A Study On Factors Influencing Construction Contract Claim Management

Transcription

1 A Study On Factors Influencing Construction Contract Claim Management K.Sundhar #1, N.Nandhini #2 #1 PG Student (M.E Construction Engineering and Management), #2 Assistant Professor ( Department of civil Engineering), Kongu Engineering College, Perundurai, Erode. Abstract-Construction contracts are notorious for occurrence of claims and disputes. Most of the construction projects in India face the problems of time and cost overruns which result into claims and are result of claims. The basic reason for occurrence of any dispute is, two parties viewing the same situation from different angles. When either party involved in a contract feels that it is been made to suffer due to actions of other party a dispute occurs which eventually results in a claim been put forward.there are a varied number of reasons for occurrence of claims. One sided nature of the contracts, heavily biased in the favor of client, are one of the primary reasons for occurrence of claims. There are many other reasons for occurrence of claims like delays, force majeure, nonperformance which have been discussed in detail in the study.once a claim occurs, it is very important that it is resolved quickly to ensure that the project does not gets affected. It is very essential for either party to ensure that the project remains unaffected. There are a number of remedies available for dispute resolution. Arbitration is a widely adopted approach in this regard. For a contractor, proper documentation is very essential to ensure that the contractor has sufficient material to back his claims. Although the cost for documentation seems waste in the initial period, yet it proves beneficial in the longer run. Proper documentation goes a long way in ensuring speedy settlement of the claims. However positive attitude of both the parties and a commitment to resolve disputes are the prime Keywords: Contracts, disputes, time and cost. INTRODUCTION Construction claims form an inseparable part of any construction project. It is very rarely that a construction project gets completed without any disputes or difference of opinion between the client and the contractor. In some projects this difference of opinion come out in open and give rise to claims. However in some projects, the contractor or client let goes certain things for maintaining a good business working relationship. Both the parties executing the contract do end up having disputes over a wide range of subjects which eventually give rise to claims. Both the parties hold the other one responsible for claims and disputes. The general tendency of passing the buck around is largely responsible for this. The contractor thinks that it is he who is been victimized by the unfair conditions of the contract. On the other hand the client thinks that it is the contractor who is trying to exploit the client by finding the loopholes in the contract conditions and taking unfair advantage of the client s unfamiliarity of the work procedures of the contract which is the case in most contracts. OBJECTIVE OF STUDY The objective of the study is: To find the various reasons for occurrence of claims and discussing the remedies for the same. NEED FOR STUDY The study was conducted by employing data gathered by the researcher from various sources. Various literatures available on claims and contracts were referred to such as journals, magazines and books. In addition to this the researcher met many experts in the field of dispute resolution. Interactive discussions and interviews with such respected people have gone a long way in framing of the thesis. The subject of claims is such that it is of little use to discuss the topic without referring to the actual case studies. Actual case studies were also discussed in the thesis to get an idea of how actually things work practically. CAUSES OF CLAIMS When two parties are entering into a contract with each other it is essentially that they are getting in to an understanding with each other. Now no understanding can be made so perfect that there will be no disputes between the concerned parties. Disputes can be due to a variety of reasons: Clash of parties involved. Rise in awareness amongst the parties. Delayed response by the other party. Inadequate clarity in contract conditions. It is often the contract document that comes up for interpretation. Therefore certain basic rules have to be formulated which should be observed while interpreting the contract. This includes the following: Intention of the parties is to be considered. Subsequent mentions super seed the previous ones.

2 It is to be noted that the contract is to be read in totality. Ambiguities may be resent in the contract. COST OF CLAIMS Both the parties involved in the contract are very much involved when it comes into claims. It is but natural that each party blames the other one for the claim occurrence. In case the Government is the client it is usual tendency for the Government Officers to pass the buck around. Bath the parties are reluctant to step back from their positions after the claim has been lodged. Hence it is in the best interest of both the parties that to see to it the claims are settled as early as possible so as to avoid it s affect on the progress of the project. As far as the client is concerned he should understand that prolonging a claim settlement is ultimately going to affect him. Some of the costs that have to be borne by the client as far as claims are concerned are; 1. Cost Overruns: The cost of the project will increase and the increased cost will have to be borne by the owner. 2. Delay in Completion: Every owner builds the facility since he wants to generate revenue from the facility. If the completion of the project is delayed it will lead to loss of revenue for the owner. Delay will also increase the cost of financing the project. 3. Loss of reputation for the owner: If the owner has a reputation of having a tendency of getting into disputes often with the contractors, the contractors will resort to adding the cost of claims in the contract. Also it is possible that the bid received by him would not necessarily be the lowest bid. METHODOLOGY The study was conducted by employing data gathered by the researcher from various sources. Various literatures such as journals, magazines and books are available on claims and contracts were referred. The subject of claims is such that it is of little use to discuss the topic without referring to the actual case studies. Actual case studies were also discussed in the thesis to get an idea of how actually things work practically. Literature review Study of claims REASONS FOR CLAIM OCCURRENCE The reasons for which the claims occur are varied and plenty. However we shall now concentrate on the common types of claims that occur. Also it has to be kept in mind that it is not necessary that all the types of claims will be covered in the subsequent discussion. The following chapter is just an effort to identify the various types of claims and discuss them briefly about their occurrence pattern, effect on project, etc. Before we move forward we shall take a look at some commonly occurring claims: Identifying factors Questionnaire preparation Questionnaire survey Questionnaire analysis using SPSS Conclusion & recommendations Partial Nature of Contracts Improper Framing of Contract Conditions Delay in Handing site Delay in handing Drawings Changes in design Change in Scope of work Late supply of materials Miscellaneous Changes Ambiguity Change in quantity Delays Non Performance Time Extensions Delays Escalation Delays by Third party Fixation of rates

3 OCCURRENCE OF CLAIMS The claims may occur due to variety of reasons as cited above. We shall now try and classify the frequently occurring and common types of claims. The major reasons for occurrences of claims can be as follows: 1. Claims due to delays 2. Claims due to change in scope of work 3. Claims due to force majeure 4. Claims due to non-performance 5. Miscellaneous claims. REMEDIES FOR RESOLVING DISPUTES This helps in clearing many misunderstandings that might have been existed between the parties. In case one party feels that it is not been treated properly and the other party is not fulfilling obligations properly, it lets the party know about it. It asks for certain actions from the other party. In other words it tells the other party what it expects it to do. If the second party agrees to it then there is no dispute. The dispute occurs only when the other party does not accept the demands. It is then that negotiation comes into picture. Usually the method that has to be adopted for solving a dispute is specified in the contract itself. It gives clear steps that are to be followed in case a dispute arises. Different contracts specify different remedies for dispute resolution. It varies depending upon the conditions of contract, the nature of work, the no of contractors, the nature and extent of involvement of the funding agencies and other related factors. The following are the usual remedies that are employed in case of dispute resolution: Negotiations Dispute resolution board Dispute Adjudication board Arbitration The methods have been involved to resolve the disputes amongst the parties itself instead of going to the court. However either party can go in for legal remedy if it is not satisfied with the outcome for this method. Initially there was no alternative except going to the court if things did not work within the party. However litigation is a very complex process. The time and money involved are tremendous. Also the parties lose substantial business in the process. In addition to this, the relationship between the parties is soured. This is very harmful for the parties. In most case it is the contractor who has to suffer many losses in case of litigation. As it is the contract conditions are not designed in a fair way and they are heavily biased in favor of the client. NEGOTIATION Negotiation between the parties is the best available method for settlement of disputes. Both parties sit and put their viewpoint forward. They give the other party description of what they expect from the other party. Also the party tells the other what it is ready to give the other party in return. Direct communication between the parties is the biggest advantage of this method. Usually both parties prefer for going in for negotiation at the beginning, as both realize the advantage of the method. They sit for a discussion where each party puts forward its view point. They tend to agree on certain things but disagree on other terms. The idea is to come to a working compromise with each party taking certain steps back. The attitude should be to come to a solution such that both parties leave the discussion in position that is better before they came into the discussion. Many times it may happen that the issue is not resolved in a single meeting. However the parties should not let go off the process immediately. In case of complicated and highly debatable issues it is better to have a series of meetings. It should be also kept in mind that the very essence of the negotiations is the fact that both parties are willing to compromise. Hence an open mind while going in negations is very important. DISPUTE REVIEW BOARD Wide scale adoption of Dispute Review Boards (DRB s), sometimes also called Dispute Adjudication Boards (DAB s), in large size engineering projects construction contracts is only a decade old in the advanced world. It was realized during this period that DRB s are ideally suited to dispute resolution processes in large size projects involving sophisticated technology and intricate construction techniques. DRB in construction contracts is a voluntary, nonbinding and mutually accepted process, as a part of contract agreement. With the passage of time, it has found wide scale acceptability. In construction contracts, worldwide, all from 1998 onwards, there is huge trend of DRBs for resolving disputes. RESULT Result from SPSS analyses,

4 The following are the factors which are identified as risk on productivity. According to the response obtained from the survey the ratings are calculated. SUMMARY OF MEAN VALUE AND RANK OF CLAIM FACTORS Changes in designs Site Condition of the construction project Delay in obtaining various permissions FACTORS Working Shifts of the labors Extent of effect of the force majeure claims MEAN RANK VALUE Delay in approving works Delay in giving approvals Delay due to clients Quality related claims in construction Delay in handing over the site Changes in external conditions Delay in drawings,specification,etc Payment of losses for uncertified works Extension of time Natural calamities Third party claims Environmental Conditions Failure in meeting specifications Insurance claims Altered site due to unsuitable conditions Wrong Decisions in Completion Period Late possession of the site Extent of damages work disturbing the overall work schedule Need for Additional or extra items Misinterpretations of drawings or specifications Unforeseen increase or decrease in the quantities Social issues Non-payment of bills Breach of contract Interest due to delayed payments CONCLUSION & RECOMMENDATIONS The following are the inferences made from 60 respondents collected from various contractors, owners and engineers. The Working shifts of the labors greatly affect the claim due to contractors with a mean value of This can be reduced by assigning different work shifts to the labors. The extent of effect of the force majeure claims has a mean value of 3.62 which states that it plays a vital role in increasing claims. This sort of work pressure can be avoided by regular monitoring of works by the supervisors or engineers. Delays in approving the works resulting of halting the progress of future also includes more claims which has a mean value of 3.57 and it can be neglected by maintaining quality in work and due to influence with government authorities. The changes in external conditions like laws and regulations have a mean value of 3.55 and hence non-

5 violating the laws will improve the efficiency of project and thus reduces the claims with contractors. The payment of losses for uncertified works has a mean value of 3.55 where labors are forced to complete the work with pressure. These issues may be rectified by having clear knowledge about the worksite, before executing it. The extension of time, as the name implies it increases the claim since the project could not be completed within time and the entire cost of the project may also increases. This leads to claim which has a mean value of Natural calamities like earthquake, storms, thunder, blizzards having a mean value of 3.53 contributes more claims to the contractors and can be minimized by predicting the earthquake zones before commencing the project work. Due to unfortunate happenings of resources such as insurance claim due to accident and damages of the equipment and machineries, disabilities to workers lead to insurance claim with a mean value of This can be avoided by monitoring safe working of labors and improving the awareness about site accidents and value of human life, also by regular maintenance of equipment and replacing the old ones. On the whole the claim for contractors is more influenced only by claims due to force majeure claims rather than claims due to delays, claims due to change in scope of work, claims due to non-performance and claims due to miscellaneous. Nabil Abbas M.A., The impact of construction contract models on construction claims Association of Researchers in Construction Management,Vol. 2, ,(1998). Patil B.S., Building and Engineering Contracts,(1994). Prakash V.A., Contract Management in Civil Works, Projects, A Text Book, A Nicmar Publication. Spang K., Designing the relationship between contractor and client to partnership, Challenges, Opportunities and Solutions in Structural Engineering and Construction Ghafoori (ed.).(2010). VikasDeshpande., Contracts and Claims Management Conceptual Approach, CE & CR JUNE (1993). He is percusing M.E Construction Engineering and Management in KonguEngineering College, perundurai. He Completed B.E Civil Engineering in in Kongu Engineering College, Perundurai. REFERENCES BakshiP.M., Legal aspects of construction Contract, Asymposium On Contract Management, NICMAR (1996). DeshpandeVikas S.K., Contracts and Claims Management A Conceptual Approach. Fagbenle, Olabosipo I., Factors influencing construction clients/contractors choice of subcontractors Journal of Sustainable Development, Vol. 4, No. 2, (2011). GajriaKishor., Laws relating to Building and Engineering Contracts in India, Butterworth India, Fourth Edition,(1999). Gupta S.C., Dispute Resolution mechanism in contracts by conciliation, Proceedings of the CIDC conference (1997). Kathuria K.C., Construction contracts some legal aspects, Proceedings of CIDC conference (1997). Kharb K.S., Contract Administration, Proceedings of the CIDC conference (1997). KongkoonTochaiwat and VisuthChovichien, contractor s construction claims and claim management process, Chulalongkornuniversity.