Contractual Claims Protection: A Checklist for Owners

More and more public owners have come to the realization that their general conditions and “front-end” documents are inadequately protecting them. Here is a checklist of clauses for owners to consider including in contracts for protection against potential construction issues. The following, in no particular order of importance, are brief summaries of some of the key clauses that owners should consider including in their contracts.

Notice Provisions – These provisions require the contractor to provide the owner with prompt notice of an alleged change, delay, claim for additional compensation, or differing site condition. A well-drafted clause will strive to bar claims that did not comply with the notice provisions because the owner can argue that there was a lack of notice to be able to respond. The purpose of such provisions is to give the owner an opportunity to adequately investigate the situation in order to verify (or rebut) the contractor’s contention and to actively participate in the resolution and monitoring of the work. In the case of an alleged differing site condition, the notice requirement should be one of immediate notice, since an owner investigation is likely essential to protect evidence of the condition and to determine how the affected work will proceed.

Differing Site Conditions – It is important to define what a differing site condition is and how it will be treated should one be encountered during construction.  This clause is particularly important in projects involving significant earthwork, tunneling, work in highly developed areas or renovation projects due to the increased likelihood of encountering susceptible conditions unknown to the designer and bidders.

Scheduling Requirements – Owners must take a more active role in monitoring the contractor’s schedule submittals in order to protect against potential improper schedule manipulation which could lead to inflated delay claims.  In order to achieve this, owners must first have a solid specification with a mandate that requires the contractor to submit regular and meaningful schedule data.  The areas which the specification should cover include, at a minimum:

·       Technical requirements for the initial baseline submittal and updates

·       Review/acceptance procedures and timeframes

·       Updating and revisions requirements

·       Treatment of “early completion” schedules

·       Inclusion of submittals and procurement activities in the overall schedule

·       Means of submitting requests for time extensions, i.e., fragnets

Audit Provisions – An owner can obtain extremely valuable information for evaluating or rebutting a contractor’s change orders and claims by gaining access to the full volume of the contractor’s records, including all cost records and correspondence with subcontractors.  General contractors almost always have access to the public owner’s records by virtue of public records statutes, but often an owner can only get access to a contractor’s records after a formal litigation process has been initiated.  A well-drafted audit or access to records clause can provide the owner with the contractual right to have access to all the contractor’s and subcontractors’ records at all stages of construction, thereby giving the owner much more information to utilize when assessing a request for change order or a claim demand.

Defined Mark-ups – Many disputes arise because contract provisions are not clear as to what is or what is not included within a contractor’s and subcontractor’s mark-ups and what is allowable under the contract.  Better defined provisions will take away the guesswork and arguments associated with this common problem and will decrease the chances that an owner pays for “double-dipped” overhead on extra or changed work.

Escrow of Bid Documents – This is a procedure used on large projects whereby the contractor is required to place all of its bid preparation materials into an escrow.  Then, if a change order or claim arises that brings the contractor’s bid or original plan of performance into question, the owner and contractor can jointly review the bid documents to determine whether they support the contractor’s performance.

Claim Submittal Requirements – Often, owners are frustrated at the end of a project when the contractor submits a disjointed omnibus claim or a claim with too sparse details that it is virtually “non-analyzable”. The addition of a claim submittal clause can formally specify the format, content and level of back-up documentation that is required within the contractor’s claim to be valid; otherwise, it will be rejected until it meets the contract requirements.  

Liquidated vs. Actual Delay Damages – When drafting contracts, owners are faced with a choice in deciding how they are going to address the possibility of contractor-caused delays that extend a project completion date. The Owner can elect to include a liquidated damages provision which is a pre-determined amount included in the bid documents that “fixes” the contractor’s daily exposure or liability for contractor-cause delays. The other option is for the owner’s contract to be silent regarding the amount of damages that the contractor would be liable for in the event of a delay.  In that case, the owner could claim all reasonable, foreseeable damages caused by the contractor’s delay.

Limitations on “Early Completion” Damages – Another damages-related area where an owner can protect itself is in limiting the types of damages a contractor can claim in the event of owner-caused delays or disruptions.  One type of claim that is quite prevalent is “early completion” whereby the contractor alleges that it would have finished the project earlier than the required contract completion, but the owner caused the delay, so the contractor is thereby entitled to the extended overhead costs. Owners can include clauses in their contracts that prohibit the recovery of damages based on missed early completion dates, forcing bidders to accept language that specifically acknowledges this premise.  A contractor may argue that in the public sector such a clause is rendered unenforceable under certain state-enacted statutes, which essentially makes wholesale no-damages-for-delay clauses difficult to sustain. However, the distinction that the clause only limits a contractor’s right to claim for early completion delays is not a wholesale denial of liability for all owner-caused delay similar to most typical no-delay-for-damages clauses.  Like any contract provision that restricts a contractor’s ability to recover, the mere potential for disagreement should not hinder an owner from including such a clause in its contracts.   

Defining Submittal Review Times – An area of frequent dispute and delay allegations involves the time taken by owner’s representatives to review required contractor submittals.  When a contract is silent about how long an owner’s representative has to review submittals, there is often a difference of opinion as to what a reasonable review period is. This can result in protracted arguments and even claims.  An easy way to address this from the outset is to simply specify in the bid documents the timeframe, (e.g., 20 calendar days) that the owner has to review submittals.  This forces the contractor to schedule its work accordingly based on the assumption that the owner contractually has “X” number of days for review.  Consideration should also be given in the specifications as to whether the review “clock” fully or partially starts over when a submittal is properly rejected and has to be resubmitted/re-reviewed.  In addition, owners should consider prohibiting the transmission of a large number of submittals simultaneously which could effectively overwhelm the owner’s project staff.  

Estimating Requests for Information (RFI) Times and Volume – Often, claims by contractors include allegations devoted to “untimely responses” or “excessive volume” of RFIs. Both of these subjects can be addressed by the owner in the contract.  The first, dealing with turnaround time, can be resolved by simply specifying a contractual turnaround time.  Many owners accuse contractors of failing to plan their work ahead and then demand instantaneous responses to RFIs.  To fairly set the turnaround time, the owner must take into consideration the complexity and duration of the project.  With regard to the volume of RFIs, a clause can be put into the contract stating that the contractor should expect “X” number of RFIs. This way, the owner can establish a reasonable baseline for denying “excessive” RFI-related claims and establish a baseline for contractor expectation.  The owner must also be on the lookout for contractors that may submit unnecessary RFIs to circumvent the baseline. 

The contract provisions discussed in this article are only a handful of the key clauses that an owner should consider to help protect against untimely or inflated claims. Because each project brings a different set of circumstances and complexities, it is always advised that owners engage a construction claims expert as early as possible to resolve potential issues arising on a project.

Mark Guevara, Esq., CFCC, PSP, PMP is a Principal Claims Analyst with ARCADIS and has over 35 years of experience in the areas of construction dispute and claims analysis and resolution.  He has appeared before dispute review boards, panels, mediations, trial and appellate courts, and has testified as an expert witness. He served as Chairman of the Certified Forensic Claims Consultant (CFCC) Certification Board, AACE International (AACEi) and currently serves as Chairman (Elect) of the Construction Law Section, Orange County Bar Association.