CONSTRUCTION CLAIMS DURING THE FINANCIAL CRISIS WHAT DEVELOPERS NEED TO KNOW

Claims During the Financial Crisis

The construction industry is experiencing one of the worst downturns in history; a lot of developers believe that the market is favourable for reducing construction costs and, to a certain extent, they are right. However, during previous downturns, some contractors tendered for projects at negative margins i.e. from -5 to 20%. Why? Apart from the obvious survival aspect, the answer is simple, Construction Claims! The Contractors try to convert negative margins into positive ones by pursuing an aggressive claims strategy. It is true that most projects have claims-related problems anyway, however, during an economic slump, the situation becomes exponentially worse. Whats the Solution? There are some key areas that developers need to Reasons for Claims Unfortunately, claims have focus on in order to minimize always been a part of the con- their exposure to claims. The struction industry and a lack of project contracts should be awareness of these amongst based on well-known ones Project/Construction Managers like FIDIC. The contracts (PMs/CMs) has led to considerable financial losses for developers. In a lot of claims situations, the Contractors are entitled to receive an extension of time to their contract duration and additional sums of money for loss and/or expense, however, Contractors generally tend to exaggerate the magnitude of their claims. There are several issues that give rise to claims, the primary one being variations. Contractors revel in raising claims for variations and can make a mountainous claim out of a molehill variation. Employer-related delays in the delivery of design documentation, co-ordination errors in drawings and discrepancies in Contract Documentation result in claims as well. should not be amended significantly and the project team should be conversant with the same. In terms of choosing personnel, it is vital to ensure that the potential PM/CM has regional experience with respect to the management of claims. Among the main issues that need to be queried are details of the PMs/CMs Claims Management Procedure. Most PMs/CMs have reactive procedures, i.e. they wait until the Contractor submits a claim before reacting. This procedure is ineffective; it may well succeed in giving cardiac arrests to the Developers team though! Developers also need to ask for details of the PMs/CMs in-house Claims Consultant; his CV should be perused in order to ensure that he is suitably qualified/experienced. It is also important to find out where the consultant is based; there is no point in having somebody based in the UK or the Middle-East for a project in C&EE. It is critical to choose contractors/designers carefully in order to keep post-contract variations/errors to a minimum. Do not employ Contractors/Designers just because their tender was the lowest; companies must be chosen based on their reputation, experience, financial stability and success in completing projects. Another common mistake is the reduction of project duration(s) by the Client for an accelerated completion. The project durations for all the Contractors on the project should be reasonable; a significantly reduced time-frame will result in more claims related issues for the Client. Above all, when it comes to hiring professionals, it should be borne in mind that the cheapest option is usually not the best option; as a wise man once said: Look before you leap! G
Text provided by Bovis Lend Lease

Raj Madhav - Senior Commercial Manager/ Claims Manager C&EE at Bovis Lend Lease B.E.(Civil), MCIArb, Corporate Member Chartered Institute of Arbitrators (UK) Raj.Madhav@eu.bovislendlease.com