July 25, 2007

Construction change orders & claims:

Keeping your client happy while ensuring that you get paid

By Brian Swartz

(SPECIAL)

Everyone has heard of Murphy’s Law which holds: “If something can go wrong, it will.”

For those of us in the construction industry, we have also learned that Murphy actually invented two secret laws, which he maliciously and deliberately failed to disclose. Good grounds for a claim of fraudulent misrepresentation one would think.

The first secret law holds that: “Just when you think things have gotten back on track, they get worse.”

The second secret law holds that: “Just when you think things can’t get any worse, they will.”

Clearly Murphy was an optimist.

The unhappy truth is that construction projects are very complex undertakings and, as a result, things rarely, if ever, go as planned. When changes occur in a construction project (and they will), most are dealt with effectively as Change Orders in accordance with the process outlined in the Contract Documents. (Capitalized terms herein refer to definitions as set out in CCDC2).

Change Orders authorize the Contractor to perform Work not covered by the Contract Documents while addressing increases to the Contract Price, extensions to the Contract Schedule and other ancillary changes required as a result of the change in the Work. In many cases however, a dispute will arise between the Contractor and the Owner (or the Owner’s representative) with respect to whether or not the Contractor is entitled to be issued a Change Order. A disputed or unapproved Change Order then becomes the basis for a Contractual Claim, which can lead to increased costs and corresponding delays to the project schedule.

It is critical that the contractor maintain a thorough record-keeping system in order to establish the elements of proof of the claim.

Brian Swartz

While changes can not be avoided, a prudent approach to avoiding or to limiting disputes arising from changes is to ensure that a complete risk review has been completed at the bid stage, identifying the allocation of responsibility for project risks (risk matrix), as set out in the Contract Documents.

A thorough risk assessment should give rise to a suitable risk management program addressing appropriate project contingency, risk mitigation and risk transfer measures. Thereafter, sound project management principles as discussed below will result in effective resolution of unplanned events and changes.

Many unplanned events can give rise to changes in the Work. The Contractor must be diligent in recognizing the changes and dealing with them accordingly. Changes to the Work may include:

a) Addition, modification or reduction in the quantity or quality of work called for by the Contract Documents;

b) Changed delivery schedules, productivity losses, or other events that impact the sequencing of activities;

c) Access and interface problems which were not clearly shown on the bid documents or Contract Documents but which inhibit productivity as estimated;

d) Interference or delay by the Owner, its consultant or other contractors, which impact productivity, performance or scheduling of the work;

e) An excessive amount of Change Orders, which impact Contract management, as well as scheduling and productivity;

f) Delay caused by others;

g) Acceleration (typically extra manpower and overtime premium), which is required as a result of delays to the critical path schedule that must then be recovered in order to avoid delay and late completion damages;

h) Seasonal shift, which arises when, as a result of delay, work is deferred to another season. This might entail working outdoors during winter, incurring additional costs to heat the place of the work, or working during a season where the work can not be implemented at all, eg. laying asphalt in the winter;

i) Bid to construction design changes where it becomes apparent that work is required which was not called for in the tender documents, and dispute arises as to whether they were to be necessarily inferred from the tender documents;

j) Changed site conditions or latent conditions that could arise from unanticipated sub-surface conditions, including hazardous waste, or archaeological finds;

k) Changes required by or delays in receiving approvals by regulatory agencies;

l) Conflicts in the work with other contractors employed by the Owner;

m) Discrepancies between specifications and drawings;

n) Subcontractor or equipment vendor deficiencies;

o) Late delivery of Owner-supplied/directed materials;

p) Late completion of Owner-directed work;

q) Poor or erroneous overall design and design co-ordination that is below the standard required to perform the work;

r) Accidental destruction of the work (including equipment in transit) that requires rebuilding/replacement (as opposed to negligence or defective workmanship);

s) Loss/damage/breakdown of equipment/temporary works;

t) Injuries;

u) Severe weather;

v) Force majeure events;

w) Labour disruption, including strikes (both on and off site) and jurisdictional disputes, as well as labour unavailability;

x) Changes of law, including building codes, working hours, safety requirements, and/or taxes; and

y) Default, including insolvency of participants, failure or refusal to perform, termination or suspension rights, security for performance, including bonds, guarantees, letters of credit and passage of title.

Any of the foregoing may give rise to Contractual entitlement for a Change Order. Such entitlement might cover both compensation and an extension to the Contract schedule. In that regard, it is critical that the Contractor know and follow the terms and conditions of the Contract (if not before signing, at least afterwards) in order to ascertain entitlement, as well as the structural process required to go through in order to process a Change Order or Claim. The Contractor must then substantiate quantum by demonstrating the cause and effect, and then quantifying the adverse impact, which has arisen as a result of the “unplanned event”.

The basis for a compensable claim or Change Order will be the result of how well the Contractor has managed the process. Sound project management principles include the following:

1. Record Keeping

Simply put, good project management skills and complete records will lead to sound construction claims.

It is critical that the Contractor maintain a thorough record-keeping system in order to establish the elements of proof of the claim. This system would include comprehensive daily time logs, daily time records, memoranda and correspondence between the Contractor, the Owner and/or the Owner’s representative relative to the change. The Contractor should also maintain dated photographs and video footage of the events. Minutes of meetings should be maintained and sent to the other party for verification and/or acceptance. Notes of all verbal discussions should be made and retained. Daily journals should be created and maintained. A critical path schedule must be maintained, updated, and analyzed frequently. Reports should be maintained and updated on a regular basis. It is also important that only personnel experienced in claims preparation and negotiation handle this function.

2. Compliance With Contract

As part of good Contract Management practices, it is essential that the General Conditions of the Contract are followed and implemented in connection with Change Orders or claims. You must understand your contractual entitlement to a Change Order. You must also ensure delivery of timely notices of delays and requests for Change Orders dealing fully with impact to price, schedule, scope of work, performance guarantees, warranty and productivity. Time is money, so it is important to request compensation for delay, not just a schedule extension. Subcontractors and suppliers should also be notified as appropriate. A claims team should be established to gather data, assess cause and effect, and prepare claim submissions outlining quantum calculations and providing supporting evidence for each event.

3. Monitor Progress

The Contractor must analyze progress prior to site meetings and use such meetings as a forum for discussing changes, delay and extra work. The Contractor should record disputes in the minutes of meetings and notify the Owner of any discrepancies between the Owner’s and the Contractor’s view of the minutes. The Contractor should track extra work, hours and amount of work accomplished, to demonstrate efficiency and impact.

One of the most difficult claims to prove is a productivity loss claim, where the work has been completed within the schedule allotted, however, the cost of the work has increased beyond the Contractor’s anticipated budget arising from acceleration, overtime and extra manpower costs. In this case, the Contractor must prove to the Owner that a compensatable event (as determined by the Contract Documents) has caused the Contractor to suffer productivity loss, whereby his cost of production was more expensive during the occurrence of the event, than if there had been no intervening or interfering event. The assistance of an experienced claims consultant in this regard is invaluable in analyzing and establishing a productivity loss claim.

In addition to monitoring productivity, the Contractor must adequately plan scheduling and sequencing requirements. This involves establishing a proper layout area and following through with the layout of equipment to ensure that all materials are on site as required to erect the work. It is also critical to ensure proper understanding of the ownership of schedule float. That is the free time available in the schedule to accommodate events of delay without impacting the critical path. Typically, if a contract provides that the owner holds the float, a Contractor will not be entitled to an extension of time in circumstances where the Contractor has been unable to prove adverse impact on the critical path. This is often dealt with in the Contract Documents.

4. Customer Service

Customer service focus in the field can be the difference between a good job and a disastrous one, so it is important to use it to your advantage. Good customer service is essential to protecting a Contractor’s reputation since it only takes one dissatisfied customer to spread a lot of negative comment. Unfortunately, in the construction industry, a Contractor can have plenty of good jobs, but everybody hears about the bad one.

Some of the characteristics of a good Project Manager include: open and timely communications; identifying changes early on in a constructive non-threatening manner; being accessible and responding promptly; being pro-active and demonstrating attention to problem solving and issue resolution; demonstrating dedication to and focus on safety, quality, attention to detail and getting the job done with minimal disruptions to existing operations or the environment.

Good project management techniques and customer focus demonstrate professionalism and will certainly assist in addressing changes to the Work in a mutually beneficial manner. At the end of the day, all parties share the same interests, namely that the project is completed, on budget, on time and in a safe manner. A good project manager keeps this in mind. When Owners want to walk through job sites, they do not want to be treated like the enemy.

An Owner on site is an opportunity, not a problem. Being “Customer-focused” does not mean simply meeting customer expectations, it means finding ways to exceed expectations so that they will positively remember their experience. Treat Owners with professionalism and it will pay off in the long run, with approved Change Orders, claims and repeat customers.

Brian Swartz is vice-president, legal services at Aecon Group Inc.

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