CONSTRUCTION CLAIMS

 

 

Claims in construction contracts are inevitable. The Contractor's entitlement for claims are founded in terms of the contract and in the general law to which it relates and if a particular provision of contract confers on the contractor a right to get reimbursement of direct losses and/or extra cost incurred which he has suffered or incurred, he is entitled to seek a fair treatment for settlement of his claims from the employer. It is however unfortunate that the issue of claims becomes so often emotive, tending to polarise the two sides and making them very rigid on their respective stand, thus preventing amicable settlement of claims. Both parties are responsible for this unpleasant situation. The employer and his professional representative who prepare the contract in haste leaving many shortcomings in their documents and also commit defaults in fulfilling their obligations try to defend their documentation though they very well know that some aspects are indefensible. On the other hand, as experienced many claims made by contractors, are ill founded because the basic principles are misunderstood, common sense and psychology, which cost nothing, are seldom employed in the preparation of claims. None of these attitudes is justifiable and therefore there is need that both parties must be objective in their approach to the subject of claims. This chapter includes e different types of cIaims-contractual, extra contractual, quantum meruit, Ex-gratia, counter claims preparation and presentation of claim, proving damages, negotiating settlement-preparation before start of negotiation, timing the negotiation, strategy of negotiation and tactic check list, communication and bargaining position; alternative disputes resolution methods etc.

 

INTRODUCTION

 

Claims in construction contracts are inevitable, To tackle the problem of the claims effectively it is necessary for both sides to have a better understanding of the basis and principles of contract and therefore of the rights and obligations of the two parties. It is necessary for professional representatives of both sides to have an understanding of business side of industry so as to appreciate the circumstances in which the contractor conducts the risks in which he can properly and contractually be expected to undertake and the financial consequences if things go wrong. If things go wrong by reason of any default on the part of contractor, it must remain his concern; however, if the default lies with the employer or his management team, then the employer must face the financial consequences and settle the claims without any loss of time to avoid any adverse effect on progress of work. It must also be born in mind that the whole question of claim is very complicated, since the preparation of claim is not only difficult but lot of efforts are needed to extrapolate the relevant data, fundamental details, figure, data and, other' evidence together with the establishment of sound basis so as to demonstrate fully the validity of claim argument. The contractor therefore needs an expert who can assist him in this area.

 

The face value of the claims outstanding in the construction sector at anyone time is enormous and one cannot speculate as to what it would mean to the construction sector if only a modest portion of that face value could be paid up and their outstanding amount brought to a reasonably low level. Such a step certainly will have positive effect on contractor's cash flows, reduction in finance cost, more competitive tendering and creating smooth relation between the contractors and the employers making it possible for completing the projects on time.

 

Different Types of Claims

i.          Contractual Claims

ii.         Extra Contractual Claims

iii.        Quantum Merit Claims

iv.        Ex-gratia Claims

v.         Counter Claims

 

Contractual Claims

These are the claims, which arise out of the express provision of the particular contract, for extra cost, expense and direct loss specifically provided as a remedy in the contract for breach of contract on the part of the party concerned.

 

Extra Contractual Claims

These claim as also known as common law claims. These claims are for damages for breach of contract at common law.

 

Quantum Merit Claims

Provide remedy for a person who has carried out work under the instruction of the owner but no price has been agreed or where a new one has replaced original contract and payment Is claimed for work done under the substituted contract.

 

Ex-Gratia Claim

Ex-gratia claim is one where no legal remedy is available to the contractor but arise out of hardship. On the ground of equity or favour the authority concerned may in certain circumstances consider that hC1rdship calls for mercy or moral liability. These claims are also called sympathy claims. Wherever such claims are to be given it will be better if these are given during the currency of the contract so that the money paid helps in improving the progress of the work.

 

Counter Claims

The claims raised by the opposite party to counter the of the claimant is called as counter claims.

 

Potential Heads of Claims In different claim

i.          Late handing over of site

ii.         Variation in data/information supplied and that actually encountered during execution. 

iii.        Late supply of drawing and required Information

iv.        Disruption/disturbance caused due to untimely instructions.

v.         Consequences of delays in decision on progress as well as cost to the contractor.

vi.        Delay caused and extra expenditure incurred/loss suffered on account of non-fulfilment of various other obligations on part of employer as well as contractors.

 

PREPARATION AND PRESENTATION OF CLAIMS

 

Preparation Of the Claim

Burden of proof

 

Where the claim situation arise the party attempting to demonstrate that it was prevented from performing or performed in excess of, that the other side performed contract to contract requirements has the responsibility of proving such a conduct. The accused party need not usually defend itself against the allegation until the some evidence is presented by the party-raising claim showing wrongful exercise of lawful authority on the part of the party against whom the claim is raised. When the party establish evidence in his favour which is sufficiently strong and would be enough to render a favourable decision unless contradicted and overcome by the other party, the party against whom the claim is raised, either has to come forward with a concrete counter fact to demolish the claim or will have to consider the claim. Therefore the party claiming must bring out concrete evidence while raising the claim, which will not be easily demolished by the other party.

 

Basis of claim

 

The party while preparing the claim must ensure that the relevant position of the Contract Law where the remedy is provided is precisely stated. In case remedy is not available under express provisions of the contract, the party claiming should bring out the relevant provision of Contract Law under which such a remedy is available. It should be remembered where Contract language is clear no remedy would be affordable other than the one expressly mentioned. This is a general principle of law applicable to all contracts. No doubt, exception may exist. The party-raising claim must also base his claim on a legal theory that is accepted as a reasonable ground of recovery under the Law applicable to contract. It should also be kept in mind that the party raising claim should not only show that the owner is responsible for the harm for which relief is being sought, he should also prove that he is free from blame or have not made any contribution to the harm.

 

Importance of facts

 

It should be remembered that facts are the glue, which hold the claim together. Thus if your presentation is not coming to logical conclusion, it must be accepted that some facts are lacking. So search should be made to find out the missing facts. The missing facts can be gathered from the various letters, memos, pictures, test reports, watch diary, site documents, suppliers, officials and experts, etc. If the facts exist, these should be verified and should be safely preserved so that the claim can be supported by such hard evidence. It will be desirable that once the particular area of facts are identified, an examination of events leading up to the claim made should be made and put from all relevant facts/ documents should be placed in a chronological order and studied to establish those factual development upon which the claim is based. When the facts complete concrete evidence the claim can be resolved some time by the parties themselves and by doing so lot of money and time is saved.

 

The contractor who raises the claim bear the burden of proof for establishing his claim by providing concrete evidence of cost impact that is effective enough to demonstrate that the claimed cost were incurred as a result of extra work, changes or defaults of owner etc. It has been seen that the owner is generally hesitant to accept the contractor's request' for additional cost in cases here the contractor fails to provide adequate cost records. Therefore the proof of expenditure is a pre-requisite for complete claim analysis by the owner.

 

Supporting Evidence

 

The claims submitted by the contractors are found consisting merely of broad and sweeping assertion of incompetence on the part of the employer project team end generalised allegation of disruption delays and loss without any hard supporting evidence. The nature of the back up evidence will obviously depends upon the type of the claim, but the following supporting evidence can contribute immensely in proving the claims.

 

 

 

§   Site records

§   Correspondence

§   Record of site meetings

§   Site diaries

§   Programmes and progress schedules

§   Payments claimed and made

 

In a situation where a claim is lost for direct loss and/or expense the in respect of a variation it will be necessary that It is supported cal by the following :

 

§   Copy of an instruction for variation validly issued and acted upon.

§   The date of issue and receipt of instruction relating to variation

§   Brief on the nature of variation.

§   The time at which it was necessary to carryout the work pursuant to the variation instructions.

§   Justification that carrying out of the variation instructions certainly affected progress of the work.

§   The extent of work, which got affected by implementing the variation instructions.

§   Proof that the contractor made a proper and timely application to the engineer in respect of the direct loss and/or expense.

§   Substance supporting particulars and proof of direct loss and/ or expenses suffered or incurred.

 

Drafting of a claim

The claim should be written after all the facts are assembled. The first steps should be to thoroughly understand the problem area of the job from which dispute has arisen. All important contract documents and other relevant material should be assembled. Organisation and inspection of documents at an early stage is desirable to avoid surprises at later stage. It should be remembered that the purpose of the claim is to place the contractor in the same position he would occupy had the owner not committed breach of the agreement. Therefore it is important to link up the cost incurred by the contractor with some action or omission on the owner's part. Therefore the body of the final claim document should start of by giving a brief description of the project and what was required as per contract. It should also describe what was the progress according to project schedule and thereafter bring out the problems, which affected job performance. Each claim should be thoroughly discussed and written in a format, which proves the facts that a contractor requirement was breached and that a particular clause of contract entitles: the contractor to relief. In this process it would be advantageous to cite those provisions of the contract upon which reliance has been placed. Once the above is accomplished, the contractor should demonstrate that the resulting harm was caused by the owner's act. Thereafter the resultant cost impact on the operation is brought out meticulously. Supporting documents should also be attached and referred in the claim presentation. The writing of the claim should be such that the statement of fact will read in such a manner as to lead the reader to definite conclusion, which you yourself has reached in the assessment of the claim. The claim should be written under the following three headings:

a.         Introduction

b.         Ground of Claim

c.         Substantiation of Claim.

 

Introduction

In the introduction, brief contract particulars relevant to the claim and brief description of the situation leading to the claim" and reference of the relevant correspondence/notices shall be covered.

 

Ground of Claim

Reference of the relevant contract clauses which entitles the contractor for the claim and where the contract clauses do not provide any remedy, reference of the contract law section where the claim can be legally justifiable and admissible.

 

Substantiation of Claim

Many contractors generally follow the approach in substantiation of claims the same way as the claimants in Bruno Law v. US sand in Merton v. Leach, and many a potentially valid claim founders because of lack of proper substantiating evidence and the contractor's inability to (a) establish the direct link between cause and effect with regard to delays, and (b) provide sufficient particulars of the resulting loss and/or expense.

 

Moreover, as Don and Keating rightly says general words intended to arouse sympathy or other emotion favourable to the contractor's interest should be used sparingly lest they excite the suspicion that the contractor really things his claim is founded in mercy and not in law. Further, it is rarely useful to say that the contractor has suffered loss due to causes outside his control or which he did not reasonably anticipate. It is elementary law that such factors are hot grounds in law for extra payment unless, which is rare, they are expressly so made. If put forward as the sole grounds of a claim the reader may\ veil assume that there are no other grounds.

 

In order to substantiate the claim properly the supporting evidence as mentioned above as well as the various details of, the expenses of the losses suffered with appropriate proof is desirable. In order to prove the fact of delay on the part of the employer use of planning technique such as CPM, should also be made.

PROVING DAMAGES

 

As mentioned earlier, the prerequisite to recovery is presentation of evidence of an act, which claimed cost were incurred. The contractor must provide concrete proof between the act or condition complained of and the damage incurred. The documentation of actual cost is favoured but limited somewhat due to the requirement that extra costs be segregated from anticipated cost. In this process a burden of proof lie on the contractor to couple his actual cost proved by payroll records, invoices, equipment hire charges, sub - contractors etc. with his anticipated costs shown by estimates, purchase orders, quotation, bid take off etc.

 

NEGOTIATING SETTLEMENT

i.          Preparation before start of negotiation

ii.         Timing the negotiation.

iii.        Strategy of negotiation and tactical check list.

iv.        Communication and bargaining position

 

Preparing before start of Negotiation

 

Negotiation is an art and one must understand the psychology and approach of the other party so as to structure the relationship in such a way that it will not harm future dealing. It is an accepted fact that all questions cannot be satisfactorily resolved unless an initial step in the process of negotiation is taken in the right direction. It has also to be decided as to how many people are  to be included in a negotiating team, and whether including too, many negotiators will damage any rapport established earlier. It is also to be decided who will be the best spokesman of the group who can present the claim with clarity and in precision and is also in a position to clarify any point that may be raised by the other side. The presentation has to be made in a firm and gentle manner. The team leader should be well prepared in having analysed and evaluated the claim because a well-informed negotiator lends credibility to a request for additional cost and time. Emphasis on substantive issue is very important. The main aim of the negotiation is to achieve the objective and how this goal can be achieved is determined by the overall plan and purpose from the presenting side. Do not emphasise too much on weak points, as some times lesser consideration may have to be sacrificed if it can contribute to achieve your goal. You must also remember what you want and what you will take and the amount requested .for a claim should permit flexibility during negotiation. Some time the client may be willing to eventually agree on those 'hard' cost to which the contractor is reasonably entitled but may not agree to those border line, soft cost which a contractor generally include to inflate a claim so as to provide a cushion between the cost which actually absorbed and those which are purely speculative.

Timing for Negotiation

 

Choosing timing for negotiation is also very important. Some time discussion at proper time may help in settling a dispute before it takes the shape of a full-fledged claim. It would be a proper time for discussion before a problem even arises or before the job is over. The earlier the negotiations are commenced the faster and easier are the settlements because the events are still fresh in everybody's mind and all the records are easily available. It should be remembered that reasonableness would always bring better results than rigidity. Never be afraid of initiating a discussion and desire to settle a claim is not a sign of weakness. The party claiming must be patient with himself to wait for the result they want without hurrying and patient with adversary to allow himself to express fully without interruption or rudeness. If your adversary seems to be disturbed then you can take it that this is not the state of mind you want him to be. On such occasion it may call for change of subject matter, to break for refreshment or for r a joke anything, which can contribute to remove the agitating atmosphere.

 

Strategy for Negotiation

 

First of all strategy should be planned in advance due to the following :

reasons:

 

i.          The party best prepared can discuss its position with full confidence and know where its stands as the negotiation if progress.

 

ii.         You must appreciate that negotiation are held in strange  environments, so there is a greater likelihood of unexpected  occurring. Therefore preplanning reduces these risks.

 

iii.        A checklist will help in evolving steps to be taken if problems develop during negotiations. The following may be included in the check list:

a.    Absorb all formalities to get the negotiations off in the right direction.

b.    Establish good feelings and trust among the parties before  getting down to business.

c.    All the issues should be covered in a planned manner during your presentations; otherwise if you forget to raise an issue after negotiation this will destroy your integrity and good faith.

d.    Prepare a list of items in advance which you can give away) as

well as a list of important items on which more concentration is

necessary.

e.    Always anticipate trouble spots by planning for alternative    

strategies.

 

Communication and Bargaining Position

 

Always remember that the party can resolve the disputes if they are speaking about the same thing. Constant and continuing contact helps in removing the misunderstanding which some time develop. It must be remembered that close relationship reap benefits, such as lessening tension and in providing a. warmer environment which will help in sorting out the things. The bargaining position will depend upon the strength of your case and the reputation you enjoy with your clients.

 

Negotiation is itself an art. As learned from various authors, the gambits suggested are: 

i.            to make the other party appear unreasonable

ii.           to place the other -party on the defence side

iii.         blame the third party

iv.         where necessary temporarily walk out of the negotiations

v.           pose that you have little time to settle and would like to clear up things so that you can catch your flight

vi.         Don't give the impression that you are fully satisfied with the outcome, and

vii.        Quit when you are ahead.

 

It is important to emphasise that the usual amount of tact, diplomacy patience and communication skills will be required and you may engage a trusted advisor who can help in convincing the client and achieving your objective of a reasonable settlement acceptable.

 

 


ACM2I3/II

 

Accounting, Storage & Preservation

 

1.         Accounting:- This is the process of creating a written record to reflect what materials have been received. What are in stock and to whom issued etc. this can be in the form of Ledgers, Cardex or Computerized data. It is this system & records that not only tell us these aspects but also give an important Management Information and form a component of MlS.

 

2.         Receipt:-When the materials are received in the stores/organisation, the following actions have to be taken.

i. Opening

ii. Inspection             a. Physical for damage etc.

b. With respect to P.O.

c. With respect to Challan

iii. Preparing Receipt record

iv. Handling over to holding section

v. Recording rejection & disposal of rejected material

vi. Making insurance claim for damaged / deficient materials

 

3.         Consignee Inspection :- This is required to be done in addition to formal inspection which may have been at suppliers premises (Pre-dispatch) or which may be done later by the designated persons as per P.O. This is done mainly as a visual inspection. The idea is to check the condition, size, damages etc. During this, the physical materials are compared with the purchase order. In case of any transit damage, the reason evaluated w.r.t. P.O./ Insurance Policy and further action taken. In many organisations the users are requested to carry out a formal inspection. They like to compare the physical materials with the indents/requisitions. (comment)

 

4.         Receipt Documentation:- Some of the documents prepared by stores during receipt are :-

i.              Daily Receipt Register

ii.            Receipt Voucher

iii.        Inspection Report

The formats could be as given in Annx -I

 

5.         Once the stores are inspected & accepted, these are collected by the Holding section. They are supposed to collect only those items or quantities which are accepted. They physically shift the materials and keep them in designated place. This is also called Binning. The location can be

i.          For bulk materials                a.         Cement Store

b.         Shed No.5

ii.         For Small items                    a.         Rack No.23

b.         Shelf C

6.         Storage System :-. In order to retain the usefulness or condition of materials in which these were received & accepted, certain system or techniques for storage have to be followed:

a.    Cement                          i.          2 bag depth

ii.         10 bag height

iii.        Main & cross passages                  

iv         Dunnage

v.         Dry flooring

vi.           Covered shed

 

b. Tyres, Tubes, Rubber Items       i.  Storage in Dark Room

ii  Rotation/turning

iii.Inflation

 

c. Timber                                            i. Damage - White Ants Termites

ii. Air Circulation

d. Lubricants                                     i. Drum vent holes                                                                                                   ii. Rotation

 

7.         Identification Tag:- It is necessary to attach a card to one item giving following details.

i.          R V no and date                   iv.        Description

ii.         Location                                 v.         Name of Eqpt.

iii.        Item code                               vi.        Part no

 

In case of spare parts, it is essential to maintain this "Identification tag" very meticulously as otherwise it becomes very difficult to identify an item to the correct equipment or vehicle and the part no which it represents.

 

8.         Once the stores are shifted to storage area, the stock holder signs on 1-2 copies and these are then sent to store Accounting section.

 

9.         Issues: -Whenever any material is required by the user, they send a Material Requisition (Appx -II) to the store in 2-3 copies. These are normally machine serial numbered so that the issue can be controlled. One copy i.e. office copy (generally in the bound book it self) is returned to the indentor (user) along with the materials. In some cases a separate Gate Pass may have to be prepared. The other copies are kept by stores & record of issue made in the ledger/computer.

 

 

 

10.       In case of large organisations, the following is checked: -

i.              Correct cost Centre Code & job details are given in Material Requisition

ii.            Only approved person has authorized the issues.

iii.        The budget provision exists in that particular Cost - Centre.

 

11.       Costing: -In order to achieve cost -control it is necessary to do costing of inventory as well as issue. The following are 2 of the most widely used methods.

 

i.            FIFO -As a normal practice the item First Received (FI) should be issued/consumed first (FO). It is assumed that this is being done and all issues/consumption is priced and valued as per Original/First price.

ii.           Moving average/weighted average -Since it is not always possible to follow FIFO, the system of Moving Average is followed. In computerized environment it is very easy to follow and it is better of the two methods.

iii.         LIFO –valuation

iv.         Standard Cost

v.           Replacement Cost

 

12.       Material Handling :- Depending on the size, quantity & nature of materials the following material handling eqpt. shall be required.

i.          Step Ladder                          v.  Chain Pulley blocks -Tripods

ii.         Wheel barrow                       vi. Weighing-Measuring devices like

iii.           Fork/lift truck                              Platform Scale. Counter scale,

Liquid Cranes -Mobile/ Gantry    Measuring cans etc.

 

13.       Stock Verification: -It is normal to verify the stock on Periodical basis. The aim of the activity is to check if the physical stock is same or tally with the stock in ledger/ computer.

a.         Periodicity :- i) Annual- Quarterly -Monthly

ii) Nature of materials

b. System :-               i) Ground to ledgers

ii) Ledger to ground

c. Team :-                   i) User, Finance & Materials

ii) Single Person

 

14.       Discrepancy: -Surpluses as well as deficiencies if any, are regularized. The surpluses are taken on charge & deficiencies are written off. This write -off -shall need approval. Aim is to change the ledger balance to tally with physical balance.

 

 

15.       Preservation: This is a process/activity by which the materials are retained in the same condition in which they were received. It involves various activities like:

i.          Packing & repacking                       v. Coating -paint, oil, grease

ii.         Cleaning                                           vi. Physical Handling-oil

    drums, Vee belts

iii.        Controlling Moisture                        iv. Controlling Temperature

 

16.       The following concepts should be known

i.          Shelf life                    iii.        Turn Over

ii.         FIFO                           iv. Periodic Inspection & Alternative use.

 

17.       Technically it is the manufacturer of an item who is competent to decide & guide the user as well as materials executive about

i.          The complete system, periodicity etc. of preservation

ii.         Shelf life ...

iii.        Serviceability of item where shelf life has expired

 

However many users based on their technical knowledge can playa vital role and materials executive can contribute. It is very convenient to combine the inspection ~f materials along with stock verification.

 

18.       The method of Preservation and Preservatives for few common items are given in Appx Ill.

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