STRATEGIC DATA FOR EMPLOYERS CONSTRUCTION CLAIMS
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1 STRATEGIC DATA FOR EMPLOYERS CONSTRUCTION CLAIMS KONGKOON TOCHAIWAT and VISUTH CHOVICHIEN Department of Civil Engineering, Chulalongkorn University, 254 Phyathai Road, Patumwan, Bangkok 10330, Thailand. ABSTRACT This research aims at examining and identifying the cost components of construction claims and necessary data for substantiating and pricing claims. The research was done by identifying and analyzing the cost components for each contractual claim type handled by employers. The availabilities, the appropriate method for calculation, and the data required in substantiating and pricing process of each cost component were analyzed. In addition, the ranks of the important cost components and the contract provisions are also identified. The required data collected from the analysis were then classified into subgroups by their sources. It was found that there are a number of cost components, which can be classified into either the employers claim cost components or the contractors claim cost components. The availabilities of each component of each contractual claim type were also presented. The data required in substantiating and pricing claims handled by the employers were classified into seven groups by their sources and their topics. The strategic data acquired from this research, especially that are necessary for substantiating and pricing high ranked contractual claims and their related cost components, should be paid high level of attention in order to enhance the effectiveness in the employers claim management process and to reduce the project time and cost. Keywords: Construction claim, contract, construction data, FIDIC INTRODUCTION Construction claim is the seeking of consideration or change by one of the parties involved in the construction process [Arditi and Patel, (1989)]. Several research works show the order of magnitude of the effects of construction claims on cost and time of the projects. For example, the results of the survey of the claims in 24 construction projects in Western Canada in 1994 found that the large majority of claims involved some delays and in a lot of cases delays exceeded the original contract durations by over 100%. As to the project cost, more than half of the claims were additional costs of at least 30% of the original contract values [Semple, Hartman, and Jergeas, (1994)]. In addition, a study shows that transit agencies in the United States and Canada experienced an average cost overrun of 7% of contract values from settlement of disputes and claims from heavy civil contracts [Callahan, (1998)]. In Thailand, the survey of the claim behaviors of 21 construction companies showed that the average cost overrun from contract value caused
2 548 Strategic data for emplyer s construction claims by claims was about 7% [Khanchitvorakul, 2000], close to Callahan s finding. Nowadays, the substantially increasing volume of claims are the result of the rising complexity of the projects, the price structure of the construction industry and the legal approach taken by many employers and contractors [Levin, (1998)]. Although construction claims have significant effects on the projects, they are not always given adequate considerations. For example, a study shows that records available on sites seldom allow an as-built schedule to be constructed easily [Scott and Assadi, (1999)]. The daily report is often given the least amount of attention although it may be the most important document on the project [Pogorilich, (1992)]. A survey of construction claim management practices in Thai construction companies showed that the lack of awareness of on-site people is considered the major problem of claim management. Inadequacies of supporting evidences, stemming from unaware project personnel as well as improperly designed documentation systems, are the next serious shortcomings causing loss of chances to recover incurred damages. The management level was also recommended to pay more attention to these aspects for having an effective claim management system [Surawongsin, (2002)]. From the employers point of view, it is appropriate that they should establish an effective claim management system so that they can be aware of the potentially adverse job conditions and have opportunities to take proper actions to protect or remedy the works in advance instead of simply complying with contractor s claims. From literature review, it can be seen that the majority of the claim management systems focus on supporting the contractors claim process. Because of the difference between the employers and the contractors roles, rights, duties, availabilities of the information, their relevant types and aspects of claims, and methods of analyzing and pricing claims, the management system that is suitable for them must also be different. While the contractors always claim against the employers for the delays, changes in scope-of-work, acceleration, and differing site conditions, the types of claims generally claimed by the employers against the contractors are claims for delayed project completion, defective work, and abandonment of the project [McDonald, (1984)]. This research presents the results of analyzing the required data for the employers to manage their claims in accordance with The Conditions of Contract for Construction for Building and Engineering Works Designed by the Employer ( The Construction Contract ) prepared by the Federation Internationale des Ingenieurs-Counseils (FIDIC) in 1999, which is one of the most accepted standard forms of construction contract. In addition, this research examined the strategy of identifying the cost components of the employers claims, cost component quantification, and acquisition of necessary data for substantiating and pricing the claims. RESEARCH METHODOLOGY The steps to examine and acquire the data necessary for the claim substantiating and pricing processes consist of: 1. Identifying and analyzing the components of cost claimed for each employers and contractors claim type specified in The Construction Contract [FIDIC, 1999]. In this
3 Strategic data for emplyer s construction claims 549 step, the types of contractors claim cost components for each type of the contractors claims presented by [Adrian (1988)] were used as a framework in identifying and analyzing the employers claim cost components. 2. Analyzing the availability, the appropriate method for substantiating or pricing, and the data required in substantiating or pricing or recognizing each cost component of claims. 2.1 Analyzing the availability of each claim cost component for each claim-related contract provision. In this analysis, the list of contractual claim in FIDIC s forms of contracts proposed by [Booen (2001)] and the types of contractors claim cost components for each type of contractors claims [Adrian, 1988] were used. Each claim cost component was labeled as Not Included, Sometimes Included, and Always Included for each employers or contractors claim-related provision. 2.2 Finding the ranks of the most frequently found cost components and contract provisions by representing Not Included by 0, Sometimes Included by 1, and Always Included by 2. Then the summation of such values for each cost component and each contract provision are calculated. 2.3 Reviewing and Selecting the appropriate method for substantiating or pricing each claim cost component from literature. The criteria for selecting the appropriate method of calculation were the correctness of result, advantage, disadvantage or limitation, and acceptance. The discussion of each selection is, however, beyond the scope of this paper. 2.4 From the substantiating or pricing method selected in 2.2, analyzing the data necessary to be inputted into the relevant calculation process of each method. Some data were classified into the same group in order to reduce the number of the data. 3. Analyzing the sources of each required data. Four sources of data, e.g. the employer, the contractor, the engineer, and sources, were used in this analyzing step. 4. Identifying the availability to the employer and the engineer (as an employer s representative) of each data by considering its sources. The data which are not available to the employer or the engineer were then replaced with another alternative data that are directly or indirectly available to those parties. 5. Classifying the data collected from the above analysis into eight subgroups according to their sources(data directly and indirectly acquired by the employer or the engineer) and their relationships with the construction process (data related to the employer and the engineer, contractor and the subcontractor, project, and miscellaneous respectively). Employers and Contractors Contractual Claims In order to determine the standard contract management process used in this research, the process specified in The Conditions of Contract for Construction for Building and Engineering Works Designed by the Employer or The Construction Contract prepared by Federational Internationale des Ingenieurs-Conseils (FIDIC) was adopted as a framework for the analysis. This form of contract is recommended for building or
4 550 Strategic data for emplyer s construction claims engineering works designed by the Employer or by the Engineer, as his representative, and the Contractor has obligations to construct the works in accordance with a design provided by the employer [FIDIC, 1999]. The former edition of this form of contract, Conditions of Contract for Works of Civil Engineering Construction (Fourth Edition) or The Red Book (Fourth Edition), was mandated in the World Bank Standard Bidding Document for the Procurement of Works published in January 1995, and then was recommended by the World Bank for the purpose of drafting the new edition [Bowcock, (1998)]. This is a reason why this form of contract has become one of the most accepted contract forms, which has been used worldwide. There are several provisions related to the construction claims, both against employer and contractor, in The Construction Contract (1999). [Booen(2001)] listed the sub-clauses related to several types of claims, as shown in Table 1. It also presents the party against whom each provision claims and the purposes for which each provision claims. Table 1. The Provisions related to Claims from The Construction Contract (1999) No. Sub-Clause Claimed By Claim For Employer Contractor Cost Time [Delayed Drawings or Instructions] [Right to Access to the Site] [Setting Out] [Unforeseeable Physical - Conditions] [Electricity, Water and Gas] [Employer s Equipment and - - Free-Issue Material] [Fossils] [Testing] [Rejection] [Remedial Work] [Extension of Time for Completion] [Delays Caused by Authorities] [Rate of Progress] [Delay Damages] [Consequences of Suspension] [Failure to Pass Tests on Completion] [Taking Over of Parts of Works] [Interference with Tests on - Completion] Table 1. The Provisions related to Claims from The Construction Contract (1999) (Cont.) No. Sub-Clause Claimed By Claim For Employer Contractor Cost Time [Extension of Defects Notification - - Period] [Failure to Remedy Defects] [Contractor to Search] [Omissions] [Right to Vary] -
5 Strategic data for emplyer s construction claims [Value Engineering] [Adjustments for Changes in Legislation] [Delayed Payment] [Contractor s Entitlement to - Suspend Work] [Indemnities] [Consequences of Employer s - Risks] [General Requirements for - Insurances] [Insurance for Works and - - Contractor s Equipment] [Consequences of Force Majeure] - Employers and Contractors Cost components There were seventeen cost components proposed by Adrian in However, six cost components collected from the contract provisions of The Conditions of Contract Contract for Building and Engineering Works Designed by the Employer [The Construction Contract (1999)] were added in order to improve the analysis. The relations between the contractors claim related provisions from [The Construction Contract (1999)] and the contractors claim cost components are the result of subjective analyses by the authors, taking account of their availabilities in each provision. The ranks of the cost components which have the highest frequencies among the contractual claims and the contract provisions which have the highest number of the related cost components, for both contractors and employers claims, can be analyzed by assigning the values to the cost component and contract provision matrices. The cost components which are seldom or never found in the claim specified in the related subclause were assigned 0 value while the cost components which are sometimes and always found in the claim related to such sub-clause were assigned 1 value and 2 value respectively. The values were then summed in both row direction and column direction to find the rank of the cost components and the rank of the contract provisions, respectively. The analysis shows the cost components with the highest frequencies among the contractors contractual claims and the contract provisions with the highest number of the related contractors claim cost components in Table 2 and Table 3 respectively. These cost components and contract provisions are found in several contractual claims and should be given special attention. Table 2. Rank of Contractors Claim Cost Components No. Cost Component Score 1. 1) Equipment Rental Cost 2) Cost for Owned Equipment Used ) Additional Material Unit Price 2) Additional Subcontractor Cost 34 34
6 552 Strategic data for emplyer s construction claims 3) Variable Job Overhead Cost 4) Profit 3. 1) Additional Direct Labor Hours Due to Lost Productivity 2) Increased Labor Rate 3) Interest or Finance Costs Table 3. Rank of Contract Provisions Related to the Contractors Claims No. Contract Provision Score 1. 1) 19.4[Consequences of Force Majeure] ) 7.4 [Testing] 30 2) 10.3[Interference with Tests on Completion] 3. 1) 1.9 [Delayed Drawings or Instructions] 2) 4.7 [Setting Out] 3) 4.24[Fossils] 4) 8.4 [Extension of Time for Completion] 5) 8.5 [Delays Caused by Authorities] 6) 8.9 [Consequences of Suspension] 7) 10.2[Taking Over of Parts of the Works] 8) 13.3[Variation Procedure] 9) 13.7[Adjustment for Changes in Legislation] 10)16.1[Contractor s Entitlement to Suspend Work] 11)17.4[Consequences of Employer s Risks] Note that almost all high-rank contract provisions are related to delay claims, scope-ofwork claims and acceleration claims. In addition, sub-clause 4.7[Setting Out] and 4.24[Fossils] are related to the changing-site-condition claims. On the other hand, the cost components of the employers claims were identified by using the contractors cost components as a framework. But only fifteen components were collected from the employers cost components. After being added seven cost components acquired from analyzing [The Construction Contract (1999)], there are twenty-two cost components used in substantiating and pricing the employers claims. After performing the same analysis of the contractor s claims, Table 4 and Table 5 respectively show the three employers claim cost components which are frequently found and the three contract provisions with the highest relationship with the employer s contractual claims. It should be noted that the important employers claim cost components are related to the overhead cost. These cost components and claim-related contract provisions should be given special attention. 30 Table 4. Rank of Employers Claim Cost Components No. Cost Component Score 1. 1) Variable Job Overhead Costs ) Additional Employer s Personnel Hours ) Variable Company Overhead Costs 2) Fixed Company Overhead Costs 8
7 Strategic data for emplyer s construction claims 553 Table 5. Rank of Contract Provisions Related to the Employers Claims No. Contract Provision Score 1. 1) 8.7[Delay Damages] ) 11.4[Failure to Remedy Defects] ) 7.6[Remedial Work] 18 Data Required in Employers and Contractors Claim Management Processes. 67 pieces of data are found to be necessary in managing the employers contractual claims, which can be divided, by their sources (data directly and indirectly acquired by the employer or the engineer) and their relationships to the construction process (data related to the employer and the engineer, contractor and the subcontractor, project, etc. respectively), into seven groups, as shown in Table 4. Data in the Data Directly Acquired by the Employer or the Engineer category are the data which the employer or the engineer produces or posssesses while the data in Data Indirectly Acquired by the Employer or the Engineer category are the data which are produced or possessed by other parties. It should be noted that the employer or the engineer can acquire all data related to the employer and the engineer themselves directly. Therefore the cell in the Data the Employer or the Engineer Acquire Indirectly Data Related to the Employer and the Engineer group was not filled. Table 6 shows that there are several data required by the employers in substantiating and pricing the claims specified in The Construction Contract (1999). Some data can be collected from either the employers or the engineers, as the employers representatives, while some data must be collected from the contractors or other external sources. The data which must be collected from the contractor but which there is no contract provision specifying the contractor s obligation to provide to the engineer must be substituted by other data more conveniently acquired by the engineer. Some data, such as the contract value, the name of the bidders, and the bid price of each contractor in the project bidding in the past are always overlooked although they are necessary in substantiating some cost components of the claim. The engineers or the employers should inspect their claim management system whether such necessary data are sufficiently collected. Table 6. Data Necessary for Managing the Claims by the Employer Data Directly Acquired by the Data Indirectly Acquired by the Employer or the Engineer Employer or the Engineer A. Data Related to A1. General Information - the Employer and 1) Actual Employer s Cash Flow 2) Employer s Cost in the Segmented the Engineer Cost Code 3) Employer's Cost of Capital 4) Original Employer s Cash Flow 5) Works Done by the Employer A2. Free-Supplied Material 1) Date of Employer s Free-Supplied Material Purchase 2) Employer s Free-Supplied Material Unit Price
8 554 Strategic data for emplyer s construction claims B. Data Related to the Contractor and the Subcontractor C. Data Related to the Project 3) Employer s Free-Supplied Material Sent to the Contractor 4) Employer s Free-Supplied Material Return to Employer A3. Equipment 1) Employer's Equipment Actual Hour 2) Employer's Equipment Hourly Ownership Cost 3) Employer's Equipment Hourly Operating Cost A4. Personnel 1) Employer s Personnel Rate 2) Employer s Personnel Hours 3) Employer s Personnel Hours of Increased Employer s Personnel Rate A5. Engineer 1) Date of Instructions Issued 2) Details of Instruction Issued 1) Works Done by Other Contractors 1) Contractor's Cost of Capital 2) Details of Works Done by the Subcontractor 3) Total Price of Contracts the Contractor Receive C1. General Information 1) Date that the Work can be Used as Intended 2) Productivity Records 3) Required Rate of Return of Project 4) Test Result C2. Cost 1) Adjusted Unit Cost Table 6. Data Necessary for Managing the Claims by the Employer (Cont.) Data Directly Acquired by the Employer or the Engineer C. Data Related to the Project (Cont.) 2) Normal Hourly Equipment Operating Cost 3) Normal Hourly Equipment Ownership Cost C3. Document 1) Date of Documents Received 2) Date of Documents Submitted 3) Details of Documents Received 4) Details of Documents Submitted C4. Site Condition 1) Climatic Condition 2) Site Condition 3) Site Condition of Neighborhood Sites C5. Defect and Delay 1) Cause of Deficiency in Works 2) Details of Deficiency in Works 3) Delay Duration Attributable to the Contractor 4) Problem of Use of Works 5) Reasons of Delays C6. Site Event 1) Date of Each Use of Works 4) Works Done by the Contractor 1) Cost Pattern of the Opportunity Profit Loss Project 2) Expected Climatic Condition 3) Normal Productivity 4) Normal Equipment Rental Cost 5) Normal Labor Rate 6) Normal Material Unit Price 7) Percent Overhead+Profit+Tax / Direct Cost Data Indirectly Acquired by the Employer or the Engineer
9 Strategic data for emplyer s construction claims 555 2) Date of Special Events Occurred 3) Details of Special Events Occurred 4) Purpose of Each Use of Works D. Miscellaneous 1) Estimated Payment to Other Contractors 2) Original Value of Works 3) Payment Amount 4) Payment Date 5) Payment Purpose 6) Payment to Whom 7) Bid Price of Each Contractor 1) Date of Law and Regulation Changed 2) Details of Law and Regulation Changed 3) Law or Regulation 4) Bid Price of Each Contractor in Past Bidding Project 5) Expert s Opinion : Engineering 6) Expert s Opinion : Law 7) Expected Interest Rate of Central Bank at Profit Loss Project Duration 8) Interest Rate of Central Bank CONCLUSION This paper presents the claim-related provisions of The Conditions of Contract for Construction for Building and Engineering Works Designed by the Employer or The Construction Contract (1999), the contractors and the employers cost components, the ranks of the important cost components and the claim-related contract provisions, and the data necessary for the employers in managing their construction claims. There are thirtytwo provisions of The Construction Contract (1999) which are related to the construction claims. They have relationship to some components of twenty-three contractors claim cost components or twenty-two employers cost components in different ways. The most important cost components and claim-related contract provisions, both for employers and contractors claims, were also presented. Finally, there are 67 pieces of data required in substantiating and pricing the claims by the employers, which can be divided into seven groups. The strategic data acquired from this research, especially that are necessary for substantiating and pricing high ranked contractual claims and their related cost components, should be paid high level of attention in order to enhance the effectiveness in the employers claim management process and to reduce the project time and cost. References Adrian, J J (1988) Construction Claims : A Quantitative Approach, New Jersey, Prentice- Hall. Arditi, D and Patel, B K (1989) Expert System for Claim Management in Construction Project. Project Management, Vol. 7 No. 3, pp Booen, P L (2004) Claims & Adjustments of the Contract. FIDIC Global Conditions of Contract Seminar (January 2001), Bowcock, J (2004) The Four New FIDIC Forms of Contract - Introduction. FIDIC New Contract Launch Seminar Series (Sep.-Dec.1998), Callahan, J T (1998) Managing Transit Construction Contract Claims. Synthesis of Transit Practice 28, Washington, National Academic Press. Federation Internationale des Ingenieurs-Conseils (1999) Conditions of Contract for Construction, First Edition, Lausanne, FIDIC. Khanchitvorakul, S (2000) Development of Construction Claim Supporting System, Master Thesis Department of Civil Engineering King Mongkut University of Technology Thonburi [KMUTT].
10 556 Strategic data for emplyer s construction claims Levin, P (1998) Construction Contract Claims, Changes & Dispute Resolution, Second Edition, Boston, ASCE Press. McDonald, P R (1984) Construction Claims Costing for Owners and Contractors. Construction Management and Economics, Vol. 2, pp Pogorilich (1992) The Daily Report as a Job Management Tool. Cost Engineering, Vol. 34, No. 2, pp Scott, S and Assadi, S (1999) A survey of the site records kept by construction supervisors. Construction Management and Economics, Vol. 17, pp Semple, C, Hartman, F T, and Jergeas, G (1994) Construction Claims and Disputes : Clauses and Cost/ Time Overruns. ASCE Journal of Construction Engineering and Management, Vol. 120, No. 4, pp Surawongsin, P (2002) The Implementation of Construction Claims Management in the Thai Construction Industry, Master Thesis School of Civil Engineering Asian Institute of Technology[AIT].
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