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ECAM
15,3 Claims management in
the Egyptian industrial
construction sector
246
A contractor’s perspective
Received August 2006
Revised October 2007
Amr A.G. Hassanein and Waleed El Nemr
Accepted December 2007 Department of Construction Engineering,
The American University in Cairo, Dokki, Egypt
Abstract
Purpose – This research aims to provide a better insight into the status of claims management in
general, and change order claims in particular, from the contractor’s perspective with respect to the
Egyptian industrial construction sector, as they proved to be the main cause of claims in this sector.
Design/methodology/approach – A questionnaire survey discussing the most persistent issues of
claims management in general, and change order claims in particular, was conducted on a selected
sample of construction industrial companies.
Findings – The results demonstrated that claims management in the Egyptian industrial sector has
been suffering from a variety of obstacles, including lack of proper notification procedures in public
contracts and poor documentation management. Change orders had been actually lost due to poor
documentation. Oral change orders were present in approximately 76 percent of the projects; half of
which resulted in loss of rights due to improper documentation, which was largely attributed to the
lack of contract awareness of the site team, and to the “fear of consultant phenomenon”.
Practical implications – The paper presents several recommendations for improving claims
management including: the formation of a standard form of contract general conditions for the
Egyptian industrial sector, and applying a methodological approach for change orders quantification.
Originality/value – The increasing number of international companies contemplating construction
projects in Egypt, and the significant problems with regards to claims propagation and management,
addressed the need to conduct such a study, which targets one of the most challenging areas in the
Egyptian construction industry.
Keywords Construction industry, Contract law, Performance contracts, Laws and legislation, Egypt
Paper type Research paper
Background
A claim was defined by Hughes and Barber in their reference “Claims in perspective”
as “a request, demand, application for payment or notification of presumed entitlement
to which the contractor, rightly or wrongly at this stage, considers himself entitled with
respect to an agreement has not yet been reached” (Hughes and Barber, 1992).
A study was conducted on 24 construction projects in Western Canada showed that
the main cause of claims was change orders which accounted for approximately 50
percent of all the claims recorded during the course of the study, (Semple et al., 1994).
Other documented causes were: severe weather conditions and acceleration.
Engineering, Construction and A significant number of contractors do not quote a contract clause when preparing a
Architectural Management claim, as stated in various research studies including Jergeas and Hartman (1994) and
Vol. 15 No. 3, 2008
pp. 246-259
q Emerald Group Publishing Limited
0969-9988
This paper was published again in Engineering, Construction and Architectural Management
DOI 10.1108/09699980810867406 journal, Vol. 15 No. 5, pp. 456-69. The Editors would like to apologize for this mistake.
Vidogah and Ndekugri (1997). This was assumed to stem from their lack of familiarity Claims
with the contract and its relevant clauses. management
Qualification of change orders is an important dimension of claims management
that has been the focus of many research works lately. According to the Conference of
Claims Management presented by James (1993), it has been proven from various
judicial rulings that a contractor or subcontractor who fails to serve a proper claim
notice would lose his rights. A research by Jergeas and Hartman (1994) addressed the 247
need for proper qualification of change order claims notices by emphasizing the effect
of costs. Subsequent researches supplemented Jergeas and Hartman’s emphasis on the
importance of costs, (Hanna and Russel, 1998; Hanna et al., 1999a; Hanna et al., 1999b).
Zack (1993) introduced several tactics or legal maneuvers that contractors and
owners could use to win claims without actually violating the contract terms.
Reservation of rights approach was among the most important practices discussed.
The industrial sector in particular is one of the areas most susceptible to changes
and claims (Burati, 1992). Heavy industrial projects need adequate time for design.
Hence, execution phases might commence while the design phase is still under way,
leading to incomplete and inaccurate designs (Hanna and Russell, 1998). The result is
an ongoing flood of claims and a project budget and time for completion, that are not
met.
Over the years, a significant portion of construction literature has been written on
claims. While the majority of this research was the result of research conducted in
Europe or North America, yet scarce research has been conducted in the Middle East;
despite that the situation in the Middle East is not that much different. However, it has
been reported that, in 2004, construction claims in the United Arab Emirates reached
$4 billion; nearly ten times its reported figure in 1999 (Al Bawaba, 2005). Similarly, a
study aimed at evaluating the causes of delay in Saudi Arabia and the UK concluded
that the magnitude of delays in Saudi Arabia exceeded that of the UK, although the
delay categories were comparable (Falqi, 2004).
Sample selection
The companies chosen for this research were Egyptian industrial companies with
significant experience in industrial projects, which took a contracting role in their
248 projects. Selected companies were middle to large size whose cumulative industrial
work volume exceeded LE 50 million, and cumulative construction work volume
exceeded LE 100 million. However, since there is a limited number of Egyptian
contracting companies that fit those criteria, seven major companies were chosen for
this research. Out of these companies, 21 industrial projects were solicited to constitute
the sample for this research.
Triggered by reduced margins and shifting markets, contractors normally adopt a
claims-conscious attitude and utilize claims as a profit center (Pinnell, 1998). For this
reason, the authors decided to analyze the claims practices of contractors to gain a
deeper insight regarding the nature of claims in the industry.
Questionnaire formulation
As mentioned previously, the questionnaire was formulated based on extensive
literature. It comprised seven questions. Each question was discussed in detail in light
of the literature on which it was based.
Question no. 1
The claims that occurred in this project can generally be attributed to:
.
Change orders (design changes, extras . . .).
.
Faulty or late owner-supplied materials and equipment.
.
Inadequate bid information.
.
Poor quality of drawings and specifications.
.
Other.
Question rationale
The above causes of claims were obtained from the research conducted by Jergeas and
Hartman (1994). The authors listed additional factors, but the four highlighted were
chosen due to their prevalence in the Egyptian industrial sector. The question provides
an indication of the type of claims experienced in heavy industrial projects.
Question no. 2
The percentage of change order claims relative to the total claims in the project is:
.
5 percent.
.
10 percent.
.
15 percent.
.
20 percent.
.
50 percent.
.
Other.
Question rationale Claims
This question is simply a logical extension of question no. 1 as it serves to highlight the management
significance of change order claims in relation to other claim types in the project.
Comprehensive research on claims by Diekmann and Nelson (1985) indicated that
72 percent of all contract claims originate from change orders (Jergeas and Hartman,
1994). Design errors accounted for nearly 46 percent of these change orders, (Burati,
1992). Hence, this question was designed based on Diekmann and Nelson’s theory on 249
this significant weight of change order claims.
Question no. 3
In this project, what is the percentage of claim notices that were directly tied to a
contract clause?
.
5 percent.
.
10 percent.
.
15 percent.
.
20 percent.
.
50 percent.
.
If other – specify.
Question rationale
The question discussed one of the major parameters of proper claims management,
which is qualification of claims. In an article written as a guideline for engineers
entering into arbitration, the authors outlined the importance of proper contract
administration. They specifically addressed the issue of relating every dispute to the
contract stating, “it will be difficult, if not impossible, to prove the merit of a claim not
tied to a contract clause” (Gransberg and Joplin, 2000). However, this important
concept of contract management stimulated the need for this question.
Question no. 4
What is the procedure through which the documentation for a claim is handled?
.
Do you believe that there were change orders to which you were entitled but
which you did not obtain due to poor communication?
.
In your opinion, what documentation may have helped improve your records
management in the project?
Question rationale
Seemingly, one of the greatest weaknesses in construction management in Egypt in
general is that of proper records management. This area has not been given the
attention it deserves not only in Egypt, but also elsewhere in the world. For example, in
a research conducted in the UK concerning the reasons for consultants’ rejection of
contractors’ claims, one of the main causes was poor information systems and
documentation practices by contractors (Vidogah and Ndekugri, 1997). Therefore, due
to this imperfection, many research works were dedicated to finding solutions to the
problem. One of the articles strongly addressed the need for the development of a
record management program inside engineering firms utilizing records management
ECAM organizations and consultants (Hamilton, 1991). After analyzing this article, the above
15,3 main question emerged. Its objective was to arrive at the cycle of a claim
documentation process inside a project once a claim issue is initiated.
Question no. 5
Does the contract in this project stipulate that all change orders must be written?
250
Question no. 6
Were there any oral change orders in this project? If yes, how were they handled?
Questions rationale
The above questions were based on the article “Legal aspects of oral change orders” by
Thomas et al. (1991). Commonly, there are frequent verbal instructions on job sites. The
relationship between oral change orders and documentation is that frequent verbal
instructions with no supporting documentation bar the contractor from recovering the
associated incurred expenses. A noteworthy point that was brought up by Thomas
et al. is that, contrary to common perception, oral changes can be made valid if certain
requirements are met. One ruling was made by a Supreme Court in the USA stated that
“oral change modifications are valid even though there might be specific contract
language prohibiting oral changes” (Thomas et al., 1991). The discussion presented in
this article stimulated the need to investigate the status of oral change orders in the
Egyptian industrial sector. Two areas were examined. The first was to understand the
contract’s position regarding written versus oral change orders. The second was to
explore the frequency of oral change orders occurrence and the means by which these
instructions were handled.
Question no. 7
Is there any agreed-upon basis for quantifying changes that occurred in this project?
Question rationale
This question was based on Fourie’s approach (1993) of change orders quantification.
Fourie presented numerical formulae to calculate changes costs so that the balance of
the parties at the time of tender remains unchanged. Fourie recommended that both the
owner and the contractor must agree on these formulae prior to the execution of work.
The changes costs are divided into: method related costs; activity duration costs;
project duration costs; quantity related costs and change rate costs. Thus, if Fourie’s
logic is applied in any form to the Egyptian industrial sector, claims and disputes over
the cost impacts of contract change orders can be greatly reduced.
Figure 1.
Causes of claims in the
Egyptian industrial
construction sector
ECAM 10 percent of the sampled projects stated that notifications were tied to a contract
15,3 clause in 0 to 25 percent of instances. This figure was attributed to a variety of reasons.
One respondent stated that notifications were never made in the contracts of public
projects because these contracts were poorly formulated and did not incorporate any
descriptions on claim procedures. In another public project, a respondent stated that
only 30 percent of the notifications made were tied to a contract clause. Both
252 respondents stated that relations with the owner were jeopardized whenever
notifications or documentation for contractual problems were made.
Results revealed that in 67 percent of the projects, notifications were always tied to a
contract clause. However, this percentage may not be regarded as a factual
presentation of the status of notifications, as respondents may have optimistically
answered this question so as to not admit a shortcoming on proper claims notification
within their respective organizations.
Figure 2.
Documentation that could
improve records
management of the project
ECAM As evident in the above figure, one of the most important tools for proper
15,3 documentation management is the use of daily records from the site team, particularly
if these documents were signed by the consultant. Many respondents stated that the
absence of these reports have caused the head office team to lose contact with the
events that happen on site, and accordingly, were unable to handle claim situations.
Equally important to the site daily records is the contractual awareness of the site
254 team. The lack of contract awareness by the project’s site team has been recognized in
numerous published literature, such as that of Vidogah and Ndekugri (1997) and
Jergeas and Hartman (1994). In Egypt, the situation is no different. During the course of
this study, numerous cases had been reported of site engineers who received direct
instructions from the owner’s representative or consultant and the result was
additional incurred expenses as a result of poor or inadequate supporting
documentation. Therefore, this research recommended that contract awareness
should not be restricted to high-level site management, but should be directed to site
engineers directly dealing with the consultant or owner’s representative.
One of the solutions offered is that the head office should develop a contract
checklist that contains all the required contractual administrative requirements, and
send this checklist to the site to be filled out with the daily report. Such a checklist
would ensure that important contractual information would be delivered to the head
office and that would force the site team to consider contractual implications when
facing daily issues on site.
One significant result from this research was what was termed as “fear of
consultant (or owner) phenomenon”. Nearly 33 percent of the projects exemplified this
phenomenon. Several respondents stated that they waived some of their contractual
rights due to fear of bruising their business relations with the owners and consultants,
which could affect their chances as candidates for future potential projects. Therefore,
written timely notices, documented minutes of meetings, written confirmations of oral
changes would not be implemented purposely by Egyptian contractors in light of the
adversarial impact such practices would have on their business relations with the
owner.
Suggested solutions
Solutions are proposed based on the nature of the problem and the documented
solutions for improvement.
Conclusions
As outlined previously, this research aims at fulfilling two main objectives. Concerning
the first objective, the following is concluded:
.
The most common types of claims have been documented as change orders and
delays caused by the owner (contributing to 54 percent and 25 percent
respectively of the projects sampled).
.
Regarding claims qualification, 67 percent of the sampled projects stated that
they used contract – clause notifications all the time. As for claims documentation
procedures, in nearly 62 percent of the projects, the site team was the initiator of
claims matter.
.
A total 57 percent of the sampled projects indicated that change orders had been
lost due to poor documentation practices. Respondents reported several
documentation procedures for improving records management status. A
majority (76 percent) of the projects experienced oral change orders, of which
50 percent stated that their entitlements were lost due to the improper
documentation practices, which were in turn linked to the lack of contract
awareness of the site team and fear of consultant phenomenon.
ECAM Concerning the second objective, the research addressed the following
15,3 recommendations for the enhancement of claims management in the Egyptian
industrial construction sector:
.
The inclusion of float-sharing provisions in the contracts as a means of
mitigating impacts of owner-caused delays.
.
The formation of standard conditions of contract tailored for the Egyptian
258 industrial sector to enforce standard contract administration practices, such as
written instructions, timely notifications and adequate record keeping and
documentation.
.
The improvement of claims documentation and filing procedures through the
introduction of claims/change orders filing systems and the utilization of
electronic document management systems within organizations.
. The education of the contractor’s site team of fundamental contract principles, so
that the contract representative becomes aware of his company’s obligations
vis-à-vis the owner and consultant, and be cognizant of his scope of work under
the contract
.
The use of standard equations at contract formation to be applied for the
quantification of change orders during the project execution phase as a means to
resolve and mitigate disputes over change order pricing.
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Corresponding author
Amr A.G. Hassanein can be contacted at: mail@finbi.com