CONSTRUCTION CLAIMS AND DISPUTES: CAUSES AND COST/TIME OVERRUNS

Transcription

1 CONSTCTION CAIMS AND DISPTES: CASES AND COST/TIME OVENS By Cheryl Semple, ~ Francis T. Hartman, 2 and George Jergeas 3 AnsrACT: Avoiding construction claims and disputes requires understanding of the contractual lerms, early ncmadversarial communicalion, and understanding o! the causes of claims. The present paper addresses the latter issue by presenting the results of a pilot study undertaken by the niversity of Calgary and evay and Associates td. This paper examines, among other things, the causes of claims, delays, and cost overruns on 24 projects in Western Canada. Projects investigated in this study included civil, institutional, high-rise apartment building, and petrochemical. To identify some of the critical elements in construction contracts, the investigative process also included determining the causes of claims, categories of compensation for claims, and contract clauses quoted in claims. esults of this pilot study indicated that critical elements in construction contract~ relate m changes/ extras, disputes, soil/site conditions, and delay. It is the writers' opinion that special attenlion to factors identified in this study will help industry practitioners in minimizing the risk of contract disputes. Further, the present paper also suggests several essential steps an owner can take to minimize risks. INTODCTION Although there has been a slight decrease in the volume of work done by the Canadian construction industry in the last few years, the continuing overall growth of the industry is certain. In 1990, for example, the Canadian construction industry signed over $90 billion dollars worth of contracts ("Canadian" 1992). Further, this industry's influences are felt in most sectors of Canada's economy, including transportation, manufacturing, and resource management~ Today's construction industry has become a very complex, high-risk, multiparty business. Thus, it is understandable that a great deal of conflict exists within the construction industry. nfortunately, although the symptoms are well known, the fundamental causes and real costs associated with this conflict are not well understood. As already mentioned, there is, potentially, a very large range of parties involved in construction projects. Construction contracts determine the basis for the relationships between these parties. In the simplest terms, a contract is a promise or agreement that the law will enforce. More specifically, and in the simplest terms, a construction contract involves a promise by one party to provide services or materials to build for another party who promises to pay for the work. Construction contracts are very often long, complex documents. Consequently, disagreements or disputes can arise regarding contractual obli- 1Grad. Student, Proj. Mgmt, Specialization, Dept. of Civ. Engrg., niv. of Calgary, 2500 niversity Dr., NW, Calgary, Alberta, Canada, T2N 1N4. 2Dir., Proj. Mgmt. Specialization, Dept. of Civ. Engrg., niv. of Calgary, 2500 niversity Dr., NW, Calgary, Alberta, Canada, T2N 1N4. 3Sr. Consultant, evay and Associates td., Centre 70, Suite 715, 7014 Macleod Trail, SW, Calgary, Alberta, Canada, T2H 2K6. Note. Discussion open until May 1, To extend the closing date one month, a written request must be filed with the ASCE Manager of Journals. The manuscript for this paper was submitted for review and possible publication on July 26, This paper is part of the Journal of Construction Engineering and Management, Vol. 120, No. 4, December, ISSN /94/ /$ $.25 per page. Paper No

2 gations or expectations. When one party feels that the contractual obligations or expectations have not been met, and they feel that they deserve monetary and/or time compensation, they may submit a claim. A claim is defined by the Canadian aw Dictionary (Sodhi 1980) as an "assertation to the right to remedy, relief, or property" or a "faiture to fulfil obligations under the contract." More simply, a claim is a request for compensation for damages incurred by any party to the contract. A claim presents the basis of the claim (causes and effects), explains the contractual and legal basis for paymerit (entitlement), and quantifies the resulting damages. The present paper provides the results of a pilot study of 24 construction claims prepared by evay and Associates, td., Calgary, Alberta. Although claims may be submitted by any party in the construction process, the claims that were investigated in the present study were submitted by contractors or subcontractors. The purpose of the study was to identify common causes of claims and problem areas within the construction process. Being aware of potential problems ahead will help owners, contractors and consultants to avoid or reduce disputes and claims. It is the experience of the writers that owners generally attempt to transfer project risks to the contractors during the construction process. Contractors should use the information herein to avoid possible disputes and/or properly prepare themselves for potential problems in the construction industry. More specifically, the paper refers to time and cost overruns on construction projects and suggests proactive ways of addressing their causes and how their impact may be minimized. SCOPE OF STDY Over a period of 3 months, 24 construction claim reports were investigated carefully and analyzed with a specially developed claim research survey form. The claim reports were prepared on behalf of contractors based in Western Canada. Note that all of these claims were disputed claims. The entitlement for each claim is pursuant to the contract terms and general contract law. This means that the claims were based on contractual oversights or failures. Also, any delays that were involved in these claims were ascertained to be the responsibility of the owner. The level at which each of the claims was resolved and the amount of time and/or money awarded at settlement is completely confidential information that was not available for the present study. The research form for this study extracted the following information: 9 Type of contract the claim originated from 9 Method of payment in the contract 9 Industry or sector the contract originated from 9 Original contract duration 9 Delay encountered during the course of the project 9 Original value of the work 9 Amount of compensation requested in the claim Each of these categories is explained more carefully in the following Type of Contract Claims that were analyzed involved either prime contracts (P), that is, between the owner (or owner representative) and a contractor, or subcontracts (S), that is, contracts between a contractor and a subcontractor. 786

3 Method of Payment Payment for contracts was performed on the basis of ump Sum (), nit ate (), or a combination of both ( + ). ump sum refers to a fixed amount of payment for contract work. nit rate involves payment where the price per unit of work remains constant. In this case, the exact amount of work is not known or fully quantified at the beginning of the project. Industry/Sector For the purposes of the present study, industries or sectors were categorized in the following manner:,, Institutional, Commercial, High-rise apartment building, or Other esources (i.e., not ). Ownership Ownership refers to whether or not the parties involved are owned publicly or privately. If at least one of the parties involved in the contract was owned publicly, the project was designated as public (meaning that public money was involved at some level). Original Duration The original duration for the project was recorded in calendar days. The contract usually includes a schedule that outlines the work activities and durations. Delay Many projects are delayed for one reason or another. All extensions to the original schedule were considered as delays for the purposes of this pilot study. Original Value Original value refers to the value of the original scope of work to be performed as specified in the contract. Claim Value The claim value is the dollar amount of the claim itself: the amount of money for which compensation is being sought. In the claim reports, the claim values have been carefully quantified and calculated. The claim value represents the amount of money that will compensate for the damages experienced. After analyzing the 24 claims and completing the research forms, the results for the variables discussed were compiled into a summary chart as shown in Table 1. Note that some claim-value data was not available for two of the claim reports. These particular claim reports were eliminated from any calculations or graphs as necessary. A visual illustration of the composition of the claims studied is summarized in Figs ANAYSIS Initial analysis of the 24 claims shows that time and cost overruns can be extremely significant. Fig. 5 compares the original contract duration to delay experienced on 787

4 TABE 1. Summary of Project Information "4 G0 GO Sample no. (1) Prime(P)/ subcontract(s) (2) ump sum()/ unit rate() (3) Private()/ public() (4) Industry/ sector (5) Institutional Institutional Petrochcmical Olher resources Commercial High-rise Institutional Original contract value (dollars) (6) N/Av 11,015,222 1,118,345 17,247,247 1,707,922 1,401,035 7,524,399 3,964,262 3,739,760 12,457,856 5,199,900 1,006,916 N/Av 2,728,400 2,692,211 2,855,627 27,000, ,545 8,366, ,600 4,235,454 3,850,656 3,711,000 1,(122,833 Claim value (dollars) (7) 10,919,939 10,761, ,577 3,075,675 1,297,866 1,190,881 1,008,207 1,522,721 1,858,326 2,068,482 3,756, , ,325 1,026,433 1,090,342 2,077,734 1,940, , , ,723 2,128, , , ,290 Original contract duration (days) (a) ( ( l Delay duration (days) (9)

5 Prime Contrac~ 17 contract FIG. 1. Type of Contract Ownershit 19 ~ Private \ ~/////f Pub,c ~ Ownership FIG. 2. Type of Organizations ump Sum Only nit ate ~///~,~_~v Only ump Sum & nit ate FIG. 3. Method of Payment 789

6 Other esources Petro- Chemical Commercial High ise Institutional FIG. 4. Industry or Sector of Project # of Calandar Days Claim Sample # Original Duration I ] Net Delay Duration FIG. 5. Project Durations the project investigated. Fig. 5 also illustrates that there are a few claim reports that involved projects that had no delay or actually finished ahead of schedule. However, the large majority of claims involved some delay. In several cases, delay exceeded the original contract duration by over 100%! Increased duration translates to extra cost to construction projects due to extended site overhead, attempts to accelerate or mitigate delay, loss of productivity, and so on. Fig. 6 compares the original contract values with claim values. This figure demonstrates that claims can add significantly to the cost of projects. More than half of the claims were an additional cost of at least 30% of the original contract value. About a third of the claims amounted to at least 60% of the original contract value. In a few cases, the claim values were almost as high 790

7 (Millions) $30 r $25 $2O $15 $10 $5 $o Claim Sample # Original Value I ] Claim Value FIG. 6. Contract and Claim Values TABE 2. Cost and Time Overruns Classification (1) ump sum (only) nit rate (only) ump sum and unit rate Private ownership Public ownership Institutional Commercial High-rise building Sample size (2) Average percent increase in duration (i.e., delay) (3) Average percent increase in cost (4) as the original contract value! These findings are consistent with those reported by ose (1991) and Hartman (1993). Our analysis of Figs. 5 and 6 indicate that the vast majority of claims that had relatively large delay and/or claim values involved private ownership. For instance, it was discovered that six out of seven claims that have a greater claim value than 60% of the original contract value involve privately owned organizations, and that 10 out of 11 of the claims that involve delays greater than 60% of the original contract duration involve privately owned organizations. 791

8 Accleration estricted Access BB Weather/Cold Increase in Scope Number of Claims FIG. 7. Common Causes of Claims Premium Time Equipment Costs Financing Costs oss of evenue oss of Productivity Site Overhead FIG Number of Claims Common Categories of Compensation Close analysis of the remaining summary data did not reveal any other significant relationships. Table 2 summarizes the study results and presents the expectations or cost and time overruns for particular types of payment methods, ownership, and industries/sectors. The table displays the average percent increase in duration (delay) and average percentage increase in cost. This table provides an indication of the potential savings if claims can be avoided. 792

9 Scheduling Independence of the Contractor esponsibilities/ elationships Extra Work/ Change Orders Changes in Schedule/ Acceleration/Overtime Delays Number of Claims 1C FIG. 9. Common Contract Clauses Quoted in Claims CASES OF CAIMS Although there is very seldom one absolute causes of a claim, some of the contributory causes for each of the claims were identified. The causes of claims can be very specific to a particular project, so only the most commonly reported causes were identified. The most common causes that were experienced on the 24 projects analyzed and the number of claims they appear in are shown in Fig. 7. The "acceleration" category in Fig. 7 represented situations that involved attempts to mitigate delay by accelerating the schedule with the use of extra workers, overtime, and/or extended work weeks. "estricted access" referred to situations where a particular work area or the entire site was not ready or available for work to progress. The "weather/cold" categories referred to conditions where extreme weather or cold conditions affected the ability to do work. "Increase in scope" included any design changes, extra work, and errors. As a point of interest, the increase of scope of work was the main cause of dispute in approximately half of the claim reports analyzed. COMPENSATION It is both interesting and valuable to analyze the breakdown of costs included in the claims. When a claim is submitted, the claim value has usually broken down into several categories of compensation. These are the areas in which the claimant feels that they deserve payment. Again, the areas of compensation can be quite varied or project specific. The most common areas of compensation that were listed in the 24 claims are shown in Fig. 8. This figure also displays the number of claims each category appeared in. Note that more than half of the claims seek compensation for loss of productivity, which is a direct result of either one or a combination of the following factors: 793

10 9 Cumulative impact of design changes, extras, and errors 9 Acceleration 9 Winter conditions CASES QOTED IN CAIMS Claims include detailed explanations of why the claimant is entitled to more money and/or time. These entitlement discussions often refer to clauses from the original construction contract. Identifying which types of contract clauses are most commonly quoted in claims may indicate areas that deserve improvement or special attention from industry practitioners. Fig. 9 shows the most common topics of the quoted clauses encountered in the 24 claims. The number of claims in which these clause topics appear in sample claims is also shown. Seven of the claims did not include clauses that referred to any of these main topics. CONCSIONS The general conclusion of the pilot study was that construction contract claims can be used to indicate several problem areas in the construction process. These areas should be noted and monitored by industry practitioners during all stages of the construction process. Steps should also be taken to clarify any issues or conflict that may arise in these common problem areas. To summarize, the causes that were the most common contributing factors in claims were increase in scope of the work, weather, restricted access, and acceleration. Categories of claims that were mentioned in the largest number of claims were site overhead, loss of productivity, loss of revenue, and financing costs. Contract clauses that were quoted in the claims were most commonly in the areas of delays, scheduling, and increase in the scope of work. In accordance with these results, special consideration should be given to contract clauses dealing with changes/extras, disputes, soil/site conditions, and delay. The best means to cope with risk of construction disputes is to reduce or avoid them altogether. There are certain fundamental means of reducing the number of claims encountered. The essential steps an owner can take to minimize risks and deal with the aforementioned identified causes are 9 To allow reasonable time for the design team to produce clear and complete drawings and specifications 9 To use value engineering and implement constructability during the different stages of the project 9 To provide a proper mechanism for processing and evaluating change orders that pay for direct costs, indirect costs, and loss of productivity associated with any changes if any 9 To use critical-path-method scheduling, cost control, and productivity analysis to monitor progress and detect any change in productivity and/or cost. APPENDIX. EFEENCES Bramble, B. B., D'Onofrio, Micheal F., and Stetson, J. B. (1990). Avoiding & resolving construction claims..s. Means Company, Inc., Kingston, Mass. 794

11 "Canadian construction volume." (1992). Statistics Canada Catalog , 10. Hartman, F. T. (1993). "Construction dispute reduction through an improved contracting process in the Canadian context," PhD thesis, niversity of Technology at oughborough, eicestershire, England. ose, G. (1991). "Alternate dispute mechanisms and contract settlement." Secretariat ep., Construction Industry Development Council. Ottawa, Ontario, Canada. Sodhi, D. S. (1980). The Canadian law dictionary. aw & Business Publications (Canada) Inc. Don Mills, Ontario, Canada. 795