When an entity or person experiences a loss that they believe was caused by another party, they may exercise their right to claim (i.e. demand) compensation from the party believed to have caused the loss.

How do claims arise in projects?

Claims for compensation arise when a contractor incurs extra costs (in time, materials, labour, or third party costs) not contemplated or factored into their quoted prices. Proving the causation of those extra costs is key to whether they can successfully collect on their claims. That is, the onus is always on the claimant to prove his case – that the other party that hired him, caused the loss, either in part or totally.

Some factors in minimizing claims

Design stage : take a critical view of the constructability of whatever is being designed or proposed. E.g. inexperienced designers put in several different sizes of pipes in 1” to 2” increments in a 16” storm sewer line. The major cost in laying underground sewers is the excavation, backfill and repaving costs, not the incremental pipe size cost. Excessive sizes create a problem with procurement, maintenance, and modifications if needed later. Reducing the number of pipe sizes helps in reducing costs, that include stocking, volume purchase etc.

Tender preparation : Always be aware that the scope of work is an exercise in risk management among other things. If the owner provides materials, he assumes the risk that the materials will be delivered tothe contractor when needed.

Allocate risks to the entity that can best manage those risks. E.g. Obtaining relevant permits, such as environmental, or state regulatory permits, may be better handled by the asset owner than the contractor applying to these bodies on behalf of the owner. Providing all necessary electrical power or service water may also be more cost effectively handled by the owner instead of the contractor who has to apply to the utility or provide generators and water supply trucks.

The more aspects of the work or supplies the owner assumes responsibility for, the more likely there may be claims in the event provision of those items is not done in a timely manner compliant with contractor’s schedule. So a balance is needed between savings from the owner doing some things vs the risk of claims when these components are not delivered as needed.

Documentation. Since proving causation is the key to the success of a claim, documentation to prove such causation is of paramount importance.

Accurate recording of events soon as they occur cannot be overemphasized. If one tries to recollect events days after, important details may be lost or forgotten. In particular, photographs must be taken immediately as such opportunities are lost when site work continues, such as backfilling an excavation or cave in to ensure public safety.

The claimant (usually the contractor) is the one who has to do all the work in making his claim – recording events, taking photos, informing the client or its agents soon as possible when the claim or potential for a claim is known. It is imperative that the client also documents in a similar way, all events, time, resources and materials used – to be able to verify whatever is being claimed by the contractor. However, the client may also want to take similar action if he feels that there may be a claim against the contractor for damage to the client’s property, operations or even a direct consequential loss such as the damage to resident’s property or a piece of road after an avoidable watermain break caused by the contractor.

Claims – as currency
Other events that may cause claims against a contractor may not be very clear cut and should be recorded as potential counter claims against the contractor. For example, a contractor was behind schedule in his watermain installation and subsequent road paving, facing potential freezing weather. He proposed a realignment of the watermain to enable him to avoid having to remove the existing watermain before installing the new one in its place. That would have needed a bypass line that needed bacti testing which would have taken at least 2 weeks extra. Instead, with the new alignment, he installed the new watermain, installed all the services up to property line without connecting them, paved the road then tested the watermain and changed over the services from the old watermain after the road was paved. This operation avoided the cost of the bypass line and enabled the contractor to pave the road to base coat (in a race against cold weather) – that enabled the City’s snow clearing instead of the contractor footing the cost of snow clearing for the whole winter.

This savings was used in negotiations with the contractor in his claims for other extras on the project.

Negotiating strategy

This is an instance where “keeping score” of wrongs and concessions pays dividends! In recent times contractors have asked for concessions in bacteriological testing methods, assists with extra flushing before tests, leniency on errors made (e.g. premature removal of the asphalt on several streets when only 1 street was being worked on), leniency with liquidated damages. To the extent that small changes do not affect the fit for purpose or quality of the final product, such concessions can be effectively horse traded when negotiating extra charges.

1. When extras are claimed that are out of the contractual time period for raising such claims, they should be firmly denied. Allowing one incident legally forces you to accept other out-of-time claims for consideration.

2. In the case of delay and other disputed claims, it is a good idea to try to get agreement on all claims before signing off on payment. Avoiding payments on one set of claims while others are being negotiated provides a “soft” incentive to the other party to be more reasonable in negotiations.

Having said all of the above, it is always good practice to agree to pay promptly and in full on claims that are legitimate, even if not properly substantiated by the contractor. Good faith and not trying to get something for nothing breeds credibility and demonstrates integrity by the owner.

Managing and negotiating claims takes the higher, more advanced skill sets in engineering, project, and financial management and those involved on both sides should never be underestimated.