1991 AlicE 9!

RAusAcT1ous

Improve Your Profits by

Understanding Claim Analysis
by Ignacio Manzanera, CCE and Khaled A. Bubshait

In today*8 construction projects environment Identification of those circumstances may become

contractors are facing the ultimate challenger an easy task if the project management team has been
trained to recognize them.
6 Attain a profitable situation in a highly compet-
itive market. If the facts revealing additional costs do not
support a claim for additional compensation, recovery
4 Achieve customer's satisfaction by producing a of this hidden burden may become impossible.
quality job within the owner's time frame and
budget. However, if the facts support the claim but the
claim itself is not properly addressed and presented,
e Maintain goodwill that will bring more business a significant cost recovery is still unlikely.
to the house by avoiding unnecessary disputes.
Documentation needed to support a construction
l Recover all additional expenses created by claim should be made available at all times during the
changes in design or construction methods. contract's life.. This should not be construed as a
justification to bid a contract low to secure award
The accomplishment of this challenge requires a and then hope to make a profit out of disputes fabri-
great deal of organization, planning, scheduling, cost cation. However, a contractor who properly estimated
control, personnel training, public relations and a and managed a contract should have the right to
very good knowledge about construction claims. recover costs caused by actions of others, and this
may not be possible if documentation is not kept
Success of project management efforts is directly dispute-oriented from the start of the project.
related to a combination of factors including:
The main objective of this paper is to outline
0 project teamRs technical and administrative the areas where project management can improve its
proficiency, financial performance just by ascertaining its aware-
ness about well-known controversial issues. This
l project cost control procedures, and paper has been organized following subjects which are
considered as the essential knowledge required by
l public relations acumen. those entering the construction business arena:
However a contractor who properly considers all typical construction claims against owners,
the above mentioned factors may find it difficult to
explain why sometimes expected profits are not accom- typical construction claims against the contrac-
plished. tors,
Assuming a competitive market is forcing all legal implications of critical path method
contractors in a determined area to plan for tight schedules,
profit margins, the situation can only be improved by
proper project management personnel training on record management,
selected issues about construction disputes adminis-
tration which, in turn, will ensure cost recovery form legal relationships, and
issues impacting planned performance.
planning and cost estimating.
Project engineers, planning and scheduling
engineers, cost estimating engineers, cost engineers
and the rest of the project management team personnel TYP1catcO3sTRucT1oB CLAIIGAGAINSTOWENRS
may be well prepared to perform as expected from them
by technical standards, but today's'market is unfor- The most frequently found reasons to file a claim
9iVinq to those who are unaware of hidden costs .
against the owner of a project are;
brought on by a number of circumstances usually found
when working within construction environments. l poor project planning,

B.5.1
 0 scope changes,
0 constructive change orders, When owners or their authorized representatives
give or fail to give directions that interfere with
0 errors and omissions, the normal contract development without acknowledging
cost and schedule implications, what is usually called
c contract acceleration and expediting, a "constructive change" may be disputed by contrac-
tors. Additionally, constructive changes are some-
o work suspension and stoppages, times found after the fact, when reviewing schedules,
records, letters and minutes of meetings. This does
0 site access or availability, not negate the contractor's right to recover addition-
al expenses.
o other contractors interferences and delays, and
Contractors are advised to train their construc-
0 strikes and acts of God. tion teams to recognize constructive changes since
this can make the difference between a profit or a
Poor Project flying loss situation.
Lack of adequate attention to front-end planning Errors 5nd Cmissi.onia
of the project usually ends up in:
A potential for claims arises when the contractor
0 inadequately defined scope of work, and questions plans and specifications given by contractu-
al terms, and the owners or their representatives fail
0 incomplete and/or incorrect design. to recognize it as a valid change order. Constructive
change orders may be generated by absence of agreement
Most of the time, poor planning is attributed to on this issue. Even if the contractor is forced to
fast track projects that bring about: proceed as directed by the owner and contractual
obligations, recovery of additional costs may be
0 shortened bid periods, pursued at a later occasion. Contractors are advised
to document these cases as closely as Possible for
0 limited site investigation, future identification of additional costs.
0 unreasonable construction periods, CoxltractzJcce1eration andlXXpE&t~
c badly specified construction materials, and Contractors are frequently directed to accelerate
performance of the contract or a portion of it within
0 inappropriate staffing. the original or adjusted completion date. This
direction constitutes a change in the contractual
Whatever the reason is, claims are abundant when obligations, and the contractors have the right to
planning is not taken seriously enough to produce an pursue compensation for it.
adequate environment to develop a project. Moreover,
this situation is seldom acknowledged by owner repre- Furthermore, contractors may expend extra effort
sentatives for obvious reasons. Only well-trained in response to a directed increase in work without an
project'team personnel will be able to ascertain it increase in time. This constitutes a constructive
before it develops into a costly problem. acceleration which should be carefully analyzed, docu-
mented and decided upon. Validation of this kind of
8cope cllangea claims is, of course, difficult and requires the con-
tractors to prove their case.
Scope changes are usually initiated by a change
order, letter of intent, or a field directive. They rork Su~sion and Stoppaqee
may direct changes, work deletions or additions to the
original scope of the contract. When contractors are notified to suspend work due
to reasons out of their control, they have the right
Change orders are just part of everyday business to be compensated for the time and cost involved in
in construction environments. To think that a project the susp&nsion or part of the suspension even if the
or a construction contract can be executed without contract document calls for "work-around" directives.
them is a fallacy unsupported by experience. An Contractors are compelled to keep detailed data
effectively organized effort to eliminate cost and related to cases like these to be able to recover
time impact as a result of processing work outside the related expenses.
original scope of the contract should be high on the
list of priorities of every management team since Site Access or i2maiiardbility
change orders are the usual reason for cost and time
overruns. This is especially true for contractors When the contractors' scheduled activities have
wanting to realize their planned profits. the need for a right of way and/or a location to
proceed and the owner fails to provide them on time,
Scope changes are often narrowly and poorly the contractors should pursue a compensation for the
defined, and estimates of the associated cost and time and cost of the resources scheduled and not being
schedule impact are usually lacking accuracy in order- able to perform productively.
of-magnitude estimates.
Contractor, designer and owner may agree on the fact
that something should be done, but they may not be so When the contractual obligation forces the
agreeable on its full description and associated cost contractor to joint-occupancy, interference by other
implications. owners' contractors' actions or lack of progress in
the area may hamper performance and a justifiable

E.5.2
 1991 AlLcB Tlzm~Iws

claim for compensation over productivity levels may Defective Work

arise.
Contractors, are responsible for the quality of
Productivity or the lack of it is not an easy their work as specified in contractual terms. This is
subject to be justified. Regardless of how controver- not always easy to establish, since by definition,
sial these issues may become, contractor6 are urged to defective work is difficult to spot and decide upon.
substantiate their facts while they are actually hap-
pening. Defective work may be blamed on the designer due
to lack of adequate specifications or on the owner for
Strikes aadActeof God disturbing the original design or on the contractor
for lacking the Ski.116 needed for the job. It is not
Time delay6 due to fact6 beyond a contractor86 difficult to see why 60 many claims'are generated over
Control such a6 Strikes, boycotts, UnUSUal weather, this issue.
earthquakes, fires, and floods are excusable delays,
and the contractor should be entitled to a time
extension. The following checklist for usual owner
actions impacting contractual performance may become Property damage claim6 may result from several
handy when managing,projects: sources, 'including:
0 improper assumption of directionof field opera- l damaging owner's installation6 when performing
tions, the contract,
l failure to grant access to the construction site, e damaging neighbor'6 installation6 when performing
work,
l procedures approval delays,
0 violating right6 of property owner6 adjacent to
l arbitrary or unreasonable actions, the construction battery limits, and
e failure to expedite/disclose 'information needed e violating government area regulations.
to perform,
Even though contractual clauses call for holding
e failure to comply with contractual payment the owner harmless in all of the above cases, it may
schedule, happen that law suits may be settle by the owner
before the blame can placed on and accepted by the
0 excessive number of change Orders, and contractor.
l poor communications. Contractor'6 Late Completion
Contract6 usually call for a completion date on
TYPICU CLAIHSAWIRSTTRBcoaTBBcloa the assumption that the owner is in need of the
facility by that date., A contractor finishing late
Owners also have the right to recover from issues may bring inconvenience to the owner and/or‘ financial
that may harm them economically. Usual claims by the 1066. Some contracts include clauses where penalties
Owners, among others, are: are considered against the contractor in the event of
completion 'delays, but regardless of the contract
l out-of-specification materials!, having or not having that clause, the owner may claim
damage6 due to late completion.
l defective work,
Uw-&allBidders
e property damages,
Contractors sometime6 come up'with extremely low
l contractors' late completion, and bids which may force them to be excessively CO6t
conscious in their effort6 to recover from their tight
e low-ball bidders. situation. Their low bids are due to a number of
circumstances, such as:
Oat-of-Specification Materials
6 failure to understand the scope of the job,
Discrepancies may result due.to differing inter-
pretations about contractual material specifications. l misunderstood technical requirements,
Contract specification omissions/clarity are frequent
with the undesirable result that decision6 have to be l bid mistakes, and
waited for or direction6 given on-the-run at the job
site with the consequent confusion, 'delay6 and usual l desire to improve the competitive.edge.
increase in scope work. The main problem comes while
supplying materials where it is known that there are Dispute6 'and claims for almost every other i66ue
numerous competitive manufacturers which may sub- during the contractual period should be expected.
stitute 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 Critical path methods have become the most useful
getting maximum functional efficiency. and practical tool to negotiate contractual disputes.
I
Properly designed schedule6 include:
l total scope of the job,

/’ E.5.3 ',
 0 organized sequence of activities needed to 0 Job staffing and layoff schedules are contractual
perform the job, obligations, and lack of compliance constitutes
a breach of the contract.
O duration for all activities involved, and
0 Inspections and approval6 from the owner should
O resources needed to accomplish each activity. be performed according to the schedule.
In other WOrd6, critical path method schedule6 o Any deviation from the schedule should be settled
depict what has to be done, when it haS to be done, as per contractual procedure6 involving schedule
how it ha6 to be done, who has to do it, and where. revisions.
Contractual obligation6 usually include:
O approval of an original CPR,
O procedures to update the CPM periodically, Good, accurate records are the best assistance
anybody can get when negotiating change6 and diSpUtesa
O procedure6 to revise the CPM, and This is particularly important for the contractor6
since they usually have the burden to prove the impact
O procedure to utilize the CPN as a tool for claim any issue under dispute had on their performance. The
settlements. record6 usually needed to Substantiate a Claim are8
The following checklist provide6 a valuable tool for 0 progress schedules,
planning and scheduling administration:
0 daily and weekly reports,
O Establish and maintain a progress measurement
SyStX?m. 0 change order log,
O Gain construction schedule approval a6 soon a6 0 purchase orders and delivery receipts,
possible.
0 correspondence from and to the contractor,
O Establish and maintain planning and scheduling
routines. O photographs,
O Agree upon planning/scheduling indexes and their O job diary,
meaning.
0 plan and schedules revisions, and
0 RStabliSh schedule revision6 approval with
minimum turnover time. 0 minutes of daily and weekly meetings.
O Establish change order/approved schedule inter- Performance is usually documented through periodic
face System. reviews and revisions of the project approved sched-
ule. Report6 Showing scheduled v6 actual performance
O Create a scheduling revisions filing system. determine the project Status St any tima SO anybody
can visualize the work completed to date, the rate at
O Insist on detailed backup for proposed changes. which the work was performed, and the costs incurred.
Daily and weekly reports should include8
0 Promptly notify/process/document schedule vari-
ances. 0 issue date, weather conditions,
If properly included in the contract, some 0 staffing levels,
general legal implications of an approved critical
path method schedule may be summarized a6 follows: 0 equipment used and idled,
0 Roth parties are bound to follow the schedule 0 material6 utilized and future requirements,
specifications.
0 subcontractors performance,
0 There is an implied warranty by both parties that
they will not hinder, delay or disrupt the other 0 detail6 on controversial matters,
party.
o change orders work, and
0 Labor level6 and crew sizes established in the
schedule have to be followed unless Change6 are 0 safety.
duly authorized.
Since change order6 are one of the major causes
0 Equipment utilization incorporated in the sched- of claims, it iS important to maintain good record6 of
ule is binding, and failure to follow it consti- them including:
tutes a breach of the contract.
0 initiations,
0 Materials, tool6 and consumable a6 specified in
the schedule are equally binding. O cost and time estimates,
o Contractors are liable for productivity lower 0 approvals,
than that allocated by the schedule.
0 current status,

E-5.4
 1991 A&cB ~sAc!rIoars

0 requests for project completion revision, Contractor with Inmrance Companies

6 daily progress, and Contractors and insurance companies usually have

a complex relationship. It should be remembered that
l interface with current approved schedule. bonds required by and furnished to the owner of a
project are for the protection of the owner.
Furthermore, keeping the correspondence well organized
by subjects will provide the mean6 of understanding Additionally, bond6 required to secure perfor-
what happened, should an after-the-fact claim arise. mance in most instances come separated as performance
It al60 help6 in relating new problems to old ones. and payment bonds, but in some circumstances the bond
is combined into a single bond guaranteeing both
performance and payments.
The insurance company is not intended to sustain
Project management teams require a good working any ultimate loss. The insurance's right of indemni-
knowledge of statutory and common law developed fication by the contractor is intended to place the
through the year6 to be able to cope with every ultimate responsibility for loss upon the Contractor.
situation they may find when developing their pro-
jects. New technology, project complexity, creation Contractor with Designer
of new legal concepts according to the working area
and a host of other circumstances are forcing the Historically speaking, designers have been immune
construction industry to become aware of legal rela- from claim by the contractor or any of his subcontrac-
tionships and their usually dear implications. Some tors arising from alleged negligence or error on the
of these relationships are discussed in this paper as part of the designer because of the lack of close
follows: relationship of contract between the designer and the
contractor or any of his subcontractors.
Contractorwith Owner
Recently settled court cases have brought new
The docUment6 constituting the agreement between light to the concept of liability. A designer may be
the contractor and the owner are, of course, the basic found liable to the contractor due to deficiency in
instruments from which the rights and obligations of the performance of the designer's professional func-
the parties are determined. The pattern of organiza- tion. All the above mentioned legal relationships are
tion of these docUment6 established by their author -- in critical need of being studied, analyzed and
usually the owner's contracting representative -- expanded to maintain a desirable level of expertise
varies in some respects but, generally speaking, an within the young engineer6 and, through courses and
accepted organizational pattern is followed in as- seminars, within the project management community.
sembling the total agreement by including the follow-
ing documents:
PIAREIBG ARB COST BSTIHXl!ING
l general conditions,
ProjectHanagenu3ntPlanning
l special general conditions,
Planning may be seen as drafting future intended
l standard specifications, actions. It is usually an inexpensive activity when
comparedwith other operational costs, yet Substantial
l technical specifications, and savings may be accomplished by emphasizing it. Plan-
ning is often misunderstood by people. They tend to
l drawings. believe plans are cast in concrete, not to be departed
from under any circumstances.
If a contractor recognizes from the beginning of
the project that the ultimate settlement determination A plan is just that, no more no less. Plan6 are
Of similar issues in previously decided cases is the drawn to guide organizations in general and individu-
foundation from which a body of interpretive law has als in particular, but they are there to be reviewed
been developed, the need for a current sophisticated and revised as circumstances dictate. There may be
awareness on the part of the project management team even occasions where plans must be completely canceled
of the general concepts of contract law as applied to or superseded and new plans drawn.
construction and engineering is apparent.
A meaningful plan has to define its purpose
~hraotor with Sub-contractors clearly. It has to be based on correct premises and
information from the area where the project is going
The classically drawn sub-contract incorporates to take place. Furthermore, good planning come6 from
by reference the terms and provisions of the prime a mixture of information, knowledge and experience on
contract, and by general language the sub-contractor the area where project management ha6 to perform.
agrees that such terms and provisions as are contained
in the Pri.me"contract Shall apply to the work to be Planning requires common sense, communication and
Performed by the sub-contractor. charisma. The first two may be taught by institu-
tions, the third one is an inborn human characteristic
Nevertheless, this contractual relatiOnShip may which may be define as the art of working miracle6
become an exceedingly difficult one. Special care associated with some individual's personality. People
should be given to recordkeeping and other aspects of usually mistrust plans mostly due to lack of communi-
reporting to avoid serious complications usually cation between planner6 and those concerned by their
brought about by lack of communications on the job. plans. Good intentions are not enough ground to make
plans work. Sufficient and continuous means of inter-
face among bUSine66 participant6 cannot be overempha-
sized.

E.5.5
 Project management communications, creativity, in the area of project management. Construction law
flexibility and accuracy are substantially improved by is an ever-changing issue which must be constantly
rather simplistic planning rules. Planning will work reviewed and revised to maintain the project team's
for you if you believe on it, make others in your team potential to overcome difficult situations.
realize it6 benefits and, above all, make it an exten-
sion of your project cost and schedule control philos- There is a great deal of money to be saved day in
ophy. and day out when involved in a construction endeavor
by fostering the project team.6 knowledge about issues
abat matimat~g impacting performance and the best approach to solving
them.
Cost estimating is one of the essential area6 of
project management and usually the basis t0 SUbStanti- A simple workshop on claim related Subjects,
ate contractual disputes. given to the project team at the inception of the
projector contract can help improve dramatically your
Cost estimates for a contract in general and for chances of accomplishing profitable goals.
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 1. Buffa, E. 1965. ricbhrn iFlmduction cleaagi~t.
evidence of errors, misinterpretations or construction Wew York:John Wiley hi Sons.
changes.
2. Cleland, D. 1975. sgew &mlyd.!sl and IPrcjene
A project chart of accounts for breaking costs clanegaw!6nt. Wew York:RcGraw-Hill.
down to identifiable work package6 is the best tool to
organize a cost estimate and at the same time gather 3. Daniels, J., E. Ogram, and L. Radebaugh. 1983.
actual cost6 in a consistent manner. Changed job Isternational lBusiness. Addison Wesley Publish-
conditions can be easily segregated and coded for fur- ing Co.
ther analysis against the schedule and made relevant
daily, weekly and monthly reports for possible cost 4. Levin, R. 1975. @JRmntitateJiwe Lipp-omche% ec
recovering. Banag-t . C.A. Kirkpatrick. Wew YorkrWcGraw-
Hill.
Labor cost estimate6 should be closely related to
working schedule6 and crew arrangement6 to be able to 5. Lock, D. 1966. Project .mnagwt. Gower Press.
identify planned against actual productivity and their
relative weight should a claim situation arise. 6. Lucey, T. 1984. Qmmtitatiwe ‘EaWmm. DP
Publications.
material and equipment procurement cost estimates
and schedules should allow tracking of escalation 7. lanzanera, I., ed. 1990. Prcjcact IzaimgBt
factors and productive utilization respectively. Even iRlEfamCS5. Dhahran: Saudi Aramco.
in the event of having a contract development free of
disputes, cost estimates, if approached as mentioned 8. Roder, J. and C. Phillips. 1982. lmojmt
above, can provide an exceptional amount of informa- Tsnagex6nt with 6XZ.l and Part. New Yorkrwan
tion for project management future endeavors. Wostrand Reinhold.
9. O'Brien, J. and R. Zilly. 1971. con~ac~r'e
rz.amig-t m%ndbcoIs. Wew York:McGraw-Hill.
Project management is responsible for preparing 10. POpper, H. 1979. cbdern Cobrst IXngineerhg~ New
bid cost estimates, construction schedules, contract York:RcGraw-Hill.
documents, change orders, material6 procurement, labor
and other resources schedules on daily, weekly and 11. Rigg6, .J. 1977. Engimserimg lZommica. New
monthly basis. If all this effort is performed by York:RcGraw-Hill.
personnel having a clear awareness of how essential
these information may become as evidence when contrac- 12. Specthrie, S. 1959. Indnstrial Aooounting.
tual specification6 are changed, dispute6 and claim6 Englewood Cliffs, WJ:Prentice-Hall.
may be avoided and, more importantly, additional cost
recovered. Furthermore, project management partici- 13. Weston, J. and E. Brigham. l%nageriel Pinaace .
pants should have a good working knowledge of the maze Dryden Press.
of statutory and common law developed in recent
decade6 to be able to handle profitably project6 14. 1963. Classification System for Economic Ap-
continuously increasing in size and complexity. praisals, Coet Eegineer's E!otebooIs. Section D-3.
AACErMorgantown WV.
Project teams around the world Seldom address the
legal relationship between different entities involved

E.5.6
Ignacio Hanzanera, CCE Dr. Khaled Bubshait
Saudi Aramco King Faud University of
PO Box 10089 Petroleum and Minerals
Dhahran 31311 PO Box 950
Saudi Arabia ,Dhahran 31261
Saudi Arabia

E.5.7