Professional Practice III (SBQ 3722) Disputes And Claims

CONTENTS

ITEM

TOPICS

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1. 2. 3.

INTRODUCTION COMMON CAUSES OF DISPUTES AND CLAIMS AVOIDING CONTRCATUAL CLAIMS & DISPUTES DISPUTES AND CLAIMS ORIGINATED BY THE CLIENTS DISPUTES AND CLAIMS ORIGINATED BY THE CONTRACTORS COMMON HEADS OF CLAIM 6 6

i ii 1-5

7 8 9 14

4. 5.

HOW TO AVOID DISPUTES AND CLAIMS DURING PRE-CONTRACT AND POST CONTRACT STAGE PROVISION OF CONTRACT RELATED TO THE DISPUTES ABD CLAIMS UNDER FORM OF CONTRACT LOSS & EXPENSE EXTENSION OF TIME DISPUTES DISPUTES AND CLAIMS MANAGEMENT CONCLUSION

15 16 -17 18 -19 20 -22 23

6. 7.

Professional Practice III (SBQ 3722) Disputes And Claims

INTRODUCTION

In the construction industry, contract claims and disputes are common issues. They occur between: owners and contractors (prime), contractor and their subcontractor, contractors and their vendors, and at other contractual interfaces. Resolution of the claims and disputes can be a costly, disruptive and aggravating process for all parties. A construction claim consisted of two major part: a. The entitlement section, which typically includes a detailed description of the actions or inactions of the party from whom relief is sought, entitling the claimant to compensation; and b. The damages section, which sets forth the calculation and support for the compensation claimed. Construction projects are often complex and the project participants are exposed to many uncertainties and risks. As a result, misunderstandings, disagreements and disputes regularly occur, resulting in litigations and arbitrations. Dispute avoidance anticipates these disputes and incorporated mechanism within the contract documents to quickly identify dispute condition for early resolution, thus preventing disputes from growing into more significant claims and litigation. Adequate project planning, proper allocation of risks and maintaining an atmosphere of teamwork are some of the key elements of an effective dispute avoidance program. Disputes or differences in opinion are unavoidable in a construction project. Many disputes in construction arise due to the failure (or perceived failure) on the part of one party to fulfill what they actually contracted to do. The best way to protect against the need to commence action against each other is to ensure both parties are subject to a contract which should be in writing and which contains clearly the terms upon which the parties expect to deal.

Professional Practice III (SBQ 3722) Disputes And Claims

There are three major areas of disputes: i) ii) iii) Delay (and disruption) Loss & Expense Variation to the Contract

When disputes do arise the contract will be the first point of reference, either to make or support a claim or to find a defence. It is imperative that: Parties identified what the dispute is about. Check the contract if it covers the particular issue under dispute. Check for any particular legislation, which though may not be detailed in the contract, is relevant to the dispute. Consider what action can be taken.

Well drafted contracts would have provisions setting out detailed procedures (e.g. CIDB 2000): Notice requirements Information required The criteria or method of evaluation Stipulated time-frame Interim measures Dispute resolution

Comparative of Loss & Expense, Extension of Time and Dispute Resolution are stated in clauses of Malaysian Forms of Contracts: CIDB 2000. PAM 1998 & PAM 2006

Professional Practice III (SBQ 3722) Disputes And Claims

JKR Form 203 Rev 3/83 & Rev 2007

Most standard forms of contract used in Malaysia are based on British standards forms or other international forms. PAM Form of Building Contract is based on British JCT Contract 1963. JKR Form 203 was based on British Public Works standard forms and Civil engineering contract is based on British ICE or FIDIC Form (IEM form is based on JKR 203).

COMMON CAUSES OF DISPUTES AND CLAIMS

In every industry where people have to work together and cooperate there is a possibility for disputes to arise, and construction industry is not an exception. Often there is a lack of understanding about the reasons behind the disputes, but to avoid disputes from occurring and resolving them if they occur, it is vital to understand the causes of disputes. The Oxford dictionary defines dispute as a disagreement or argument (Oxford English dictionary online). In this report we are taking a brief, systemized view of the most common causes of disputes in the construction industry. A lot of researchers have come up several lists of the most common causes of disputes; They have systemized them in 5 main causes: 1) the contract conditions, 2) the design deficiency, 3) the construction process, 4) the consumer reaction, 5) time 1. The contract conditions

1.1. The lack of perfection in the contract documents All drawings in the contract documents somewhere have mechanical drafting errors or lack a needed dimension or detail. Many have errors which arise due to the negligence of the designer and draftsman. In addition to the human errors, there are changes always occurring as projects undergo the design and construction process which if not properly documented could lead to disputes. The larger and more complex a project is, the more are the chances for such sort of errors. 1.2. Failure to account the cost Dispute continually arises in a construction project when the cost at the beginning of the project is not defined correctly. The contractors bring cost claim on projects which

Professional Practice III (SBQ 3722) Disputes And Claims

do not come under the construction budget, and if the client contradicts to these claims then disputes initiate. 1.3. The psychology of people in construction Construction industry is all about people. There are people involved in every stage of construction, and the contract administrator knows a little about people involved in the project. This is a major uncertainty in the projects which might lead to the disputes.

2.

The design deficiency. Design deficiency can cause serious disputes between the actors in the construction industry, it is one of the most often causes approximately 38% of disputes arise from design related issues. The most common issues that lead to disputes are:

2.1. The underground or subsurface problem. One of the most common causes of disputes in construction are the subsurface conditions. Usually client provides the contractor with the soil boring information so the contractor can determine the type of soil or rock that may be encountered during the excavation and bid accordingly. When the construction process is started, often it turns out that the subsurface conditions are different than planned so the contractor asks the client for extra money - compensation for the unexpected expenses. To avoid this, the client can include different disclaimers in the contract and transfer all the risks to contractor, but that does not always necessarily mean that there will be no disputes. 2.2. Risks. Contractor should do the risk analysis and estimate the risks so he can include the price of taking these risks in the specification but it does not always happen this way. There have been many cases that contractor includes the risk of the project delay, but does not include the extra cost for overtime working during this delay. It leads to dispute because contractor does not want to cover these extra expenses and asks for extra money from the client. 2.3. Defective plans Defective or deficient plans are widespread issue in construction industry. It can be said that all plans are defective or deficient to some extent, small errors like absence of some dimensions, for example, is a common thing in blueprints. The disputes arise when these defects in plans result in extra costs. Of course, usually the designer is responsible for these mistakes.

Professional Practice III (SBQ 3722) Disputes And Claims

2.4. Methods or means and specification performance. Usually the designer specifies the methods and means how to reach the specific result. In some cases, even tough contractor does everything according to these specifications and follows the instructions of designer, the end result comes out different than expected. For example, designer specifies that 2 layers of certain damp-proofing material should be applied to certain construction. The contractor applies this material accordingly, but it turns out that 2 layers are not enough and water infiltrates the construction. Of course, the designer is responsible for the damages, but often he tries to blame the contractor and this leads to a dispute between them. 3. The construction process. A common cause of construction disputes that previously was mentioned, are incomplete contracts, this issue is common to the construction industry and the reasons why contracts are not made properly can be many. Variations and changes in the construction process is almost impossible to avoid and can sometimes have very expensive consequences, change and additional work issues are where most of the disputes relating to the construction process takes play. However, the contractor can prepare for future changes in advance, for instance to create a cost-post for possible things that can occur and have it approved, this can be brought up in the risk-analysis for instance such as "unforeseen" future alterations and additional work. In addition, the contractor can set up prevention plans and take extra notice to phases whit some greater sensitivity, but also taking in account the probability of the many different changes and additional work that may occur during the project life cycle. Changes and additional work is something that does not always arrive from the client but is often the case. For instance the client can suggest another choice of materials, requests concerning the design, or a new project in principle that is fixed to "merge into or belong to" the old project. The consequences can be great unless the participating are careful and understand how to resolve certain issues such as what kind of changes are we to make, the choice of method, what will it cost and do we have even a contract for this additional work. 4. The consumer reaction.

4.1. The public owner. Sometimes after completion of the construction project, the user or the owner of the building is not satisfied with it. It often occurs because the users of the building does not know what were the design requirements that designer should have met. For example, the building was designed to support a certain amount of kilowatts of electricity used, but the users need more and they dont realize that designer have met the requirements. This can cause a dispute between the client or the user of the building and the designer or the contractor. 4.2. Warranties.

Professional Practice III (SBQ 3722) Disputes And Claims

The clients role when it comes to the warranty issue is to make sure that they are Implemented and ready before the production process. From the clients point of view there are two warranties that should be under great consideration, firstly the Production Guarantee insurance and secondly the Construction errors insurance. The production guarantee insurance is basically a guarantee made off the insurance company that promise the client to continue and complete the construction object if the contractors company goes bankrupt.

The second warranty that will help to secure some of the clients wishes and the operation-flow of the facility or building whom the client operates in. This warranty means that the insurance company will cover future unanticipated construction errors up to ten years after the completion of final inspection. 5. Time In construction industry its not only the cost that is important, but the time is equally important too. Delay in the time period of the project generates different extra costs or losses, with which either the client or the contractor has to deal. Scheduling and proper planning will help the contractor to manage his project and finish and complete his jobs on agreed time. This will avoid any dispute that may occur due to delay because of poor planning by the contractor. There are several common causes of claims: 1) Acceptance of unclear tender offers without proper clarification, negotiation and recording of charges. 2) Inadequate or uncoordinated design by consultants. 3) Poor communication between various parties. 4) In adequate management co-ordination and supervision. 5) Failure of parties to deal promptly with changes and unexpected conditions. 6) Inadequate identification, allocation, and management of risks. 7) Inadequate project viability studies, site investigation, design process, tender and documentation. 8) Deterioration in the general standard of professionalism of consultant , contracts administrators and contractors.

Professional Practice III (SBQ 3722) Disputes And Claims

9) 10) 11)

Lack of clarity of client's brief or requirement. Poor contract documentation. Unrealistic contract price.

12) Failure of clients or contract administrator to give timely decision , instruction or information.

13) 14) 15) 16) ups. 17)

Lack of team workmanship. Macho or litigious mindset. Unhealthy sub contracting culture of passing the bug. Parties unwilling to take responsibility, preferring to shift decision to the higher Inadequate provisions in the contract.

18) Lack of good governance and transparency in the appointment of consultant and contractors

Professional Practice III (SBQ 3722) Disputes And Claims

AVOIDING CONTRACTUAL CLAIMS & DISPUTES Contract is about dealing with uncertainties (risks) which may occur in the future. If a risk arises the Contract should stipulate: Who does what, Who is to bear the consequences, and A means of enforcing those obligations. There are several risks for Contractor: Procurement of resources to execute & complete the works on time. Responsible for the security and safety of the Works. Ensuring quality and compliance with Contract. Ensure that the sub-contractors perform the purpose of the contract. There are also several risks for Employer: Obtain necessary approvals and provide necessary information for Contractor to construct. Ensure adequate funds are arranged. Ensuring that SO & SOs representative perform their duties in accordance with the Contract. DISPUTES AND CLAIMS ORIGINATED BY THE CLIENTS Typical conflict originated by Clients: 1) Complaint of poor workmanship /defect 2) Complain of design faults 3) Delay in completion and imposition o LAD 4) Ambiguities between the documents

Professional Practice III (SBQ 3722) Disputes And Claims

5) Disputing on contract's claims

Dispute originated by clients; 1) Defective works or poor workmanship

2) Delays in construction and completion 3) Imposition of liquidated damages 4) Design fault 5) Suspension and determination of client's employment 6) Non-fulfillment of contractual obligations 7) Contractors breach of statutory duty 8) Contractor's negligence, nuisance 9) Disagreement on evaluations or certification

Typical causes of construction conflicts: 1) Contract provision which unrealistically shift certain risk to parties who are unable or unprepared to cover those risks. 2) Unrealistic expectations of the parties. 3) Poor contract documentation. 4) Unrealistic contract price. 5) Poor communications. 6) Inadequate management, co-ordination and supervision.

Professional Practice III (SBQ 3722) Disputes And Claims

DISPUTES AND CLAIMS ORIGINATED BY THE CONTRACTORS

Disputes originated by contractors 1) Delay and extension of time. 2) Changes or variations.

3) Imposition of liquidated damages. 4) Loss and expenses claim. 5) Dispute on payment because of the delay payment or inappropriate set off. 6) Dispute on valuations. 7) Dispute on determination or suspension. 8) Dispute on practical completion and issue of CPC. 9) Performance bonds and guarantees. 10) Ambiguities in or between documents.

There a few typical claim originated by contractor including: 1) Claim for extension of time. 2) Claim for variations, loss and expenses. 3) Dispute on valuation of variation and final account. 4) Delay or non-payment on amount due. 5) Ambiguities between the documents. 6) Delay or non-issue of certificate by contract administrator, architect, engineer or S.O.

Professional Practice III (SBQ 3722) Disputes And Claims

COMMON HEADS OF CLAIM

There are a few common heads of claim from contractor. They are: 1) Extended preliminaries 2) Site overheads

3) Acceleration cost 4) Enhanced rate 5) Uneconomical working 6) Escalation cost 7) Head office overheads 8) Interest or financing cost

Common heads of claim from employer: 1) Liquidated and ascertained damages 2) Additional cost to complete the works 3) Cost of repairs and diminishing in value 4) Third party claims 5) On-cost

Common heads of claim from documentation: 1) In order for any claim to succeed, it is important that documents supporting the claim are well kept and presented.

Professional Practice III (SBQ 3722) Disputes And Claims

2) Where notices are required, it is important that such notices have been given to the Architect or S.O in accordance with the contract provisions. 3) Contemporary records must be kept on cost and expenses incurred. 4) Timely presentation of notices and claims or otherwise the claim may be timebarred.

HOW TO AVOID DISPUTES AND CLAIMS DURING PRE-CONTRACT AND POST CONTRACT STAGE

One of the best ways to cover and avoid costly disputes with customers, contractors and subcontracts on a project is to ensure that all correspondence is well documented and stored in writing. Verbal communication is often not conclusive enough to prove or disprove a claim and in todays litigious society, it is imperative to record documents such as transmittals, change orders, RFIs, site diaries and meeting minutes. But, why are organizations still being caught out? Is it that the process of documenting and filing is just too time consuming and difficult? This is why an investment in project management software with good document control facilities can save you time and money in the long run. Unlike traditional practices where project managers maintain all of their own estimates and documents in spreadsheets only accessible to a handful of others in the organization, well developed software products such as IPM enable automatic filing of all documents related to a project in the one place. This means that in the unfortunate event of a dispute, document retrieval is efficient and all encompassing. Records of email correspondence are also gold when it comes to dispute resolution. We know the manual filing and organizing of emails is a time consuming and monotonous task, but did you know that IPM can automatically track and file email communication for a certain job with an automatically generated tracking code in the subject line? With documentation features like this, there is now no reason why disputes should cost your organization more than they have to. There are a few stages that we can do to avoiding the disputes and claims occur: i) Inception Stage

Professional Practice III (SBQ 3722) Disputes And Claims

Prevention is better than cure Appoint experienced and competent consultants Review of Fee Structure For Consultants -Benchmarking of appropriate fees -Role of the professional boards and institutions

Arrange sufficient funding for the project

Identify potential risks and provide mechanism to deal with such risks

ii)

Project Brief Stage Adequate design brief or clients requirements with budget allocation Brief with clear project objectives, scope, quality expectations, timing, budget.

iii)

Schematic Design & Cost Planning Stage Adequate planning and co-ordination is pre-requisite to a successful project Apply Value Management techniques to confirm project objectives, enhance value and eliminate wastages. Cost plan should capture scope and expectations Confirm scope, budget and feasibility

iv)

Design Development Stage Ensure sufficient detailing and information Coordination of drawings, specification and other design information

Professional Practice III (SBQ 3722) Disputes And Claims

Cost checking and monitoring

v)

Tender Documentation Stage Use appropriate form of contract with: - clear, unambiguous and balanced allocation of risks

- avoidance of excessive amendments - adequate provision for treatment of changes and unexpected conditions -adequate provisions for recognition of disputes and settlement of disputes - adequate provisions for dispute resolution including ADR Contract provisions will not avoid the dispute, but with well documented procedures can help the parties to achieve settlement early Comprehensive and complete tender documents - Institute check processes to ensure that the full scope of works are captured in the tender documents - Any discrepancy or error discovered should be corrected prior to closing of tender

vi)

Tendering Stage Ensure fair tender price Avoid under priced tender with the hope of making up through future claims Agree on realistic construction period

vii)

Contract Award Stage

Professional Practice III (SBQ 3722) Disputes And Claims

Appoint competent and experienced contractor Pre-qualification exercise is helpful Avoid award based on lowest price only Appoint should be based on a matrix of criteria including lowest conforming price, technical competence, financial capacity, project team, etc.

Clarification and negotiation prior to award

viii)

Post-Award Construction & Contract Administration Stage Ensure contract document is signed as early as possible Clarify contract administration procedures between all parties at the earliest opportunity Proposed designers should be relieved from contract administration duties Avoid changes or variations unless they absolutely necessary or unavoidable Timely notices are important early recognition of time and/or cost implications give all parties the chance and time to re-strategies, and may avoid prolonged dispute at a later date Claims submission should be supported by relevant and clear particulars Timely notices, submissions and decisions, well kept records and reasoned decisions prevent issues from escalating Decision of Contract Administrator Fair Reasonable and Timely Client should avoid interference with contract administration Payment on time by client to main contractor and by main contractor to subcontractors All correspondence must be replied promptly

Professional Practice III (SBQ 3722) Disputes And Claims

ix)

Completion and Hand Over Stage Agree on the checklist for handover inspection Agree of criteria for approval on quality of work where it is a matter of opinion

Agree on a set of test to be carried out on completion

x)

Defects Management Stage Agree on the checklist and the period for inspection for defective works Timely notification of defective works Contractor must be ready to make good defective works as soon as possible or within time frame agreed Renovation works during DLP should be avoided

xi)

Other Recommendations Maintain teamwork and spirit of co-operation from inception to completion Avoid confrontational attitude Should dispute arises, find earliest opportunity to resolve Build trust and help all parties to take ownership of common objectives of the project Communication lines should be open and transparent Partnering concept

Professional Practice III (SBQ 3722) Disputes And Claims

DISPUTES AND CLAIMS MANAGEMENT Often, disputes are mired in a stand-off situation with both affected parties unwilling to reach a compromise. In this case, the situation calls for the intervention of a thirdparty to analyze and bring the dispute to a quick conclusion. Cost especially if there is a prolonged litigation or arbitration can have a huge and totally unnecessary impact on the project and the client. A Dispute Management Program Team has the ability to bring about a quick resolution by managing your disputes by analyzing your contractual and legal standing, and through fact-finding by involving your project personnel in the proceedings. Alternative Dispute Resolution Unless settled by arrangement of the parties, disputes normally end up either in litigation or arbitration, or other form of dispute resolution, depending on the terms of the Conditions of Contract, and how the parties seek resolution. Available dispute resolution procedure include:

Court Litigation (Not an ADR) Arbitration (Considered by many not to be an Alternative) Expert Determination Consultation (negotiation) Mediation Adjudication Early neutral evaluation Disputes Boards Alternative refers to non-judicial methods of dispute resolution, i.e. as alternatives to litigation. tion is a commonly used alternative to litigation for settling disputes. tation (negotiation) is always a step to settlement of disputes. Conciliation (mediation) is somewhat between arbitration and consultation and is usually by a third party. Adjudication is similar to arbitration, but within a set (limited) time frame, and often termed as rough and ready justice. Expert determination is a little used form of ADR. A third party of particular expertise, e.g. a specialist, is asked to give a determination upon specific issue (or a handful of associated issues) only. The expert determination not open to appeal. Therefore there is minimum courts intervention or legislative control. Early Neutral Evaluation is designed to serve as a basis for further negotiations or avoid unnecessary stages in litigation / arbitration. Not commonly used in construction disputes. Possible reason for parties in construction more comfortable with established ADR, e.g. arbitration, mediation and adjudication.

Professional Practice III (SBQ 3722) Disputes And Claims

Dispute Boards is a procedure whereby a panel of 3 engineers / lawyers (sometimes just one) is appointed at the outset of a project. The panel visit the site 3 or 4 times a year and deals with any developing disputes. This generally avoids disputes developing into an arbitration. Dispute Board is required under FIDIC standards forms; the International Chamber of Commerce & the Institution of Civil Engineers (UK) have produced the DB rules. DB are successful based on the UK and International experiences, that 97% of disputes referred will not go beyond DB to arbitration or litigation. Using multiple ADR for a Dispute It is possible use different forms of ADR for a dispute arising under one construction contract. Examples: - A dispute may initially be referred to mediation. If the parties fail to settle, then the same dispute is referred to arbitration (e.g. PAM98) - Sometimes, referral to mediation as a condition precedent to commencing arbitration (e.g.CIDB 2000). Some forms of contract does not allow arbitration to commence until after practical completion (e.g.IEM) - Therefore, referral to mediation or adjudication has the advantage of early resolution of the dispute, without having to wait until the practical completion of the works. The disgruntled party to the adjudication can still refer the dispute to arbitration (or the Courts) at later date.

Professional Practice III (SBQ 3722) Disputes And Claims

CONCLUSION Disputes are one of the major sources in declining the performance of construction projects. They not only cause a disturbance in the construction process but also cause distrust between the two parties. So every necessary step should be taken to minimize the occurrence of a dispute. We can conclude from all the listed causes of dispute that the main root of a dispute is the lack of communication and coordination between the two parties and a bit of negligence to some extent. We can minimize the disputes within a project to very low number by just increasing the flow of communication and by being careful and responsible. Better project management and the partnering approach will improve communication and attitude, will avoid many problems, and will help resolve those that do occur. The dispute avoidance and resolution efforts will encourage settlement of changes by the project team without resorting to ADR techniques. The documentation and compliance with notice requirements of the claims management portion of the Dispute Management Program will facilitate reaching a fair and equitable settlement for additional work. The use of ADR techniques in lieu of litigation will save time and money, in addition to preserving on-going business relationships.