MODULE 3

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SYLLABUS

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CAUSES OF DISPUTES
 A combination of environmental and behavioral factors can lead
 to construction disputes. 
The five most common causes
 1. Contract errors or omissions
 The biggest reason for construction disputes is one that can be perhaps most easily
avoided. A thoroughly vetted contract that is fully agreed upon by all parties can save
a huge headache down the line
 2. Differing site conditions
 While a construction bid is based on the assumption that site conditions are reflected
within the initial package, this is often not the case. Subsurface condition differences
and other unexpected changes can be a large cause for constriction disagreements.
3. Noncompliance of contractual obligations
 While a well-worded contract can be a difference maker, it’s sometimes not enough.
If a contractor, sub-contractor, employer or any other party fails to comply with their
obligations, the other parties involved will generally try to seek recourse.

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 4. Failing to correctly administer the contract
 Again, a contract issue is at the heart of the disagreement, underscoring the
importance of drafting a strong, agreed upon and respected contract.
 5. Claims errors
 Whether a claim is poorly drafted or even unsubstantiated can make a big difference.
Attorneys often define claims in contracts for this very reason.
 OTHER CAUSES ARE:
 Quality and Workmanship, Site conditions etc.

AVOIDING AND SOLVING CONSTRUCTION DISPUTES

Sometimes, disputes are inevitable. However, they can be avoided or solved once
they’ve been brought to light. In each case, consulting an experienced attorney can
prevent spending time and money down the road.

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TYPES OF DISPUTES
 Claim: Demand for something considered one’s due
 Claims of Contractor against Owner/Client
 Claims of Owner/Client against Contractor
 Sub-contractor’s claims

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 Claims of Contractor against Owner/Client

 Claims to recover damages caused by breach of conditions by

the owner
 Claims to recover loss or damage caused by an unjust
termination of the contract by the owner
 Claims to recover damages upon rescinding of the contract
due to frustration

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 Claim Generating Circumstances
1. Delay in the supply of drawings and clarifications
2. Defects in the specifications furnished
3. Delay/manufacturing defects in materials/equipment supplied
by the owner
4. Changes in law, regulations or codes subsequent to the award of
the contract
5. Changed or differing site conditions
6. Delay due to other contractor’s work
7. Acceleration in work demanded by the owner
8. Defects in the contract agreement
9. Inordinate delay in the release of payments
10. Unjustified termination of the contractor by the owner

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11. Substantial delay in handing over the site
12. Owner’s failure in his implied duties
13. Unreasonable rejection of acceptable work
14. Delay in clearances
15. Suspension of work by the owner for his own convenience
16. Rescheduling/prolonging work for financial and other reasons
17. Work arising during maintenance period, which is not covered by the
contractor’s obligations
18. Owner’s delay in decision over amendments/change orders
19. Quantity variations, for which provision is not made in the contract

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20. Failure by sub-contractors nominated by the owner

21. Stipulations of near-impossibilities for compliance or

incorporation into the contract work

22. Natural calamities

23. Force Majeure

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 Claims of Owner/Client against Contractor

 Claims for defective work done by the contractor

 Claims for delay caused by the contractor
 Counter-claim as a defense
 Claim against professionals
 Claims following termination and breach
 Claims for expenditure incurred in completing the work left
incomplete or abandoned by the contractor
 Claims for liquidated damages

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 Owner’s Claim Procedure

 Engineer’s Comments
 Consultant’s Comments
 Claims Committee’s Recommendation
 Top Management’s Approval
 Claim Initiation by the Client/Owner
 Excusable Delays

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 Modes of Settlement of Disputes

 By direct negotiations between the client and the contractor

 Settlement by arbitration
 Through civil courts

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 Direct Negotiations

 Easiest and least expensive

 Majority of the disputes are settled through negotiations
 Arbitration is sought after, only if direct negotiations fail

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 Settlement Through Courts

 Last resort
 Attempted only if direct negotiation and arbitration fails
 Time consuming, to the tune of several years
 Expensive

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 Settlement Through Arbitration
Arbitration is the hearing and determination of a dispute
by an impartial referee selected by the parties concerned.
Arbitrator is a person chosen by the concerned parties to
pronounce judgment on the dispute.

 Sole Arbitrator
 Joint Arbitrators

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Advantages of Arbitration over Litigation
1. Cost

2. Speed

3. Convenience

4. Technical knowledge

5. Informality

6. Proceedings in private premises

7. Finality of award

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Disadvantages of Arbitration
 Itis the parties’ responsibility to bear the costs of
both the arbitrator and the venue where the
arbitration is to take place.
 There are limited powers of compulsion or sanction
available to the arbitrator if one party fails to
comply with the directions set by the arbitrator.
 There are limited appeal rights available during
arbitration.
 Costs can be similar to litigation at court.

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Indian Arbitration Act 1940
Provides for arbitration in the following three cases:

 Arbitration without intervention of a court

 Arbitration with intervention of a court
 Arbitration in lawsuits

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 The Act:
 does not dictate the form of arbitration to be adopted
 does not prescribe the procedure for arbitration
 does not interfere with the award given by the arbitrator
 does not require the arbitrator to state reasons in support of his
ruling

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 Arbitration Clause

1. All disputes will be settled through arbitration in accordance

with the Indian Arbitration Act, 1940

2. The parties may appoint a single arbitrator or each party may

nominate an arbitrator and the two nominated arbitrators may
mutually select an umpire

3. The parties will mutually agree regarding the sharing of

arbitration fees and expenses

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4 The arbitration proceedings will be conducted by the
arbitrator(s) in accordance with laid down procedures, at
mutually convenient places and dates

5 If difference in opinion arises between the two arbitrators,

the decision of the umpire will be final

6 The arbitration award will be final and binding upon both

parties

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Arbitration Award
 Decision of Arbitral Tribunal is termed as Arbitral Award
 An arbitration award (or arbitral award) is a determination on the merits
by an arbitration tribunal in an arbitration, and is analogous to a judgment
in a court of law.
 An arbitration award is the award granted by the arbitrator in their decision.
 This award can be money one party has to pay to the other party. It can also
be a non-financial award, such as stopping a certain business practice or
adding an employment incentive.
 The award should be dated and place when it is made should be mentioned.
 Copy of award should be given to each party.

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Construction Cost??
Expense incurred by a contractor for labor,
material, equipment, financing, services,
utilities, etc., plus overheads and contractor's
profit. Costs such as that of land, architectural
design, consultant and engineer's fee are not
construction costs.

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Types of Construction Cost
Before moving into the main classification of project costs, some of the
specific costs encountered in construction projects are explained below.

1. Fixed Cost

This is defined as the cost spent once for a particular point of time. The
purchase of equipment, machinery etc comes under fixed cost assets.
2. Time-Related Cost
Time-related cost is the cost spend for a particular activity for a given
duration. The cost spent on wages, equipment and building rents etc comes
under this category.
3. Quantity -Proportional Cost
This type of cost will vary based on the quantities. Materials costs are
examples of quantity-proportional costs.
Major classification of construction projects costs are:
Project direct costs
Project Indirect Costs
Total Project Cost =  Project Direct Costs + Project Indirect Costs
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 Direct Costs of Construction Project
 The costs and expenses that are accountable directly on a facility,
function or product are called as direct costs. In construction
projects, the direct costs are the cost incurred on labor, material,
equipment etc.
 These costs for a construction project are developed as estimates by
means of detailed analysis of the contract activities, construction
method, the site conditions, and resources.
 Direct Costs are Directly attributable/traceable to Cost object
 Different direct costs in construction projects are material costs,
labor costs, subcontractor costs, and equipment costs.

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Indirect Costs of Construction Project

 The costs, unlike direct costs, is not directly accountable

for a particular facility, product or function.
 Indirect costs can be either variable or fixed.
 The main sections coming under indirect costs are
personnel costs, security costs, and administration costs.
 These costs do not have a direct connection with the
construction project.

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 The indirect cost can be classified as:

1. Project Overhead Costs

 In a construction project, the cost of some of the items cannot be directly
allocated for a specific activity. Most of the site related costs come under this
section and are categorized as project overhead costs.

 Project overhead costs can either be fixed or time-related costs. Different costs
coming under overhead costs are the costs of stores, safety facilities, workshops,
offices, staffs and parking facilities. All those plants that are required to support
the working crews will come under this cost.

 The overhead cost is estimated by a detailed analysis of the site-related activities

and their cost. Hence an accurate cost estimate is obtained. Most of the
companies make use of forms and checklist developed by them to estimate these
costs. The site overhead costs account for 5 to 15% of the total project costs.

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2.General Overhead Costs
 The general overhead costs cannot be directly charged for a specific
project. These form the costs that are used to support the overall
activities of the company. The general overhead costs will include
the cost of the design engineers, expenses of head-office, cost of
directors and managers, schedulers etc.

 The general overhead expense and cost are found reasonable

through continuous monitoring of the company expenses. The
general overhead costs account for 2 to 5 % of the contract direct
costs.
 The amount of the general overhead that should be allocated to a
specific project equals:

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 Based on a future plan of actions Prepared in advance
 Based on objectives to be attained Expressed in monetary and/or
physical units
 Prepared for the implementation of policy formulated by the
management

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 A project budget reflects the financial plan of operations ,divided
into responsibility centers, while scientific goal clearly outlined
along with the costs expected to be incurred.
 Purpose is to assign financial targets and resources to each
responsibility centers.
 In a construction Projects the client and contractor is having
separate budgets.
 The client construction budget is a capital budget,which is
enmarked by the clients for a project. It includes the expenditure on
preliminaries, procurement of land, consultants fee, contractors
payment and the cost of working capital.
 A contractor budget is earned value income and resources
expenditure oriented budget.It include quantity statement of income
and expenditure and forecast of financial statement of project
balance sheet,cash flow ,profit and loss and performance measuring
base time. 30
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Types of budget

 Earned Value Budget

 Project Operating Expense Budget
 Indirect expense budget

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Earned value budget
 The earned value means “what we get for what we spent”
 The earned value or sales value of the work in progress yields revenue.
 This revenue nourishes the growth of the project..
 It is the earned value forecast that forms the base for the quantification of
the entire production budget.
 Therefore it is important that all those engaged in project management
should take an active role in the formulation of the earned value budget..
 First step is preparing monthly physical targets to be achieved. These
targets are achieved from the project schedule of work.
 This is computed by assigning standard earned value for each package and
then aggregating these month wise to derive the work done earned value.

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Project operating expense budget
 Determined by summing up the standard costs of corresponding
work packages constituting the tasks.
 It details the resources and costs planned for achieving phased
objectives.
 It can also be termed as expenditure budget.
 Project expenditure can be classified as production related expenses
and administration related expenses.
 Production related expenses: includes budgets for each of the
production responsibility centres and the services responsibility
centres who support the production.
 Administration expenditure budget: consists of general
administration budget, technical management budget and temporary
work and common facilities budget

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Indirect Expense Budget
 It includes Cost inflation, Escalation and Contingencies.
 Inflation results in an increase in the price of goods and services, and thus
gradually decrease the purchase power of money.
 Escalation in a project work can be taken as the difference between the
original and the latest estimate of the final cost of the project.
 The inflationary trend can be reviewed at the time of the review of the
budget and the cash flows forecast can be modified by taking the prevailing
trend of prices.

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Project Master Budget

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Importance of Project Budget
 Provide an organized procedure for planning
 Outlines the financial plan of the project.
 Depicts the management vision for the future.
 Without budget there can be no budgetary controls
 Supply information on the basis of which
corrective action may be taken

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Project Budget preparation Guidelines
 1.The budget should be prepared after the project plan is
crystallized.
 2.The budget should be prepared by a team not by an individual.
 3.The budget should be prepared, proceeding systematically using
scientific techniques as applied in a given situation .
 4.The budget should be prepared in the format used for making a
corporate budget.
 5.The budget should be prepared as a comprehensive total
document.
 The budget should be prepared keeping in mind that it has to be
used for budgetary control.

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