Construction Update

Claims Management Can Make or Break a Firm

In North Georgia, excavators know about changing site conditions. Even the region’s ancient mound builders occasionally ran into hidden outcrops of Stone Mountain granite.

Modern-day contractors who sign up for a simple red-clay dig still run into pieces of the mountain now and then. Of course, hard-rock mining adds considerable expense to an excavation project — yet sometimes the owner insists on the original price.

An earthmover in this situation has a fair claim for more money, but that doesn’t guarantee the owner will pay. As work proceeds while the claim drags out, the excavator’s profit on the job can disappear. A few jobs like that can put a construction company out of business.

When a contractor files a claim, the owner enjoys a natural advantage: Doing nothing costs nothing, and may be enough to prevail. So the burden of action falls on the contractor.

Causes of Construction Claims

Most construction claims arise from five sources. In every case, the contractor’s close and timely adherence to procedure is critical.

1. Differing site conditions. Knocking down a wall, you find something you didn’t see on the plans, such as the fiber-optic trunk line for an entire complex. Whether your unpleasant surprise is hard rock or high-volume data — and whether or not you can judge the impact on cost and schedule — give the owner written notice immediately.
2. Disagreement over the price of a change. These disputes are usually easy to resolve, but if they delay other work, both owner and contractor can face much greater damages. Protect your rights with a letter of agreement stating that work will proceed during the resolution of such disputes.
3. Disagreement over the existence of a change. An owner wants you to perform new work, but he says it’s in scope —and the project is waiting. Most contracts require you to notify the owner, in writing and by a deadline, that you disagree with his interpretation. And make it clear that you expect payment for the work in question.
4. Delay and acceleration. After a delay not of your making, an owner demands that you accelerate your work. Document the delay and request an extension — quickly and in writing. (Some state laws include a no-damage-for-delay clause, and some mandate extensions for contractors who request them.)
5. Delay and price increases. Financing hangs up, permits are slow in coming, and drawings drag out. Meanwhile, your prices for steel and concrete spike. Even if you’ve got some contractual protection, you still may need to file and document a claim.

Do It Yourself or Trust a Specialist?

A small claim seems easy enough to manage. But a claim can grow, merge with others and bring forth new ones — and down the road these claims can loom large.

When a dispute hardens and grows and puts significant money at risk, a contractor whose claims haven’t been handled fully and properly is in trouble. Retroactive advice — coulda-woulda-shoulda — isn’t very comforting.

But a contractor whose claims have been competently managed from the start can proceed with confidence and stand a greater chance of being paid — even through a lawsuit, should one become necessary.

An experienced claims consultant, especially if brought in early, can assemble proper documentation and ensure the timely filing of required notices. This initial work may help resolve the dispute quickly. If the claim progresses — and especially if it moves to litigation — this early record-keeping and strict adherence to protocol can mean the difference between success and failure.

Home Depot doesn’t have a department for do-it-yourself claims management. But skilled claims consultants are available to every contractor. (See page 3 for considerations in choosing a consultant.)

Get Proactive About Claims

Many claims can be forestalled simply by following the terms of the contract. If you can’t live with the terms, don’t sign the contract.

Then look down the road, and consider the plight of the pedestrian caught on the median of a busy interstate. The poor guy needs assistance, but all he gets is shouted advice: You shouldn’t be out there! True enough, but little help.

So plan now to avoid such situations. Don’t walk onto highways — and don’t let contracting disputes accelerate out of control. Bring in the help you need to manage them, and bring it in early.

An owner’s refusal to pay can badly damage a construction firm, or even destroy it. But the firm that always collects its due will grow and prosper.

What to Look For in a Claims Consultant

A contractor should consider several factors when choosing a claims consultant. Among the most important are:

• Construction claims experience. Does your candidate know this industry’s terrain? Find out about the claims he or she has pressed — not just the winners, but the losers too. Is the candidate familiar with the matrix of entities that make up a construction project, how they interact and where most claims arise? Does he or she understand contract language and the benefits of various resolution options?
• Specific claims experience. Does the consultant have experience with your type of claim? A project management expert may have handled hundreds of delay claims — but what about a design defect that affects only cost, not schedule? Familiarity with your specialty and its particular rhythms, challenges and metrics is a great advantage.
• Personality. You may bring the claims consultant on board — but your people are sailing the ship. It’s essential that they be frank and forthcoming about all aspects of the claim. Look for a claims adviser who can quickly establish trust.
• Company depth. A complex construction claim requires vast sorting and classification. Make sure the consulting team is strong enough — both in claims expertise and administrative depth — to get the job done effectively and efficiently.

For more information about our services to the construction industry, Contact:
Mark Lund, Parter-in-Charge of Construction Services at 713.297.6907.

The articles in this newsletter are general in nature and are not a substitute for accounting, legal, or other professional services. We assume no liability for the reader's reliance on this information. Before implementing any of the ideas contained in this publication, consult a professional advisor to determine whether they apply to your unique circumstances.