University of Baghdad

College of engineering

Claims and insolvencies

Concept of Claims

The construction industry covers a complex field of activity involving many

operative skills and conditions which very considerably from on project to
another. Site and climatic conditions, market conditions, project
characteristics and available resources each of which can have a significant
effect one the operation of the contract.

Claimscommonly arise between the parties toconstruction contracts. This

can be as a result of problems such as; delays, changes, insufficient
information, and conflicts.Claimsmight be made forloss and
expense,extension of time,liquidated damagesand so on.

Types of claims

Contractual claims.
Negative
Positive

claims.

claims.

Ex-contractual claims.

Common law claims.

Contractual claims
1)

Negative claims:

Negative claims are those where the contractor seeks to avoid a

payment, such as liquidated and ascertained damages. A claim for
liquidated damages is made by the employer, against the contractor for
alleged breach of contract, in that the contractor has not completed
the works within the agreed contract period. In order to mitigate this
claim by the employer, a negative claim may be submitted by the
contractor, claims within this classification include those seeking an
extension of the contract period..

 The JCT Standard Form of Building Contract(1980, as amended) Clause 25

deals with extension of time The contractor is required to give written

notice to the architect of the material circumstances, including the cause or
causes of the delay
Examples

of relevant events are listed in clauses according to JCT

standard:
25.4.1:

Force majeure

25.4.2:

Exceptionally adverse weather condition.

25.4.3:

Loss or damage from specified perils such as floods.

25.4.4:

Civil commotion, strike or lock-out at the site

25.4.5.1:

Compliance with architect's instructions.

25.4.5.2:

Inspection and testing.

25.4.6:

Non-receipt by the contractor in due or sufficient time of

necessary instructions, drawings and details.

25.4.8.1: Delay or failure to execute work by tradesman are thus outside These
persons are engaged direct by the employer control.

25.4.8.2: Delay in or failure to supply goods and materials which the employer is
obliged under the contract to supply.

25.4.10.1: The contractor's inability to secure adequate labour for the proper carrying
out of the works. This must be beyond the contractors control and not reasonably
foreseeable at the base date.

25.4.10.2: A similar problem as covered by 25.4.10.1 but for goods and materials.

25.4.11: Delay in execution or failure by a local authority or statutory undertaker in

pursuance of a statutory obligation.

23.1.2 Execution of work covered by an approximate quantity in the contract where

such an approximate quantity is not a reasonably accurate forecast of the work actually
required.

25.4.15: delay due to a change in statutory requirements occurring after the base date
which necessitates alteration /modification to any performance specified work.

25.4.16: Threatened or actual acts of terrorism or actions of authorities in dealing

therewith.

The ICE Conditions (sixth edition, 1991) Clause 44 is the relevant clause,
whereby any claim for extension of time that the contractor wishes to make
shall be submitted within 28 days after the cause of delay has arisen.

PSAA: General Conditions of Contract for Building and Civil Engineering, This
form is intended for use in both public and private sectors for UK building and
civil engineering works.

Positive claims
It is this type of claim that attracts most attention. Such a claim, if
successful, can result in an addition to the contract sum and
consequently more money being paid to the contractor, Before
examining the initiation, origination, preparation and presentation
of such claims, it is desirable to consider the relevant clauses of
the conditions of contract.

The following provisions relate to the JCT Standard Form:

6.1: Any liability in respect of statutory requirements that are at variance with the
contract documents.

8.3: The cost of opening up for inspection any work covered up or the testing, of
materials or goods and the cost of making good, unless the inspection or test shows
that the work, materials or goods are not in accordance with the contract.

9.2: Liability in respect of any infringement or alleged infringement of patent

rights, such as proprietary techniques, or royalties.

13.5.6: Any direct loss or expense that is not reimbursable by effect of the
valuation of a variation.

17.2 and 17.3 The cost of making good defects that appear within the defects
liability period, the failure may result from faulty design, poor construction or both,
responsibility may be divided according to causes.

22.C.1.1 and 2: The cost of insurance premiums in respect of existing structures,

particularly where the contract includes extensions to existing buildings, upon
default of the employer to insure the works.

26.1: Any direct loss and/or expense resulting from disturbance of the regular progress of
the works, caused by one of the matters listed in.

26.2. The matters include delay by the architect in issuing instructions, or between
contract drawings and/or bills, default by the employer inspect of direct employees or
supply of materials and goods.

28.2: Direct loss or damage arising out of the determination of the contract by the
contractor upon the default of the employer. The action by the contractor could result
from such factors as excessive interference by the employer.

34.3: loss or expense in dealing with antiquities found on the site. For example, a site
contain items of special historic interest and work may be suspended on part of the site
while archaeologists carry out investigations.

37: Fluctuations, where price fluctuation provisions are included.

Additional cost for loss or expense

JCT Standard Form of Building Contract(1980) Under clause 26.1:

the contractor must claim within a reasonable time of the loss being incurred or the regular
progress of the works being delayed. As soon as any of the relevant facts are established, the
contractor must make written application to the architect without delay, otherwise the claim may
subsequently be regarded as inadmissible. The claim will normally only be in principle at this
stage, being more in the nature of a notification of intention to claim pending the assembly of
more detailed information and costs
.

ICE Conditions of Contract(1991)

Under clause 12, a claim may be submitted as a result of adverse physical conditions or
artificial obstructions encountered during the execution of the works, and which could
not reasonably have been foreseen by an experienced contractor. . A claim submitted
under the provisions of clause 12 may be for additional payment to cover the cost of
dealing with the conditions or obstructions. Clause 12(b) prescribes that this shall
include a reasonable percentage addition in respect of profit, and any extension of
time to which the contractor may be entitled.

Clause 52(4) gives a contractor an opportunity to claim for additional payment

under contract. It is up to the contractor to give notice in writing to the engineer
as soon as reasonably possible and in any event within 28 days after the
occurrence of the event that gives rise to the claim. In respect of the pricing of
variations, the engineer under clause 52(1) and(2) is given authority to
determine certain prices. If the contractor intends to claim a higher price than
that determined, he must under clause 52(4)(a) notify the engineer within 28
days, The time limitation is all important. After giving notice that he intends to
claim under this clause, the contractor must send to the engineer account giving
full and detailed particulars of the amount claimed to date and the grounds upon
which the claim is based. he contractor update this information when the full
facts and extent of costs are known.

iii PSA/1: General conditions of Contract for Building and Civil Clause 46 of these conditions
gives a contractor the opportunity to claim for any expense properly incurred by reason of
compliance with any of the project manager's instructions and related matters resulting in
prolongation or disruption. The amount of such expense is to be determined by the quantity
surveyor. The contractor must give notice to the project manager immediately upon becoming
aware that the regular progress of the works or any part of them has been or is likely to be
disrupted or pro- longed and the circumstances causing this. The contractor must provide full
details of all expenses within 56 days of being incurred.

Origination of claims

on site during Course of Works

is important that the occurrence that results in a situation where the contractor suffers loss
or expense is identified soon after the event. the verification of the supporting information
and facts, which are so important to the success of the claim, is very difficult in
retrospect. a Members of the contractor's management team are likely to experience
variety of situations where certain aspects are not entirely he following examples will serve
to illustrate some of these problems:
1) the site surveyor observes an operation proceeding on site but cannot clearly
determine how it is going to be reimbursed;

(2) the contracts manager experiences difficulty in obtaining information from the
architect despite a number of approaches;

(3) the managing director is unhappy about the profitability of the project. In each of
these circumstances immediate investigation is warranted.

Periodic checks by the Management Team of Contract Particulars:

In addition to the occurrence of events during the works that may give rise to a claim, it
should be the duty of one of the management team, probably the contractor's quantity
surveyor,
to check if a fundamental change are occurred between the contract
documentation and the works themselves. Some examples will serve to illustrate this
aspect:

(i) the site area and accesses, which may be more restricted than was indicated in the
contract documents;

(ii) the foundations, as the details are frequently incomplete at the design stage

(iii) the proportions and quantities of each type of work in the contract bills.

(iv) the nature and character of the works, to determine whether any significant change
has occurred between the project documents and that required on the site.

Preparation of claims
A contractor may need to refer to any of the following documents:

correspondence

approved minutes of site meetings

architects instructions

clerk of works directions

contract and working drawings and other documents

labour allocation sheets

correspondence with and claims from subcontractors and suppliers.

site diary

daily weather reports

receipt of drawings schedule

progress photographs

site level details

effect of tradesmen work

Records showing time period between date of tender and date of order to
start a work

Build up tender

extension of time claims

materials schedule

invoice lists

plants records

authorised day work schedule

programme and progress chart

borehole logs

work method system

variation sheets

Disruption of works resulting from

variations

The issue of certain type of variation affect on efficiency of project, and

productivity and profitability. For example, an extension to abuilding under
construction impinges contractors main access to site that affect on movement
of operative, plant and materials.

Proving that such disruption falls in (direct loss and /or expense)can be difficult.
There are some fundamental principles that are important in the preparation and
assessment of claims.

Programme: a realistic, properly prepared and detailed programme is a vital aid

to proving disruption especially when it identifies critical activities.

Resource allocation : an aid to proving the costs of disruption it is advisable for

contractor to show resources he has planned to used it in various stages. the clerk
of works normally keeps his own records which can be used an independent
check.

Effect of variation: the disruption of variation should be suitably recorded at

the time the variation orders are issued. These are best recorded on a
standardized form containing the type of questions are posed earlier and the
information required in response to the questions.

Acceleration entails increasing rate of constructional work to meet contract

completion date. This can be achieved by increasing number of operative,
length of working hours or amount of plant.it is unwise to contractor to
expend his money in this way without first obtaining architects agreement
and his confirmation that he is prepared to meet the cost.in this type of
disruption claims the contractor request for an extension of time under clause
25 of the JCT conditions with request for recompense under clause 26, the
architect will usually decide to accept the cost of acceleration.

Recovery of the cost of variations: contractors have in the past cooperated

with quantity surveyor in applying pro rata rates as a ready means of valuing
varied works.this procedure should be applied when work is similar character
and executed under same conditions.

Final accounts: some of quantity surveyors appear to treat a final account as

a technical operation rather than a matter of judgment. In some cases a
project is subjected to redesign that is bears little resemblance to the
original scheme. quantity surveyor may decide to abandon the preparation
of a bill of variation and to remeasure the whole works at billed rates.this
tantamount to an admission that the entire contract is varied, new rates and
prices should be negotiated to arrive at a fair valuation of the work.

Prolongation claims: these claims may be presented as a result of extensive

variations and be associated with a claim for extension of time under clauses
25 or as result of interference with regular progress of work under clauses 26.
prolongation claims will be based on direct the direct loss and/or expense
incurred by contractor resulting to extension of contract period. normally
relate to activities on critical path.

Preliminaries: the value of Preliminaries may be increased because of a

number of components being directly related to the contract period. A claim
under this head should preferably be based on actual expense, the contractor
should record the actual expense incurred during the period of extension. The
main expenses involved are likely to include the following:

Salaries of site staff

Cost of plant and scaffolding retained on site

Temporary lighting

Offices and stores and their upkeep

Safety measures

Protection of works

Insurance premiums

Telephone costs

electricity costs and rates on site buildings

Time of year when work is carried out

The extension of a contract from summer into winter may lead to extra costs
resulting reduce working hours, stoppages through bad weather and other
associated additional costs.

Extended attendances on nominated subcontractors

When contractor prices general and special attendances on nominated

subcontractors relate to period of time that nominated subcontractor is on site,
the contractor should record the actual cost should incurred.

Overheads

Claims should ideally reflect actual costs or expenses that are provable and this
should be applied to site overheads. Overheads are a budgeted amount
calculated on the anticipated years expenditure on staff, officers, equipment
and like. on this basis a minimum percentage on a fixed turnover must be
achieved to recover cost, if the turnover reduced then the percentage should be
increased.

Loss of profit

Must contractors claims will include some element of profit. a claim of this type
is very difficult to prove, since the profit can be lost by ineffiicency or bad
tendering before any extension of time occours.

Insolvency of building contractors

Nature and causes of insolvency

Insolvency is an omnibus term to cover various forms of individuals or companies being

so short of cash as to affect their legal position.(Keating)
The fact of being unable to pay ones debts or discharge ones liabilities.(oxford
dictionary)
In law; only individuals or partnership can be bankrupt.
Insolvent companies are put into liquidation; a receiver can be appointed to a company
that is not insolvent and a receivership is not followed inevitably by liquidation.
Many insolvencies occurred due to falling workloads and keen cometition accompined
by rising cost of labour and materials.some contractual and organizational aspect
contribute to insolvencies such as inviting excessive number of contractors to tender
for project.

Receivership applies when the debenture holders of a company, or their

trustees, consider that the security against their debentures is in jeopardy.

Duties of receivers and liquidators:

Assets charged

Collect rents and profits

Exercise the debenture holders powers

Liquidation: (winding up) of a company is the process whereby its life ended
and its administered for the benefit of its creditors and members.

Indications of imminent insolvency

There are some indications before receiver or liquidator appointed on insolvency

Slowing down in progress work and decreasing in labor force

Reduction in the value of materials on site

Non payment of nominated subcontractors

Requests from contractor for the quicker honoring of certificates

changes in the contractors personnel

Unusual visitors to the site

Since the quantity surveyor, clerk of works and architect should all be on the
alert for these warning signs.

Possible action prior to appointment of receiver or liquidator

The employers advisers should keep all information received strictly

confidential to avoid any possible escalation

The architect should take special care to ensure that quality of matrials
satisfy the requirements of contract documents.

Similar action should be taken to temporary fencing, hoardings and site

protection.

The clerk of works should be instructed to resist the removal of any unfixed
materials or goods delivered.

All insurance policies required by contract conditions should be checked

The contract requirements with regard to payment by contractor to

subcontractor must be monitored.

Any valuation should be prepared carefully to ensure no overvaluation

Possible action prior to appointment of receiver or liquidator

No interim certificate shall include the value of any defective work.

Where the financial position of the contractor is in doubt, the architect could
exercise his prerogative

If the contractor stops work on site without receiver or liquidator having been
appointed, the site should be made secure and a security watch placed upon
it.

Procedure upon appointment of receiver or liquidator

Preliminary action

No more certificates issued or valuations made and any payments from

employer to contractor should be withheld

The name and location of the receiver and manager or liquidator should be
obtained, and name and form of company not been changed

The site should be adequately secured

Insurances should be arranged for materials and plant on site

Arrangements should be made to take possession of materials off site under

clauses 30.3 by moving them to the site or secure store

The necessary authority should be obtained from the employer to complete

the works and the bondsman should be informed

Procedure upon appointment of receiver or liquidator

Subsequent action

Arrangements made for representation the employer at any meeting of creditors

Statutory undertakers should be informed for maintenance of temporary services

A financial assessment should be prepared

Nominated subcontractors and suppliers should be informed by liquidation

Scheduling should be prepared detailing the state of the works including any
defective items

The receiver or liquidator given a time limit for any assignment

Schedule of plant should be prepared

Outstanding letters should be acknowledged and replies sent where possible

Staff costs, fees and other expense should be recorded that may constitute a
charge against receiver or liquidator

Completion of contract works

To secure the earliest possible continuation of the contract because longer

delay in arranging completion greater cost to employer. Four methods to
completed the works:

I.

Reinstatement: the employment of contractor under contract may be

reinstated, this is the quickest way but a written insurance required to
liquidator to not subsequently disclaim.

II.

Assignment: the completion of the works arranged by receiver or liquidator

by assignment with the agreement of employer. This is effective procedure
provided financial standing of assignee is satisfactory.

III.

Novation: the receiver or liquidator mat secure a successor contractor of

acceptable financial and technical standing.

IV.

Completion by the employer: the Qs will obtain tenders for completion by

negotiation, competition or direct lamor.

The position of subcontractor

mostly, the contractor employed to complete the contract will make his own of
subcontractors. the subcontractor of main contractor, their reinstatement
depends on new nominations of the successor contractor.

Financial aspects

Reinstatement is the quickest and cheapest method of securing completion

works, providing the Qs assurance that responsibilities under contract.
assignment and novation are the next best means to complete works but
additional cost will be incurred. When employer arranges completion of works
the additional costs are likely to be high.

Final account and settlement

A normal final account determines the final cost of the contract and a
notional final account sets out what would have been the final cost of the
contract had the original contractor continued and finshed.

Insolvency of employers

When the employer is in insolvency, the contractor can determine his

employment by recorded delivery and he becomes the creditor of the
employer and the amount of the debt calculated under provisions of clauses
28 of the JCT standard form.