Episode 47:

Hello and Welcome to the Part3 with me podcast, 

The show that helps part 3 students jump start into their careers as qualified architects and also to provide refresher episodes for practicing architects. I am your host Maria Skoutari and this week we will be talking about Claims in general and next week I will be covering Loss and Expense Claims — PC1, PC3 & PC5 of the Part 3 Criteria.

As we all know, construction projects come with complexities and a number of uncertainties. Given their length there are bound to be a number of changes throughout its process and however accurate the authors of the construction contract are, there is always the small possibility that an issue may arise that falls outside of the scope of the contract. 

So when a disruptive event occurs under the contract, for example because of a delay to provide the design information to the contractor on time, the contractor as a result will incur a loss and will seek reimbursement under the contract, so under such a scenario, the document produced to encourage the client to reimburse the contractor for the losses, is know as a ‘claim’. 

The term ‘claim’ can be used to describe two different types of request, described as:

• An application for reimbursement of direct loss, expense and /or damage arising from a clause in the contract the creates such an entitlement,
• And the second, is a claim for damages arising from a breach, or a series of breaches of the contract conditions. 

So what are some common reasons for claims to arise:

There are typically three main reasons for the submission of claims:

• The first, and most common, being that genuine grounds for a claim have arisen but due to a lack of  sufficient records the claim can’t be proved, which typically happens if a contractor for example acted on oral instructions or from their own initiative believing its for the best interest of the project, or another instance may be if the contractor has been issued with documented instructions or granted extensions of time but the contractor failed to keep records of the resulting losses. In either scenario the claim will be considered weak due to the lack of supporting information and the claimant may have to resort to submitting an unparticularised, global or rolled-up claim, which I will expand on in further detail later on.
• The second reason for a claim, is that the contractor has genuinely incurred a loss on the project and seeks to have those losses reimbursed. In some occasions the contractor won’t be certain why these losses have arisen but they will be certain they didn’t cause them, for example due to inadequate supply of labour and materials, or due to price inflation on labour, materials and contractors, which is what we are currently seeing in the market. So the contractor will have to demonstrate these losses occurred due to acts or omission of the client but these cases typically lead in failed claims. 
• And the third reason for the submission of a claim, is known as a speculative claim, whereby a strong contractor may find weakness in an architect or employers representative and sees it as an opportunity to pressure them into granting instructions and extensions of time.

In each of these claim cases, the claimants intention is to improve their financial position beyond what is contractually and legally supported. 

Of course claims tend to rise due to conflict between parties which can easily add 20% or more to a projects final cost. So how can conflicts and claims be avoided in the first place:

Common reasons for conflict tend to rise due to:

• Proceeding on a design that is incomplete or needing significant changes 
• Tendering too early in the design process
• Poor choice of tenderers and/or selection of a successful bidder
• Using an inappropriate standard from of contract or bespoke contract 
• Refusing to implement or comply with design freeze dates
• Refusing to allow a reasonable time for completion

To avoid claim and conflicts arising from the common situations just mentioned, it is wise and more economical to allow contractors to complete the contract works as planned and retrofit changes later on a fixed price quotation. When it comes to contract conflicts, to avoid such situations leading to conflict it is best to seek legal advice when amendments to the contract wording are required to pre-empt a claim for rising. And generally to avoid any of the scenarios mentioned from occurring that would lead to a claim, early design completion should be aimed for along with an agreed design freeze date, minimal changes as much as possible, tight administration control, realistic time scales for completion, constant valuation of changes as the works occur and prompt resolution of disputes. We all know this tends to never happen due to the unpredictability of projects but as architects we can aim to guide the project down this path as much as we can in exercising reasonable skill and care. 

So what is the process when a claim is received:

1. Lets start with claims received under contract:

So most standard JCT building contracts, and other forms, enable contractors to be reimbursed under the contract for time and money lost due to delay and disruption and majority of contracts will typically define the circumstances in which money and time claims can be made by the contractor. A typical wording example within the contract for money loss will be stated as ‘loss and/or expense’ which as a term covers the money lost that ought to have been received and the expenditure of extra money not intended for. 

For example, under the JCT Standard Building Contract, the contractor will be able to recover direct loss and/or expense if the works where impacted due to what’s described within the contract as ‘relevant matters/events’, I would advise you to refer to the JCT Standard Building Contract for a break down of the relevant events or to listen to Episode 33.  

So under such circumstance, the contractor would typically rely on the contract terms to raise their claim and for it to be successful as long as the contract was properly administered and worded from the beginning. 

2. Then we have claims made for breach of contract:

As mentioned in the beginning of the episode, contracts will never be able to capture every event arising and as a result contractors may encounter difficulties that are not listed as ‘relevant matters/events’. In such cases there are two scenarios:

• The parties to the contract agree to amend the contract between them to manage and/or resolve the issue
• Or they do noting and await for a claim that the contract has been breached 

Examples of breaches of contract can include the architect refusing to change the completion date, or the architects refusing to certify appropriately and so on. If the contractor successfully proved that a failure isn’t covered by the contract then it stands a chance to be considered under the general law. 

3. Then you have Intermingled claims:

Which is the process of pursuing claims under the contract and extra contractual claims separately. For example, a contractor claimed that 1. they had late possession of the site, 2. that significant changes were made after installation had taken place, 3. that drawings were delivered late, 4. instruction and variations were issued and concluded, 5. extensions of time were not granted and 6. the contractors employment was terminated - so under such a scenario, some of the events 2-4 would fall under relevant events but others wouldn’t such as 1 and 5 - the employment termination could have been resolved under the contract conditions but the contractor didn’t accept this which would lead to the case ending up at litigation when it can be resolved without involving the courts and saving everyone both time and money. So every method should be made to permit claims to fall under the contract terms so they can be ascertained under the control of the architect and quantity surveyor to avoid third party involvement.

Now lets look more closely at the claimants, which can be the contractor, obligations and liabilities:

First and foremost, the claimant must specify their claim sufficiently to allow the respondent to understand the case and enable them to answer appropriately. So they must provide sufficient detail in the Points of Claim to enable the responded to defend their position and prove they have been wronged resulting in loss and damage and the claimant is expected to prove the financial implications of the damage by using reasonable calculations. 

Firstly the claimant must show that there is a legally binding contract between the parties creating rights and obligations and then the claimant must demonstrate that the contract terms and conditions give rise to an obligation or duty on the part of the respondent which has been breached. 

If it is established that the responded has certain obligations to the claimant under the terms of the contract then the claimant must show which of these obligations were breached, when they have been breached and how. Then the claimant must show that some financial loss has been incurred so they can recover their losses or to avoid financial penalties (excluding liquidated damages which as agreed and stated in the contract at the start).

So once the obligation breach and financial damage have both been determined, the claimant will need to establish that the loss had incurred due to the breach to be able to claim. For example, if a contractor can link their losses to individual causes and if they can prove an outstanding financial loss, the courts may allow some monies if its convinced that the losses arose from a complex interaction of events which can’t be separated.  

So what effect do claims have financially to the project:

So construction projects have a final account when they reach completion and any reimbursable costs incurred by the contractor can be recovered by the final account or through the loss and expense claim. 

The final account consists of the contract price, any adjustments for extra or reduced works, any adjustments of prime cost and provisional sums, an evaluation of daywork and an evaluation of the consequences of price escalation on materials, plant and labour. 

These items are typically the source for many disputes as there may be differences in opinion on the perceived evaluation for extra work or daywork. 

1. So lets look at some of these items that make up the final account, starting with adjustments for extra or reduced works most commonly known as variations:

So where the instructed work is to be valued by measurement, the contractor will have to show and argue that the characteristics of the work are different to what they were expected to carry out which may also result in extra timing required and so on and as a result they will be able to use rates found in the contract documents which will most probably be higher than their initial competitive tender pricing. So to be able to be reimbursed for these additional works the contractor must make sure that all items, as well as preliminary costs and overheads, are incorporated into the variation account. For items not covered in the variation account they will be covered under the loss and expense claim. 

2. If the work can’t be valued by measurement, then the daywork rate is added to the contract to be used to value the labour, plant and materials on a reimbursable basis. Reasonably, most employers don’t like this arrangement as they bare the risk of the contractors time and cost and they have no control over either. A potential way to monitor this is if the contract administrator demands daywork sheets so they can check them against their own records to make sure the contractor is working efficiently.  

3. Then we have the evaluation of the consequences of price escalation. Price escalation clauses in contracts allow contractors to seek reimbursement for the inflationary price increases affecting their costs during the construction period. This can be achieved either through the allowance of a fixed price addition to the contract price or the employer may adjust tender base date prices to reflect the period the work is carried out in.

So these are the most common methods in establishing the final account when reimbursable costs arise.

Next week I will be covering loss and expense claims so join me then for more information on that.  

So to sum up what I discussed today:

• Claims can be made under contract clauses, and the term ‘claim’ can be used in two different types of request, as
• An application for reimbursement of direct loss, expense and /or damage arising from a clause in the contract
• And the second, is a claim for damages arising from a breach, or a series of breaches of the contract conditions.
• A fully evidenced claim that establishes cause and effect and quantifies the losses for each event will probably succeed.
• Common reasons for submission of claims include, grounds for a claim has arisen but due to a lack of  sufficient records the claim can’t be proved, such a claim will be considered weak and the claimant may have to resort to submitting an unparticularised, global or rolled-up claim, the second reason for a claim, is that the contractor has incurred a loss on the project and seeks to have those losses reimbursed. And the third reason is known as a speculative claim.
• There are three processes when a claim is received, claims received under contract, claims made for breach of contract and Intermingled claims
• The effect claims have financially to the project is on the final account or through the loss and expense claim. Which I will cover in next weeks episode.