Prevention Is Key to Claims Management
Many contractors believe they practice claims management by making a claim for reimbursement of cost overruns. But when they finish pursuing a claim, they find all they’ve done is play catch-up. The most effective approach is claims management prevention. Anticipate the possibilities and effects of a cost overrun or claim before it happens. Investigate the root causes and stop them before they grow. There are five aspects of construction that must be controlled in order to minimize claims:
- Scope of work.
- Cash flow.
- Quality of work.
Cost control starts with careful estimating. An estimate is simply a blueprint for direct costs, labor, material and onsite overhead costs. The estimate is the direct cost budget from which actual costs must be monitored and controlled. If some force ripples any of the costs, there will be an overrun and the project won’t be finished within the estimated budget. The key to controlling costs is hands-on management. If the owner changes the contract or conditions of a project, the costs increase. Normally, a subcontractor is entitled to extra compensation. You must know and understand the change procedure and pursue compensation immediately when changes are made so you can avoid a claim in the future. However, informal actions by the owner can increase your scope of work and thereby increase your costs just like a formal change order. These are called constructive change orders. The law recognizes that these informal acts change the scope of work in the same way a formal change order would. Informal actions that may increase your cost are things such as:
- Defective plans or specifications.
- Changes in the methods performance.
- Misinterpretation of specifications.
- Rejection of conforming work.
- Defective material provided by the owner.
- Physical site conditions not as stated in the contract.
You also may have your costs increase because the time schedule has gotten out of control. A construction project is estimated on a time baseline. If the schedule plan is delayed or disrupted, it can cause a severe cost overrun. Sometimes the owner interferes with your performance schedule by:
- Simply interfering.
- Disrupting your control.
- Delaying your work.
- Accelerating the deadline.
When the owner causes the delay, you are entitled to an increase in the contract amount and to an increase in the time allotted to perform the work. Delays not caused by the owner or you (e.g., acts of God, terrorism and other conditions beyond your control) again entitle you to an increase in time to complete the project. This type of delay doesn’t usually increase the contract price. When you cause the delay, there’s no increase in contract price or time to complete the project. In fact, the owner may be entitled to damages that result from the delay. Schedule delays you’re responsible for may be covered by a liquidated damages provision that reimburses the owner for any damages suffered.