Ten Mistakes Employers Make That Cause Disputes

03/24/2011 11:32

After nearly four decades as a contracting officer, construction manager, and a construction claims consultant, I have concluded that employers routinely make a number of mistakes on projects that actually cause disputes. Those are the following: 1. Solving contractor problems – Employers want projects completed on time and within budget. When the contractor encounters problems on the jobsite, employers want resolutions – now. When contractors appear to be dragging their feet over a problem, employers often step in and direct a solution. If the problem was truly the contractor’s problem, not something caused by the employer, the directed solution may make the employer liable. In this case employers voluntarily make the contractor’s problem their own. Should this happen the employer may owe compensation and time to implement the solution. If a contractor poses a problem not of the employer’s making, employers should provide suggestions, not direction. 2. Proceeding with variations before time and cost are agreed upon – When a need for a variation arises, employers may feel pressured to proceed before the time and cost of the variation is negotiated. By authorizing the contractor to proceed with the work before agreement on time and cost is reached, the employer’s negotiating position evaporates. When instructed variations (known in North America as force account or time and material changes) are issued, the employer is at risk for the time and cost of the variation – regardless of how much higher these are than the employer thought at the outset. Employers are better advised to negotiate prospectively priced variation orders. Employers can learn the total time and cost impact before the work is underway and reach a business decision on whether the variation is worth the impact. 3. Failing to agree on the cost of variations on a daily basis when instructed variations are employed – When instructed variation directives are issued by the employer, many do not demand that the contractor provide a daily record of labor, equipment, materials, etc. Failure to obtain a daily record of the variation work may lead to higher costs. Failure to obtain and review the daily record of variations denies the employer the opportunity to check on mitigation of damages. When an instructed variation directive is issued, one of the terms should be that the contractor shall provide a detailed daily record of the work involved in the variation to the employer. 4. Not understanding the contract – Employers frequently modify standard form contract documents, but fail to train their own staff in the meaning and intent of the revised terms and conditions. The employer’s staff may be left with a poor understanding of what is in the contract and the intent of various clauses. When questions are raised by the contractor about various sections of the contract, they may provide inaccurate responses, which later develop into disputes. To avoid this situation, employers must train their staff about the contract – its contents and intent. If they know the contract and can explain it to contractors correctly, there is less likelihood of a dispute arising. 5. Using Requests for Information and contract interpretations to correct errors or redesign the project – Drawings and specifications sometimes require variations to correct errors. Other times, employers decide to make other variations to the plans. In either case, the contractor is typically owed additional cost and/or an extension of time. At times, however, employers or design professionals attempt to use interpretations or responses to ‘Requests for Information’, to direct variations to the work at the expense of the contractor. Should a scope of work need to be revised to overcome an error in the original documents or to provide for a variation the employer wants, employers must acknowledge their responsibility and instruct, or preferably agree upon a variation order with the contractor. 6. Objecting to written notices – Employers include numerous notice provisions in contract documents. Such requirements are intended to benefit the employer by bringing to their attention events and actions that may have potential impact to the time and cost of the project. Notwithstanding the clear benefit of written notices, many employers object when contractors file notices of time and cost impact. Some employers actively attempt to discourage contractors from submitting written notices despite the clear requirements of the contract. To avoid disputes concerning lack of timely written notices, employers should discuss notice requirements with the contractor and encourage them to submit written notices whenever called for in the contract, and then take action. 7. Requiring contractors to finance project variations – Construction is usually done on a cost reimbursement basis, in that, the contractor first spends their money to perform the work and only then can request payment for the work installed. Employers occasionally attempt to take advantage of their cash flow control position when faced with very large variations. Employers may direct the contractor to proceed on an instructed variation basis knowing full well that the variation will take much time to be installed. As instructed variations are sometimes not paid until work is measured by the employer’s Quantity Surveyor, this has the effect of requiring the contractor to finance the owner’s variations. When an employer determines a need for a large variation, the easiest way to avoid a dispute over the financing of a variation is to negotiate and execute a prospectively priced variation order. Once executed, the variation order can be added as a pay item to the schedule of values and the contractor can seek payment routinely as the variation work is installed. 8. Refusing to deal with extensions of time in a timely manner – The majority of variations do not delay the outcome of the project, but some will. Employers may fear settling extensions of time when variations are ordered, especially if the variation is issued early in the project. Employers say “What if I grant an extension of time now and it turns out the contractor really doesn’t need it at the end of the project?” As a result of this doubt, employers may refuse to deal with extensions of time preferring to wait until later in the project “when the contractor really needs the time.” Consequently, contractors struggle to reserve their rights to delay and impact claims, planting the seeds for a dispute. They argue that: The employer has breached their agreement by not administering the contract properly; they may accelerate work to protect themselves against liquidated damages; they argue that time is now at large and they are only obligated to deliver the project “within a reasonable time”; etc. All can lead to a dispute at the end of the project. And, all are avoidable if the employer adheres to the terms of their contract and grants extensions of time when impacts to the end date of the work are demonstrated. 9. Refusing to deal with indirect costs when variation orders are issued – As with the extension of time issue, many owners refuse to deal with the impact of variations. These are typically soft cost claims – lost productivity, extended field costs, etc. It is well known that multiple variations can cause indirect costs far in excess of direct costs. Indirect cost claims often arise at the end of the work because the employer refused to deal with them earlier. At the end of the work, however, the contractor may be pursuing decreased profit margins in addition to cumulative impact, mixing the two together in hopes that the employer cannot disaggregate the costs. The way to avoid end of job claims, is to work with the contractor when a variation order is being negotiated to determine what impacts are likely to result. Negotiate a reasonable cost for the indirect costs and include it in the variation order. 10. Failing to settle variation orders “full and final” – Many contractors seek to hedge their bets during the work by reserving their rights to delay cumulative impact until the end of the project. And, employers allow this. At the end of the project, it is likely that some element of decreased margin will be included in the cumulative impact claim. Employers then argue over what impact was caused by variations and how much of claim the contractor is simply trying to recover for other problems unrelated to the variations. To avoid this situation, employers should negotiate the full time and cost of each variation order, including indirect costs, preferably prior to work being performed in the field, and then include waiver language precluding the contractor from resurrecting settled variations at the end of the project. (To determine such language, a knowledgeable construction lawyer should be consulted.) Construction projects are a fertile field of endeavor, ripe for disputes. There are many parties involved in a construction project and the opportunity for things to go awry is significant. However, many disputes are self-inflicted. Employers who make one or more of the mistakes above invite such disputes. Each is avoidable if the employer adheres to the terms of their contract, deals with the contractor fairly, and proactively addresses issues as they arise. James G. Zack, Jr. FRICS CCM CFCC FAACE PMP Executive Director, Navigant Construction Forum, Navigant Consulting, Inc. James G. Zack, Jr. FRICS possesses almost 40 years of deep industry experience in construction management and dispute resolution services. He has been involved in more than 5,000 claims, both public and private, throughout his career and has been designated as an expert witness in mediation, arbitration and litigation. His disputes experience spans the globe, having worked on claims in Canada, Egypt, China, Germany, Kazakhstan, Saudi Arabia, The Russian Federation, and Trinidad & Tobago, as well as throughout the United States. He was formerly the Executive Director, Corporate Claims Management for Fluor Corporation, a $20 billion a year engineering, procurement, construction and maintenance contractor with offices and projects worldwide. In the construction disputes field, Jim is a recognized and well-published expert in mitigation, analysis and resolution, or defense of construction disputes. He is a nationally known author, speaker and trainer concerning the management, mitigation and resolution of construction claims and disputes and has testified as an expert witness. Jim is a Fellow of the Association for the Advancement of Cost Engineering, International (FAACEI) and the Royal Institution of Chartered Surveyors (FRICS). He is also a member of the Construction Management Association of America (CMAA) and the Project Management Institute (PMI). He is a Certified Construction Manager (CCM); a Certified Forensic Claims Consultant (CFCC); and a Project Management Professional (PMP). Jim is also a Past President of the Association for the Advancement of Cost Engineering, International (AACEI).