By Andrew Avalon
In a perfect world, the owner never changes his mind, the engineer never alters his drawings, the contractor never has execution problems, the resident engineer’s decisions are perfect, and Mother Nature behaves herself. That perfect world does not exist.
In the real world, with geometric precision, the forces of owner, engineer, contractor, and Mother Nature combine to make change. The owner changes his mind. The engineer changes his drawings. The contractor changes his means and methods. Mother Nature then changes what the others have missed.
Depending on which party is assessing and determining the causes for claim generation, the perspectives cover a broad range. Voluminous claims are not foolproof indications that a compensable claim exists and often mask a party’s responsibility for the problems that have occurred. It is frequently necessary to examine the project history in detail before intelligent judgments can be made on the validity of the claim.
The following are regarded as the primary owner practices that may result in construction claims. Bond producers and surety professionals would be prudent to understand such practices and their potential impact on projects.
Competitive bidding is the procurement practice where often the contractor who leaves the most money out of his estimate, usually as contingencies, gets the job. The lowest bidder is also the one faced with the highest danger of loss if contingencies, i.e., risks, are encountered. Much time may be spent by the low‑bid contractor in search of ways to cut losses by seeking additional funds through changes. While competitive bidding is often a sound procurement practice, a bid that is significantly below the other bidders often is a claim waiting to happen.
Fixed-Priced or Lump-Sum Contracts
Each adjustment to the time or price of the contract requires a turning of the administrative machinery. All too often it becomes a contest; the contractor looks for ways to get more and the owner looks for means to give less. The contest becomes confrontation and the dispute is formed. Allegations of scope change and defective and deficient contract drawings and specifications are at the core of claims on these types of contracts.
Unit Price Contracts
Owners often go out for bid seeking unit prices for performance of an incompletely defined scope of work. Justification for this pricing strategy is to reduce the overall execution time for the project, i.e., a fast-track schedule. However, disputes often erupt as the engineered quantities are defined during the detailed design phase, and these engineered quantities are significantly more or less than the owner originally estimated. Claims for delay and the loss of productivity costs of significantly higher levels of required manpower that result from higher quantities than originally estimated, or under-absorbed overhead for lower quantities than originally estimated, are encountered when significant discrepancies occur between the original and final quantities.
Contract Language that Inappropriately Shifts Risks to the Contractor
The ideal contract is a balanced document that respects the rights of both parties and thoughtfully allocates each category of risk to the party who is in the best position to manage that risk. In the real world, the owner-drafted contract tends to lean sharply in the owner’s favor through the use of exculpatory language. While it may give the owner some degree of added protection, it also leads to higher bid prices and expensive arbitration hearing or courtroom battles.
Failure to Grant Time Extensions for Excusable Delays
Years ago, parties did not fuss much about time extensions. When the contractor finished 100 days late, the owner granted a 100‑day extension – a simple transaction. It worked because contractors thought “claim” was a dirty word and owners did not have to use liquidated damages as a weapon. Today, most owners have learned – some the hard way – that requests for time extension should not be stored in the filing cabinet. Each request demands analysis and timely response.
Major Changes in the Plans and Specifications During Construction
The owner is ultimately responsible for defining the scope of a project during the conceptual phase of the project; the scope will probably change quite frequently without causing any undue hardship. However, changes that occur during the construction phase or even detailed design phase inevitably make life difficult for the construction contractor. Scope changes result from a number of situations, such as owner preferences, design reviews, constructibility issues, safety requirements, hazardous operations reviews, and operations and maintenance concerns.
Mishandling of Minor Change Orders
The tranquility that follows contract award does not last long before the inevitable changes begin: the owner wants alloy pipe instead of carbon steel because chlorides are found in the feedstock; the engineer wants to move vessels higher in the structure to obtain more head on the pumps below because of higher pressure drop in the system; the contractor wants to use a less costly concrete batch plant instead of buying concrete from the local supplier, but the permits did not provide for a batch plant; and Mother Nature brings a 200‑year flood. Change is the necessary ingredient. Without it, disputes are rare events.
Unrealistic Schedules and Underestimated Costs
Whenever time schedules and/or project costs are based on optimistic predictions of labor productivity, availability of skilled labor, good weather, quantities based on an incomplete design, etc., the project will be burdened with missed milestone dates, cost overruns, and even low morale among project personnel. Sufficient time must be allocated in the planning stage of a project to accurately estimate time and cost requirements.
Failure to Obtain Adequate Funding
Adequate funding for construction projects is more difficult when money is tight. Financial institutions are often averse to adequately fund small to medium‑size construction projects. Stringent guidelines are now enforced in the lending of money to construction owners. The banking industry is becoming much more selective in the kinds of projects in which they are willing to invest. The construction contractor has to be concerned about whether the owner is going to be able to reimburse or pay progress payments in a timely manner. By far, the most common cause of contractor bankruptcy is not failure to earn a profit over the long term, but because they did not get paid in a timely manner. Most contractors go bankrupt because they cannot meet short‑term obligations, resulting from not being able to manage their current obligations.
Inadequate and Ambiguous Scope Definition in the Bid Documents
This has a far‑reaching effect because a project’s scope must be defined in enough detail for comprehensive scheduling, estimating, and resource allocation to be reasonably accomplished. Whenever the owner is unwilling to make a concerted effort to define the construction project in the early stages, or charges ahead using a fast-track concept without adequate contingency, problems will undoubtedly occur throughout the entire project lifecycle.
Inadequate Time Provided for Bid Preparation
Owners are always under economic, market, environmental, political, and other pressures to start and complete a new capital project or a modification to an existing facility. As a result of these pressures, owners may hastily prepare incomplete bid packages and then request fixed price or unit price bids by a date that does not provide the contractor with an adequate time period to investigate the site conditions, thoroughly read and understand the owner’s specifications, prepare its design, verify the accuracy of the owner’s quantities, secure quotations for equipment and materials, prepare an adequate project schedule, and estimate its costs for performing the work. When this occurs, the contractor may either choose not to bid, add significant contingencies to its estimate to cover the risks and hope that its bid is still within the owner’s budget, or bid competitively in spite of the risks and hope that, if it wins the bid, it can recover any unanticipated costs through change orders and/or claims.
Excessively Narrow Interpretation of the Plans and Specifications
Plans and specifications are often susceptible to different but reasonable interpretations, particularly if they are unclear or ambiguous. To be competitive, contractors are always seeking reasonable ways to reduce their costs and win bids. If the contractor’s interpretations are reasonable, and the owner rejects the contractor’s equipment and/or material submittals or construction means or methods because its intent was different, claims may be the only recourse available to the contractor, particularly if the owner’s interpretations are very costly.
Owners typically want to procure and furnish their own equipment for unique projects, such as chemical plants and refineries, educational facilities, hospitals, and research facilities, because of favorable purchasing agreements with vendors or the special needs associated with such projects. Many owners fail to understand that contractors have specific material management plans for the project – a plan for when that material will be installed and where it’s going to be stored once it arrives at the site. Some owners assume incorrectly that whenever owner‑supplied material arrives on the site, the contractor can efficiently store or install the materials. The sequence of delivery of bulk material items such as structural steel, large bore piping, and piping supports is extremely important to the contractor’s efficiency. Owners and contractors must thoroughly coordinate and schedule the delivery of these items if the owner elects to perform the procurement function. Contractors usually have installation schedules that they plan to follow, and this type of misunderstanding leads to significant material management problems.
Incomplete and Defective Plans and Specifications
There have been few instances where an engineering design was so complete that a project could be built to the exact specifications and drawings as contained in the original design documents. There are always going to be errors or omissions in the design documents that will result in some modifications to the originally planned construction process.
Delays to Project Award
Often as a result of delays in securing funding approvals or permits to commence the contract work or design completion delays by the owner’s engineers, owners may delay project awards beyond the dates stated in the bid documents. It is not uncommon, however, for owners, after clearing such roadblocks to their projects, to still insist that the contractor complete the project by the original bid completion schedule and at the same price. If the contractor accepts the project award at its original bid price, and its increased costs to complete the project on time significantly outweigh the savings in time-related costs, the contractor may submit a claim to recover its increased costs.
Failure to Give Adequate and Timely Access to the Work Site
When an owner does not provide the contractor with adequate access to the work site to complete its work in the timeframe and in unobstructed conditions that were anticipated in its bid, the contractor may file a delay and loss of productivity claim for the resulting increased labor costs resulting from the access problems.
Interfering with Work on the Job Site
Owners invite claims by inappropriately directing the contractor’s work, performing concurrent operations, or actively interfering with the contractor’s least cost performance.
Letting Other Contracts in the Same Area
A contractor depends on the availability of qualified craft labor in adequate numbers to perform the project work in the quality, time frame, and productivity rates anticipated by its bid. When the owner disrupts this labor supply by letting other projects in the area without prior notice of such plans at the time of the subject project bid, contractors may submit claims for increased costs of importing labor from outside the geographic proximity of the project, paying higher wages to attract more labor, paying overtime premiums to attract more labor, or incurring decreased productivity for less experienced workers.
Failure to Recognize Legitimate Change Order Requests
The owner’s conduct during construction is a critical factor. Disputes will flourish if the owner elects to stonewall all requests for additional time and money. Even the most contentious of contractors will come forth with some well‑founded requests that should be handled with equity and dispatch. The owner’s positive response to reasonable requests can set the tone for the subsequent relationship of the parties.
Late decisions that delay the performance of the contractor’s work are invitations for claims. Examples of this problem are decisions on pending change orders that drag on well beyond the contractor’s ability to complete the work efficiently and without delaying the project, and decisions to approve a time extension or require the contractor to accelerate the work.
Delayed Approval of Submissions, Shop Drawings or Materials
These types of delays can often affect activities on the critical path of the project schedule and cause delay claims. The contract should state the turnaround time that is available to the owner to perform these tasks. In addition, the contractor should always state in its transmittals the date when it needs a response.
Overzealous Inspections and Rejection of the Contractor’s Work
Holding the contractor to higher than specified standards for performing the work can cause delay claims and claims for increased costs for correcting the work to the inspector’s unreasonable standards.
Inadequate Project Management Controls
Project management control areas that cause the greatest concern include: lack of meaningful cost and schedule control information because the contract does not require detailed cost and schedule information to be provided by the contractor; project decisions that are not made in a timely manner or not promptly implemented; confusion regarding the apparent authority and responsibility of project personnel; and, an apparent lack of integrated planning.
Refusal to Accept Materials or Equipment that Meet Specifications
This problem often occurs over the interpretation of “or equal” specifications, where the contractor proposes equipment or materials that the contractor believes meets the owner’s specifications and requirements, but the owner insists on a specific manufacturer or model that is usually more costly than the contractor’s submittal. If the owner wants a specific item, he should specify the exact item and not include “or equal” language in the specifications.
Bidding the Project Construction with an Incomplete Design
In its eagerness to get a construction contractor started in the field, theoretically to complete the project sooner, the owner may issue its bidding documents prior to the completion of “ready for construction” documents. Contractor’s usually only bid on what they see in the documents and are reluctant to add contingencies for unknowns because such bids may not be competitive. Completing the design often brings claims for changes and associated delays that, in the long term, extend the project duration and increase its costs.
Assignment of Inexperienced Staff to Oversee the Contractor’s Performance
Many owners undertake projects with inexperienced and inadequate staff to appropriately administer the contract in a timely manner. Such problems often lead to delays waiting for the owner’s approval of submittals, changes, or responses to Requests for Information. Alternatively, the owner could retain construction management, contract administration, or project controls personnel to augment its staff, but this option may not be implemented because of budget constraints. The result of this problem is usually delay, disruption, and claims by the contractor for increased costs.
Unanticipated Site Conditions
Owners often do not undertake adequate underground investigations to determine the type of soil, bedrock, existence and depth of water, contamination of soil, and other subsurface conditions to provide the contractor with adequate information to prepare its bid. The naive owner will put disclaimers in its bidding documents in an attempt to put the risk on the contractor. The result of finding these “differing site conditions” are delays and claims for increased costs.
Contract Requirements for Socioeconomic Objectives
Public or government owners will often place requirements in their contracts for achieving certain hiring objectives, such as minority percentages or local hire percentages. If the number and skill level of the available labor is inadequate to meet these objectives, the project may be delayed and the contractor may attempt to recover any increased costs it has incurred because of an “impossibility of performance” situation.
Unclear Definition of Mechanical Completion
Owners typically designate the Mechanical Completion Date, or the Substantial Completion Date as the key completion milestone in the contract. When these dates have occurred, the owner can begin to start-up the facility or begin to move in and partially occupy the building. Also, this date is usually the date from which liquidated damages are measured. Final Completion is the last milestone before the contractor can completely demobilize. Often, the contractor is merely completing punchlist work or certain miscellaneous work that was not necessary for Mechanical or Substantial Completion. Disputes often erupt at the end of the project if the owner’s contract definition of Mechanical Completion or Substantial Completion is unclear. The contractor knows what it has to do for Final Completion, but each owner’s requirement for Mechanical Completion or Substantial Completion may be different. For example, are as-built drawings, hydrotest packages, operating manuals, and loop check documentation required for Mechanical Completion or Substantial Completion? If the owner requires these items before it will agree to the contractor’s declaration of Mechanical Completion or Substantial Completion, but the contractor was planning to submit these after it declared Mechanical Completion or Substantial Completion, a dispute may occur over liquidated damages.
Hopefully, the identification of these problems will help to avoid the need to file claims and allow for a more successful project. Bond producers, surety professionals, owners, and contractors should be aware of these potential causes of claims and strategies for claims prevention.
Andrew Avalon, P.E., PSP, is president of Long International, Inc. and has over 30 years of engineering, construction management, project management, and claims consulting experience. He is an expert in the preparation and evaluation of construction claims, insurance claims, schedule delay analysis, entitlement analysis, arbitration/litigation support and dispute resolution. Avalon is based in Orlando, FL, and can be contacted at [email protected] or 407.445.0825.