Given the complexity of construction projects, it’s understandable they are fraught with possibility of claims. Actually, at least one quarter of construction projects go through a claim. Claims equal delays, frustration, financial losses and strained or ruined relationships. Part of construction management, construction claims management is all about identifying and handling risks.
What is a Construction claim?
When a party in a construction project asks for compensation outside the provisions of the contract, that situation is a claim. It’s not a claim if a change is requested in writing, negotiated and agreed upon. Claims are disputed changes, which are often the result of a failure to meet contractual terms.
What drives claims?
The causes of claim are not the same like drivers of claims. Claim drivers are what contributed to the problem and it’s the understanding of claim drivers that allows for effective construction claims management. When you know the weaknesses of the project, you act preemptively to avoid claims (or at least mitigate them).
Most common claim drivers are:
- High profit pressures on contractors
- Poorly written contracts
- Poorly executed contracts
- Increased contractor’s risk
- Poor involvement on part of the owner
- Excessively aggressive schedules
Construction claims management is in large part risk management
Risk is the largest driver of construction claims. Projects in which time is the major constraint tend to have claims more often than conventionally scheduled projects. Projects with an aggressive schedule are 70% faster than the standard. It’s understandable that such projects are susceptible to claims because external factors influence the course of the project.
Aggressive project costs are also linked to a higher incidence of claims. An example would be a construction project where the costs are pressured to be under a certain amount per square foot.
Highly competitive bids have also shown to result in claims.
In general, projects in which the risk is predominantly on the contractor are quite likely to develop a dispute.
Practices that reduce the risk
If owners choose to go with a design/build project, it’s important that they have a good Basis of Design. Design/build combined with lump sum Engineering-Procurement-Construction (EPC) payment is much more likely to develop a claim than a design/bid/build project.
Design/bid/build project uses a combination of reimbursable and fixed payments. Engineering and procurement are done on a reimbursable basis, whereas construction is paid a fixed fee. This route significantly reduces the risk for the contractor, so there are much fewer claims.
Integrated teams included in the project have shown to contribute to a lower incidence of claims. Integrated teams are those that bring together individuals from various aspects of the construction environment – for example, construction managers, project managers, realtors, experts in maintenance, operations, etc. These teams serve to monitor contractor’s work from various sides so that problems are spotted early and addressed. We can perceive them as owner representation.
It has also been observed that having a thorough insight into the conditions of the site reduces the likelihood of construction claims.
When the owner and the people working on the project are involved in writing the contract (when it’s not just up to lawyers), there tends to be a lower probability of claims.
It is generally advised that owners stay involved in the whole construction process, either on their own or through a representative. Active engagement allows the owner or anyone else who monitors contractor’s work to identify red flags in a timely manner. Early identification of potential problems allows measures to be taken to mitigate the consequences.
Do you need construction claims management?
Like all walks of life, some people would argue against the costs of it until they have the painful experience dealing with a major claim themselves. Depending on your project team, the need may only arise in certain phases. Preventative management is always preferred to having to hire services to try to turn around projects in distress.
When you need construction claims resolution services or want to take measures to prevent claims (like owner representation), Xpera Group is here to serve you with experience and cutting-edge knowledge. Xpera Group is able to deliver you holistic, tailor-made solutions owing to the vast breadth and depth of our team’s collective experience. Contact us for more information!