Avoiding Claims

1. Avoiding Claims MCA of Alaska

2. What You Need To Know • What claims are and how they operate • Identify conditions that create claims

3. What You Need To Be Able To Do • Answer the question, ‘Do I Bid This Job?’ • Create strategies that avoid claims on existing projects • Thus build stronger relationships

4. Theme • Avoid adversarial relationships that give rise to claims Looking for the second phone call

5. Avoiding Adversarial Relationships You’re angry. So you shoot a hole in my boat. Only trouble is, we are in the same boat.

6. FMI – Survey of Construction Industry Ethical Practices (2004) Rank the five most critical issues you face in your work 5. Bid shopping 4. Change order games 3. Payment games 2. Unreliable contractors 1. Claim games The Importance of This Topic

7. 10 Principle Causes of Construction Disputes (CII) 10. Managers who “pass the buck” up to a higher level or to lawyers. 9. A “macho” or litigious mindset by some 8. A lack of team spirit or collegiality 7. Failure to deal promptly with changes or unexpected conditions 6. Inadequate contractor management 5. Poor communication between parties

8. 10 Principle Causes of Construction Disputes (CII) 4. Contractors who bid too low 3. Ambiguous contract documents 2. Unrealistic expectations of the parties, particularly owners who have insufficient financing 1. Contract provisions which unrealistically shift project risks to parties who are unprepared to cover those risks

9. “4.3.1 A claim is a demand or assertion by one of the parties seeking, as a matter of right, adjustment, or interpretation of Contract terms, payment of money, extension of time, or other relief with respect to the terms of the Contract” Claim Components Entitlement Damages Relief Claims

10. Claims “15.1.1 4.3.1 A claim is a demand or assertion by one of the parties seeking, as a matter of right, adjustment, or interpretation of Contract terms, payment of money, extension of time, or other relief with respect to the terms of the Contract” AIA-201, 2007 Edition

11. Entitlement • A change occurred • The change was unexpected • The risk is borne elsewhere

12. Red Flag • Spearin Doctrine (United States vs. Spearin, 1918) “…a contractor who undertakes an entire contract for erecting a building is presumed, in absence of an express provision to the contrary, to have assumed the risk of unforeseen contingencies arising during the course of the work, unless performance is rendered impossible by the act of God, the law or the other party.”

13. Case Study • Replacement of a cooling tower • Owner selected equipment • $44,000 base contract • A/E drafted “conceptual” plan for owner.

14. Two Questions • Is the contractor entitled to a change order? • How could you avoid this situation?

15. Avoiding a Claim Before the Bid Section I

16. Avoiding a Claim Before the Bid • Most effective • Most economical

17. What is Risk?

18. Risk Management Steps • Identify risk • Quantify risk • Quantify reward • Account for risk/reward ratio

19. Risk/Reward Ratio Example • What is the risk to the contractor?

20. Go/No Go Decision Making • Thorough investigation of: • Owner • Architect • Contractors • Vendors • Project scope • Project risks

21. Project Risks • Financial • Operational • Environmental • Strategic

22. Go/No-Go Decision Making • Have a process! • Checklist form • Financial • Operational • Hazards • Strategic • Calculation form

23. Include the Internet

24. After-the-Fact Strategy “The Owner shall, at the written request of the Contractor, prior to commencement of the Work and thereafter, furnish to the Contractor reasonable evidence that financial arrangements have been made to fulfill the Owner’s obligations under the Contract.” AIA-201A, Paragraph 2.2.1, 1997 Edition

25. Keeping Track of Emotion “So what kills the enemy is anger” Sun Tzu, The Art of War

26. Case Study

27. Partnering as a Strategy • A team building process • Create trust • Recognize inherent risks • Generates a change in attitude

28. The Results of Partnering • Arizona DOT saved $5.2 million per year due to reduced claims since it embraced partnering • Las Vegas Contractor completed $1 million retail store in 35 days instead of 120 days with partnering all 22 subcontractors. “Partnering: Changing Attitudes in Construction”, AGC Publications

29. U.S. Army Corp of Engineers “Clearly, the best dispute resolution is dispute prevention…..By taking the time at the start of the project to identify common interests, lines of communication, and a commitment to cooperative problem solving, we encourage the will to resolve disputes and achieve project goals.” 1

30. Avoiding Claims Within the Contract Section II

31. Identify and Avoid Claims Within a Contract • What is a contract? • Determines the relationship • Assigns risk • What changed?

32. How Can a Contract Generate a Claim? • Creates an atypical relationship • Offloads risk to another party

33. Reading the Fine Print

34. Three Steps to Use the Contract in Avoiding Claims • Read the contract • Read the contract • Read the contract

35. Relationship Changes “The Subcontractor shall obtain and pay for all necessary permits and licenses pertaining to the work and shall comply with all Federal, State, and Municipal Laws, codes, ordinances, rules, and regulations, whether provided for by the Contract Documents, or not so provided for without additional change or expense to the Contractor….”

36. Relationship Changes “The Subcontractor shall obtain and pay for all necessary permits and licenses pertaining to the work and shall comply with all Federal, State, and Municipal Laws, codes, ordinances, rules, and regulations, whether provided for by the Contract Documents, or not so provided for without additional change or expense to the Contractor….”

37. Relationship Changes “The Owners and the Architect’s interpretation shall govern the scope and performance of the Work and no allowances shall be made in behalf of this subcontract for error or negligence on his part in this connection.”

38. Relationship Changes “The Owners and the Architect’s interpretation shall govern the scope and performance of the Work and no allowances shall be made on behalf of this subcontract for error or negligence on his part in this connection.”

39. Reassignment of Risk (What changed?) • Types of Changes • Nonexcusable and noncompensable • Excusable and noncompensable • Compensable

40. Nonexcusable & Noncompensable Changes

41. Excusable and Noncompensable • Prevents Liquidated Damages • Extends the Contract • Allows damages for acceleration if Owner fails to provide a timely extension

42. Compensable • Extends both Contract Time and Contract Sum

43. What Changed? “Subcontractor agrees that its sole remedy for any delay caused by the Owner, Architect, Contractor, or any of their respective agents, officers, employees and/or subcontractor shall be an extension of time for the number of days by which the Subcontractor has been delayed, as determined by the Contractor and/or the Owner, and that the Subcontractor shall not be entitled to any recovery for loss, costs, expenses, damages, or attorney’s fees suffered in connection with any such delay.”

44. What Changed? “Subcontractor agrees that its sole remedy for any delay caused by the Owner, Architect, Contractor, or any of their respective agents, officers, employees and/or subcontractor shall be an extension of time for the number of days by which the Subcontractor has been delayed, as determined by the Contractor and/or the Owner, and that the Subcontractor shall not be entitled to any recovery for loss, costs, expenses, damages, or attorney’s fees suffered in connection with any such delay.”

45. What Changed? “If Contractor shall desire the Work of the Subcontractor hereunder to be performed with greater speed than is herein contracted for, the Subcontractor shall, without affecting or abridging the rights of Contractor set forth in any Article hereof, upon receipt of written order from Contractor, employ overtime work as so directed. The actual cost of such overtime work as shown on time sheets checked and approved each day by Contractor shall be paid by Contractor to Subcontractor, but no overhead, supervision costs, commissions, or other costs shall be charged thereon.”

46. What Changed? “If Contractor shall desire the Work of the Subcontractor hereunder to be performed with greater speed than is herein contracted for, the Subcontractor shall, without affecting or abridging the rights of Contractor set forth in any Article hereof, upon receipt of written order from Contractor, employ overtime work as so directed. The actual cost of such overtime work as shown on time sheets checked and approved each day by Contractor shall be paid by Contractor to Subcontractor, but no overhead, supervision costs, commissions, or other costs shall be charged thereon.”

47. What Changed? “Subcontractor shall take all necessary action to prevent and avoid strikes, picketing, lockouts, and all other labor disputes and difficulties on the Project and shall do all things necessary to prevent and avoid any Work stoppage on account of any such strike, picketing, lockouts, or other labor disputes. These occurrences shall not entitle Subcontractor to any extension of the Contract time or any additional compensation or Delay Damages.”

48. What Changed? “Subcontractor shall take all necessary action to prevent and avoid strikes, picketing, lockouts, and all other labor disputes and difficulties on the Project and shall do all things necessary to prevent and avoid any Work stoppage on account of any such strike, picketing, lockouts, or other labor disputes. These occurrences shall not entitle Subcontractor to any extension of the Contract time or any additional compensation or Delay Damages.”

49. 10 Principle Causes of Construction Disputes 4. Contractors who bid too low 3. Ambiguous contract documents 2. Unrealistic expectations of the parties, particularly owners who have insufficient financing 1. Contract provisions which unrealistically shift project risks to parties who are unprepared to cover those risks

50. Strategies for Avoiding Claims During Construction • Great management of the project • Documentation • Schedules • New ideas to consider • Forward Pricing • Backward Pricing • BIM