

Claims commonly arise between the parties to construction contracts. This can be as a result of problems such as delays, changes, unforeseen circumstances, insufficient information and conflicts.

Claims might be made for things such as loss and expense, extension of time and liquidated damages. The contract should set out exactly what can constitute a claim and how it should be dealt with. There may also be claims associated with the appointment of consultants.

Claims must be properly constituted and documented:

  • Proper legal entitlement must be established.
  • Cause and effect must be clearly demonstrated by contemporaneous records.
  • Additional costs must be backed up by full supporting documents.

Unmerited and exaggerated claims should not be made, and claimants should avoid unnecessary optimism when reporting settlement figures to managers and should be willing to accept a reasonable offer of settlement without recourse to expensive legal action, which occupies management resources that would be better utilised elsewhere. There is no guarantee of success in court.

[edit] Clients

The client should keep mind:

[edit] Tender documentation

A number of strategies can be used in the preparation of tender documentation to help avoid claims:

[edit] Design

Many claims are based on delays resulting from design consultants issuing schedules, drawings and specifications after construction has begun. Conflict can then arise due to arguable deficiencies in that information:

  • Missing, or not produced
  • Late
  • Incorrect
  • Insufficient to order or build
  • Impractical
  • Unclear or conflicting
  • Inconsistent with pricing information
  • Inappropriate or not fit for purpose
  • Uncoordinated with other information

Some flexibility is allowed by standard traditional contracts for the design team to issue further drawings and details reasonably necessary, either to explain or amplify the contract drawings.

There can be an onus on the contractor to raise any queries on newly received information within 28 days of its receipt or forfeit their right to additional payment.

[edit] Contractor’s master programme

Many contracts require the contractor to draw up a contractor’s master programme after the execution of the contract. The contract documents should specify the level of detail required by the contractor's master programme, however, the contractor should make allowance for the following:

Upon receipt of the contractor’s master programme, the client’s team should examine and challenge any aspects of the programme that cannot be justified. This programme is most likely to be the basis upon which all future claims for delay, extensions of time, disruption and loss and expense are based and judgments made. Challenging the contractor’s master programme at a later date when claims are submitted is arguing from a position of weakness.

The client should not ‘approve’ the contractor’s master programme, as approval might be considered to relieve the contractor of liability for programming the works in such a way as to achieve the completion date.

NB: As it is produced after the execution of the contract, the contractor’s master programme does not impose any obligation on the contractor beyond those imposed by the contract documents.

[edit] Cause and effect

Global claims, made by lumping together many different causes of delay to make a case for continuous disruption and cumulative effect, has not always found favour with the courts. This method of ‘death by a thousand cuts’ can be fairly easily counter-challenged by the client’s team, citing all the contractor’s deficiencies such as labour shortages, poor management, plant breakdowns and subcontractor non-performance. This all leads to the argument of parallel, concurrent or contemporaneous delay.

It is better to be specific rather than generic. This is a more painstaking exercise requiring more intellectual rigour, as the claimant lists each alleged default, linking it against the consequential delay and its knock-on effect, backed by contemporary records.

This approach is obviously a more precise way of establishing quantum and will lead to a more factually-based judgement. In other words, to succeed, a claimant needs to establish a discernible nexus between the breaches pleaded and the consequential delay and/or associated costs.

[edit] Notice and particulars

Under UK commercial law and under all forms of building contract any party has to give the other notice as soon as a breach is apparent so that it can be remedied or its consequences mitigated. Failure to do this expunges the right to additional payment for loss or expense.

The delay or loss and expense notice should:

The client team should immediately check the factual basis of such a notification and comment on any content that appears to be subjective.

[edit] Concurrent delay

Concurrent delay is a situation where several causes of delay are running in parallel. An example might be where consultants details were issued late, but an industrial dispute delayed progress of critical work at the same time. In more recent judgments, the courts have disregarded arguments about which was the dominant delay and judgement has been made on the basis that the loss should lie where it falls.

In the above example, the contractor may be entitled to an extension of time and relief from damages but not entitled to loss and expense.

[edit] Quantifying claims

Quantifying claims may involve a number of considerations:

[edit] Costs

Actual cost is the proper basis for evaluating claims. It is a popular misconception that the contractor is bound by its tender rates as its full entitlement. Costs may include allowance for inflation resulting from delay.

[edit] Preliminaries

Preliminaries include set-up costs, running costs and dismantling costs. Thus extensions of time should not include set-up or dismantling costs but merely running cost at the time of the breach and its associated period of delay.

[edit] Disruption

Disruption describes loss due to inefficient productivity. It is extremely difficult to assess.

Often the most effective approach is to localise the claim to a specific area of breach. Then compare individuals productivity prior to and after the disruption occurred against the productivity during the period of disruption. Generic claims based on statements such as ‘this was the tender price and this is the outturn cost’ are unlikely to succeed.

[edit] Head office or factory overheads

Hudson’s formula appears to be the one most readily accepted by the courts:

(HO Profit % / 100) x (contract sum / contract period (weeks)) x (delay (weeks))

In applying the above formula, the following should be subtracted:

[edit] Loss of profit/opportunity costs

This is only valid when the claimant can prove breaches of contract directly prevented it making a profit elsewhere. Deductions must be made for additional profit that has been paid on the project as a result of extra work instructed and priced within the final account.

[edit] Finance charges and interest

Finance charges and interest on extra capital required to fund costs arising from breaches in the contract are recoverable providing:

  • Interest rates are proven and reasonable (e.g market rates prevailing during the period of breach).
  • If financed within the corporate group, the rate will be that received from monies it has placed on deposit.

[edit] Related articles on Designing Buildings Wiki

[edit] External references


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