Construction is inherently risky. The objective going into any construction project — regardless of whether you are an owner, design professional, contractor, subcontractor, or even supplier/fabricator — should be to properly assess the risk and allocate the risk to the party best equipped to manage the risk. You have probably heard this before, but hearing this and implementing this as a routine practice for managing risk (and dealing with construction claims) is a different story.
Read about some considerations and certain suggestions to put into practice so that you are in the most favorable position moving forward when encountering construction claims and dealing with construction risk.
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How to prevent construction claims & reduce risk
As the expression goes, an ounce of prevention is worth a pound of cure. This could not be more true when negotiating your construction contract. Below are some of the keys to look for in the contract that help in reducing construction claims.
Know your scope of work
One of the first things you should consider is your scope of work. Is your scope of work well-written (i.e., no ambiguities that could be argued down the road)? Does it clearly encompass the scope of work your price is predicated on? If not, it should be.
Spend time in this regard to include a well-written scope of work. This includes taking the time to identify qualifications and assumptions your price and scope of work is based on and clearly articulate exclusions and allowance items included in the contract sum.
Understand the Contract Documents
Next, you want to understand what composes the Contract Documents. Most construction contracts use this term, but the key is understanding those specific plans, specifications, addenda, and agreements that make up the Contract Documents, as this may impact any qualifications and assumptions your contract sum is based on.
You want to understand the priority of documents in the event there is a conflict in the Contract Documents, because this priority will govern the interpretation of conflicts. This priority may warrant you doing another review of the scope of work and drawings and specifications to ensure the contract sum catches or reconciles any conflicts.
Moreover, you want to understand the general conditions of the contract so you are fully cognizant of notice provisions, change order provisions, termination and suspension provisions, force majeure provisions (very important in today’s times), differing site conditions provisions, insurance requirements, the scope of indemnification, dispute resolution, payment terms, any standard of care language (important for the design professionals), and so on.
Know your payment rights
Lastly, you want to know whether you have construction lien rights or payment bond claim rights on the project, and that you properly preserve those rights from the onset of the project. This will help maximize payment rights in the event a payment dispute arises down the road. The collection of payment is important, right?
Having an understanding of these provisions will assist in the contractual negotiation — and then ultimately an appreciation of assumed risks.
One way counsel assists in this process is to point out assumed risks in a contract and make suggestions to the general conditions for you to consider in the negotiation process.
How to mitigate construction claims
If a construction claim is necessary, there are a number of steps you can take to lessen the impact on your business — and your bottom line.
Chart all of the notice provisions
Once your contract is negotiated, it is a smart practice to chart all of the notice provisions.
What is the notice provision for delays? What is the notice provision for change orders? What is the notice provision for force majeure occurrences? What is the notice provision for termination and suspensions? What is the notice provision for submitting a claim?
Create a spreadsheet to chart all of this out and give it to your team running the project. This will make sure you are preserving your rights which is always an important step in risk-mitigation.
By preserving rights, you are affirmatively taking steps to resolve outstanding claims.
Properly document everything on the job
Another way to mitigate claims is to properly document events and occurrences during the course of the job.
- Take persuasive jobsite photos
- Include items in daily construction reports
- Edit meeting minutes as appropriate
- Send detailed notice letters and e-mails
- Submit change order requests in a timely manner
- Review schedules
- Provide input commenting on durations, sequences, and locations
There is more, but the key is to keep good contemporaneous documentation that captures conditions in real-time that can persuasively be used to support a claim.
For example, if you are a subcontractor contending a work location is not available or ready for you (or your work is being impacted in that location), make sure to take plenty of photos of the area, and send notice letters/e-mails detailing the affected work and location, and include photos or other documentation demonstrating the point.
Pursuing your claim
Once you chart the claims procedure and preserve claim rights, the next step is pursuing your claim. This includes packaging and presenting the claim to the person/entity the claim needs to be sent to with a supporting explanation and documentation.
For instance, if your contract includes an initial decision-maker or dispute resolution board, you want to know this so you know who to send the claim to. If the contract requires certain information to be presented, you want to know this too to best present and package your claim. If the claim involves schedule delay, lost productivity, or acceleration, you want to include some explanation and analysis demonstrating the issue and the costs associated with the issue.
Resolving construction claims
Now that you have preserved and pursued your claim, ideally, you want to resolve it. Hopefully, it gets resolved in the claims review process where the merits of the claim led to a favorable resolution.
Unfortunately, this is not always the case, and claims get denied. This means you want to understand what the next steps are in the dispute resolution process.
The next step may be mediation. If so, you want to initiate mediation, which may be with an administering body like the American Arbitration Association or JAMS.
You want to know if the contract requires litigation or arbitration as, depending on the claim, you may want to formally initiate litigation or arbitration understanding that this process will be stayed pending compliance with any mediation requirement.
You will also want to know in the case of a payment dispute — when there are construction lien or payment bond rights — to ensure those rights are properly perfected.
Common types of construction claims
Construction claims vary in type. This is just a sample of claims that come up and, depending on the project, you want to consider on the frontend.
If you are owed money, as mentioned above, you will want to absolutely perfect construction lien or payment bond rights. It is important to know which of the rights you have so that they are properly preserved from the get-go (very important!) and then perfected if you are owed money.
Not doing so is a big mistake. Jurisdictions have different requirements to preserve and perfect construction lien and payment bond rights and it is imperative you know what these rights are.
Working with a company like Levelset will help facilitate the preservation of these rights in the event you have to deal with a payment dispute and collect the owed money.
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Safety and injury
Safety is crucial in construction. Injuries happen based on the risks involved but the objective should absolutely be to minimize injuries and comply with all safety protocols (and then some). If a non-compliance is observed, immediately nip that non-compliance.
Know all of the rules and OSHA regulations governing your scope of work. Know any additional safety protocols that may be required for the project including your own protocols and standards.
In the current climate, know all COVID-19 safety regulations and any regulations specifically required for the job. Make sure your own safety protocols are being followed on the job and that your team is aware of all safety protocols and regulations governing safety relative to your scope of work.
If an injury does occur, make sure you timely and properly notify those that need notification (i.e., OSHA, a workers compensation carrier, etc.), fill out a contemporaneous safety incident report, and take steps to avoid that injury or safety violation from recurring.
Many contracts have differing site conditions or a changed conditions clause. This clause covers latent physical conditions on the site that differ materially from those identified in the Contract Documents (known as a Type I differing site conditions claim) or unknown physical conditions on the site which differ materially from those ordinarily encountered and generally recognized in the project site location (known as a Type II differing site conditions claim).
If you encounter what you consider to be a differing site condition, make sure you properly serve notice documenting the condition and additional costs you forecast based on the differing site condition. You will want to demonstrate how the condition is a differing site condition.
Notably, a construction contract will generally include language that you visited the site, performed testing you deemed appropriate relative to the site and your scope of work, and warrant the site is suitable for your work. Consider the implications of this language when dealing with a differing site conditions clause.
Another analogous clause may pertain to unforeseen conditions that would apply to renovations of existing structures. In these circumstances, it is always good to include certain qualifications or assumptions in the contract because unforeseeable things are encountered when renovating existing structures as materials become removed.
Time and productivity is money in construction, but construction delays are an unavoidable part of the job.
If you are delayed, you want to notify the other party — not only of the delay, but the work being delayed and the potential cause of the delay (with supporting documents).
Timely notice is important. Moreover, this could have an impact on your efficiency from a manpower or equipment usage standpoint. You naturally want to know this, because if you are a subcontractor, your profitability will be drastically affected if you are exceeding manpower or equipment usage.
Oftentimes, contracts contain a no-damage-for-delay clause, which could impact certain delay-type damages being sought. However, you should still ensure timely notice is given so rights are preserved; not doing so is a mistake.
You also want to submit timely notice so you have contemporaneous documentation that you are not the cause of the delay in the event delay damages are sought against you.
Similar to the above, if you are required to accelerate, this has financial implications. Are you directly being asked to accelerate, or are you forced to accelerate because you asked for additional time due to a delay and such time was denied, and you now need to overcome the delay (the latter routinely known as constructive acceleration)?
Even if trying to catch up from a delay, you may need an acceleration claim to cover the costs of accelerated work.
If you need to work overtime, weekends that were not anticipated, additional shifts (like a night shift), or load up on manpower to make up time, this all has a financial ripple effect. Timely notice is also key for preserving rights.
Termination and suspension
Contracts contain termination and suspension provisions. Make sure you know what constitutes a termination for cause and any written notice to cure requirements.
Make sure you also know what constitutes a termination for convenience and what type of damages you could recover if you are terminated for convenience (meaning you are terminated without cause).
Along the same lines, you want to understand whether the other party can suspend performance, for how long, and whether the suspension gives rise to an equitable adjustment of the contract sum before you resume performance. Further, if the contract is suspended for “X” number of days, you want to know whether you have the right to terminate the contract.
Sometimes, an unavoidable force can interfere with the completion of a construction project, which is where force majeure clauses come into play. If you are entering into any contract moving forward, you may want to address two things.
First is COVID-19: Leaving this blank or neglecting the implications of COVID-19 is not good practice. There could be governmental regulation or restriction, material delays and shortages, an owner-selected restriction, or a suspension relative to COVID-19 that impacts your work. You should include language addressing COVID-19 and other pandemics or epidemics.
Second, the imposition of tariffs, any potential trade war, and other scenarios stemming from COVID-19 (by way of example), that could drive up material prices. How are you dealing with this including any material price increase that was not factored into your contract sum?
Construction and design defects
If you notice a construction or design defect, you want to give notice, and the contract probably requires you to timely do so. If it is a design issue, this may warrant a request for information or clarification and you want to do this as soon as that design issue is uncovered.
What you do not want to do is proceed knowing there is a defect that impacts your work.
For example, oftentimes a contract may say if you are proceeding to place your work on other work, you inspected that other work and have accepted that work as a suitable substrate. Based on this, it could be hard to argue later that the substrate was defective because you assumed that substrate in performing your work.
On the other hand, if you are the one that performed the defect, you want to make sure you have an opportunity to address the defect. Sometimes, the defect gives rise to a back-charge because another subcontractor needed to be engaged to address that item; regardless, you still want to give notice of the defect so you can inspect the condition and be in a position to remediate it.
Furthermore, certain jurisdictions require statutory notices to be served before proceeding with a construction defect claim. You want to know these requirements and how to handle any construction or design defect claim, including notifying an appropriate insurer(s) based on the defect.
Prevent construction claims by planning ahead
Construction is a risky business — but you can stay ahead on educating yourself about construction claims, keeping track of your payment rights, and knowing and managing risks.
Proper implementation of risk allocation requires being proactive on the front-end to understand the risks involved with the project, the best allocation of those risks, and for those risks you are assuming, making sure you can appropriately manage the risks and have insurance to cover insurable risks. I also would be remiss not to tell you that a prudent way to do this is to work with counsel you trust to best assess, manage, and mitigate risk.