Claims are an inevitable process on most construction projects – there will be changes and delays. Yet some projects seem to have multiple claims and delays. A recent study by KPMG found more than 70% of the respondents reported that their projects increased by more than 10%, and 75% experienced delays of more than 10% on their timeline.
But it isn’t just clients who receive delay and cost claims from their contractors, but also contractors who receive claims from their subcontractors.
Unfortunately many projects end in lengthy, acrimonious, legal disputes between owners and managing contractors, and between contractors and their subcontractors. Frequently there are no winners in these situations – except of course the lawyers.
The outcome of these variation claims is the inevitable increase in costs and delays in the project completion. But there are other impacts which include:
- The management time taken to put together and argue the variation claims. Time which could be better spent elsewhere on the project.
- Sometimes legal costs to fight the claims.
- Frequently the breakdown of the relationship between the contractor and their client, or between the contractor and subcontractor.
- The adverse impact on reputation.
- The negative impact on cash flows.
- The possibility that there won’t be money to pay the claims.
The obvious solution is to avoid the reasons for variation claims in the first place. When variation claims do arise these should be dealt with speedily and in a spirit of goodwill between the parties.
How to avoid variation claims on construction projects
- Have a sound contract document which doesn’t contain ambiguities, contradictions or loopholes. This document must clearly detail the duties, responsibilities, and obligations of the contracting parties.
- Adjudicate the prices/quotations received to ensure that the contractor has priced all the work and hasn’t included any clauses which aren’t acceptable. Check that the contractor is capable of completing the work, that they understand the project and have the necessary resources. The wrong contractor or one that has submitted a price that’s too low will submit variation claims in an attempt to recoup their losses.
- Ensure that the contractor or subcontractor pricing the work is provided pricing documentation that has a clear scope of work and that includes all the contract terms and conditions which will be included in the final contract documents.
- Provide as much information as possible to the contractor before they submit their price. Remember any new information or changes after the contract is agreed may provide a reason for a variation claim.
- Ensure that there is an agreed construction schedule with clear milestone dates.
- Know when the contractor, or subcontractor, requires access and information, and ensure these are provided before the required date.
- Monitor progress against the construction schedule and ensure that follow-on contractors won’t be delayed by the previous contractor.
- Make sure that changes are limited.
- Ensure all instructions of a contractual nature are in writing. Verbal instructions inevitably lead to misunderstandings and claims.
- Understand the contract document, knowing what your obligations are in terms of the contract. Make sure that you and your team fulfill these obligations.
- Foster a culture of open and honest communication. The parties should highlight problems, or potential problems, as soon as they are noticed. Solutions should be sought to mitigate the problem. Early intervention can often mitigate the variation claim.
- Clients need to be aware of the consequences of their actions, or lack of action, on the project. Even small decisions can have ripple effects across the project causing a bigger problem elsewhere.
Dealing with claims
- Variation claims need to be dealt with promptly. Variation claims that aren’t promptly dealt with can cause resentment to the contractor, even impacting their cash flow and their ability to deliver the project. Dealing with claims immediately when they arise could provide the opportunity to mitigate some of the costs and delays, and avoid other similar variation claims in the future.
- Ensure that you understand the reasons for the claim and the logic behind the time and cost calculations. Unfortunately, many variation claims are wrongfully rejected because the client failed to understand the claim. If necessary ask for further reasons and backup.
- Claim meetings can be useful to provide understanding to the claim, and they can be more productive than sending letters and emails backwards and forwards. They can short-cut the whole claims process.
- Variation claims should be judged on their merit in terms of the contract document. Emotions and budgetary constraints should not influence the discussions.
- However, it is important to treat contractors in a fair manner, ensuring they are paid adequate recompense for legitimate delays and costs that they could not have been expected to foresee.
- Carefully check all the calculations, reasons and logic in the variation claim. Ensure that the causes are solely due to reasons the contractor didn’t cause and couldn’t have foreseen. Check that the variation claim does not cover events dealt with in other variation claims or that aren’t concurrent with previously agreed claims. Frequently contractors claim for events that were caused by their actions (or lack of action) or by events that they should have expected and allowed for.
- Reasons for rejecting a claim should be in writing and clearly stated so that the contractor can understand why their variation claim was rejected.
- Proceeding down the legal route should be the avenue of last resort. Litigation is expensive and lengthy and will not always deliver the results either party expected or desired. Resolving variation claims amicably should always be the aim of all parties.
Regrettably, most construction projects will incur some delays and variations. Some contractors view variation claims as a way to score additional profits or claw back lost money and time caused by their poor performance. However, variation claims aren’t necessarily as profitable for contractors as they think they are since preparing and arguing claims often distract management from other more profitable endeavors. Clients want their projects finished on time, within budget and with minimum fuss and trouble.
Proper planning of the project can avoid many of the reasons for variation claims. Poorly written contract documents lead to claims and disputes. Choosing a contractor based purely on their price alone inevitably leads to problems on the project, and the cheapest price sometimes can end up being a very expensive price when things go wrong and when the variation claims come rolling in.
Open and honest communication should be encouraged through the life of the project. All parties should strive to minimize variation claims, not by ignoring them or rejecting them, but rather by taking early immediate intervention when problems are noticed.
What is your experience of construction variation claims? What impact have they had on your projects?
Are you contractually astute?
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