Contract claims in construction
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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 loss and expense, extension of time, liquidated damages and so on. The contract should set out what can constitute a claim and how it should be dealt with. There may also be claims associated with the appointment of consultants.
Contractors and subcontractors should avoid unmerited and exaggerated claims which in extreme cases can lead to personal prosecution on charges of criminal fraud. 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.
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.
The client should keep mind:
- The desirability of avoiding claims.
- Their obligation to resolve proper claim entitlements in an efficient and professional way.
- Investing in front end surveys, particularly ground investigation and topographical surveys, can help reduce the likelihood of claims. A National Economic Development Office (NEDO) report on 5000 industrial buildings, 8000 commercial buildings and 200 roads and bridges established that over 60% of claims arose from delays due to ground problems.
- It is important to ensure that all geotechnical data is made available to all parties in the bidding process.
- It is important to pick the most suitable method of procurement in relation to risk allocation and appropriate contract conditions. This includes deciding which elements of a project are to be designed by the contractor or subcontractors.
- Avoid drafting changes to standard forms of contract, which while attempting to re-allocate risk, can lead to ambiguity and uncertainty. The balance of marginal judgement will favour the party that had no hand in drafting the contract. The ‘contra proferentum’ rule may be applied against the interpretation of ambiguities.
- Usually the earlier a dispute is settled, the cheaper the settlement. In addition, there are considerable advantages to reducing the period of antagonism between parties to the contract.
- Avoid dealing with items post tender. Statements such as ‘to be agreed’ can lead to dispute without the leverage of competition.
- Phrases such as ‘to suit the contractor’s programme’ are open ended.
- Setting a conditional date such as, ‘in accordance with the architect’s instruction’ creates uncertainty for tendering contractors. It is not possible to enforce an ‘agreement to agree’.
- Avoid ambiguity in design responsibility, such as, ‘the contractor shall complete any design required after the consultants have finalised the drawings provided for tender purposes’.
- Ensure that programmes, resource charts and method statements supplied by contractors with their tenders are provided for tender assessment only and are not adopted as contract documents or as the basis for variations.
- If possible avoid ‘letters of intent’ as they encourage arguments over details in the contract not covered in the letter of intent. There are many cases where disputes have gone to Court with no signed contract in place. At the very least a letter of intent should limit activity to pre-construction activity, such as engineering design and pre-ordering of long-delivery items of manufacture. It is also beneficial to define payment terms in a letter of intent as this can be one of the most contentious matters of legal disputes. There is no exact legal definition of Quantum Merruit, and so a letter of intent should describe how overheads, profit and indirect costs are to be treated.
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.
- Insufficient to order or build.
- Unclear or conflicting.
- Inconsistent with pricing information.
- Inappropriate or not fit for purpose.
- Uncoordinated with other information.
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.
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:
- Realistic time for carrying out each section of the work, with proper consultation and agreement with the major subcontractors involved.
- Sensible periods for specialist design and manufacture, including approval periods for checking conformity and co-ordination with other specialist input.
- Providing consultants with an even workload for the approval of specialist drawings.
- A stated system for recording progress against programme and future updating to reflect enforced changes.
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.
 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.
 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:
- Identify the specifics of the breach and legal entitlement clauses in the contract.
- Disclose as full information as possible, including the effect of the delay.
- Identify relevant dates and periods of delay involved.
- State any criticality and effect on the completion date.
The client team should immediately check the factual basis of such a notification and comment on any content that appears to be subjective.
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.
Quantifying claims may involve a number of considerations:
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.
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.
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.
 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:
- Credit for staff time included in the project costs as visiting supervision.
- Any additional overhead recovered within the final account, such as the variation account.
- Credit where resources were re-deployed due to delay.
 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.
 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 (eg 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.
 Related articles on Designing Buildings Wiki
- Alternative dispute resolution.
- Causes of construction disputes.
- Civil procedure rules.
- Contract sum.
- Construction contract.
- Contractor's master programme.
- Dispute resolution boards.
- Expert witness.
- Extension of time.
- Final account.
- Housing Grants, Construction and Regeneration Act.
- Liquidated damages.
- Loss and expense.
- Modifying clauses in standard forms of contract.
- Scheme for Construction Contracts.
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