Contract claims in construction
This article is all about Contract claims in construction.
Stravelles run a course in Adjudication which aims to allow the student to run their own adjudication as the referring or responding party without paying for legal representation.
We support legal representation in more complex cases but we want to encourage especially smaller companies to feel more confident fighting for their contractual rights.
Introduction to Contract claims in construction
In the Construction Industry it is very common for events or issues to occur that will lead to one party making a claim for more money or more time.
The events giving rise to a claim may include:
Delays
The builder may be delayed in completing the building by two months. The Client may claim for loss and expense due to this delay. For example, if a builder is constructing a new supermarket for the retail giant Tesco. If the builder is two months late then Tesco lose out on two months of sales and profit.
Changes
A Client may instruction additional or reduced quantity of work or a change in the specification of a product. This may lead to a claim for more money from the builder. It may also lead to a claim for less payment owed by the Client.
Unforeseen circumstances
If there are huge storms for several days effectively shutting down the site then the builder can claim for additional time and perhaps additional monies.
New information or issue with the information
Should the construction drawings that the builder have priced on be wrong then a claim may be forthcoming.
While these are all legitimate events for a claim to be raised, Stravelles is interested in the underlying cause of these events. We have an article about the real causes of events in construction. Stravelles believe in eliminating these causes which will reduce the events and therefore the disputes.
What should Contract claims in construction look like ?
Introduction
A claim should be a communication between parties that they believe there is a potential claim.
Notice of the event
There should be first a formal notice of the event leading to the possible claim as soon as the event is discovered.
For example, if bad weather is leading to a delay, the contractor must issue a notice of delay and potential claim to the Client ASAP so they are aware of this event.
A claim for extension of time can follow.
This is common sense, it gives the Client a ‘heads-up’ that there is an issue and a chance for them to fix the issue or mitigate its negative impact.
Description of the claim
The claim itself should describe the event including:
- duration – when did the event start and when did it finish
- effects – who did this event effect and how? Is the completion date now in threat ?
- the reasons for the event – why did it happen?
- the steps taken to mitigate its effects – what was done to ensure costs or delays were reduced as much as possible
Contractual link
A successful claim will link the event to its relevant clause in the contract and any breach or legal entitlement resulting from that clause.
Breakdown of costs
Any party submitting a claim should quantify in the detail the costs they are seeking.
For instance the contractor must demonstrate the actual cost that they have incurred. It can get a little nerdy here over the question of whether claims should follow tender rates. We at Stravelles believe that consistency in claims is the key factor. If a contractor wants to use tender rates for additional works then they have to use tender rates if works are omitted from their works package. If a builder wants to deduct actual costs for work omitted then they must prove actual costs for the works omitted.
A Claim may also include allowances for additional preliminaries. For example, if the builder is granted an extension of time for 10 weeks then they are entitled to 10 weeks of rental for the scaffolding.
The claim may also include an allowance for head office overheads. Again, using the example of 10 weeks the builder may prove he is spending 10 weeks of additional office hours on this project or certainly part of this resource.
Getting very granular now, we can mention that finance changes may form part of a claim. If a party can prove that they are spending more on finance or borrowing costs because of the event then they can claim for this too.
Supporting documentation
There should be a copy of any documentation that would help support the claim.
What can parties claim for ?
Contractual parties can claim for time and money.
Liquidated damages
Most construction contracts include standard clauses for liquidated damages. A contract may include a set charge of £500 per day for every day a project is late.
If a builder hands over a project 10 days late then the Client can reduce the amounted owed by 10 days x £500 = £5,000.
The Client should issue a notice of this delay plus notice of this claim.
Extensions of time
Of course, if a builder has their paperwork in order, they can apply for extensions of time. If in the above example, the builder has successfully applied for an extension of time for 10 days then this cancels out the clients claim for 10 days delay.
Loss and expense
Any contractual party can issue a claim for loss and expense at any stage. This is simply a claim for additional monies due to an event. The builder who successfully obtains an extension of time for 10 days can submit a claim for monies to cover security and preliminaries for those extra 10 days.
Loss of profit/opportunity costs
A contract may claim for loss of profit if the Clients removes say the joinery package from their works. if this joinery package was worth £200,000 the builder might legitimately claim that they had expected to earn £20k of their profit on this package and thus are entitled to that profit.
How to deal with Contract claims in construction ? (once they have occurred)
By its nature a claim can be either accepted, rejected outright or acknowledged and then the final outcome is negotiated.
Upon receiving a claim, a party to a contract should acknowledge receipt and then review it. They should ask for more information if required and then they should issue their response.
It is important that both parties deal with claims efficiently and FORMALLY as they arise. There is no point saying verbally ‘yes we understand, no problem’ if the contractual paperwork is not followed up on.
A terrible situation in construction is where both parties stack up claims against each other whilst not agreeing them.
This strategy of ‘leaving it all to the final account’ is lazy and ultimately kicking the proverbial can down the road.
In most construction contracts, parties meet regularly so these claims can be dealt with in person then and the paperwork can follow.
How to avoid Contract claims in construction
?
Some people might write an article about avoiding claims by essentially passing all the risk onto the other party. A construction contract can be prepared that will essentially do this, for example, a design and build contract.
Stravelles have an article about the real causes of events in construction. We believe that if you eliminate the real underlying causes of events in construction you reduce the events, issues, claims and disputes.
The important thing to remember about claims
People can get very upset about claims during a construction project. They can attach emotion to what is essentially not an emotional subject.
Claims in a construction contract should simply be seen as a tennis match between the contract administration team of both parties.
Each party must abide by the terms of the contract and must keep up with their paperwork. If each party takes care of their paperwork each week then this tennis match will inevitably head towards an honourable draw.
If one party fails to keep on top of their paperwork then they will have a large number of claims stacking up quickly. This means that should a dispute over claims go to Mediation, Adjudication, Arbitration or the courts system this party will be at a disadvantage.