Claims Management: Quick Response is Critical When Disputes Arise

5/1/2015 - By Zachary Farrington

-This excerpt is from our Spring 2015 Dimensions Newsletter-

Construction projects are, by their very nature, complex processes with many variables and numerous interested parties. In any such situation, misunderstandings and disputes are inevitable.

As business accelerates these days, disputed claims are also increasing. Common causes include undocumented change orders, scheduling delays, defective plans and changes in site conditions, to name just a few.

Whenever a claim arises ― regardless of whether you are filing the claim or defending yourself against it ― how quickly and effectively you respond can make all the difference.

Early and Expert Legal Advice
One of the first steps a contractor should take whenever a construction claim arises is to get qualified legal advice. It is important to consult with an attorney who is proficient and specifically experienced in construction claims litigation. This is a highly specialized field in which early advice from an expert can save you time, money and effort ― not to mention improve your chances of success.In particular, look to your lawyer for advice on:

• The specific terms of the contract and legal notifications required.
Most contracts spell out specific steps you must take in order to give proper notice of a claim and preserve your rights. If these processes are not followed precisely, an otherwise valid claim is likely to be thrown out.

• The dispute resolution processes that are spelled out in your contract.
Many contracts require you to agree to mediation or binding arbitration in lieu of going to court. In addition to explaining the steps your contract requires you to follow, your attorney can also advise you on the pros and cons of the settlement processes your contract specifies and how they are likely to affect your chances of success.

• The legal precedents in your particular issue.
You can run up sizable legal costs pursuing a claim that seems justified to you, only to learn that arbitrators or court precedents have consistently ruled against you in similar cases. This is one more reason why specialized legal expertise in construction claims is so important. An experienced claims attorney can advise you if the claim you are pursuing has a reasonable chance of success.

Documenting and Quantifying Damages
As you prepare to talk with your attorney about your claim, it can be useful to review some general concepts about the subject of damages, particularly as they relate to your accounting and job costing systems.

For example, when you are pursuing a claim you normally must be able to demonstrate certain basic facts to a mediator, arbitrator or court. These include the underlying issue that’s driving the claim (such as schedule delays, defective plans, changed site conditions, etc.) and why you believe the party against whom you are filing the claim is responsible for the issue.

You will also need to be able to demonstrate that the damages you are claiming are a direct result of the issue you raised. In addition, you must be able to quantify those damages.

That last point is often more difficult than it sounds ― and it’s an area where your accountant can be of particular help. While direct costs such as materials and labor can be relatively easy to document, it can be much more difficult to accurately allocate indirect costs such as overhead and administrative expense. You will need solid and detailed accounting and cost tracking systems to be sure you are including all the relevant costs you incurred as a result of the action that drove your claim.

What’s more, these costs should be quantified and documented as they are incurred ― not weeks or months later as you struggle to come up with accurate numbers. Courts and arbitrators tend to look skeptically at “after the fact” computations and quantification of damages. The inability to quantify damage through contemporaneous accounting records can often cause an otherwise valid claim to be reduced significantly.

Educate your project managers and other key field staff about the importance of recognizing potential claims situations early. This way, you can immediately begin accounting for potential claims-related costs separately. Set up separate cost categories for charging time, materials and allocated expenses as they are incurred, rather than trying to separate out the costs later.

Again, your attorney can offer guidance into which costs should be documented.