1 997 AACE INTERNATIONAL TRANSACTIONS
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How to Lose Money
Negotiating a Construction Claim
Michael R. Just, CCE, and Brian Tbrone
W
tenable arguments The most common mltakes made by owners and
COntraCtOrS include poor strategleS in defense of delay clalmS, I)Oorly
artioulated claims for additlOnal costand negotlat10n apProaches
that result m animoslty between the parties instead of effective reso-
lution. These meifectlVe methods can make succeSful claims reOlu_
t10n muCh more difficult and adversarlal The resuIt can be delayed
resolutlOn Or, ln the worst case, eXPenSIVe lltlgation We haYe docu-
mented the most common loslng Strategies in three areas Schedule
delay, COSt and damages, and negotiation approach In addlt10n, We
have cited experiences from actual case hltOneS Where negotiations
Were affected by poor strategy Hopefully, lessons will be leamed
at will be valuable to cost englneers and pro]eCt management prO-
fessionals in achievmg more succeSclalmS and change-Order ne-
godations.
LOSING SCHEDULE STRATEGIES
Losing Strategy #1 (Contractor)-LBlame the Owner for A
Delays
Contractors sometlmeS uSe a negOtlatlng Strategy Whereby all
PrQJeCt delays are blamed, by default, On the owner. When thlS Strat-
egy lS aPPllednO COnSideration lS glVen for how discrete changes or
events impac[ed the prqect completion date Usuallya lltany Of
OWner-CauSed impacts is identified, but the relatlOnShip of these im-
PactS and alleged delays to specific actlVities in the prQleCt SChedule
is not specified. If specifro activities are idened, the criticallty Of
these activities is lgnOred.
Loslng Straegyl (Conlractor)-Ignore Conrrency
Failure to consider concurrence of delays may result in an
analysis that greatly overstates total prQieCt delay. In fact, nOt COn-
Sidering conourrency may yield an analysIS that show a longer delay
than the actual preet delay that occurred. On a recent claim negoti-
ationo additlon Of a11 delay days requested by the contractor ex-
Ceeded the actual prqiect delay by tee years. Put another way, the
requested time extension, if granted, WOuld have resulted in a con_
tract complefron 3 years after 'he actual proJeCt COmPletion date
This inaccurate analysis reulted from the addltion of delays that all
OurTed at the same lime. This led to a total breakdown of negotia-
tien and to a lengthy and expenive triaL After the trial judge made
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it clear toe contractor that ltS delay methodoIogy was wrong, the
delay anaIysIS WaS reVled during the trial
Losing Strategy(Contractor and Owner)-Ignore Resoce
Constraints
Both contractors and owners have used this losmg strategy and
Suffered the consequences When contractors lgnOre reSOurCe re-
qulrementS m their scheduleshe result is a Chedule that shows
more float than if resources were taken into accountThis leads
to a classIC argument OVer Who owns the float in the schedule When
a contractor submlts a requeSt for a time extensIOn, lt is reeCted to
the extent the lmPaCt Or Change uses available float The owners
ClaSic (and technlCaIly correct) argument is that lfe change uti-
llZes float and the prQJeCt COmPletlOn date lS nOt lmPaCted, then the
tlme eXtenSIOn requeSt lS denied The contracIor argues tha=) the
float does not actually exlSt, Or 2) lf lt does exist, the float is required
to maintaln SOme level of eclenCy These arguments, mOre Often
than not leave the owner unconvlnCed. When the parties cannot ne-
gotiate the changet oflen leads to a more serlOuS dispute later. The
reallty i that most schedules are created without consideron of re_
SOurCeS. The obvIOuS Wmnlng Strategy lS tO Ioad schedules with re-
SOurCe requlrementS When this has not been done, both partleS need
to consider the lmPllCation When evaluating requests for tlme.
CentlyVeI few contractors are sophlSticated enough to integrate
resource planmng wlth the schedug effort eifectively
Losing Strategyl (Contractor)-Ignore CPM
Even if the contract does not requlre a Critical path method
(CPM) Chedule, a CPM is required to prove delay to the project
SChedule In the interest of saving time or money, many COntractOrS
try to assert owner.caused delay without the aid of a CPM schedule.
Owner Wi11 not generally granime extensions or entertain delay
Claim Wlthout some fom of CPM analysl The CPM-based Ched-
ule presentation should be ued at the changeOrder stage EYen if lt
is not requlred by the contracCPM schedule i8 neCeSSary to P-OVe
delay.
Losing Strategy rs (Contmctol. and Owner)-FIle `q3arly
Schedulel) Claims
An early schedule is a schedule that shows prq)eCt COmPle
tion earlier than the contract completion dale. Thi is a loer for the
OWner Who usually refue tO alow legitimate early schedules. It lS
also a loser fore contractor, Who artifroially shortens schedule to
Wm the claim game [5]. Becaue OWnerS are WOrried about the
 1 997 AACE INTERNATIONAL TRANSACTIONS
amiflCatlOnS Of approvmg early schedules they are frequently e-
jected The reason owners are reluctat to approve early schedules is
the fear that a delay claim will be filed even though the prueCt is
completed wlthin the specified contract tlme. Of course lt l nOW
well-eStabllShed that the contractor has the righ=o finish early The
coactor,s Iow bld prlCe may have been based on a plan that results
in ely completlOn and the associated cot SaVlngS. The on]y way
the owner knows for sure lS through the contract or contractor COOP-
eration when the bid lS PrOVided to the owner WhlCh proves it lS
predlCated on an early completion Even O, an OWner could assert
that the plan lS unreasOnable In many cases the contractor does not
provlde bld backup or provides ntradlCtOry backup to support the
early complet10n SChedule. The wlming strategy for the contractor lS
to be prepared to support early schedules with bid backup and a ra-
tionale for its reasonableness. The wlnnlng Strategy for the owner is
to approve early schedules that are supported by the bld and deter-
mined to be reaOnable
Lusing Strategy #6 (OwIler)-Ignore Possible Contractor Claim
Yet to Be Made
Owners and thelr COnSultants should not lgnOre ClalmS that have
not yet been made but could be made ln the futue When negotiatmg
a claimt lS always helpful to put yourself ln yOur adversarys
shoes Although it is up to the contractor to prove de[ay and lmPaCl
the wise owner recognlZeS When legltimate clains could be devel-
oped wlthe expendlture Of addltlOnal money and outslde expertlSe.
Inevltably, the contractor that has been damaged by legitlmate OWner
impacts wln tlme, hire the necessary consultants to prove it. Tlme
and money can be saved lfese claims can be negotlated early m
e resolution process.
I,OSING COSTIDAMAGE STRATEGIES
Lusing Strategy(Contractor)-AIways Usee Eiceay
Fomula
Many clalmS uSe the EIChleay formula to calculate home o
overhead impacts. The Eichleay formula, howeverS aPPlicable ln
very linrited circumstances. The two key elements for the proper use
of the Eichleay fomula are
l. a distinct standby penod of uncertain durat10n Caued by the
PrQleCt OWner, and
2. an economic impact on the absorption of the contractors home
Oce expese
In recent decl10nS in the US federal courts [2], contraCtorS have
es[ablihed prima facie Eichleay damages (economic impact) by
showing l)e existence of a govemmenimposed delay, and 2) that
the delay was for an unce-taln Period during which the contractor
had to stand ready to compe the work. The burden then shs to
the govemment to show that the contractor could have reduced its
overhead or laken on other wok to absorb the unabsoed overhead
created by the impacted prQject Other recent case law (Ayer V.
JohoI1996) has focused on standbyrequirements
The blanket use of the Eichleay formula for most owner_CauSed
delay situations l Clearly a losing strategyl Contractors that use the
Eichleay formula need to be prepared to prove standby and eco-
nomic effect.
LuslngStrategy# (Contractor)Use Total Cost Clalms
Gratuitously
Applicability of the total cost recovery lS also rare' but [he
hopes of converting lump sum contracts into cosreimbursable con-
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tracts IS temPtlng. In addltlOn, 1t lS less tlme COnSum]ng and leS eX-
pensiYe to PrePare ClalmS On this basIS Contractors often take the a
titude, I bld X, and I spent X plus Y, I want to be paid Y also The
reality is that ln mOSt CaSeS, the costs can be accumulated to mdlVld-
ual changes or lmPaCtS Aough the US Federal Coof ClalmS
has anowed this method, lt Placed llmits [4l on posslble abue by re-
qulng pOf tha
l the nature of the partlCular losses make -t imposslble or hlghly
impractical to detemme them wlth a reasonable degree of accu-
raCy;
2the plalntlff, bld orestlmate WaS reallStlC,
3its actual costs were reaOnable; and
4 1t WaS reSPOnSlble for the added expense
These circumstances certalnly occur on construCtlOn ProeCtS
but not nearly as often as thlS methodoIogy lS uSed In most crCum-
stances, the cost can be attributed to specific events and estmated as
SuCh.
Losing Strategy # (Contractor)-Ignore Overhead Recovery in
Change-Order MarkUps
Frequently, the mark-uP On Changes IS lgnOred when extended
overhead (field and home oce overhead) clalmS are made Clearly
some portion of the specified contract mark-uP IS lntended to cover
field and home oce overhead Some contracts explicltly state that
intent and go on to specify the allocatlOn Of the mark-P between
home office overhead, field oce overhead, and profit Some con-
tract clauses also mClude what the overhead lS lntended to cover [3]
With or wiout clear contrac=anguage, many COntraCtOrS COm-
pletely lgnOre any reCOVery Of overhead that was lnCluded as part of
the mark-uP and request the total St for field and home oce over-
head (Eichleay) for period Of owner-CauSed delay However When
the overhead received through mark-uPS IS lgnOred SOme Or a11 of
the overhead lS double recovered Altemate contract recoverleS have
been suggested to reduce the double recovery and the resultlng dis-
putes [1]. Unthe contracts are modified COactors need to con
sider the overhead received in changes and avoid the double
recovery, Which can reduce the credlbility of an otherwISe me-itor
ous claim
Losing Strategy # (Ownerd Contractor)-Use Reservation of
Rigts
Contractors and owners hould endeavor to negotlate all costs
associated with changes-rdlreCt, lndlreCt' lmPaCt Or Otherwise
Currently, ln Order to kP their clalmS OPtlOnS OPen unti=he very
end of the prQject, COntraCtOrS nOW rOutinely mclude reservation-Of-
rights langunge ln their change orders. This statement uua11y indl-
cates that the change orders covere direc=ime and costs of the
changed work but do not include any effects or rlPPle costs, Or fur-
ther extension of time These are to be reserved until such time as
they can be finally ascertalned.'. Any reservation-Of-rights language
or other language that precludes thenal resolution of cost on a par-
ticular issue is gomg tO be construed as a failure to demonstrate
gooduth negotiations. Contractors should have prQ]eCt COntrOl yS-
tems, both Chedule and cost systems) to aCC`tely assess theI
impact of a change. PrQjects wchange orders contaimng reserva-
tlOn-Of-nghts lmguage are much more likely to end up ln PrOtraCted'
expensive litigation.
 1 997 AACE INTERNATIONAL TRANSACTIONS

to t?e into account amounts already recovered ln Change orders, and

RECOMMENDED READING
fallure to agree on the reservation of nghts ln Changes Loslng negO- l. DrlSCOll, Thomas J,, et al Construction Schedulig:

tiation approaches are related to both the negotiators preparatlOn PrepaI.ation, Liability and Claims New York: Wlley Law
and his1er taCties during the negotlatlOn PrOCeSS. Preparation prob- bllCaons, 1991

lems mClude relylng On the frequently faulty or biased reco11ections
of pcople who worked on the job, and negotiating without command
of the facts. Problemat]C taCtics lnClude addlng emOtion to the nego-
tiatron sessIOnS, and inexibility on ceraln POlntS beyond what lS
warranted by the facts Owners, COntraCtorS, and nSultants can all
2. Fondahl, John W7he Developmen! f !he Cotruc10
Emeer Pas POgreSS CZndre Problem. Journa1 0f
Construction Engineering and Management l 17, nO 3
(Septeber 1991) 380-392

lean from these frequently used losmg strategleS tO PreSent thelr fu-
Michael R Just, CCE
ture cases well and achieYe equitable se.ttlements at the bargalIrng
OBnen Keitberg
ble.
200 West Madison, Sulte 2805
REERENCES ChlCagO, lL 60606

I Just, Michael, and James Murphy. New Jas m Ovehead

Recovery 1995 TI.anSaCtions of AACE International. Brian Torone

Morgantown, WV AACE Intemationa=995 OBrien KreltZberg

50 Fremont St.
2. ech-Con Co. v West61 S.3d 883 (Fed. Clr 1995)
San FrancISCO, CA 94105
3. Torone, Brlan, and MIChael Jus{ Avoiding Construction
Disputes With Eective Cost and Schedule Specications

Project Management Institute ReglOnal Symposlum, 1 993.

4. WB Co7PO oJ. V. UndSe, 183 Ct C1 409, 426 (1968)

(lS is theotal cost case)

5. Zack, Jame GClazmsh: C rrePtZCtice Journal

of Construction Engieerlng and Manngemen= 19 nO. 3

(Septembe 1 993)

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