Professional Documents
Culture Documents
Construction Projects
ABSTRACT
Claim management is an essential skill required by the Contract and Project
Management Professionals, especially due to the increase in both number and value of
claims in construction projects. A claim must be presented in a professional manner with
sufficient details including the basis, calculations and evidences in order to save time,
cost and effort of the Claimant and Defendant.
This Technical Paper describes the importance and meaning of claims, method of
evaluation, and preparation of a successful claim presentation. The relationship between
the contract base lines, i.e., Contract Price, Scope, Schedule and Conditions are
established here along with the head of claim due to change in conditions, delay and
disruption. Methodology for the calculation of Head Office Overhead and Profit is also
discussed with their relative importance and interrelations. This Paper further discusses
about some of the common terms in claim. As the final output of the evaluation process
is the claim presentation, this paper describes the structure and requisites of it.
1. INTRODUCTION
Claim is a request for a benefit for which the Claimant believes or contends he is
entitled, but agreement has not been reached. The construction industry is witnessing
an increased numbers of claims in both domestic and international sectors and the
claim presentation is important in claim related issues in Project Management. The
Project Management and Contract Management Professional should have basic
knowledge about the meaning, evaluation and preparation of claim.
Claim leads to wastage of money, time and efforts, especially due to unprofessional
presentation of it. A survey conducted with 24 construction projects in Western Canada,
demonstrated that the total amount of claims contributed to a 40% increase in project
cost and total delays to 48%. The study also revealed that more than half of the claims
led to a cost increase of at least 30% of the original contract value.
The unfortunate reality is that construction claims are often resolved by people who
were not directly involved in the construction project. In the courtroom, it is settled by
lawyers and judges; or in conference room often by corporate, vice presidents, or
financial officers with little construction experience. Hence, it is critical to provide a
simplified, graphically driven presentation of claim issues. Too much information and
not enough information are two main pitfalls of claim presentation, and should be
avoided in claim presentation.
A well prepared claim presentation helps all the involved in settling the issues in an early
stages, before going to arbitration and litigation, which are expensive and time
consuming. A claim must be presented in a professional manner with sufficient details
including the basis, calculations and causations. If the claim presentation is transparent
and reasonable, it is easy for both parties to reach in agreement in an early stage itself
and this requires a professional claim presentation, which is the rationale of this Paper.
2. MEANING OF ‘CLAIM’
A claim is a demand, request or application for a benefit for which the Claimant believes
or contends he is entitled, but agreement has not been reached. In other words, claim
may be defined as a failure to fulfill obligations under the contract or law by either of
the parties. Change order claims can be defined as, written authorization provided to a
Contractor that approves a change from the original plans, specifications, or other
contract documents, as well as a change in the cost. A claim may be for money, for time,
or both; however it should be noted that a successful claim for time extension does not
automatically honor a valid claim for money, and vice versa.
When the liability of the discovered change is easily attributable and the consequences
of the change can be ascertained (cause and effect) by evaluation; then a formalized
variation orders will be the result. Sometimes the liability of the change cannot be easily
attributed or for which liability is disputed, then it will lead to claims. Claim is usually
caused by defects; conflicts or ambiguities in the Scope or Schedule; Exclusion clauses;
or Endeavour to avoid un-quantified risk. In order to successfully justify such claims, it is
usually necessary to carefully analyze the scope and the schedule, particularly the
contract documents and the provisions of the law.
Evaluation
Evaluation is the process of assessing the quantum in money value and for the extension
of time. As Burden of Proof is on the claimant, the claimant must show that there is a
direct link (causal link) between the breach (cause) and the loss (effect) thereby
sustained. When there is more than one competing causes, then it is necessary to
ascertain and define such competing causes and responsibility, the timing and effect,
and losses actually and properly sustained. Generally a claim can only comprehend the
losses actually incurred, possibly with the addition of an agreed or ascertained element
for overheads and profit.
Scope Schedule
Contract
Price
Conditions
Schedule is the most easily affected element of the lumpsum contract baseline, because
any delay, acceleration, disruption, or distortion of performance constitutes a change
which may entitle the Contractor and obligate the Employer to pay additional
compensation. ‘Time is money’, is a factual reality, and the failure by either or both the
Employer and the Contractor to recognize this relationship can lead to substantial delay
and subsequent time-related damage claims.
The Contractor’s right to obtain time related compensation must be proven against the
contract’s ‘baseline’, which should be accurate and verifiable with the contract scope,
schedule, and condition. The Employer, on the other hand, must ensure that he has a
clear idea of the effect of its actions upon these three ‘baseline’ elements.
A claim consisting of a request by the Contractor for money or time, due to a change in
any of the three basic elements of the contractual baseline, given that each change is
beyond the control of the Contractor, may affect his cost and thus decrease his profit
unless an appropriate adjustment is made to the contract.
4. EVALUATION PROCESS
Evaluation is the process of quantifying the amount or extent of the additional costs
sustained due to the breach, and establishing that the subject losses were actually and
properly sustained as a result of the breach. As the Contract Price of the lumpsum
contract is equated to the elements of ‘baseline’, each of the three basic elements
should be priced to aggregate to the ‘Contract Price’.
The basis of the pricing is usually referred to as the ‘Price Analysis’, given that the
Contract Price usually aggregated from the total of a Bill of Quantity, the rates which in
turn are broken down or analyzed into the primary cost elements of :
Labor
Material
Equipment
Subcontractors
The more detailed the price analysis the more accurately and quickly any variance from
the original contract price can be ascertained. Budget of a project, which can be used as
a benchmark for measuring any variation in respective cost element coupled with
proper cost monitoring and control mechanism will enable to evaluate the claim
adequately and effectively.
Records
While it is important to have an accurate and detailed make up of the contract price it is
equally important to keep accurate contemporary records of the usage of key resources
of labor, equipment and material. A brief list of the more important records that should
be properly and regularly updated for the purpose of efficient project management, and
particularly to claim management, is as follows:
Drawings register
Site instructions
Variation orders
Contract program
As-built program
Delay notifications
Claim notifications
Any other project documents related to schedule, cost, risk or quality including
correspondence between various stakeholders can be used as Detailed and Extensive
Records in the evaluation and preparation of claim.
5. HEADS OF CLAIM
Most of the construction projects are unique by their very nature and have varying
characteristics; however certain heads of claim that occurs frequently, can be grouped
into three main categories as follows:
Loss due to carrying out work at a time of the year involving special factors
Telephone account for the delay period including rental and calls
Profit and overheads on increased costs reimbursed during the extended period
Finance charges
Loss of profit.
Another term for disruption is ‘fragmented working’, in which the claimant contends
that the actions of the other party have prevented or hindered the claimant from
executing the affected works, reduced output level and/or enforced the same output for
an increased level of resources. Due to the burden of proof, and the requirement to
show causal link substantiating claims for disruption can be very tedious and difficult.
Costs of Disruption
In order to make claim for the costs of disruption, it must be evident that some planned
or orderly sequence of work had been affected by an act of the Employer, of the
Engineer, and/or by a variation or variations. It is often the case that individual sections
of work may be affected in a way, which does not cause prolongation by themselves.
Idle time of plant, tools and equipment; and Loss of Productivity are the two main heads
of costs of disruption.
Site Overheads
Site overheads cover all of those site costs that are not directly related to particular
items of work, which may include:
Security
The majority of the above items are of a time-related nature, but there are a few with
lumpsum nature. The latter must be excluded when calculating the weekly site on cost,
which may be calculated separately.
Head-Office Overheads
Head Office Overheads are the costs incurred by the Contractor in maintaining his head
office establishment, and include the cost such as, head office staff, rent of head office
premises, Contractor’s all risk insurance, tendering for new projects etc., together with
all other global costs. From historical data a Contractor can identify the cost of Head
Office Overheads, and his gross turnover (revenue) for the same period. Head Office
Overheads can be allocated at the same percentage of historical data in estimation.
Profit
The percentage included for profit in a tender is entirely a management policy decision
of a Contractor only. The profit is a function of revenue, where Head Office Overheads is
a function of time. ‘Lost opportunity’ is the philosophy behind claims for profit because
the Contractor has been denied the opportunity to generate further revenue and profit
from other projects by utilizing the resources for the additional time. To claim for this
item, the Contractor will show that he would have probably undertaken other contracts
by utilizing these resources.
Different Formulae for calculating the Head Office Overheads and Profit, as follows:
The Hudson formula
Ernstrom Formula
Manshul Formula
Carteret Formula
Allegheny Formula
CV – Contract Value
Emden’s Formula
Emden’s Formula is similar to the Hudson formula except that instead of using the
percentage included in the Contract for Head Office Overheads and Profit the
percentage used is for the company identified from audited accounts, generally the
average of the percentage for overheads and profit for the previous 2 – 3 years is used.
Eichleay’s Formula
The Eichleay Formula, although once again following a similar concept to both the
Hudson formula and Emden’s formula, is a more sophisticated formula and amount
claimed are calculated on the basis of a number of calculations.
7. GLOBAL CLAIMS
The correct way of presenting a claim to the Engineer or before a Court or Arbitrator is
by using causation, i.e., rational and logical linking of the effect with the cause. If the
Engineer is 14 days late in issuing the drawings for the foundations and as a result the
completion of the work is delayed by 14 days, will illustrate cause and effect linkage.
Nowadays, the Contractors and Subcontractors are practicing a method known as the
global or ‘Rolled up’ claim by giving less importance to the classical cause and effect
linking. All causes of loss and/or delay under the global claim method are compiled
together and one overall delay given as a consequence. In this global claim method, the
classical method of linking each effect with its cause ignores the synergic effect of
additional cost and/or delay.
While such rolled up claims may be acceptable in respect of financial claims, cause and
effect will still have to be linked in respect of delay claims, as a matter of evidence. While
it is impractical to assign individual cause to a particular effect, the principles of global
claim method can be used successfully. If a rolled up claim is appropriate, the events on
which it was evolved should be described in sufficient detail to indicate how they might
be causative of the entitlement claimed and why the other party was responsible for
them.
To avoid a great deal of argument over a global claim, Contractors and Subcontractors
are advised to establish the linkage between cause and effect of every event, which may
lead to a claim, at the time of occurrence itself. As well as producing the cause and
effect matrix, it will be appropriate to highlight major delaying events in the text of the
claim by making reference to progress of works and effect on other trades. Particulars
about the implied link between cause and effect also shall be given with sufficient
details such as:
The absence of other explanations for the delay and disruption suffered.
Coupled with convincing evidence of a breach or change, it is still not evidence that any
damage or additional cost has been caused by that breach or change
Coupled with evidence of a change or breach, and evidence that at least some damage
or expenditure must have been incurred as a result of the change or breach, it is not
evidence as to what that damage is, since there are so many other possible explanations
of the cost over-run
If there is more than one cause of action involved, or one cause of expenditure for which
the owner cannot be responsible, the owner’s advisers, and any tribunal, have no
material for valuing or examining the case on those parts of the claim which they are
disposed to accept or concede
A function of such claim is to impose an absolute upper limit on any claim or group of
claims which a Contractor may wish to bring, since a total loss claim represents the
maximum theoretical damage or additional expenditure attributable to all proven
changes or breaches affecting the performance of a contract.
Introduction
Appendices
Introduction
As the person, who is responsible for the final assessment may not be totally familiar
with the contract, it is important to give background details in order to make the
document a complete entity in itself. The minimum required details should be as
follows:
Names of the parties to the contract and the consultants
A claim for loss and expense or extra costs or expense flowing from a remedy contained
within the conditions themselves
A claim for damages resultant upon a breach of the express or implied terms of the
contract or the law
It is essential to state clearly the event or events pertaining to the claim. It is also good
practice in this section of the claim to make reference to notifications which have been
made during the contract.
Appendices
A well prepared claim usually has a large volume of backup documentation to
substantiate the case such as correspondence, records, photographs, video and
programs. Inclusion of all the details in the main body will make the presentation bulky
and distract the reader. Hence it is advisable to attach as appendices.