Holloway Construction Report
Construction Contractor Claims©

Introduction

It has been said that construction contracting is comparable to gambling: Both
have limited upside, with almost unlimited downside. The risky nature of the
industry is further reflected in the fact that approximately 30% of all
contractors survive only three years. These factors understandably contribute
to a claim consciousness within the AGC and ABC communities. However, in spite
of many contractors’ aversion to disputes, the decision to file a claim or
lawsuit against an owner may represent the only means of staying in business.

The Construction Environment
Partnering efforts notwithstanding, the nature of construction creates a
predictable set of opponents: the Owner and the Contractor. Rules of conflict
are drawn up and recorded in the contract documents. Throughout the various
stages of the work, both sides are repeatedly reminded of their lack of common
interest. Battle lines are formed and the war begins. Both sides understand the
basic rules; the Contractor seeks to maximize revenues – the Owner needs to
minimize expenditures.

These competing positions contribute to a project atmosphere that can quickly
change from one of tolerance, to one of suspicion and ill will. The owner and
contractor begin to argue about the issues, and exchange threatening (and
sometimes entertaining) correspondence. To further expand the dimensions of the
problem, the owner’s agents become emotionally and/or legally involved and join
in the fight. By default, management of the project is often left to the
subcontractors. The general contractor soon reports a financial loss, and
attorneys and experts are retained to assist in final resolution.

Construction Reality Versus Utopia

In utopia, the owner never makes any changes – the A/E’s documents are
error-free – the contractor performs perfectly – and Mother Nature behaves
herself. Regrettably, construction utopia does not exist. In the real world,
with uncanny predictability, the forces of the Owner, A/E, contractor, and
Mother Nature combine to create conflict: The Owner changes his mind – The A/E
changes the design – The Contractor fails to perform properly – Mother Nature
changes what the others have missed. A claim results.

A construction claim is an unresolved dispute between the parties to a
construction contract that is comprised of three elements:

1. Entitlement – the contractual or legal basis of the claim,

2. Quantum – the damages or dollar value of the claim, and

3. Causation – the relationship between the entitlement and the damages.

Any one element, without the other two, is of little value.

Claims are a common element of today’s construction industry. The contractor
who proudly boasts, “My company has never had a claim”, is becoming
an endangered species. To survive in today’s construction marketplace, the
contractor must understand his rights and be quick to implement the techniques
of survival when a claim situation arises.

Quantum

There will be times when a contractor will recognize entitlement prior to
damage, and other times when the inverse will be true. On those occasions when
entitlement precedes damage, the contractor should immediately place the owner
on written notice regarding the timing and nature of the causal events. In
fact, in the absence of timely written notice, many claims will be barred by
contract.

On those occasions when extra costs or damages are incurred ahead of
entitlement, the contractor should immediately undertake an investigation into
the status of the work to identify the potential causal factors. (HCG has
developed questionnaires to guide the contractor (and owner) through the
initial phases of these investigations.)

Causes Of Contractor Claims

The complexities inherent in the claim identification and resolution process
are illustrated in a brief examination of some of the consistent causes of
contractor claims against owners, in both private and public contracts:

1. The owner’s failure to adjust the schedule, or grant a time extension, even
in the face of valid contractor claims.

2. Changed conditions relating to the contract between the Owner and Contractor
that are so dramatically different as to render the original agreement void.

3. Conditions outside the base agreement that are unilaterally imposed by the
Owner onto the Contractor.

4. Contract documents that contain errors and omissions, code violations, or a
lack of inter-discipline coordination.

5. Failure of one or more of the parties to perform in a timely manner, thereby
delaying the other party.

6. Failure of the owner’s agent to perform proper investigation of subsurface
and/or site conditions.

7. Changes in the work unilaterally imposed by the owner onto the contractor.

8. Conditions known only by the owner that will adversely affect the contractor’s
performance.

9. Project conditions not contained in the contract documents that prevent a
party from performing efficiently.

10. Overzealous, deficient, or unreasonable performance on the part of an
Owner’s agent.

11. Unilateral or uncompensated suspension of the contractor’s work.

12. Contracts that are terminated by the owner, either for convenience or for
cause.

13. Abnormal or unusual weather conditions.

14. Untimely delivery or deficiency in a component furnished by the owner.

There may, of course, be other causes of contractor claims, but the foregoing
represents causes that repeatedly occur on construction projects.

Entitlement

Entitlement is the legal basis of the claim. It may be derived from a contract
clause, or the principals of tort law, which set forth the duties and
responsibilities of the individual, such as implied warranty. Therefore, an
understanding of construction contract entitlement is one of the prerequisites
to the preparation of a claim.

The administrative boards and court system of the federal government are
clearly at the forefront of construction contract law. With growing frequency,
state and local courts are looking to the federal system for guidance and
direction on construction matters. As a result, the basic types of entitlement
recognized at the federal level have gained nationwide recognition.

As illustrated above, disputes that arise in engineering, manufacturing, and
construction contracts have grown more complex with each passing year. However,
for purposes of the contractor’s claim evaluation, the causal factors can be
associated with a few basic types of entitlement. Although a steady flow of new
construction case law continues to modify entitlement theory, as of today, at
least sixteen types of entitlement have emerged from the federal court system:

1. Acceleration

2. Cardinal Change

3. Constructive Change

4. Contract Termination

5. Defective and Deficient Contract Documents

6. Delay

7. Differing Site Conditions

8. Directed Change

9. Implied Warranty

10. Impossibility of Performance

11. Maladministration

12. Owner-Furnished Items

13. Strikes

14. Superior Knowledge

15. Weather

16. Work Suspension

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Consulting Group, LLC. All rights reserved.