Construction Claims: Root Causes & Avoidance

Construction projects are growing in number and becoming more complex, leading to long construction times, and involvement of many stakeholders. Projects today require highly specialized designs, detailed plans and specifications, high-risk construction methods, skilled resources, strong project management, and effective coordination. Even a slight negligence or improper due diligence can lead to claims. Khalid J. Memon (M. Eng., P. Eng., PMP), Business Administrator, Oil Facilities Projects Department, Aramco, Saudi Arabia, gives insights on the reasons for claims and how to mitigate or resolve disputes between parties.

Construction projects are growing in number and becoming more complex


A construction claim is either a claim against the Contractor by the Owner/Client or vice-versa. In both cases, the claim, in most cases, is regarding money and/or time required to complete the project. Today, construction projects face a higher risk of claims than any other industry. Claims can hinder completion of construction and cause delays in delivering projects. Sometimes, claims are not finalized even after completion of the projects.

Claims are undesirable as they require significant time and resources to resolve. Therefore, it is in the common interest of all involved parties to prevent, minimize, or resolve them as amicably as possible. Construction claims usually result from unresolved disputes between the Owner and Contractor during construction. A construction dispute can be the outcome of factors such as construction delays, idle/standby time, failure to comply with the procedures and standards etc, which affect project schedules and costs.

The most common causes are Idle/ Standby Time, Acceleration/Additional Resources, Scope Change, Financial Loses etc. Various recommendations have been highlighted to avoid claims between disputed parties to reach an amicable solution.

When a dispute arises, it can have severe consequences on the whole life cycle of a project. For the project to proceed, both parties must take steps to resolve every single dispute in a timely manner. A considerate approach for early settlement of disputes between parties is always cheaper and leads to a win-win situation. On the other hand, delaying or failing to resolve these disputes or issues present risks that will result in Claims and has the snowball effect, increasing the magnitude of Claims considerably.

Fishbone Root Cause Analysis

A Fishbone Diagram technique was used to perform a comprehensive Root Cause Analysis (RCA) for claims on various Construction Projects. This technique is a visualization tool for categorizing the potential causes of a problem to identify its root causes.

Construction projects are growing in number and becoming more complex

 

Categories of Claims

The following categories were found to be very common on various construction projects:

  • Idle/ Standby Time
  • Acceleration/Additional Resources
  • Scope Change
  • Financial Loses

Idle/Standby Time

This is a period in which a resource (machine, equipment or workforce) is ready and available but is not being used or not doing anything productive. Significant reasons for Idle/Standby time are:

Force Majeure: These are external events that the project team cannot control. Examples include natural causes like fire, floods, and pandemics, governmental or social actions such as war, civil unrest, labor strikes, etc.

Unavailability of work front: The project execution team often faces difficulty acquiring access to construction sites, especially in brownfield projects since they have constraints related to the site's current state such as the operational plants.

Delay in Work Permit: This too is especially observed on brownfield projects, where factors related to the risk of impacting the operation of plants may lead to delays in issuing work permits to access the construction site, resulting in idle/standby time.

Design issues: In many construction projects, a consultant or an engineering design company carries out engineering; it is a different entity from the contractor. The designing firm that develops the design may delay issuing the drawings for construction, leading to idle/standby time.

Such events may lead to stoppage of work partially or entirely, and thereby affect the productivity of resources. The result is an extended duration to complete certain activities or the entire project, ultimately impacting the cost and schedule of the project.

Acceleration / Additional Resources

Various situations may compel Contractors to bring more resources to accelerate construction to achieve desired progress and complete the project within the deadline. These additional resources add additional costs to the overall budget of construction projects. The Contractor has no other option but to file a claim if it is not compensated in such a situation.

The following factors usually contribute to delays:

  • Delays caused by different factors,
  • Low Productivity of resources,
  • Change in the sequence of construction activities.

 

Construction projects are growing in number and becoming more complex

 

Scope Creep or Change

According to the report "The Pulse of Profession 2018" by the Project Management Institute (PMI), 52% of all projects face scope creep in one way or another. An inadequately defined scope of work leads to scope creep and unnecessary scope changes. Reasons for scope creep include the following:

Based on a study: Project scope sometimes needs to be changed based on reports and studies when they become available such as a Geo-Technical Study, as a result of which, Scope change becomes inevitable.

Unforeseen site condition: It is often seen that site conditions differ from details provided by owners to the contractor. The availability of underground utilities or varying soil conditions may pose overwhelming challenges during construction, resulting in additional expenditure and time.

Environmental requirements: Change in environmental requirements by the government or local bodies can lead to scope change and impact the cost and schedule of the project.

Additional Requirements: Most of the time, the owner of the project also adds an additional scope to the original scope of the project. Though the owner may add the cost of the new scope, it indirectly impacts other project areas/activities, resulting in a dispute on the total cost and schedule.

Financial Losses

Many construction contractors face financial losses during the completion of projects, which can push contractor companies on the verge of closure. The following are a few important reasons for financial losses:

Lowball Bids: The chances of financial losses increase if the contractor bids on the project with minimum profit to keep it afloat or enter a new market. The contractor takes a risk in this situation and starts executing the project in the hope that it will profit from "change orders," if any. If it does not happen, the contractor ends up having less profit or even loss, and files a claim to recover the financial losses.

Market Condition: Unusual increase in material prices or implementation of custom duties, taxes, and fees may reduce the contractor's profits. In this case, the contractor may file a claim if not compensated earlier.

Uncontrolled Expenditure: Poor resource management leads to expenditures that the contractor could have avoided with adequate planning. These unnecessary expenditures reduce the Contractor's profit and may result in losses. Though this is not usually the owner's fault, the Contractor files a claim to recover some cost.

Suggestions to prevent claims

As mentioned earlier, construction projects are complex and are usually carried out within a very tight schedule and budget. Though it is often impossible to eliminate the risk of claims but both parties (especially the owner) must exert efforts to mitigate them.

Before any project starts, it is imperative to prepare a robust bid package with all details for contractors so that they can estimate the required cost and duration for the project. In addition, owners must ensure that a good design has been made to start construction of project in order to minimize changes later on.

Owners must also exercise due diligence during the bidding phase. Lowest bidders may appear to be technically and commercially viable, but could pose a higher risk of claims. Hence, contracts must be awarded after careful evaluation.

Contractors must consider various factors such as site conditions, weather patterns, historical data of price escalations, market conditions, and constructability issues, especially in brownfield projects. This will help in assessing the expected cost and duration of any project. It is also critical to keep all communication records and other supporting documents to resolve disputes and reach an agreement. Processing due payments on time will keep contractors' cash flow healthy, making it easier for the contractors to fulfill their contractual obligations and meet project completion deadlines.

Conclusion

To avoid claims, owners must form a dedicated team and a project team to look into compensation requests from contractors before they become disputes or claims. The team should consist of Subject Matter Experts (SMEs) capable of evaluating and quantifying such requests.

An impartial review is a must to reach a fair conclusion. If the compensation request is valid, a process should be initiated to make additional payments. Failing to do so can result in a lengthy process of claims that burden contractors' and owners' resources.

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NBM&CW - January 2025

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