Type: Law Bulletins
Date: 11/22/2011

Contractor Basics: Claims Recognition and Documentation

Given current economic conditions, most contractors are not in a position to simply walk away from legitimate claims for additional compensation with the expectation that the lost dollars will be recovered through the next profitable job down the road.  Despite the fact that some contractors have historically been averse to making claims, limited project opportunities, increased competition, and tight margins make this a less attractive option.  Notwithstanding the importance of securing full and fair payment for their work, however, many contractors still don’t take the time to review and understand the claims process before starting work, and deal with claims in an ad hoc, reactive manner.  This can and often will result in a contractor failing to properly preserve its rights and/or position its claim for success.  Consequently, it is critical that the contractor have the people and procedures in place to proactively anticipate, identify and document claims for additional compensation.

A. Claims Recognition
Early identification of potential claims is essential to successfully prevail on disputes arising during the course of construction, particularly those involving additional work and compensation.  For example, it is not unusual for construction contracts to incorporate provisions requiring timely notification of claims as a strict prerequisite to obtaining additional compensation.  Other considerations include the need to properly document developing claims to establish facts and preserve evidence, and the proactive identification of potential defenses to such claims and possible avoidance strategies.  In certain circumstances, it may also be prudent to seek assistance from counsel or expert consultants at an early stage of the claims process.  The above considerations will apply regardless of whether the claim will need be pursued through an administrative claims process, informal negotiations, mediation, arbitration, or litigation.

In line with the above, a contractor’s key project personnel must take a proactive role in the early recognition of potential claims and disputes.  These individuals should be in the best position to evaluate the progress of the work and identify any developing problems on the project.  Beyond being familiar with the project itself, management personnel need to have a basic understanding of the terms and conditions of the contract documents.  Lacking an adequate knowledge of the parameters of the contract documents, for example, a project manager may not recognize in a timely manner that the contractor is performing beyond its original scope of work and is entitled to seek additional compensation.  As referenced above, the failure to recognize a claim until the end of the project may expose the contractor to contractual defenses, such as untimely notice. Beyond contractual issues, it may be extremely difficult to reconstruct the facts to support a claim at the end of the project.  Consequently, project managers must be vigilant in identifying potential claims during the course of construction.

B. Documenting the Claim
Once a potential claim or dispute has been identified, the value of developing and preserving supporting documentation cannot be overstated.  Disputes are very often won or lost on the strength of a contractor’s documentation.  Even before a claim is identified, it is important that the contractor keep good records of its activities on the project.  Certain records, such as daily project logs, will usually constitute critical evidence in establishing entitlement to a claim.  A detailed project log can document levels of manpower, the progress of the work on a particular date, and any impacts that the contractor may encounter on the project.  Obviously, a detailed project log prepared contemporaneously with the work performed will have greater weight as evidence than the verbal testimony of a project manager or foreman months or even years after the events in question.  Moreover, if the claim will be presented to a fact finder from the construction industry, it is likely that the contractor’s credibility will be enhanced if it maintains detailed and accurate records, particularly if the opposing party’s documentation is weak.  Of course, the above factors apply to all project documentation that might be used to support a claim, including estimates, take-offs and bid documents, submittals, original and as-built schedules, manpower loading reports, correspondence and e-mails, and other materials kept in the normal course of a project.

Beyond maintaining good records of daily activities and of the project in general, the contractor must be both proactive and reactive in developing claim documentation.  With respect to proactive documentation, the contractor should take immediate steps to create a record of potential claims as they arise.  Where the contractor determines that it will be subject to unforeseen expense, delay, acceleration or disruption due to the fault of another, such concerns should be placed in writing and provided to all proper parties. If feasible, the contractor should also photograph and/or videotape problems on site, identify potential witnesses, and summarize the activities of other trades affecting its work.

Turning to reactive documentation, it is essential that the contractor respond promptly in writing to any communication concerning alleged facts or positions that may impact the viability of its claim.  Where the owner, general contractor, construction manager or other relevant project participant disputes the claim or indicates that the problem has been addressed, the contractor must respond in a timely manner.  A failure to provide a prompt response could represent a waiver of the claim under certain contract provisions or, at a minimum, be viewed as evidence that the claim was not a continuing issue.

To effectuate the above recommendations, a simple flow chart or summary of the claims process should be prepared at the start of each project and provided to all of the contractor’s management personnel.  In particular, deadlines and other strict requirements which could result in a waiver of the contractor’s right to assert a claim need to be highlighted.  Further, it would be helpful to have in place a written protocol which incorporates standard procedures for the proper handling of potential and/or asserted claims.  For example, when a potential claim is identified it would be advisable to immediately create a file to compile all communications and project documents which have any relationship to the claim.  Further procedures might include a list of proactive actions, such as developing evidence through photographs or video taping, creating a list of individuals with knowledge of the claim, strict deadlines for communicating notice of the claim and/or the contractor’s position, and setting up a separate code to segregate costs related to the claim.  Periodic training of management personnel with respect to appropriate claim handling procedures would also be instrumental in creating an ongoing awareness of best practices when confronted with potential claims.

While the above recommendations are presented in the context of a contractor seeking compensation for extra work, these considerations are equally important for the contractor to effectively dispute a back charge or offset to its contract balance, or for that matter to other project participants confronted with any questionable requests for additional compensation or an extension of the schedule.  Regardless of the party or the nature of the dispute, however, there is little question that the project participant who acts in a proactive manner and properly documents its position will hold a distinct advantage over an opposing party who fails to timely recognize and document issues as they arise.

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