By: Michael Metz-Topodas
Most contractors hope their projects will proceed efficiently, within budget, on time, and, most importantly, without needing to file a claim against any of the other parties working on the job. Unfortunately, reality often proves otherwise. Claims come in all kinds of forms – delay, extra work, acceleration, inefficiency – but essentially involve recovering any type of entitled cost or time impact. Claims can possibly risk jeopardizing the cooperation and good relationships among project stakeholders necessary to get the job done successfully. Sometimes, however, that necessary cooperation cannot overcome losing money undeservedly, making the claim a business necessity. Also, pursuing a claim under a construction contract often involves a process that can seem overwhelming.
Neither concern, however, should keep contractors from bringing claims to ensure they receive what they bargained for in their contract, especially if contractors follow these key rules: preservation, preparation, and presentation. Taking the right steps to preserve, prepare, and present claims not only facilitates communication with others on the job about real concerns, but it also puts the contractor making the claim on a path to ensuring its fair treatment under the contract.
Definition of a Claim
A claim involves a request for an adjustment to the contract’s terms, usually seeking additional time or money (or both) to perform the work required. Most construction contracts define this term similarly. For example, AIA Document A201-2017, General Conditions, states a “claim is a demand or assertion by one of the parties seeking, as a matter of right, a change in the Contract Time, or other relief with respect to the terms of the Contract.”
Types of Claims
Types of claims are organized by their direction: up-the- chain or down-the-chain. “Up-the-chain” claims come from a lower-tier entity, often a subcontractor, bringing a claim against its general contractor, usually seeking additional compensation, whether through time or money. For example, a mechanical subcontractor may seek payment for extra piping installed beyond what project plans and specifications called for, especially where the general contractor or owner already rejected the corresponding change order request. Similarly, when a general contractor or owner (or both) causes a mechanical subcontractor to spend a longer time performing its work than what the subcontract stated, the subcontractor potentially has a delay claim.
Down the chain claims come from a higher tier entity, often an owner or general contractor, seeking to recover losses a subcontractor caused. For example, where an electrical subcontractor installs a switchgear that does not comply with project specifications or differs from an approved submittal, the owner or GC may seek to recover the cost to remedy the defective work. Also, where an owner assesses liquidated damages against a GC for failing to complete the project by the contracted deadline, the GC may, in turn, seek to recover those charges from late-performing subcontractors.
The right a contractor has to pursue a claim depends as much on how the contractor pursues the claim, as the claim’s merits. This makes it critically important for a contractor to preserve the claim through proper notices, releases, and records. Almost every construction contract has notice requirements with precise deadlines. Under the AIA A201-2017, for instance, a party must notify the other party of a claim within 21 days of the situation creating the claim—a rejected change order request, a demand to accelerate, etc. Although in certain jurisdictions failing to provide notice does not forever bar the claim, proper notice makes a claim easier, and less costly, to pursue.
Claims can also be lost via the monthly lien waivers and releases often required to accompany payment applications. Although subcontractors and contractors often need to sign these to receive payments owed, such releases should expressly exclude any pending or unresolved claims, such as change orders and time extension requests.
Preserving the right to a claim only makes up half the battle; contractors should also make sure to preserve the amount of a claim. Careful contemporaneous records of actual costs provide solid evidence in the face of higher-tier contractors’ challenges to claim amounts.
Preparing a claim does not begin the day or so before it is submitted. Instead, it involves a process that starts the moment the claim arises. Contractors making a claim should track all associated costs, both direct (such as labor and materials) and indirect (such as overhead). Using codes or other designations in project accounting records can make it easier to identify these costs when assembling the claim for final submission. All back-up documentation, such as invoices and timesheets, should be similarly coded or designated for easy access. Ultimately, the records required to support a claim will vary on a case-by-case basis, so consulting a claims expert and counsel will ensure the claim preparation process goes smoothly.
With the right to assert the claim established by proper notice, protected by properly limited waivers, and preserved by appropriate records, presenting the claim becomes a more user-friendly process. Typically, contractors prepare a letter or report outlining the events leading to the claim, the contractual basis for the claim, and the calculation of total costs. The report or letter is accompanied by volumes of back-up documentation and data. After being submitted, the claim is reviewed by the other party and sometimes the architect. Following that review, but before a decision is made on the claim, the parties on both sides of the claim should convene. That meeting can include reviewing records for accuracy, seeking to resolve the claim, or investigating other project stakeholders involved. For example, in a meeting between a subcontractor and the GC about a delay claim, the discussion may include whether the owner caused some or all of the schedule impacts and should bear some liability. Like with preparing a claim, presenting one can benefit greatly from having an expert and counsel participate. With their involvement, should the claim be denied, the appropriate team is informed and prepared to move forward promptly with the dispute resolution process.
This overview provides a framework for further discussion about the finer issues and complexities involved in construction project claims. As no two projects are alike, each claim requires a unique approach.