Contractual Claims Protection: A Checklist for Owners

BY JEFFREY M. DEFEO, ESQ. – Regional Director of Claims Services

More and more public owners have come to the realization that their general conditions and “front-end” documents are inadequately protecting them from inflated construction claims by contractors. From ARCADIS’ 30 years of experience assisting public clients with redrafting contract language, we have developed a checklist of clauses that serve as a guide for owners to include in contracts for protection against potential construction issues. The following, in no particular order of importance, are brief discussions of some of the key items owners should include in contracts for maximum protection.

Notice Provisions – These provisions require the contractor to provide the owner with prompt notice of an alleged change, delay, claim for additional compensation, or differing site condition. A well-drafted clause will strive to bar claims that did not comply with the notice provisions because the owner can argue that there was a lack of notice to be able to respond. The purpose of such provisions is to give the owner an opportunity to adequately investigate the situation in order to verify (or rebut) the contractor’s contention and to actively participate in the resolution and monitoring of the work. In the case of an alleged differing site condition, the notice requirement should be one of immediate notice, since an owner investigation is likely essential in order to protect evidence of the condition and to determine how the affected work will proceed.

Differing Site Conditions – It is important to define what a differing site condition is and how it will be treated should one be encountered during construction. This clause is particularly important in projects involving significant earthwork, tunneling, work in highly developed areas or renovation projects due to the increased likelihood of encountering susceptible conditions unknown to the designer and bidders.

Scheduling Requirements – Owners must take a more active role in monitoring the contractor’s schedule submittals in order to protect against potential improper schedule manipulation which could lead to inflated delay claims. In order to achieve this, owners must first have a solid specification with a mandate that requires the contractor to submit regular and meaningful schedule data. The areas which the specification should cover include, at a minimum:

• Technical requirements for the initial baseline submittal and updates
• Review/acceptance procedures and timeframes
• Updating and revision requirements
• Treatment of “early completion” schedules
• Inclusion of submittals and procurement activities into the overall schedule
• Means of submitting requests for time extensions (i.e., fragnets)

Audit Provisions – An owner can obtain extremely valuable information for evaluating or rebutting a contractor’s change orders and claims by gaining access to the full volume of the contractor’s records, including all cost records and correspondence with subcontractors. General contractors almost always have access to the public owner’s records by virtue of various “sunshine” laws, but often an owner can only get access to a contractor’s records after a formal litigation process has been initiated. A well-drafted audit or access to records clause can provide the owner with the contractual right to have access to all the contractor’s (and subcontractors’) records at all stages of construction, thereby giving the owner much more information to utilize when assessing a request for change order or a claim demand.

Defined Mark-ups – Many disputes arise because contract provisions are not clear as to what is or what is not included within a contractor’s (and subcontractor’s) mark-ups and what is allowable under the contract. Better defined provisions will take away the guesswork and arguments associated with this common problem and will decrease the chances that an owner pays for “double-dipped” overheads on extra or changed work.

Escrow of Bid Documents – This is a procedure being used increasingly on large projects whereby the contractor is required to place all of its bid preparation materials into an escrow. Then, if a change order or claim arises that brings the contractor’s bid or original plan of performance into question, the owner and contractor can jointly review the bid documents to determine whether they support the contractor’s performance of the bid.

Claim Submittal Requirements – Often, owners are frustrated at the end of a project when the contractor submits a disjointed omnibus claim or a claim with too sparse details that it is virtually “non-analyzable.” The addition of a claim submittal clause can formally specify the format, content and level of back-up documentation that is required within the contractor’s claim to be valid; otherwise it will be rejected until it meets the contract requirements.

Liquidated vs. Actual Damages for Delays – When drafting contracts, owners are faced with a choice in deciding how they are going to address the possibility of contractor-caused delays that extend a project’s completion date. The owner can elect to include a liquidated damages provision which is a pre-determined amount included in the bid documents that “fixes” the contractor’s daily exposure or liability for contractor-caused delays. The other option is for the owner’s contract to be silent regarding the amount of damages that the contractor would be liable for in the event of a delay. In that case, the owner could claim all reasonable, foreseeable damages caused by the contractor’s delay.

Many owners include liquidated damages provisions, but set the amount at a level that does not come close to adequately compensating the owner for the real costs of a contractor-caused delay. Such costs could include lost revenue, additional CM and inspection costs (as well as owner employee costs), rental of temporary facilities, extended financing costs, etc. Owners must realize that if they include liquidated damages for delay provision, it is an absolute cap on the owner’s recovery for contractor delays, regardless of the actual costs ultimately incurred by the owner. This is why some owners, particularly in the private sector, are leaving contracts silent regarding contractor-caused delay damages. By operation of law, the contractor is then exposed to liability for the owner’s actual damages, subject to proper proof by the owner.

When choosing one of these options, an owner should do so carefully. If liquidated damages are the preference, perform an analysis of what the actual, out-of-pocket costs might be and be sure to save that analysis as proof of the estimate. This will serve as backup documentation should a contractor later challenge the liquidated damages amount as being a “penalty” rather than a genuine pre-estimate of likely damages. If the true estimated daily amount is so high that publishing it in the bid documents might “scare” bidders, owners can elect to leave the contract silent and simply allow actual damages to apply without drawing attention to a dollar figure. Obviously, these are major factors that should be considered when drafting contracts. In addition, public agency owners should check with their counsel to determine whether they are required to use liquidated damages.

Limitations on “Early Completion” Claim Damages – Another damages-related area where an owner can protect itself in contract drafting is in limiting the types of damages a contractor can claim in the event of owner-caused delays or disruptions. One type of claim that has become quite prevalent is the “early completion” claim, whereby the contractor alleges that it would have finished the project earlier than the required contract completion, but the owner caused the delay, so the contractor is thereby entitled to the extended overhead costs. Owners are beginning to include clauses in their contracts that prohibit the recovery of damages based on missed early completion dates, forcing bidders to accept language that specifically acknowledges that their bid is based on this premise. A contractor may argue that in the public sector, such a clause is rendered unenforceable under certain state-enacted statutes, which essentially makes wholesale no-damages-for-delay clauses very difficult to sustain. However, the distinction in an early completion claim is that the project may not have been delayed beyond its required completion date, yet the contractor is still asserting a delay damages claim. Another distinction is that a clause which only limits a contractor’s right to claim for early completion delays is not a wholesale denial of liability for all owner-caused delay on a project similar to most typical no-damages-for-delay clauses. Like any contract provision that restricts a contractor’s ability to pursue claims, this type of clause may be argued by contractors; however, the mere possibility of an argument should not hinder an owner from including such a clause in its contracts.

Defining Turnaround Times for Submittal Reviews – An area of frequent dispute and delay allegations involves the time taken by owner’s representatives to review required contractor submittals. When a contract is silent about how long an owner’s representative has to review submittals, there is often a difference of opinion between the contractor and “reviewer” as to what a reasonable review period is. This can result in protracted arguments and even claims. An easy way to address this from the outset is to simply specify in the bid documents the timeframe (i.e., 20 calendar days) that the owner must review submittals. This eliminates the “reasonableness” argument, and forces the contractor to schedule its work accordingly based on the assumption that the new owner contractually has “x” number of days for review. Consideration should also be given in the specifications as to whether the review “clock” fully or partially starts over when a submittal is properly rejected and has to be resubmitted/re-reviewed. In addition, owners should consider prohibiting the transmission of a large number of submittals simultaneously which could effectively overwhelm the review process.

Estimating the Volume and Turnaround Time for Requests for Information (RFIs) – Often, claims by contractors include allegations devoted to “untimely responses” or “excessive volume” of RFIs. Both of these subjects can be addressed by the owner in the contract. The first, dealing with turnaround time, can be resolved by simply specifying a contractual turnaround time. Many owners accuse contractors of failing to plan their work ahead and then demand instantaneous responses to RFIs. In addition to providing contractual protection to the owner, a specified turnaround would serve as a message to the contractor to either plan ahead or to not expect an instant turnaround. With regard to the volume of RFIs, a clause can be put into the contract stating that the contractor should expect “x” number of RFIs. This way, the owner can establish a reasonable baseline for denying “excessive” RFI-related claims and establish a baseline for contractor expectation. To fairly set the turnaround time, the owner must take into consideration the complexity and duration of the project. The owner must also be on the lookout for contractors that may submit unnecessary RFIs to circumvent the baseline.

The contract provisions discussed in this article are only some of the key clauses that an owner should consider for to help protect against untimely or inflated claims. Because each project brings a different set of circumstances and complexities, it is always advised that owners engage a construction claims expert as early as possible to prevent these issues from arising on a project. For questions or additional information, please contact the author, Jeff DeFeo at 949-854-5237 or Jeff.DeFeo@arcadis-us.com.


ABOUT THE AUTHOR

Jeffrey M. DeFeo is Regional Director of Claims Services for ARCADIS. He has 32 years of experience in the areas of construction claims analysis and resolution, CPM scheduling, program management, contract administration and training, Mr. DeFeo’s expertise is extensive, covering a broad area of construction-related work. He is a recognized expert on dispute resolution and management aspects of projects and capital improvement programs. His extensive claims experience has included performing expert analysis of all claim aspects, including complex CPM schedule delays, disruption, liability, loss of productivity and damages. He has provided expert testimony at mediations, dispute review boards, arbitrations and trials. He can be reached at Jeff.DeFeo@arcadis-us.com.