The Rules of Engagement and Construction Claims: Towards a Smooth Construction Contract Execution and Responsible Claims Process

Chapter One: Introduction

There are certain assumptions that both the contractor and the owner possess when entering into a construction contract. These assumptions do not necessarily coincide with one another. The contractor should assume that the scope of work is sufficiently defined, the plans and specifications are complete and accurate, and the owner has fulfilled any requirements necessary to proceed with construction. The Owner, on the other hand, assumes the contractor is qualified to complete the work accurately and on schedule, and the price proposed is the total amount the owner will have to pay for the project. When these assumptions are not fulfilled, a claim usually ensues.

Many different approaches exist to administer a construction contract from the position of the owner or the contractor. There are simple ways that will get the job done and there are complicated ways to get the paperwork done. Neither of these ways will necessarily produce a successful project. A concise strategy to administer a construction contract is important and should support a successful project. Knowing and understanding this strategy can support or challenge construction claims.

From a contractor’s position, it is understood that one should have competent supervision and competent and effective workers, subcontractors, and suppliers. Additionally, a contractor should have a concise strategy that incorporates at least six rules of engagement that are critical to know and understand when entering a contract. These six rules include the following: 

1. Read and know the contract documents
2. Develop a comprehensive and accurate construction schedule
3. Prepare accurate and comprehensive daily construction reports
4. Notify the owner of issues
5. Keep track of costs
6. Maintain inclusive documentation

From an owner’s position there are six similar rules of engagement that are also critical to know and understand when entering a contract. These rules provide a concise strategy for administering a construction contract. The six rules include the following:

1. Read and know the contract documents
2. Understand and analyze the contractor’s construction schedule
3. Prepare accurate and comprehensive daily construction reports
4. Respond appropriately and timely to contractor’s notification of issues
5. Analyze and research contractor’s cost for performing extra work
6. Maintain inclusive documentation

If the owner and contractor both know and understand the rules of engagement for administering a construction contract, then they should know what to expect should a claim arise from the occurrence of a disruptive event.

Chapter Two: The Contractor’s Rules of Engagement

The contractor that enters into a construction contract with an owner assumes that the owner has accurately and completely defined the entire scope of work. This enables the contractor to project costs and profits and successfully complete the project. This assumption is made on the basis that the plans and specifications are complete and accurate, nothing is left to guesswork, and the contractor is allowed to accurately price the work. An additional assumption made by the contractor is that the owner has fulfilled any requirements necessary to proceed with construction. Such requirements may include the following: the plans are permitted, the land upon which the project is to be constructed is available and free of obstruction, financing is secured, and everything is in place for construction. When assumptions such as these are not fulfilled, a claim will usually develop and the contractor must be ready. The six important rules of engagement must be understood and implemented by a contractor to effectively execute the contract.

Rule 1: Read and Know the Contract Documents

Reading and knowing the contract documents is a simple task but is, surprisingly, the most misunderstood task. Many contractors believe the contract documents simply include the basic contract and the technical specifications for the work. Many other contractors believe the contract documents are for the lawyers to know and understand as long as the contractor has the plans and specifications. It is important to convince the construction supervisors that the contract documents are not overly complicated and are intended to provide them with a roadmap to administer the contract. The contract documents will not build the project, but they will guide the building of the project.

The contract documents generally defined by the American Institute of Architects (AIA) as the requirements of a general construction contract include, at the minimum, the following: 

1. The Agreement or Contract between the owner and contractor. This is the main component of the contract documents.

2. The Conditions of the Contract. These conditions provide basic definitions to words or terms used in the contract and set forth many of the rights, responsibilities, and relationships of the parties involved in the contract. These conditions describe provisions of the contract and can be supplemented or altered specifically for the project.

3. A Modification to the contract after contract execution. This is generally a written agreement signed by both parties that alters either the scope of work or scope of the contract and becomes a part of the contract documents.

4. Project drawings and technical specifications. These are generally included as a reference within the contract documents.

5. Addenda issued prior to the receipt of bids or execution of the contract. These are also included in the contract documents.

The inclusive contract documents act as a roadmap for the contractor to follow in regards to contractor’s rights, responsibilities, and/or procedures to follow should an unexpected perceived change occur at the jobsite. 

Rule 2: Develop a Comprehensive and Accurate Construction Schedule

Developing a comprehensive and accurate construction schedule is also an important task that is misunderstood. Whether or not the owner requires a schedule, a schedule is a valuable tool that every construction project needs, especially if an untimely incident should occur. These project schedules do not have to be complicated CPM-type resource loaded schedules; they must, however, be accurate and current.

A comprehensive construction schedule notifies the owner, as well as the contractor, what construction tasks have been performed, are being performed, or are planned. Should the owner desire to change the scope of the work or add or modify the work, the owner must be given the opportunity to know when or if the work task is scheduled to be accomplished should the owner desire to change it. 

A comprehensive construction schedule informs the contractor of when specific material, equipment, or labor is needed to perform a specific work task. The accuracy of the schedule must include any updates to the schedule should changes or plans regarding a specific work task change. It is critical to inform the parties regarding the reason for the schedule change, whether it is a work task scope change or a modification to the execution of a work task. Even if the contractor was responsible for changing the timing or execution of the work task, an explanation is necessary in case other work tasks are affected. Should the scheduled time of project completion be impacted and become an issue regarding accountability, a complete tracking of all work task items is necessary to evaluate which work task may have contributed to the impact. Without a well-documented current construction schedule, the contractor and owner are left to recreate an impacted schedule analysis.

Rule 3: Prepare Accurate and Comprehensive Daily Construction Reports

The third rule of engagement recommends that the contractor prepare accurate and comprehensive daily construction reports. These daily reports should be inclusive of any and all issues affecting the project regardless of responsibility for the issues. These reports should accurately and comprehensively outline work progress. This allows the contractor to provide daily updates on productivity as necessary. Complete daily reports allow others to update construction schedules rather than consuming the valuable time of the superintendent/foreman. 

Any issue that affects productivity should be itemized on the daily reports to establish a record. Should the owner affect the contractor’s productivity a record can be established. If a subcontractor causes an issue, it should be recorded. If the contractor causes an issue, it should be recorded. Accurate, unbiased daily reports are creditable sources for establishing a record of events affecting daily work productivity. These comprehensive daily reports notify the owner of issues that may be referenced in a dispute situation. If accurate daily reports sink a contractor’s claim against an owner for lost productivity, then the contractor likely had no claim against the owner in the first place.

Rule 4: Notify the Owner of Issues

If a construction issue outside the expected occurs on a project, the contractor generally notifies the owner. The construction issues or discovery may or may not affect the contractor’s overall project productivity, but if there is the possibility of a productivity impact and the issue is not the contractor’s responsibility, the owner must be notified. What is important to understand about notification is the fact that most contracts define when, how, and why that notification is made. If this requirement is not followed, then any claim concerning the issues may not be valid. The timeliness and accuracy of the notification is important to the owner as well because it allows the owner the ability to correct the detrimental impact of the construction issue or, at least, understand the potential consequences of the construction issue.

The owner must be notified in the specific manner outlined in the contract. This is also why a job foreman or superintendent must be familiar with all of the rights, responsibilities, and relationships of the parties involved in the contract. The one contract requirement that is generally not available at the time of notification is the cost impact of the construction issue. Even though the contract may require the contractor to provide within the notification process the cost impact of the construction issue, it is a generally accepted practice that the potential cost impact can be estimated. This potential cost impact is necessary for the owner to be allowed to make a realistic judgment call about the impact of the issue. If the issue is an extra work item, the owner may decide to perform the work later. If the issue is going to affect the timely completion of the project, the owner can weigh any alternative opportunities. Either way, the owner has the right to be properly notified of a detrimental construction issue impact.

Rule 5: Keep Track of Costs

An obvious rule of engagement that is usually understood and complied with by most contractors is keeping track of all costs; however, the method of tracking costs differs from contractor to contractor. Even the simplest costing system can be utilized if the lowest level of tracking is comprehensive enough to establish the actual cost of specific issues that need to be evaluated. 

Correct cost system application is based on the accurate and complete input of data; therefore, the personnel inputting the data must understand the cost system. The data input must be done at a level where one understands the reason for and results obtained from accurate cost information.

In many contracts, the owner is allowed to audit the costs of the contractor. Thus accurate and comprehensive cost reports are paramount should extra costs incurred by the contractor be claimed for extra work. Though it is not recommended that the owner be issued contractor cost reports, the costs for change orders cannot be disputed if the change ordered work was performed efficiently and the specific costs recorded accurately.

Rule 6: Maintain Inclusive Documentation

Maintaining inclusive documentation, the last rule discussed in this chapter, is certainly not the final rule of engagement for contractors. It is, however, an inclusive rule that incorporates most of the previously discussed rules. It goes without saying that accurate and timely documentation of detrimental construction impacts should assist in the mitigation of construction claims resulting from such impacts to a project.

A job documentation accounting system is paramount, even if the project runs smoothly and completely without any lost productivity or cost overruns. An ideal project is the best training tool for the next one, and a complete and inclusive document history is necessary.

Many project management software systems incorporate documentation identification and numbering systems. It is critical to maintain inclusive documentation using the system designated for the project. This document maintenance includes adding information from written notes and conversations. This way, once a claim is established, all information is documented in the system and not on pieces of paper. The contractor who maintains inclusive documentation can more effectively establish entitlement for costs.

Chapter Three: The Owner’s Rules of Engagement

The owner, like the contractor, enters a construction contract with some basic assumptions. The first assumption is that the contractor is qualified to complete the work accurately, has sufficient support staff to manage the project effectively, and has financial support necessary to work within the payment provisions of the contract. The owner also assumes that the contractor can schedule its work appropriately and efficiently to complete the project within the time limits allowed by contract. Finally, though no less significant than the other assumptions, the owner assumes the price the contractor proposed and contracted to build the project is the total amount to be paid. When these assumptions are incorrect, a claim will usually develop and the owner must be ready. An owner must understand the six important rules of engagement to effectively execute a construction contract. This paper identifies the owner as the management team established to execute the contract.

Rule 1: Read and Know the Contract Documents

Reading and knowing the contract documents is an unusual task for the owner since the contract is the owner’s contract; however, the architectural or engineering consultant likely prepared the documents, and the owner’s attorney likely developed the contract language. Some owners believe the contract documents are thoroughly understood by the contractor. The contractor, therefore, will abide by the contract making it unnecessary for the owner to be aware of the basic contract requirements. Other owners believe the rules are written only for the contractor and the owner has no requirements to follow. It is important to convince the owner that the contract documents provide a roadmap to manage the administration of the contract. These contract documents act as a roadmap that allow the owner to follow directions concerning the rights, responsibilities, and/or procedures to follow should an event occur other than what was expected by the contractor.

Rule 2: Understand and Analyze the Contractor’s Construction Schedule

Understanding and analyzing the contractor’s construction schedule is critical to an owner’s ability to manage the project. Most owners require a comprehensive construction schedule to be developed and maintained throughout the progress of construction. These project schedules do not have to be complicated CPM-type resource loaded schedules; they must, however, be accurate and updated on a routine basis.

As long as the owner understands the construction schedule, the owner will know what construction tasks are completed, current, or planned. This allows the owner to better acknowledge the amount of work that has been performed, if the payment for such work is based on partial payment for work performed. A high risk an owner faces is over paying for work that is alleged to have been performed. The contractor’s updated construction schedule also gives the owner the opportunity to know when or if a work task is scheduled for completion, should the owner desire to change the scope or work.

A comprehensive construction schedule also details when specific material, equipment, or labor is needed to perform a specific work task. An owner that understands the schedule can readily evaluate the timeliness and status of the contractor’s performance based on the use of scheduled material, equipment, and/or labor. The contractor must maintain the accuracy of the schedule, and the owner needs to be assured that the schedule updates are accurate. 

The owner should understand the reasons for changes in the timing or execution of the work task, should other work tasks be affected. Should the scheduled project completion time be impacted and become an issue between the owner and the contractor in regards to accountability, a complete tracking of work task items will help determine the work task that caused the impact. Without a well-documented current construction schedule, the contractor and owner are left to recreate an impacted schedule analysis.

Rule 3: Prepare Accurate and Comprehensive Daily Construction Reports It is not often that an owner takes the time to prepare accurate and comprehensive daily construction reports. This important task is often left to the contractor to perform. The contractor will generally write contractor-biased reports, even though biased reports tend to discredit the reports’ accuracy. Even if the contractor writes non-biased reports, owners should take the time to complete their own written records of job progress. The owner’s daily reports should be inclusive of any and all issues affecting the project, regardless of responsibility for the issues. These reports should accurately and comprehensively report work progress. The owner may not be able to accurately reflect all work progressed, however, the owner can generalize certain progress and as well as the lack of progress.

Should the contractor affect its own productivity by an act or omission, a record can be established. Accurate, unbiased daily reports are creditable sources for establishing a record of events affecting daily work productivity. These comprehensive daily reports notify the contractor of issues that may be referenced in a dispute situation. If accurate daily reports sink an owner’s dispute with a contractor for lost productivity, then the owner should reimburse the contractor for its lost productivity.

Rule 4: Respond Appropriately and Timely to Contractor’s Notification of Issues

If a construction issue outside the expected occurs on a project, the owner must be notified. The construction issues or discovery may or may not affect the contractor’s overall project productivity, but if there is the possibility of a productivity impact and the issue is not the contractor’s responsibility, the owner must be notified. What is important to understand about notification is the fact that most contracts define when, how, and why that notification is made. If this requirement is not followed, then any claim concerning the issues may not be valid. If the contractor’s notification of an unexpected issue to the owner is timely and accurate, the owner also has an obligation to respond appropriately and in a timely manner. Proper notification allows the owner the ability to correct the detrimental impact of the construction issue or, at least, understand the potential consequences of the construction issue.

There are rarely definitions of what is considered a timely response to a contractor’s notification of a detrimental impact on its performance. A reasonable response time is not an accurate definition, but the owner must be reasonable in its response. Generally, the owner, through its architect, engineer, project manager, or other technical expert must evaluate the issue, evaluate the timing and/or cost of the impact of the issue, and finally forward instructions to the contractor. These instructions are generally drawings or requests for a proposal of costs.

The contractor cannot usually wait until the owner has provided all of the required detail information. The contractor must, however, be advised as quickly as possible of the owner’s intentions. A timely response from the owner allows the contractor to adjust the work schedule accordingly and prevent or decrease any loss to productivity. The owner must understand that it costs money to recover time lost by a contractor on a project.

Rule 5: Analyze and Research Contractor’s Cost for Performing Extra Work

It is generally recognized that during the progress of a construction project, extra work items will be performed. During the time to contract, drawings are prepared and the contract is executed; except for the smallest of jobs, things can change. For example, the owner may change its mind about some items or innovations may motivate the owner to add additional work. Most extra work items are routinely cheaper to perform during the initial construction than after the project is completed. For these reasons, an owner should competently evaluate the cost of any extra work items.

In many contracts, the owner is allowed to audit the contractor’s costs. If this provision is not allowed, the owner must have other resources to evaluate any cost proposals generated by the contractor for extra work. There are many resources available to the owner for this purpose. There are published guides on estimation such as those published by the R. S. Means Company. There is construction-estimating software available for the technically savvy owner. Whatever methodology the owner uses to verify and approve a contractor’s cost proposal, a consistent record should be maintained to track labor productivity, hourly rates, labor burdens, equipment usage, and overhead and mark-up cost.

Rule 6: Maintain Inclusive Documentation

Maintaining inclusive documentation, the last rule discussed in this chapter, is certainly not the final rule of engagement for owners. It is, however, an inclusive rule that incorporates most of the previously discussed rules. Accurate and timely documentation of detrimental construction impacts should assist in mitigating construction claims resulting from such impacts to a project.

A job documentation accounting system is paramount, even if the project runs smoothly and completely without any lost productivity or cost overruns. An ideal project is the best training tool for the next one, assuming the owner will build another project.

Many project management software systems incorporate documentation identification and numbering systems, and an owner can specify a system in its contract that the contractor can use. It is critical to maintain inclusive documentation using the system designated for the project. This maintenance includes adding information from written notes and conversations. This way, if a claim is established, all information is documented in the system and not on pieces of paper. The owner that maintains inclusive documentation can more effectively establish entitlement for costs or defend against contractor claims.

Chapter Four: The Construction Claim

When both the contractor and the owner follow their respective rules of engagement, the resulting project is not assured to be claim free. A construction claim, on the other hand, does not necessarily result from disputes among the parties. A claim can develop concurrently with an event that disrupts the construction progress, or it can develop after the results of the disruption are thoroughly reviewed and all cost impacts are evaluated. Claims can develop from both the contractor’s perspective and the owner’s perspective. An owner’s claim against the contractor is somewhat unusual, but it can occur.

There are many different approaches for administering a construction contract from both the owner’s position and the contractor’s position. If both the contractor and the owner follow their respective rules of engagement, the process of claim evaluation can be simplified. A concise strategy to administer a construction contract is important and should support a successful project. Knowing and understanding this strategy can support or challenge construction claims.

The basic theory behind construction claims remains simple; the claims, however, have become extremely complex. Successfully proving and pricing claims requires an extensive knowledge of key elements of the claim and the ability to illustrate the facts and/or position persuasively. Successfully challenging a claim also requires an extensive knowledge of key elements of the claim, the ability to illustrate the facts, and the ability to respond persuasively to the pricing of the claim.

Construction claims can result from many issues including the contractor’s assumptions of the owner’s duties as well as the owner’s assumptions of the contractor’s duties. When these assumptions differ, a claim results. Claims can result from impacts to the contract from delays, disruptions, or loss of productivity.

Chapter Five: Conclusion

If the previously discussed rules of engagement are followed, the contractor will have a thorough and complete knowledge of the contract requirements and will have preserved its contractual rights. Any disruption in the construction schedule would have been described comprehensively and accurately in the updated construction schedule and daily reports. Once the disruptive event occurred, the owner was properly notified of issue. An accurate and effective cost control program allowed the contractor to assimilate and document the costs of the disruption. This claim preparation activity was well supported by an inclusive documentation program that detailed each issue.

The owner, on the other hand, having followed the previously discussed rules of engagement, also had a thorough and complete knowledge of the contract requirements and would have preserved its contractual rights. Any disruption in the contractor’s construction schedule would have been evaluated in the updated construction schedule and the owner would have a chance to evaluate the issues at the time of occurrence. The owner would have maintained its own daily reports that would be used to compare with the contractor’s interpretation of the event and the effect of the event on its schedule. Assuming the notice of the event was properly disclosed, the owner would have quickly and thoroughly evaluated the event and mitigated potential cost increases at the time. The owner had effectively and routinely maintained an accurate methodology to verify and approve a contractor’s cost proposal for previous extra work items and, by maintaining these records, should track labor productivity, hourly rates, labor burdens, equipment usage, and overhead and mark-up costs that would support an affirmative claim. This claim defense mechanism was well supported by an inclusive documentation program that detailed each issue.

Source: Philip D. Barnard

Released: July 30th, 2007 11:00 AM

Phone: (713) 626-2525

Fax: (713)626-2555

Email: pdbarnard@interface-consulting.com

Category: construction claims analysis

Subcategory: interface