Construction Claim & Dispute Resolution-2

CHAPTER 2: CLAIMS AND DISPUTE ISSUES

Construction companies and projects in Malaysia have a track record for completing late and over-budget. Too many projects, particularly, in the public sector, had shown overrun in time and many claims and disputes are related to delay and/or disruption.

There seems to be a lack of know-how and knowledge of the method by which delays may be demonstrated to have occurred or by which the time element of such delays could be clearly related to their causes and the financial impact of such delays and/or disruptions. All too often the aggrieved contracting party who are preparing the time analysis do not understand the legal implications and requirements, and they leave it to their lawyers to handle their grievances, in the hope to receive a just compensation and award. Unfortunately, these lawyers may not really understand construction methodology and logical acceptable planning techniques, which are being used.

Typically, these contractors would make a number of complaints of many things, which were purported to have delayed or disrupted his works or programmes, such as the amount of variation works, the timing of instructions, changes to the scope of works, the delay or lack of information necessary for the implementation of the project.

Very little information about the facts of the delays could be produced and little explanation could be offered of how the relationship of the change which were alleged to have occurred were said to have affected the time or cost for performance of the works. The project architect or engineer would then analyze the claims submitted by the contractors and they would often perused them on a global basis without any systematic or logical analysis of time or the effects of the events on costs.

Delay and Acceleration Claim

Delays and acceleration issues in contract disputes are probably the most complex issues in contract claims. The complexity arises mainly due to the factual criteria of assessment of whether an issue is excusable or nonexcusable, whether the issue occurs in isolation or concurrently, or as a serial result of one or a combination of excusable or nonexcusable issues.

In the event of a delay, to establish an entitlement to time extension and delay damages, it must be substantiated that the delay impacted the contract completion date and that loss and expense had been incurred arising therof from the instructions which caused delay. The cause-and-effect relationship must be identified, quantified, and supported by contemporaneous documentation. Having established entitlement, alleged damages must be substantiated and supported by project records.

Entitlement

The rights for entitlement to extension of time and/or for loss and expenses incurred resulting directly or indirectly from the purported delay for reasons beyond the control of the contractor, is usually incorporated in the contract clauses pertaining to time extensions, variation, S.O. Instruction, and Loss and/or Expense. Contract must provide the power to the S.O. to extent time if the cause of the delay is attributable to actions or inactions beyond the control of the contractor. The variation clause also empower the S.O. to instruct changes which the contractor must comply and provides that any lawful instruction for change shall not vitiate the contract. The extension of time clause empower the S.O. to address the time extension by specifying that the contract time are to be adjusted as a result of changed instructions. A direct relationship must be established between the change instruction, the delay, and the contract completion date. If the relationship becomes difficult to establish or is nonexistent, a dispute may arise.

When analyzing delay, it is necessary to determine the cause of the delay, which would require it to be supported by contemporaneous documents. Delay issues are generally classified as follows:

1. Excusable compensable delay – delay that is within the control of the owner and provides for a contract time extension and compensation to the contractor.
   
   
2. Excusable non-compensable delay – delay that is beyond the control of the owner and the contractor. In this case, the contractor is entitled to time extension but not entitled to compensation (loss and/or expense).
   
   
3. Non-excusable delay – delay that are within the control of the contractor (culpable delay due to the contractor’s own fault). Should the contract completion be exceeded, the owner will then impose the liquidated damages clause as provided in the contract.
   
   

Classifying delays are complex and difficult as delay may be such that the owner and contractor are each responsible for delaying different activities during the same or overlapping time periods, and both of these activities may be critical to the completion of the project as a whole.

Complexities in resolving delay entitlement are further increased when the serial effect of a delay is considered. For example, if work has been delayed by an excusable compensable delay and was rescheduled to a time where a strike occurs, the delay resulting from the strike could be argued as compensable. But if the same work was delayed by a non-excusable delay, the argument that the contractor is not entitled to a time extension would exist.

Entitlement analysis is usually based on the identification and quantification of excusable delay issues. But it must also be determined, however, whether a non-excusable delay is concurrent with the excusable delay or by itself impacted the contract completion date. Documenting and proving impacts to the contract completion date are critical to supporting entitlement to time extension and damages claims.

Generally, one of the primary requirements for entitlement is written notice. The notification requirement provides the notified party with the opportunity to review the condition and take action to resolve or mitigate its impact. In the absence of notification, project documentation may be the source to prove knowledge of the issue (that both parties are aware of the issues), thus waiving the written notification requirement.

Loss and/or Expense Claims

Claims for loss and/or expenses for delay and disruptions are often subject of disputes and therefore, it is necessary to understand the theories of damage recovery.

Owner’s damages regarding delay are usually specified and defined as Liquidated Ascertained Damages (LAD) in the contract agreement. It is normal practice in construction contracts that the owner and contractor agree to provisions fixing in advance at the time of contract, what sum will be payable by way of LAD in the event that the contractor could not complete by the stipulated time, and without excusable reasons. When the breach is committed, then the contractor is prima facie liable for the sum stated in the contract (appendix to the contract). The contract must have a completion date inserted to define a definite date to act as a starting point and a definite end date. If the completion date has passed due to the culpabaility of the owner for which no extension of time can be granted, the owner’s right to LAD will be lost.

Generally, if the contract documents stipulate LAD, owners cannot purport to seek recovery of unliquidated or other consequential damages or loss. Liquidated damages are defined as an agreed sum of monies, usually represented as a daily amount. The amount must represents the estimated cost to the owner of not having the contract completed on time. Liquidated damages must be shown to represent a genuine pre-estimate of the owner’s anticipated damages arising as a direct result of the delay in the project completion caused by the contractor’s failure in performance. It is important that the liquidated damages represent a reasonable attempt at estimating the real damages, or these damages may be interpreted as a penalty, which is not enforceable by the court. To be valid and enforceable, the estimate must be prepared at or before the time of contract award and must represent a fair and reasonable compensation. Liquidated damages will not be enforceable if it is proved that the owner did not suffer actual damages because of the delay (see: Selva Kumar v Thiagarajah). The same principle applies to liquidated damages that have been set too high. Clauses providing for actual damages to be paid to the owner require the owner to itemize and substantiate its claim for such damages. The itemization and substantiation includes providing records of the costs that were incurred as a result of the delay.

Recovery

Contractors seeking recovery for delay damages may include impact costs such as loss of efficiency and extended general conditions. Efficiency losses are the result of work disruptions, rescheduling and stacking of trades, and performing work in unanticipated conditions. General condition costs claimed for the delay period include extended overheads and administrative expenses, site supervision, management, construction equipment, site office and site facilities, monthly operating costs and similar items.

To recover the costs of labor efficiency requires the contractor to establish the progress it expected to achieve with its use of anticipated resources, substantiate the cost required to achieve the actual progress, and prove that the increase in costs is related to a compensable delay issue. An effective approach to establishing the extent of efficiency losses is to show what productivity was realized on the project during periods of no disruptions or other impact. This is then compared with the productivity realized during the period of dispute.

To recover the damages due to extended general conditions, the contractor must substantiate the cost by itemizing the expenses expended during each delay period. If the period cannot be isolated, it may be necessary to determine the costs for general conditions for the project duration and use an average daily rate.

Similarly, the contractor is also entitled to seek recovery for its office overhead and administrative expenses. The theory is that the contractor was required to maintain its overhead expenses while not receiving expected contract revenue during the delay period.

Acceleration

Claims for acceleration costs is another complex issue and is generally classified into two type:

1. Actual acceleration
2. Constructive acceleration.

Actual acceleration is experience when the contractor is directed by the owner to complete the work earlier than the contract completion date. Constructive acceleration exists when:

1. A delay existed that was excusable and warrants a time extension;
2. The owner refused a time extension request;
3. The contractor performs in an accelerated method as a result of the owner’s instruction;
4. The contractor incurs additional costs as a result of accelerating its work.

The entitlement to acceleration costs is dependent upon which party was responsible for the project delay at the time acceleration was required or directed. If it is determined that the contract completion date will not be met, the owner may direct the contractor to accelerate its work and meet the contract completion date.

If the owner is responsible for the delay resulting in the completion date not being met, then the acceleration is viewed as compensable to the contractor. If, on the other hand, the contractor has caused culpable delay to the contract completion date, and the owner then directs the contractor to accelerate its work, the costs associated with the acceleration are against the contractor.

The owner may not order an acceleration of the progress of the works or require the contractor to put in extra or additional resources without the attendant risk of such additional costs, loss and/or expense to the contractor in so obeying the owner’s instruction to be borne by the owner [Sundra Rajoo p.213].

Costs of acceleration may include premium pay such as shift differential and overtime, additional resources applied (labour, material, machinery and equipments), loss of efficiency, additional overheads and administrative expenses. To assess the entitlement, a cause-and-effect analysis needs to be undertaken.

Claims for Delay or Disruption

Contractor ‘s claim for delay and disruption are commonly brought under these heads:

1. Increased preliminaries
2. Overheads
3. Loss of profit
4. Loss of productivity or uneconomic working
5. Increase cost from inflation
6. Interest for non-payment of money

It is not the function of the courts where there is a breach of contract knowingly…to put the plaintiff in a better financial position than if the contract had been properly performed.

TO BE CONTINUED IN CHAPTER 3 .......

Construction Claim & Dispute Resolution

CHAPTER 1: INTRODUCTION

There are usually a large number of parties involved in a construction or engineering project with differing responsibilities. These differing responsibilities will inevitably lead to different priorities. It is in the nature of contracting that the parties to the contract will have conflicting interests. Contractors would normally want to be paid as much as possible and for as little risk as possible. Conversely, owners will want to pay as little and as late as possible and possibly and/or forcibly, transfer all risk, expenses and cost to the contractor.

In most construction and engineering contracts, some things may be overlooked, are wrongly perceived or wrongly interpreted by one party or another. For whatever reason they are overlooked or misinterpreted, the result is that time is taken up and costs are incurred. In the event that the party incurring those costs believes that he is not suppose to bear the cost, he will certainly look for reimbursement from the other parties and dispute then often ensues.

In projects such as building construction or civil engineering works, the contract document consist of a trade-off between the contractor’s price for undertaking the work and his willingness to accept a certain degree of risk. Who bears what risk and at what price is simply a matter of commercial negotiation with the outcome often depending upon the skill, influence and power of negotiation of the parties concerned. The methods by which the risks are distributed between the distributing parties will depend not only upon the procurement method but also the form of agreement under which the works are procured and the duration of the contract under which the risk is assumed.

Construction contract disputes and claims are a reality and every management must be prepared for this eventuality. Project directors must from project initiation develop his project team to include someone who has reasonable competency in the knowledge area of contract law and configuration management.

Therefore, project documentations and project reports must be prepared with an eye to building cases and documentary evidence to support contention. Delays, damages and acceleration are complex issues from an entitlement determination and cost quantification viewpoint.

Contract documents are the basic foundation of construction claims analysis that focuses on establishing entitlement and proving damages. Timely completion of the construction works by the contractor is of great importance because of income and profitability consideration. Given the complexity of proving such damages, it is highly probable that parties will incur expense and be in dispute in proving their loss or defending it.

Construction contracts contain clauses to facilitate the execution of changes to the intended scope of work. These clauses define the responsibilities of the parties, allow for changes to the work, provide evidence to support the reason for extension of time when project is delayed beyond completion date, define the methods for pricing the changes and claims for damages, provide for rescission of contract if necessary, and stipulate the means of for a resolution in the event of dispute.

The contract documents may be the source of major disputes centering on the responsibility of the specifications. Construction changes during the execution of the work often result in claims. These claims may result from contradictory or ambiguous language and specifications, errors or omissions, or work that is impossible to perform according to the documents.

Other issues resulting in claims include disputed change orders, varied site conditions as opposed to the time of tender, apparent authority, and overzealous or improper inspections and instructions.

Construction claims often result from misinterpretation and improper administration of the contract documents during project implementation. Construction claims also occur because of misunderstandings concerning the rights, obligations and responsibilities of parties to the contract. This often leads to the waiving of one’s rights as provided for by the contract.

TO BE CONTINUED IN CHAPTER 2 ....

Heaven & Earth

Heaven & Earth


Who is number one?

Objectivism will lead oneself to the position aspired.

Project Management Information System

Information is a valuable resource. Every manager has to know that he is acquiring, producing and using information wisely and effectively in support of the organization’s goals and objectives.

Managing information requires the imposition of order, structure and discipline within a strategic direction. Information management is aided by the availability of technologies, methodologies, and development tools.

New forms of structure and technology dictate and make available new requirements for information systems. These new forms may need new types of staffs to develop and support them. This, in turn, will lead to new approaches to the training and development of information systems and information management staffs – staffs who will understand the technology, the information requirements of the business and its component parts and how information is best structured and stored to make it readily and effectively available as it is needed.

The availability of new and modern Technology has vastly increases our ability to access resources, both those we own and control and those outside of our own sphere of influence. As information management becomes more important every day, managers will need to ensure that people within the organization get the information they need to do their job effectively. Competitive advantage of organizations is very much governed by the effectiveness with which we manage these information resources.

Information systems now also extend over most areas of an organization. Once computers were restricted to the accounts department, but nowadays, we expect to see them on the shop-floor, controlling machines, warehouse – everywhere where work takes place. This means that more and more information is moving around the organization and needs to be managed. Once information was easily identified – it took the form of paper documents; today, it comes in a variety of forms. It is too valuable a resource to be allowed to move around unplanned and unchecked – and it is also a danger, in that too much of it clogs up our system.

The project management information system (PMIS) contains the intelligence essential to the effective planning, organizing, directing, and control of the project. All too often projects are characterized by too many data and not enough relevant information on where the project stands relative to its schedule, cost and technical performance objectives as well as the project’s strategic fit in the parent organization’s strategies.

Information is essential to the design and execution of decisions allocating resources in the management of a project. Decisions coming out of the planning and control of the project must be based on timely and relevant information. Project managers and his team members require information by which intelligent decisions can be made and executed effectively. Information flow is a critical consideration in the speed and eloquence with which the efficient and effective use of resources is carried out in meeting the purpose of the enterprise.

Information systems for organization include the formal information that is required to portray the organization’s posture, strategies, and performance, and the informal information which includes verbal communication which are informal and unofficial. This informal information can provide project managers with insight into how people really feel about the project.

The objectives of an information system are to provide the basis to plan, monitor, integrate project evaluation, and to show the interrelationships among cost, schedule, and technical performance for the entire project and for the strategic direction of the organization. In addition, information should provide a prospective view to identify project problems before they occur, so that they can be avoided or their impact minimized. Information is also required by the project team to continuously monitor, evaluate, and control the resources used on the project. There is also a need by senior management to be kept informed of the status of the project. The hardest part of any management job is not having all the necessary relevant information, yet having the responsibility of making the ‘right decision’.

In the construction industry, it is important that project information is shared between the project stakeholders so as to promote trust and to enhance a more mature relationships amongst them. Sharing of project information is one of the more important dimensions of keeping the team members working together cohesively and concurrently in the utilization of the project resources. Such sharing also facilitates the building of networks with the stakeholders through continuous interpersonal contact and dialogue.

It must be remembered that information has no real value and does not automatically lead to an effective management process. Information does not ensure success, but lack of information can contribute to project failures. Information and data is not equal. Data is merely raw material of information. Collected data are structured into meaningful elements and then transformed and refined to meet the needs of management.

Information provides the intelligence for managing the project. Information must be processed so that decisions can be made and executed. Information is essential to promote understanding, to establish project objectives and strategies, and to develop mechanisms for control, and forecast future performance, resources required, and to recognize changes. Information is needed to prepare the project plan, develop budgets, create and use schedules, and to lead the project team to a successful conclusion of the project. The project planning function establishes a structure and a methodology for managing the information resources which encompass defining, structuring, and organizing project information, anticipating its flow, reviewing information quality, controlling its use and source, and providing a focal point for the project’s information policies.

Project Management Softwares

Computers are the backbone of today’s information systems which form an integral part of project management. Computers are in essence data and information processors. If properly applied and managed they can greatly enhance productivity and improve quality, providing company with a competitive advantage.

In many construction companies, most management resides in the hands of those who graduated decades ago with little exposure, if any, to computer technology. Such individuals are faced with the difficulties of understanding the value and use of computers in the daily project life.

At another level, decentralization of information technology boosted productivity of those armed with proper knowledge in their fields and in the field of computing. Proper applications of remote computing make it possible to solve problems hundreds or even thousands of miles away from the project site without any loss of details or input from the project management personnel. Advance data collection techniques provide better control on cost, time, and quality as well as future estimates. Scheduling exercises of CPM or precedence take very little time to process once the schedule is set. Estimating becomes more reliable with proper use of software that facilitates reuse of unit costs and package or work assemblies.

A large number of procedures and methods have been developed to enhance the application of project management to a vast range of industrial and administrative functions. This rapid spreading of project management is largely due to the availability of computer software packages that make it possible to quickly implement project management techniques.

Computer programs for project planning and control have been available for a long time. A software package must be able to meet the needs of a project. There are numerous commercial software packages available. Although most project management software programs can run on the basic PC computer system, users of programs with graphical user interfaces often require a more powerful system.

Some of the project management softwares include: Microsoft Project, Artemis Project, Primavera, Suretrak Project Scheduler, Open Plan, Spreadsheets, Word processing softwares, & Etc, Etc.

Computer- processing applications in construction industry are becoming more and more common as many companies have realized the benefits inherent in such products. In the highly competitive construction field, the need to reduce costs and increase speed of delivery is paramount.

Computer applications, which have been used in the industries, may be broadly classified into four major categories [David Cleland, 1999]:

Administrative softwares
Engineering & design softwares
Project management & control, and
Plant and equipment control.

With the speedy growth and development in technologies and the continuous availability of development tools, this may allow for the creation of modules or building blocks for systems which allow rapid development of individual, functional systems around a common data structure.

The cost of integrated project control system software currently available is relatively high, which preclude most small businesses from acquiring these programmes. Alternatively, small corporations will need to develop their system using spreadsheet and word processors, but the reliability and accuracy may be improper and unrealistic.

Unfortunately, these applications are mainly isolated tools that lack comprehensive computer-aided project management system capable of being integrated with the project management functions within the various functional departments of an organization.

According to the research of Ken Gregson (2001), many organizations face the problem of island-development of information system. Their information system may be individually very good but they have been developed in isolation of one another and thus there is no added value arising from the interaction of the various systems. “People use different information to take different decisions – and then is surprised when the decisions do not relate to one another… individual systems should be components of a wider system. The overall planning activity needs to establish where these sub-systems interact, where they need to overlap, where and how they need to communicate and so on especially where they need to share data”, says Gregson.

The Internet is changing how project team members work together on a project, which usually comprises a complex process of collaboration, co-ordination and communication. The Internet is playing a crucial role in ensuring greater efficiency and productivity. As professor Thomas W. Malone of MIT Sloan School of Management wrote: “The revolution under way today will be driven not by changes in production, but by changes in co-ordination”. The Internet enables project teams to connect to an integrated environment that bridges geographical locations, time zones and project domains. Virtual teams can collaborate productively at any time, from anywhere [IcFox, 2001].

Using the Internet platform for project collaboration will represent a new paradigm for the construction industry in the coming years. According to IcFox (2001), by the year 2004, it is expected that construction companies will spend up to US$1 billion (RM3.8 billion) on hosted and project collaboration softwares. In is imperative for construction companies to enhance efficiency and profitability by improving their tools and methodology to enable quantum leap improvement with lower cost.

Computer should not be used to replace traditional decision-making processes. The computer should be used only as a tool to facilitate the implementation of validated techniques. The primary value of the computer is the speed at which it will perform the quantitative analysis needed in developing schedules and generating a variety of outputs and reports.

Project managers therefore need to be aware of available and emerging technologies. Together, these lead to a development of an information strategy, which itself give rise to the development of integrated and compatible systems.

Construction Project Reporting System

All companies are required to have an integrated information system which includes estimating, job costing, accounting, payroll, and scheduling. A management information system is integrated by means of a cost code of accounts.

The features of a progress reporting system are:

Work breakdown structure
Physical percentage complete
Planned and actual duration
Earned Value and project cost updates
Status report and forecast report
Estimate at completion and Estimate to completion
Manpower availability, utilization and productivity report
Material procurement and distribution
Plant and machinery availability, productivity and usage
Financial summary, Progress payment, and project cashflow
Project technical documents report
Request for further information matrix
Procurement status report
Report Summary

Project accounting system include:

Accounts payable & receivables
Balance sheet
Profit and Loss Statement
Financial Ratios
Purchase & expenditure register
Contract costs
General ledger
Purchase order
Project cost detail and summary
Project Cash flow Statement

Project reporting system must fully integrate the following: a Cost System, Material Tracking System, and the Scheduling System.

A project Cost System must interface with the organizational's Accounting Systems, which shall include, cost of material, labor, equipment and machineries (and project overhead cost). The objective of a Cost System is to track and forecast costs for comparison against budget. Apart from the Accounting System integration, it is necessary to also have a Material Management System which will track the materials from the requisition stage through to surplus disposal stage. The Scheduling System requires several levels of reporting to meet the need of the management hierarchy and therefore should be capable of the “roll-up” techniques. A scheduling system must be capable of scheduling all the activities, identify critical activities, estimate the resources required and include resource leveling, progress updating and tracking, and be produced graphically.

Reporting and feedback must be accurate and timely if it is to be effective for control purpose. Feedback must occur to the project team as well as management level. Management level reporting, that is for owners, contractors and project management teams, must provide statements of accomplishments versus planned cost and schedule objectives, forecast final costs and completion period. It should also review current and potential problems and indicates action taken to overcome the effects of the problems.

Weekly or monthly meetings are held to assess the progress of work. The review meetings are aimed at translating latest work status and critical problems into specific action plan. Weekly or bi-weekly (perhaps monthly) reports with information on the actual and ‘forecast at/to completion’, and the quantities of workdone serve as the agenda for the review meetings. By analyzing the actual manpower, material distribution, and equipment usage, the allocation and availability of resources can be adjusted.

PMBOK 3

PMBOK3