Basics of Construction Claims

Claims that arise on construction projects present complex issues for resolution, as there are numerous components associated with a claim by a contractor for compensation and schedule-related relief.  Understanding the makeup of these claims and their fundamental elements is therefore essential to resolving them.  This article discusses the basics of construction claims, explaining the most common types of claims, types of available relief, and key questions to determine whether a claim has merit.

While every claim must be analyzed individually, most construction claims start from the following bases:

• Claims alleging additions to the scope of work: in this type of claim, the contractor alleges that it is required to perform additional work that was not contemplated when the contractor prepared its initial cost estimate or price for the project.  These claims generally arise when the project owner either directly or indirectly requires the contractor to add scope to the work.  The scope addition may derive from the addition of an item of work or may arise from the need to perform additional work to achieve a specified outcome.  The delivery model used for the project can have a significant impact on how these claims arise.  For example, in a design-bid-build project, the design furnished to the contractor may have design errors or constructability issues.  In this circumstance, the contractor must find a different method to build the project than the approach assumed when bidding, which can result in a request for additional compensation due to the changed circumstance.  In a design-build project, the owner may condition acceptance of a design submittal upon incorporation by the contractor of an additional item of work, resulting in a claim for added scope.

• Claims arising from undisclosed information: in this type of claim, the contractor encounters an undisclosed circumstance that results in the need to perform additional work to complete the project.  This type of claim may arise where the owner furnished incorrect information during the cost estimation or bidding process.  This claim generally requires that the incorrect information not be something for which the contractor is required to perform due diligence when bidding the work.  An example of this type of claim is when the owner either fails to furnish or provides incorrect information concerning the location of utilities on the project site, the presence of hazardous materials, the condition of existing facilities, information about restrictions on construction methods on the site, or other similar items that can impact the cost of performing construction work.

• Claims arising from unknown conditions on the work site: in this type of claim, the contractor encounters site conditions that vary from the conditions assumed when estimating the cost to perform the work.  These claims may arise out of issues such as geotechnical conditions, soil types, liquefaction, undiscovered utilities or other subsurface hazards, the existence of endangered species or the presence of items of archeological significance.  In these claims, the contractor may seek additional compensation incurred to abate the condition or to adjust the work to account for the differing condition than originally assumed.

• Claims arising from external factors: in this type of claim, the contractor alleges that a third-party has interfered with the work in a way that increases the cost or time necessary to perform the project.  These claims often arise when third-parties either fail to perform a task necessary for the project to proceed or do not timely perform the necessary task.  Examples may include permitting agencies that do not timely issue a permit, utility owners that do not timely move their facilities or do not timely approve the contractor’s plan to adjust the utility, stakeholders who delay necessary approvals, and owners of right-of-way whose failure to relinquish property delays work.  Other external factors include interference by the weather, market conditions, or force majeure events.

Construction claims generally seek the following types of relief:

• Direct costs of extra work: this includes the cost of additional labor, materials, equipment, and supervision to perform work caused by the condition giving rise to the claim.  Generally, these costs are the simplest to quantify because they are comprised of items for which there is a clear market price and measurement is based on the actual quantities to perform the additional work.  For example, if scope added to the work requires 100 additional labor hours, the amount payable would be the labor rate for the workers who perform the work.

• Time extensions: many construction projects operate under a schedule that may require completion of work within a specified timeframe.  Larger projects, such as infrastructure work, may allow the owner to collect liquidated damages if the project is not completed by the deadline in the contract.  A contractor may request a time extension when an event impacts the contractor’s ability to complete the project by the deadline.  A time extension extends the deadline by the amount of the interruption caused by the event but does not itself result in additional compensation to the contractor.  When the owner extends the time to complete the work, the owner foregoes the ability to collect damages for late completion to the extent of additional time granted.

• Field and Home Office Overhead Delay Costs:  in addition to a time extension, a contractor may claim that it is entitled to additional compensation arising out of a delay to the work.  When an event delays the completion of the work, requiring the contractor to work longer to complete the project, the contractor may assert that it incurs additional overhead and mobilization costs solely from being on the job longer.  These costs include field overhead costs for general items on the worksite, such as insurance premiums, temporary facilities, and additional management costs.  A contractor may also seek home office overhead costs that are absorbed across all of the contractor’s projects.  Delay costs may also include direct costs such as idle labor, idle equipment, escalation, and other incidental costs.

Key issues to understand to resolve construction claims include:

• Has the alleged condition occurred?  This question requires evaluating the circumstances that are alleged to constitute the claim.  For example, where the contractor asserts that the owner added scope to the work, this question requires a comparison of the original contract requirements to the alleged changed requirements.  This question may also require evaluating whether the original contract requirements included the scope of work that the contractor is alleging is different or additional.  For a site condition related claim, this question requires evaluating the baseline assumptions for the conditions at the site and the actual conditions encountered to determine whether the true conditions were in fact different.  This would require evaluating the information provided to the contractor about the site, the investigations performed when evaluating the conditions, the information that could be gleaned from inspection of the site at bid time, and the actual conditions.  Many times, this first question requires technical evaluation concerning what a specification requires, what a report discloses, the reasonableness of assumptions, and other complex issues about the assumptions that went into the contract price and what actually occurred.  Often, this first question may be the most difficult to answer due to differing technical interpretations but is the most critical to evaluating whether a claim has merit.

• Does the contract allow the requested relief?  Construction contracts typically specify the conditions under which the contractor is entitled to additional compensation or a schedule extension.  These provisions may specify particular events that entitle the contractor to relief or may specify when relief is not permitted.  When a contractor asserts a claim, it is important to understand whether the particular event entitles the contractor to the requested relief, as this is fundamental to the risk allocation in a contract.  If the contract does not allow relief in a particular situation, it means that the risk of that event is borne by the contractor, whereas if the contract does allow for an adjustment, the owner bears that risk.  Maintaining the carefully negotiated risk allocation is important to resolving claims fairly and in accordance with the parties’ agreement.

• Does the contract have any limitations on the type of available relief?  While the contract may entitle the contractor to relief when a particular event occurs, it is important to assess whether the contract places any limits on the types of relief to which the contractor may be entitled.  For example, a construction contract may limit a particular event only to the direct costs of extra work and preclude schedule-related relief.  In other circumstances, the contract may allow for a schedule extension for a certain event but prohibit recovery of the costs of delay.  An example of this is found in many public infrastructure contracts with respect to force majeure events.  Force majeure is frequently a shared risk that allows a contractor to extend completion deadlines but without recovery of additional direct costs or delay-related costs.

• Did the contractor follow the correct procedure? Construction contracts may contain procedures stating how a contractor is able to request relief, the timing of notice, the information required to be provided, the timing for submission of further information, and a process for dispute resolution when the parties cannot agree on whether a claim has merit or the quantum of relief.  Whether the proper procedures are followed is an important aspect of whether the contractor is entitled to requested relief.  This question takes on heightened importance in the context of public projects funded by federal and state agencies whose governing laws often require that specific information be submitted before public funds can be disbursed.

It is important to consider that different contracts and different types of projects may have varying nomenclature for the items discussed above; however, the form of construction claims across all types of projects will generally resemble the structure discussed.  Additionally, the more complex a claim, the more likely that it will involve several of the issues outlined in this article.  Above all, understanding the basis of a claim, the relief available, and the contractual parameters is vital to resolving claims on construction projects.