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

a profitable
market.

Achieve
quality
budget.

situation

customer's
job within

in a highly

satisfaction
the owner's

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

compet-

by producing
a
time frame and

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

Recover

changes

additional
created
all
expenses
in design or construction
methods.

by

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

project
teamRs
proficiency,

project

public

cost

technical

control

relations

and

procedures,

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

However, if the facts

claim itself
is not properly
a significant
cost recovery

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

If
support
of this

support the claim but the

addressed and presented,
is still
unlikely.

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:

administrative
and

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.
B.5.1

typical

construction

claims

against

owners,

typical
tors,

construction

claims

against

the contrac-

implications
legal
schedules,
record
legal
planning

of

critical

method

management,
relationships,
and cost

and
estimating.

TYP1catcO3sTRucT1oB

CLAIIGAGAINSTOWENRS

The most frequently

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

path

poor project

planning,

to file

a claim

0 scope changes,
0 constructive
0 errors

change

and omissions,

contract

work suspension

0 site
o

other

orders,

acceleration

access

and stoppages,

or availability,

contractors

0 strikes

interferences

and acts

Poor Project

and expediting,

and delays,

tion
this
loss

of God.

flying

Lack of adequate attention

to front-end
of the project
usually
ends up in:
0

inadequately

incomplete

fast

and

defined
and/or

scope of work,

incorrect

shortened

limited

unreasonable

badly

inappropriate

Errors

planning

and

design.

Most of the time, poor planning

is attributed
track projects
that bring about:

to

bid periods,
site

specified

investigation,
construction
construction

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.

periods,
materials,

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

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

and

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 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.

E.5.2

andlXXpE&t~

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.

to accelerate
of it within
This
date.
contractual
the right
to

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

1991 AlLcB Tlzm~Iws

claim
arise.

for

compensation

over

productivity

levels

may

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

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

improper
tions,

assumption

failure

procedures

arbitrary

failure
to expedite/disclose
to perform,

failure
schedule,

excessive

poor

to grant

of directionof

access to the construction

approval

comply

'information

with

damaging owner's
the contract,

site,

damaging neighbor'6
work,

violating
right6
the construction

violating

contractual

needed
payment

defective

work,

property

damages,

contractors'

low-ball

late

and

to recover from issues

Usual claims by the

materials!,

installation6
installation6

from

several

when performing
when performing

of property
owner6 adjacent
battery
limits,
and

government

Late

to

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

Completion

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

completion,

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:

and

bidders.

Oat-of-Specification

may result

Even though contractual

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

Owners also have the right

that may harm them economically.
Owners, among others,
are:

Property
damage claim6
sources, 'including:
l

CLAIHSAWIRSTTRBcoaTBBcloa

out-of-specification

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.

opera-

communications.

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.

actions,

number of change Orders,

TYPICU

Work

delays,

or unreasonable

to

field

Defective

Materials

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

misunderstood

technical

bid mistakes,

and

desire

E.5.3

to improve

Dispute6 'and claims

during the contractual

the scope of the job,

requirements,

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

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

to understand

total
',

scope of the job,

organized
sequence
perform the job,

O duration

for

O resources

all

of

activities

activities

needed

involved,

needed to accomplish

to

of an original

each activity.

to update

the CPM periodically,

O procedure6

to revise

the CPM, and

The following
checklist
planning
and scheduling
O Establish
SyStX?m.

the CPN as a tool

O Establish
routines.

a progress

schedule

and maintain

planning

a6 soon a6

indexes

and their

schedule

O Create

a scheduling

O Insist

on detailed

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

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

progress

schedules,

daily

change order

purchase

correspondence

and weekly

reports,

log,

orders

and delivery

receipts,

from and to the contractor,

revisions
backup

filing

for

Roth parties
specifications.

are

bound

to

inter-

There is an implied warranty

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

the

vari-

schedule

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

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.

plan

and schedules

minutes

revisions,

and

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

changes.

schedule

follow

0
with

system.

proposed

notify/process/document

O job diary,

If properly
included
in the contract,
some
general
legal
implications
of an approved critical
path method schedule may be summarized a6 follows:

and approval6
from the owner should
according
to the schedule.

O photographs,

O Establish
change order/approved
face System.

Inspections
be performed

and scheduling

approval

Promptly
ances.

for

measurement

RStabliSh
schedule
revision6
minimum turnover
time.

claim

tool

approval

O Agree upon planning/scheduling

meaning.
0

for

provide6
a valuable
administration:

and maintain

O Gain construction
possible.

CPR,

O procedures

O procedure
to utilize
settlements.

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

and

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

issue

staffing

equipment

used and idled,

material6

utilized

subcontractors

detail6

change orders

safety.

date,

weather

levels,

and future

on controversial
work,

matters,

and

are one of the major causes

to maintain
good record6 of

initiations,

in
O cost
lower

E-5.4

and time

approvals,

current

status,

requirements,

performance,

Since change order6

of claims,
it iS important
them including:
0

conditions,

estimates,

1991 A&cB ~sAc!rIoars

0

requests

daily

interface

for

project

progress,
with

completion

revision,

Contractor

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.

and
current

approved

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.

Inmrance

Companies

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.

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

with

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

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.

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 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

general

conditions,

special

general

standard

technical

drawings.

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

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

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.

E.5.5

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.

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

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.

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

E.5.6

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.

1.

ricbhrn iFlmduction
1965.
Buffa, E.
Wew York:John Wiley hi Sons.

2.

Cleland,
D.
clanegaw!6nt.

&mlyd.!sl
1975. sgew
Wew York:RcGraw-Hill.

3.

J.,
Daniels,
Isternational
ing Co.

1983.
E. Ogram, and L. Radebaugh.
lBusiness.
Addison Wesley Publish-

4.

Levin,
Banag-t
Hill.

@JRmntitateJiwe Lipp-omche% ec
1975.
C.A. Kirkpatrick.
Wew YorkrWcGraw-

R.
.
D.

1966.

Project

.mnagwt.

cleaagi~t.
and IPrcjene

Gower Press.

5.

Lock,

6.

Lucey, T. 1984.
Publications.

7.

lanzanera,
iRlEfamCS5.

8.

Roder,
J. and C. Phillips.
Tsnagex6nt
with
6XZ.l and Part.
Wostrand Reinhold.

9.

O'Brien,
rz.amig-t

10.

POpper, H. 1979.
York:RcGraw-Hill.

11.

1977.
Rigg6, .J.
York:RcGraw-Hill.

12.

Specthrie,
Englewood

13.

Weston, J. and E. Brigham.

Dryden Press.

14.

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

Qmmtitatiwe

I.,
ed.
Dhahran:

J.

EaWmm.

1990. Prcjcact
Saudi Aramco.

DP

IzaimgBt

lmojmt
1982.
New Yorkrwan

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

S.
Cliffs,

cbdern

Cobrst IXngineerhg~

Engimserimg

lZommica.

Indnstrial
1959.
WJ:Prentice-Hall.
l%nageriel

New
New

Aooounting.
Pinaace .

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