An Overview of Construction Claims: How They Arise and How to Avoid Them

The Problem

Institutions of higher learning are undertaking major capital projects to deal with ageing infrastructure, deferred maintenance and the demand of a burgeoning student population. This has forced institutions to deal with projects which require skills which are very different from those required for the institutions’ core missions of education and research. In many instances, capital projects have been plagued with construction claims both during and following completion of the work. These claims can cause significant legal expense and also create a huge drain on personnel whose time could be better spent on more productive matters.

How do Construction Claims Arise?

Construction claims can be caused by a number of factors. Understanding what causes construction claims is the first step in avoiding them. In general, construction claims occur because of the following:

  • delays in construction and completion of the contract;
  • delays in the delivery and supply of materials;
  • weather which slows down or prevents construction from proceeding;
  • owner requested changes;
  • changes which occur even though not requested by the owner;
  • poor management and administration of the construction site;
  • site conditions which differ from those expected;
  • work becomes impossible to perform due to unavoidable circumstances, such as force majeure;
  • inadequate plans and specifications;
  • failures to disclose information which is material to the construction;
  • conflicts and failures to co-operate among consultants, contractors and subcontractors involved in the project;
  • acceleration of the work;
  • failure to adequately schedule and co-ordinate the work; and
  • insolvency of contractors, subcontractors or key suppliers.
General Recommendations for Avoiding Construction Claims

Owners who have been involved in construction claims, and especially those which have resulted in arbitration or litigation, are well aware of the costs, disruption and often ill will, caused by such claims. In many cases, construction claims can be avoided if effective risk management is performed at the outset.

Effective risk management to avoid construction claims involves a cost/benefits analysis at each stage of the project. It may not be practical to take all or even most of the steps set out below for avoiding construction claims. However, if an owner undertakes some of these steps the owner is likely to incur significant savings in the long term.

12 Steps to Avoiding Construction Claims
  1. The best way to ensure that something occurs or does not occur is to put it in the contract. Obtain good legal advice before entering into key contracts in order to ensure that your objectives are properly and adequately reflected. The standard general conditions contained in industry standard documents may not be adequate for your needs, and in particular, they commonly contain limitations on liability which are not fully understood by the owner and may be inappropriate in the circumstances. This is particularly true of public entities which have special and diverse needs and interests.
  2. Owners should try to hire contractors and consultants with whom they have a good relationship and who have a good reputation in the industry, are credit worthy and are qualified to undertake any specialized work required for the project. An owner is well advised to investigate the reputation and qualifications of its general contractor [or?]any key subcontractor. Bonding will address some of these concerns.
  3. Owners should realize that the lowest bid is not always the best bid.
  4. Owners should ensure that the contract allows them to have some say in the general contractor’s selection of subcontractors, especially when any element of the project requires specialized expertise.
  5. The parties to a contract should ensure that they understand their duties and obligations and that they have the ability to perform these duties and obligations as required by the contract.
  6. Owners should ensure that the project is well planned from the outset to minimize the need for change orders. Changes are likely to cause additional costs, in and of themselves, but are also likely to increase the risk of construction claims due to delays and impacts caused by the changes.
  7. Owners and contractors should do what they can to ensure proper management and administration of the project, including proper and adequate staffing and co-ordination of the project and trades, establishment of protocols for site meetings and provision of timely responses to requests for review of working drawings and for provision of instructions.
  8. All parties benefit from an atmosphere of mutual trust and respect and each party should do what it can to engender such an atmosphere among the parties and their advisors.
  9. While it may be initially attractive to a party to shift all of the risk in the contract to the other party for risks such as insufficient plans and specifications and unexpected site conditions, a contract which is skewed in favour of one party often results in a higher chance of a dispute and hence, a construction claim. A contract that recognizes and balances the interests of all parties and that does not include an overly unfair allocation of risk will result in a decreased likelihood of construction claims.
  10. Ensure proper and adequate documentation for the project.
  11. Acknowledge and settle claims which have merit at an early stage.
  12. Ensure that the contract has an adequate process for dispute resolution. Try to provide for a range of solutions from discussions between key personnel, through mediation and culminating in binding arbitration. Provide for how the project will proceed pending resolution of a dispute.