Resolving Construction Contract Claims and Disputes
Claims and disputes are never going to go
completely away in construction contracts; here’s a few ideas for
subcontractors on how to minimize the possibility of them arising and if
they do, how best to resolve them.
By Kit Werremeyer
President,
Southernstar Consultants, LLC
You are a successful mechanical subcontractor and
you have a very good job performing some extensive grade level and
elevated pipe work on a new addition to an existing manufacturing
facility. You’re ahead of schedule, your quality and safety records are
great, and you’re beating your cost estimate in the firm price contract,
so things are looking pretty good that the job will finish out as a
winner for you.
Friday afternoon, the Project Director for the
Owner’s Main Contractor stops by and says: “I was looking over the
schedule of your work activities and I didn’t notice that you have
planned for making all the pipe connections from your work to the piping
in the adjacent facility. When do you plan to do these?”
You take in for a moment what the Project Director
just said and reply: “What pipe connections? Those connections aren’t
included in our scope of work.”
There you have it: the classic beginnings of a
claim and/or dispute. In the above example, if only a few pipe
connections are involved and the cost and schedule impact is small,
maybe the subcontractor will just do the work and get on with the
project and chalk the whole episode up to experience.
But what happens if there are 150 welded pipe
connections to be made in high strength material Schedule 160 pipe in
diameters from 8” to 24”. All connections have to be pre-heated before
and during welding and all finished welds have to be ground flush and
then examined by either full ultrasonic inspection or 100% radiography.
Not only will it cost the subcontractor a fortune to do this work, his
schedule will likely be significantly extended and, to make matters
worse, the contract has a big time liquidated damages clause in it for
failure to meet schedule.
All of a sudden a really good job looks like it
might turn out to be a really bad one.
So, how do you stay out of situations like this?
Scope of Work – The
First Line of Defense
It does not matter what all the US and
international contract lawyers tell you, the most important part of any
construction contract is the scope of work. That is what you and all
others have agreed to do in the construction contract.
Remember, minimizing the possibility of claims and
disputes arising in a construction contract starts prior to the contract
being signed with agreement to a detailed and very well defined scope of
work document.
A useful tool is the scope of work matrix. This is
a line by line listing of all the individual work items that are to be
performed under the contract. The scope of work matrix then notes in
separate columns who is responsible for doing all the line items of
work: the subcontractor, the main contractor, the owner, other
subcontractors, material suppliers, the architect, the third party
inspectors, and all others involved in the project. The “others” or
“other subcontractors” column is a great reference to define who does
work at the interfaces between one subcontractor’s work and another
subcontractor’s work. It also makes it clear that certain items of work
(like the pipe connections in the above example) are to be done by
someone else.
If an Owner hires a Main Contractor for a project,
that Main Contractor should take the time necessary to carefully and
fully define the scope of work for everyone that is involved in the
project. After all, it is what the Owner is paying him to do.
But, it is still important for the subcontractor to
make his own further clarifications or exceptions to the scope of work
he is quoting on. Taking the time to clarify the scope of work in
writing in the subcontractor’s proposal, and subsequent final contract,
is an important first step in minimizing the possibility that claims and
disputes will arise during the course of a construction contract.
Words to Avoid –
“Reasonably Inferred”
“Reasonably inferred” are two words commonly found
in references to the subcontractor’s scope of work that may unreasonably
relieve the subcontractor of his hard earned money.
Take a look at the example wording shown below that
might typically be found in a construction contract’s commercial terms
and conditions regarding the scope of work.
Article 5 – Scope of Work
Subcontractor shall perform
the Work as shown in the attached Plans and Specifications and as may be
reasonably inferred from those Plans and Specifications.
It’s certainly understandable that an Owner or his
Main Contractor wants a complete project and that there are likely to be
lots of very small and miscellaneous scope of work items that are done
just in due course of finishing a project. No problem with that
concept; all subcontractors know you can’t describe every single small
nut and bolt item in a project’s scope of work, and that the Owner or
his Main Contractor expect all that small stuff to be included without
any hassle.
The problem arises with who is responsible for
making a decision on what’s “reasonably inferred”? If a subcontractor
thinks he will make this decision, well, good luck, get out the
checkbook.
“Reasonably inferred” are code words for: “we
overlooked this in defining the scope or work but, Mr. Subcontractor,
you have to do it anyway and at your cost and schedule, not ours.” Do
you think the subcontractor in the example about the pipe connections
will win that dispute if the Main Contractor says those connections were
“reasonably inferred.”?
Try to get the words “reasonably inferred” struck
from the commercial terms and conditions. It is the responsibility of
the Owner and/or his Main Contractor to do a first rate job of carefully
and completely defining everybody’s scope of work on a construction
project.
If the scope of work needs further clarification,
then the subcontractor should carefully describe it in his proposal and
insist it be included in the final contract documents.
Everybody benefits from a well-defined scope of
work; the Owner, the Main Contractor, the Subcontractor, and all others
performing work on a construction project.
Keep a Record of
What’s Going On – The Subcontractor’s Daily Log
Not all claims and disputes arise out of poorly
written scopes of work.
Delays to subcontractor’s schedule caused by other
subcontractors or the Owner or the Main Contractor, and changing site
conditions can give rise to legitimate extra costs and schedule
extensions.
Refusal by the Owner or Main Contractor to pay
Subcontractor these extra costs or grant schedule extensions, or both,
can give rise to a claim or dispute.
A semi-sage once said: “In God we trust. Everyone
else bring data.” On a construction project, this should be revised to
read: “In God we trust. Everyone else bring data, and a lot of it!”
A key role of a subcontractor’s site superintendent
is to keep a daily record of what’s going on in addition to the general
progress of the job. The superintendent always has plenty to do, and
doing some routine paperwork comes with the territory, regardless of how
meaningless it may seem.
Is the job being slowed down by the Owner, the Main
Contractor, another subcontractor? If so, jot it down. Keep the
details.
Are changing site conditions developing? If so, jot
it down. Keep the details.
Is the Main Contractor demanding extra work that’s
not part of the scope? If so, jot it down. Keep the details.
At the periodic progress meetings with the Owner
and/or Main Contractor, get all this information on possible or actual
extra costs and issues that may cause a claim or dispute to arise noted
in the minutes of the meeting. If it isn’t resolved by the next
meeting, get the information noted again and that it wasn’t resolved.
Keep pressing until it is resolved.
Sound tough and hard-headed? Perhaps. But it’s a
heck of a lot better than losing money on a legitimate extra or claim.
There’s nothing wrong with keeping these issues well documented and on
the table with the Owner and/or Main Contractor until they are
resolved.
If you wait until the end of the job to resolve,
it’s probably too late.
Resolution Options
– the Good and the Bad and Fairy Tales
Negotiation is by far the best way to resolve
claims and disputes.
Mediation is another good way. A mediator is a
facilitator and not a decider. He/she tries to facilitate a
resolution. Mediation is a good option when both the subcontractor and
Owner or Main Contractor honestly want to find a resolution to a claim
or dispute. A mediator can be selected who has extensive experience in
the construction industry.
There isn’t much difference between arbitration and
litigation. Both are terrible options to resolve claims or disputes.
Both methods are expensive, time consuming, resource devouring and the
outcome is unpredictable. The decision is likely to be made by an
arbitrator or a judge with little or no construction experience beyond
having Home Depot build a lawn mower shed in his back yard.
The best benefit of the threat of arbitration or
litigation is that the threat might drive a reluctant Owner or Main
Contractor to the negotiating table.
So-called “win-win” and “lose-lose” scenarios are
fairly tales; resolution is all that matters, and the best way to
achieve resolution is through negotiation.
