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Beginners’ Guide to Managing the Construction Claims

Table of Contents for Construction Claims-

  1. Introduction
  2. Current Scenario of Claims in Construction Projects
  3. What is Construction Claim and Dispute?
  4. Types of Construction Claims
  5. Reasons for Construction Claims
  6. How do I Minimise Claims in my Project?
  7. Case Study for Cost & Time Over-run.

1. Introduction

The construction projects are complex and involve huge capital investment. They have long execution periods, engage too many stakeholders and provide returns over a longer period of time. The success of any project depends on the control on triple constraint i.e., scope, cost and time.

The variances in any of the triple constraint element reduce the impact of project delivery. The variances lead to multiple problems such as financial stress, unsatisfied stakeholders, change in project objectives etc.

A project manager has to keep juggling and maintaining a fine line of balance between cost, time and scope.

The uncertainty of events in construction projects is called construction risks. These risks can be broadly classified into the following types-

  1. Project Related Risk
  2. Legal Risk
  3. Financial Risk
  4. Statutory Laws, Natural & Environmental Law related Risk
  5. Safety-related Risk

The contract variation is one of the project-related risks. The variation may be an opportunity for the client and a threat for the contractor or vice-versa. The disagreement between the client and the contractor over the variations leads to a dispute. An unresolved dispute converts to a claim.

Learn these 5 tools to identify the project risks.

3. What is Construction Claim and Dispute?

A construction claim is a request by one party to another for an opportunity or a threat. The opportunity can either be an enjoyment of contract loophole or ambiguity, an extension of time due to force majeure, liquidated damages etc. The threat can be an extra cost, increase in raw material prices, delay etc.

A construction claim is always an opportunity for one party and a threat to another. The denied request turns into a dispute. The compensation to a claim request is either extra cost or extension of time or both.

The construction projects are so prone to the claims that it becomes their inherent characteristic. The increasing competition has increased the claims. The competition forces the contractors to over-promise which eventually lead to under-performance and the inception of a claim.

2. Current Scenario of Claims in Construction Projects

As per the joint report of PMI & FICCI on Project Management Practices in India, only 49% perceive that more than 50% of the projects are completed within scope.

Perception on Project Completion for Construction Claims
Perception on Successful Project Completion

More than 33% of the infrastructure projects are facing cost over-run and 75% agree that the major reason is scope creep. 80% of Indian infrastructure projects have experienced time over-run.

As per the MoSPI report, as of 31st March 2009, the infra projects costing more than INR 200 million each had the following scenario-

Infrastructure Projects Cost & Time Over-run for construction claims
Infrastructure Projects Cost & Time Over-run

The popularity of project management in the Indian infrastructure scenario has increased. The implementation of best practices has decreased the cost and schedule over-run. However, a lot is still to be done in the sector. It is evident from the below data-

% Cost Over-run Trend
% Cost Over-run Trend
% Schedule Over-run Trend
% Time Over-run Trend

The sector wise infra data for cost & schedule over-run have generally decreased from 2012 to 2018-

Sector wise Cost & Time Over-run for Construction Claims
Sector wise Infrastructure Cost & Time Over-run

4. Types of Construction Claims

The understanding of the construction claims helps in minimising them. A project manager with a thorough knowledge of claim types can formulate a contract having the least room for the claims.

Some of the construction claims are as follows-

4.1 Delay Claims-

The delay claims are the most common types of construction claims. The delay claim can arise due to reasons attributable to client or contractor or both.

4.2 Price Increase Claims-

Irrespective of the contract type, this claim can always arrive in terms of raw material price increase, labour cost increase, fixed cost increase, tax increase etc. This claim is requested by the contractor to the client.

4.3 Work Order Change Claims-

The work order change claims may arise due to change in the project objectives or project methodology. The general conditions and special conditions mentioned in the contract may not hold good throughout the lifetime of the project.

4.4 Extra Item and Variation Claims

This claim arises due change in specifications, design etc. The original scope is prepared on thumb rules and tentative calculation that may not hold true for the detailed design. An item of work can be added or deleted as per the requirement. Similarly, the specified quantity of the work may also change.

4.5 Different Site Condition Claims-

The claims arising due to site conditions are categorised into this head. Example of such claim is that a pipeline was found at the place of foundation thus obstructing the design. It may lead to delay due to design change and cost due to rework in engineering.

4.6 Damage Claims

The damage caused to the resource, property, equipment etc. due to various reasons gives rise to damage claims. The claims arising due to theft, robbery, accident, fire, flooding, accident, improper handling etc. are damage claims.

4.7 Loss of Profit Claims

A contractor can claim the loss of profit if the scope changes or its’ margin decreases. The contractor often reduces the work for larger quantity as the fixed cost per unit work is decreased. 

4.8 Wrongful Withholding of Deposits Claims

A contractor can claim for the deduction of retention amount more than the contract specified value. Another example can be a claim against the wrongful forfeiting of guarantees etc.

5. Reasons of Construction Claims

The reasons for construction claims vary with each category of claim. However, the claim resolution boils down to cost and time.

The root cause of all the reasons of construction claims can be summarized into following-

5.1 Inaccurate risk assessment-

As per PMI study, more than 80% organizations having proper risk management plan achieve greater success.

The inaccurate risk assessment leads to surprises in the project that often lead to hastily decisions. Later, they prove to be detrimental to the project. The project team should be trained well to sense the risk and report them timely.

External factors, change in laws/regulations, health, safety and environment-related issues most affect the timeline of the project.

Claims due to inaccurate risk management-

  • Delay in land acquisition
  • Delay due to clearances from authorities
  • Delay due to environmental clearances
  • Unsafe working conditions
  • Claim for natural calamities (force majeure)

5.2 Lack of project management skills-

The inability of the project team to handle the project complexity can lead to several claims. Unsatisfied stakeholders can further add to the failure causes.

The lack of project management skills leads to scope creep, procurement failure, communication gap etc. that can be exploited and can be converted into claims.

Claims due to lack of project management skills-

  • Delay in material supply due to poor vendor management
  • Delivery of wrong material
  • Delay due to longer negotiation period
  • Failure to arrange resources
  • Claims for disturbed cash flow

5.3 Inability to correctly estimate and monitor-

The lack of experience, historical data and review mechanism causes incorrect estimates of cost and time. The incorrect time and cost estimates are the inception point of claims.

As per the old saying, the General who spends more time in planning bleeds lesser on the battlefield. The rigorous planning and its’ review mechanism help in improving the estimates thus, lowering the claims.

Claims due to incorrect estimate and monitoring –

  • Addition/deletion of work items
  • Variance in work quantity
  • EOT
  • Cost over-run
  • Misuse of resources

5.4 Not implementing the best practices and benchmarks-

“Failure are not those who make mistakes, but those who repeat it.”

The best way to improve is to learn from mistakes. Best practices are often derived from the biggest failures. Thus, it becomes mandatory to standardise the process and to implement it, to ensure project success.

Claims due non-implementation of best practices-

  • Rework due to quality issues
  • Misuse of resources
  • Claims due to delayed payment
  • Payment Defaults

5.5 Difficulty to involve multiple and diverse stakeholders

The project success relies heavily on the involvement of its stakeholders. As the decision-making is affected by each stakeholder. The ambiguity or communication gap among stakeholders may lead to confusion. This problem arises due to the unclear project objectives and understanding of priorities.

The analysis-paralysis is another demon that appears to convince stakeholders and uniting them. It ultimately results in a delay in decision making.

80% perceive that ineffective senior management is a big hurdle to the project success.

5.6 Inability to synchronise project plan and execution

The problem occurs when the project planning is done to pile up the documents. The limited involvement of the execution team in the planning leads to failure. The project team is often unaware of the assumptions made during the planning and thus keep failing to achieve the target.

The involvement of execution team into the planning phase helps them to add nuances to the planning.

Another hurdle to project success is the fulfilment of the dynamic demand of resources and cash flow as per the need of the site.

6. How do I Minimise Claims in my Project? Best Practices Explained.

Some of the best practices involve-

6.1 Pre-planning & Site investigation-

  • The delay claims and cost claims often arise due to geological surprises. Thus, proper soil investigation should be done.
  • Approvals requirement for the project should be enlisted.
  • Use of technology like BIM, drones, LIDAR etc. for thorough study.

6.2 Planning-

  • The planning phase should include all the stakeholders, so a realistic plan can be made.
  • Sufficient time and cost should be allocated for approvals and settling local unrest. This data must be collected from projects of similar nature in that locality.
  • The planning should be flexible enough to accept the feedback and change accordingly.
  • Milestone based planning should be done.

6.3 Devising a Procurement & Contract Management Plan-

  • Material procurement and labour mobilisation can be challenging task, especially at remote locations. Thus, developing and maintaining reliable vendors is necessary.
  • Using internationally accepted contracting norms such as FIDIC.
  • Setting up claims & dispute resolving mechanisms to avoid litigation.
  • Incorporating contingencies and making the contract flexible helps in amending the contract for the inclusion of new items that could not be estimated at the time of contract formulation.

6.4 Risk Management-

  • The core risk management committee should be formed.
  • Inclusion of risk management procedures in the contract.
  • Using risk-based contingencies in time and cost estimates.
  • The utilisation of technology for risk assessment, risk impact, risk responsibilities etc.
  • Training of team to assess and report the risk.

7. Case Study for Cost & Time Over-run

Project: 15 MW Hydro-power Project, Nepal

Project Start: November 2015

Project Baseline Completion: Three years from Start i.e., November 2018.

Baseline Budget: NPR 2.8 billion

Project Status as on January 2021: 75% Complete

Estimated Budget at Completion: NPR 4.5 billion

Estimated Completion: September 2021

Cost Over-run: 60% (NPR 1.7 billion)

Time Over-run: 94% (34 months)

Major Reasons for Delay and Cost Over-run: Delay in land acquisition, local public unrest, unstable geological conditions in tunnel, work difficulty due to flooding in the river, prolonged monsoon (the site being close to the wettest place of Nepal).

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