By Expert No. 9103 & Troy Vernon Sutton
We have all learned that the three most important aspects of real estate are Location, Location, Location! In construction, the three most important aspects to successful resolution of issues are Documentation, Documentation, Documentation!
We were recently asked about methods for minimizing construction claims. The project managers were all ears when told that we have discovered a method that would guarantee no claims on their next project. Our “No Claims” method simply requires:
- Supplying contract documents that are perfectly complete, correct and coordinated at bid time.
- Making NO changes to the project after the contract documents are issued.
- The Contractor and all the Subcontractor’s work diligently and make no mistakes.
However, in the real world we are aware that designers do not have the time or budget to produce drawings that are complete, correct, and coordinated. Changes of scope are inevitable in any project due to unforeseen conditions, human error, budget considerations, or owner choice.
Many times the owner issues the plans for bid, or construction, when they are not complete, correct or coordinated. This is usually based on the owner’s need to start the project within a certain time constraint, either for fiscal or political reasons. The owner has a right to issue drawings which are incomplete or to request scope changes during the project. However, the owner also has the obligation to pay for such changes.
When you buy a house, or a car, or an appliance you expect to get what you are paying for at the agreed price. However, construction contracts are unique in the world of commerce – they contain a contract clause for changes to the work. Even with a fixed price contract, the total cost of construction inevitably ends up higher than originally agreed, because a change to the scope of work entitles the Contractor to more money.
There are three and only three reasons for any change to the contract after award of the contract:
- Owner requested changes — move a door, add a window; change the door, delete the window, etc. Personal preferences.
- Architect errors (mistakes) and omissions (missing).
- Changed conditions.
With new construction, if the architectural team has done a good job, owner changes are minimal, and there are no major unforeseen conditions, the final cost should be less than five percent (5%) over the awarded contract price.
With a renovation/remodel project, where the Contractor has been diligent in timely issuing RFIs, and the architectural team has been responsive, then the final cost should be less than ten to fifteen percent (10-15%)over the awarded contract price.
With new construction, once you get above the foundation, there should be no unforeseen site conditions. With a renovation/remodel project, every time you open a wall, you risk finding a changed condition. It is impractical and unlikely that the owner has allowed the architect enough time and money to thoroughly investigate all existing conditions. Therefore, unforeseen conditions arise and impact the project.
But why blame the Contractor? He didn’t design the project. He didn’t know about the concealed conditions. He is not responsible for the concealed conditions. When the Contractor notifies the architect about a newly discovered concealed condition he expects a prompt response as to what he should do. Too often he has to wait too long to get an answer, and, sometimes, the answer is inadequate. In the meantime, he reassigns that crew to other tasks on the project and tries to minimize the disruption and impact. Is it any wonder that they turn in claims?
What is frustrating is that most Contractors, if they are entitled to compensation for a claim do not do an adequate job of clearly and persuasively presenting their claim. They invariably fail to provide adequate contemporaneous documentation. Thus, while they may be entitled to additional compensation, the claim they submit fails to achieve a threshold level of credibility.
Restraint Effect Analysis (REA)
The Restraint Effect Analysis (REA) Claim is based on establishing a clear documented cause-effect relationship to explain cost overruns experienced on a project.
A Restraint Effect Analysis of events which occurred on the project and their associated related impact to the Contractor’s operations, both directly and indirectly, should be done in the interests of meeting the needs of both the Owner and the Contractor, to resolve the claim situation of the project to the satisfaction of both parties.
The Restraint Effect Analysis is performed by analyzing detailed schedule activities and activity for work performed consistent with the applicable production reports. This material is reviewed relative to all available documentation and facts pertaining to the activities and accounts being analyzed. Following this, the Contractor determines the Restraint Effect factors as a percentage adjustment of the affected base work. This mathematical approach produces the impact values for the restrained work (impacted work). In addition, the Contractor applies percentage allowances for tools and equipment as well as other related cost factors.
The Restraint Effect Analysis identifies events beyond the Contractor’s control which caused specific cost overruns. However, a credible analysis requires relevant, contemporaneous documentation.
Contract administration is systematized and paper-oriented. This is why construction people, who are typically can-do people, generally dislike it, and avoid it. However, we emphasize so strongly its importance, because it is critical to presenting a persuasive and credible claim.
The Contractor should implement an organized program of documentation which permits the Contractor, and the Owner, to establish a baseline against which progress can be measured and the construction process controlled.
This program is based on the following elements:
- Notify the Owner/Construction Manager;
- Define the baseline scope of the work;
- Detect changes from the baseline scope of work;
- Determine the impact of these changes;
- Notify Owner of the cost and schedule impact of these changes;
- Act to mitigate the effect of these changes and
- Track the impact of these changes;
- Submit the claim.
The Contractor must extensively document, on a continuing daily basis, all events relative to interferences, instructions to the Contractor, changes to the work, impact by others and all issues which have an effect on the Contractor no matter how minor. The objective here is to provide all the necessary documentation for developing a position both as the project unfolds as well as upon the completion of the work. The Contractor’s most favorable approach to preserving its’ rights is by giving the Owner appropriate notice to be followed up with details when the effect of potential impact events can be evaluated.
Job site superintendents and field engineers should each prepare a daily log of job events with relevant site photos. On a daily basis the Contractor’s field claim documentation person should review these daily logs and speak to these people to assure all problems encountered by the Contractor are recorded.
The Contractor’s Cost Control in the field should be recording costs charged to the various activities and particularly identify those events and costs which result from impact of the problem areas. Problems would of course include acceleration and other current cost overrun conditions resulting from the acceleration schedule.
In addition, the Contractor’s claim documentation person should make extensive use of tape recording notes including conversations and discussions with management personnel, superintendents and field engineers. These notes should be transcribed on a daily basis and be sufficiently extensive to reflect the comments of the Owner field management. These should be read and signed off by the appropriate individual.
In presenting a credible construction claim, it is essential that the Contractor identify impact on an ongoing basis and to be able to account for all costs including base contract work costs, impact related to contract base work, extra work and impacts related to extra work as well as impacts and costs due to other special conditions. The key element persuasively presenting such a claim is contemporaneous documentation!
Expert No. 9103 is a management consultant actively involved in dispute resolution related to engineering and construction work. The successful resolution of design and construction claims requires a thorough understanding of the components of each problem: the technical, the construction, the contractual and the economic issues. His education and career in engineered construction have provided him with the knowledge and experience required to be particularly successful in claims management. He holds a degree in civil engineering, and has performed every major function in construction operations. He has served as consultant and expert in construction industry practices, construction claims, construction management, project management, purchasing, scheduling, estimating, cost control, and bidding strategies.
Troy Vernon Sutton has worked with above expert’s firm for over 15 years. He has diverse project experience ranging from small homeowner/contractor disputes to large civil industrial and commercial projects. Mr. Sutton recently graduated from Golden Gate University School of Law and is currently awaiting results from the bar exam.