THIS PAPER IS IN THE PROCEEDING OF THE ELEVENTH NATIONAL CONVENTION ON CIVIL ENGINEER, PHUKET, THAILAND, 20-22 APRIL 2006.
AN ANALYSIS OF THE EMPLOYERS’ CLAIM MANAGEMENT SYSTEM IN INTERNATIONAL CONSTRUCTION PROJECTS
Kongkoon Tochaiwat1
Visuth Chovichien2
1Ph.D.Candidate, Chulalongkorn University,
2Assoc.Prof., ChulalongkornUniversity,
ABSTRACT :To be successful in procurement of a construction project, the employer needs an efficient claim management system. This research aims at analyzing the communication processes among parties in international construction projects in order to find the availability of each important data required in the employers’ claim management processes. The research also seeks to provideguidelines to improve the efficiency of the processes, as well as to describe the level of importance of each document flowing in the process. In order to establish a representative model of international construction contract management procedures, the “Conditions of Contract for Construction (First Edition)” and the “Client/ Consultant Model Services Agreement (Third Edition)” prepared by Fédération Internationale des Ingénieurs-Conseils(FIDIC) and International Chamber of Commerce’s Rules of Arbitration (ICC’s Rules of Arbitration) were selected. All documents flowing in the representative model were analyzed of their availabilities of claim data. The missing data, the level of importance of each document, and guidelines for improving the system were then identified. The results acquired can be used to improve existing claim management systems, especially those of employers’ organizations, and can enhance success and fairness to all parties involved in construction industry.
KEYWORDS : Construction claims, Claim management, Information system, Contract, International project
THIS PAPER IS IN THE PROCEEDING OF THE ELEVENTH NATIONAL CONVENTION ON CIVIL ENGINEER, PHUKET, THAILAND, 20-22 APRIL 2006.
1.Introduction
An employer needs an efficient claim management system in order to be successful in procurement of a construction project. This research aims at analyzing the communication processes among parties in international construction projects in order to find the availability of each important data required in the employers’ claim management processes, guidelines to improve the efficiency of the processes, and the level of importance of each document flowing in the process.
2.Research methodology
This research was performed in the following steps:
1) Analyzing the provisions concerning communication among parties in an international construction contract.
The related provisions consist of those contain in the employer-contractor contract, employer-engineer agreement and rules of arbitration. In order to establish a representative model of the international construction contract management procedures, the “Conditions of Contract for Construction (First Edition)” and the “Client/ Consultant Model Services Agreement (Third Edition)” prepared by Fédération Internationale des Ingénieurs-Conseils(FIDIC) and International Chamber of Commerce’s Rules of Arbitration (ICC’s Rules of Arbitration) were selected [3-5]. The list of all documents flowing in the process, accompanied by their reference clause, issuer, and receiver, was created and used in the subsequent steps.
2) Grouping documents by their purposes and contents.
In order to facilitate the analysis process, documents with similar purposes and contents were grouped together. For example, FIDIC construction contract agreement and FIDIC client/ consultant agreement are in the same group because both contain the parties’ intention to have contractual relationship with the other.
3) Analyzing the availability of each claim data in the representative project.
The availabilities of 105 data necessary for claim management, proposed by Tochaiwat and Chovichien (2005), were inspected [13]. In addition, the missing data from all mandatory documents were listed and the relevant optional documents needed to be added to the system were analyzed.
4) Calculating “Document Importance Index” of each document.
Document Importance Index of each document was calculated by summingof all “Data Importance Indexes” of all claim data contained in the document. The higher Document Importance Index, the higher importance the document is in construction claim management process [13].
5) Research conclusion
3. Construction claim and claim management process
3.1 Construction claim
Construction claim is defined as “a demand or assertion by one of the parties seeking, as a matter of right, adjustment or interpretation of contract terms, payment of money, extension of time or other relief with respect to the terms of the contract” [8]. Several research works confirm the effects of construction claims on cost and time of projects. Semple et al. (1994) found that a large majority of claims involved some delays and in a number of cases delays exceeded the original contract duration by over 100%. As to the project cost, more than half of the claims resulted in additional costs of at least 30% of original contract values [11]. Callahan (1998) reported that transit agencies in the United States and Canada experienced an average cost escalation of 7% of contract value from settlement of disputes and claims for heavy civil contracts [2]. In Thailand, Khanchitvorakul (2000) discovered that the average cost escalation from contract value caused by claims was approximately 7%, proximate to Callahan’s finding [6].
Although construction claims have significant effects on the projects, they are not always given adequate considerations. From the project employers’ point of views, one of the problems is that they the do not realize what data are required in managing their claims and how important such data are.
3.2 Construction claim management
There are a number of sub-processes related to construction claim management. Levin (1998) indicated seven basic sub-processes for claim and change order administration [8]. They are:
1) Recognition and identification of change
Construction claim recognition and identification involves “timely” and “accurate” detection of a construction claim. It is the first and critically important ingredient of the claim process [7].
2) Notification of change
Construction claim notification involves alerting the other party of a potential problem in a manner that is non-adversarial. Time limit requirements are very crucial and critical and normally specified in the contracts.
3) Systematic and accurate documentation of change
Records and documentation play a very important role in the settlement of contract claims. However, there are a lot of evidences showing that the importance of record management is not realized as much as it should be [9, 10].
4) Analysis of time and cost impacts of change
There are a number of literature concerning the calculation procedures of the time and cost impacts caused by the events leading to rights to claim. These can be grouped into two major categories: time impact analysis (or schedule analysis) and cost impact analysis [12].
5) Preparation of claim
The purpose of this sub-process is to give the other party in the contract a substantive description and details of claim. Preparing of claims can be divided into two activities: (1) claim pricing (2) claim filing.
6) Negotiation of claim
Kululanga (1989) listed five activities involved in negotiation: (1) ascertaining that all information is current and complete, (2) minimizing the scope of negotiation beforehand so that insignificant points should not precipitate a violent argument and disrupt progress, (3) knowing one’s weaknesses and trying to utilize weak points by conceding them in return from the other party, (4) foreseeing problems, and (5) anticipating the opposition’s next move [7].
4.Documents flowing in a project and availability of claim data
From the analysis, there are 352 documents specified by the FIDIC’s agreements/ ICC rules of arbitration, which can be grouped into 206 groups of documents. Most of them are related to the employer or the engineer except 6 groups of documents (8 documents).
From checking the availability of the claim data, there are 18 claim data missing from the mandatory documents of the representative project, as shown in Table 1.
Table 1 Claim data missed from the representative project
Group / Claim data1. expert’s opinion / 1) engineering expert’s opinion
2) financial expert’s opinion
2. equipment / 1) hourly employer's equipment
operating cost
2) hourly employer's equipment
ownership cost
3. financial / 1) contractor’s cost of capital
2) employer’s cost in the
segmented cost code
3) original employer’s cash
flow
4) actual employer’s cash flow
5) employer’s cost of capital
6) required project rate of
return
4. relationship / 1) relationship between
employer and third party
2) relationships among each
contractor’s works
3) relationship between designer
and contractor in the project
5. employer’s use
of works / 1) date of each use of works
2) purpose of each use of works
6. visitor / 1) date of site visit
2) name of visitors
3) purpose of each site visit
Without the claim data listed in Table 1, the employers cannot perform correct and acceptable analysis of construction claim liabilities and claim quantum and will lose their claim management efficiency. In order to acquire the mentioned missing claim data, additional 14 groups of documents (18 documents) should be included into projects. Table 2 shows the additional documents accompanied by their relevant missing claim data.
Table 2 Recommended additional documents for enhancing claim management efficiency
No. / Group / Claim data missed from mandatory documents1 / 1) consultant's
monthly report
2) consultant's
weekly report
3) consultant’s
daily report / 1) relationship between
employer and third
party
2) date of each use of
works
3) purpose of each use
of works
4) date of site visit
5) name of visitors
6) purpose of each site
visit
2 / site diary / 1) relationship between
employer and third
party
2) date of each use of
works
3) purpose of each use
of works
4) date of site visit
5) name of visitors
6) purpose of each site
visit
3 / meeting minute / 1) relationship between
employer and third
party
2) date of each use of
works
3) purpose of each use
of works
4) relationship between
designer and
contractor in the
project
4 / 1) notice of expert's
opinion
2) report of expert / 1) engineering expert’s
opinion
2) financial expert’s
opinion
5 / record of
equipment cost
from employer / 1) hourly employer's
equipment operating
cost
2) hourly employer's
equipment ownership
cost
Table 2 Recommended additional documents for enhancing claim management efficiency (Cont.)
No. / Group / Claim data missed from mandatory documents6 / 1) record of
employer's
financial
transaction
2) financial report / 1) employer’s cost in
the segmented cost
code
2) actual employer’s
cash flow
3) employer’s cost of
capital
7 / feasibility report / 1) original employer’s
cash flow
2) required project rate
of return
8 / employer's financial
plan / 1) original employer’s
cash flow
2) required project rate
of return
9 / notice of
contractor's cost of
capital / 1) contractor’s cost of
capital
10 / notice for use of
works by employer / 1) date of each use of
works
2) purpose of each use
of works
11 / report of site
visitor / 1) date of site visit
2) name of visitors
3) purpose of each site
visit
12 / project's master
schedule / 1) relationships among
each contractor’s
works
13 / contractor's daily
report / 1) date of site visit
2) name of visitors
3) purpose of each site
visit
14 / contractor's weekly
report / 1) date of site visit
2) name of visitors
3) purpose of each site
visit
Some of the recommended documents are directly available to the employers or their engineers such as consultants’ reports, records of the employer’s equipment cost and feasibility report, while some data have to be based on the contractor’s notices or reports such as contractor’s cost of capital and details of each site visiting by the external persons. Sometimes, occurrences of claim can be recognized by a visit of the contractor’s legal department staff or the lawyer [1].
5.Document Importance Index
Document Importance Index indicates how important the document is in managing claims. It can be calculated by summing of the all Data Importance Indexes of the claim data contained in the document.
From ranking all documents in the representative project by their Document Importance Index, there are 78 groups (159 documents) with high importance, 65 groups (103 documents) with medium importance, and 82 groups (122 documents) with low importance, respectively. Table 3 shows top ten documents with the highest Document Importance Index.
THIS PAPER IS IN THE PROCEEDING OF THE ELEVENTH NATIONAL CONVENTION ON CIVIL ENGINEER, PHUKET, THAILAND, 20-22 APRIL 2006.
Table 3 Ten documents with highest Document Importance Index
Rank / Group / Reference Clause/Sub-clause* / Document
Importance Index
1 / 1) consultant's monthly report
2) consultant's weekly report
3) consultant’s daily report / N.A. / 60.98
2 / meeting Minute / N.A. / 51.22
3 / 1) notice of expert's opinion
2) report from expert / N.A. / 46.39
4 / 1) Statement at Completion
2) drafted Final Statement
3) Final Statement / 1) G.C.14.10[Statement at Completion]
2) G.C.14.11[Application for Final Completion
Certificate]
3) G.C.14.11[Application for Final Completion
Certificate] / 39.70
5 / 1) publications
2) cost indexes
3) selling exchange rate / 1) G.C.1.8[Care and Supply of Documents]
C.A.42[Publication]
2) G.C.13.8[Adjustments for Changes in
Legislation]
3) G.C.14.8[Delayed Payment] / 35.48
6 / site diary / N.A. / 35.18
7 / 1) notice of dispute information to Dispute
Adjudication Board (DAB), designated
representative, mediator, arbitrator
2) request for decision or opinion from DAB,
Designated representative, mediator,
arbitrator
3) request for arbitration
4) notice of answer of request for arbitration
5) notice to make counter-claim
6) notice to reply counter-claim / 1) G.C.20.4[Obtaining Dispute Adjudication
Board’s Decision]
C.A.8[Decisions]
C.A.43[Amicable Dispute Resolution]
2) G.C.20.4[Obtaining Dispute Adjudication
Board’s Decision]
C.A.8[Decisions]
C.A.43[Amicable Dispute Resolution]
3) G.C.20.6[Arbitration]
I.C.3[Request for Arbitration]
4) I.C.4[Answer to the Request]
5) I.C.5[Counter-claim]
6) I.C.5[Counter-claim] / 34.64
8 / 1) Interim Payment Certificate
2) Final Payment Certificate
3) certificate of first installment of advance
payment
4) certificate of payment of retention money
5) payment certificate in case of optional
termination / 1) G.C.14.6[Issue of Interim Payment
Certificates]
2) G.C.14.11[Application for Final Payment
Certificate]
3) G.C.14.2[Advance Payment]
4) G.C.14.9[Payment of Retention Money]
5) G.C.19.6[Optional, Termination, Payment
And Release] / 32.75
9 / 1) notice to claim
2) notice of monthly claim details
3) notice of final claim details
4) notice of claim for intellectual and
industrial property right
5) notice of delay caused by employer or
contractor / 1) G.C.2.5[Employer’s Claim]
G.C.20.1[Contractor’s Claim]
C.A.18[Limit of Compensation and
Indemnity]
2) G.C.20.1[Contractor’s Claim]
3) G.C.20.1[Contractor’s Claim]
4) G.C.17.5[Intellectual and Industrial Property
Rights]
5) C.A.25[Delays] / 32.19
Table 3 Ten documents with highest Document Importance Index (Cont.)
Rank / Group / Reference Clause/Sub-clause / Document
Importance Index
10 / 1) notice of DAB’s decision or opinion
2) notice of arbitrator's award
3) notice of designated representative’s
decision
4) report of decision of minority of DAB
5) notice of employer's decision
6) notice of recommendation or non-binding
opinion by mediator
7) record of fact agreed in mediation
8) notice of award by consent
9) drafted award
10) notice of the Court of Arbitration's
decision
11) notice of chairman of the Court of
Arbitration's urgent decision / 1) G.C.20.4[Obtaining Dispute Adjudication
Board’s Decision]
2) G.C.20.6[Arbitration]
C.A.44[Arbitration]
3) C.A.43[Amicable Dispute Resolution]
4) G.C.20.4[Obtaining Dispute Adjudication
Board’s Decision]
5) C.A.8[Decisions]
6) C.A.43[Amicable Dispute Resolution]
7) C.A.43[Amicable Dispute Resolution]
8) I.C.17[Award by Consent]
9) I.C.21[Scrutiny of Award by the Court]
10) I.C.23[Notification of Award to Parties]
11) I.C.1[Court of Arbitration] / 31.52
* G.C. = FIDIC’s General Conditions of Contract [5]C.A. = FIDIC’s Client/ Consultant Agreement [4]
I.C. = ICC’s Rules of Arbitration [3]
THIS PAPER IS IN THE PROCEEDING OF THE ELEVENTH NATIONAL CONVENTION ON CIVIL ENGINEER, PHUKET, THAILAND, 20-22 APRIL 2006.
Table 3 reveals the importance of the reports prepared by the consultants, minutes of meetings, statements, site diaries, and certificates. The documents acquired from external sources such as notices of expert’s opinion, publications, cost indexes, as well as exchange ratesalso have significant roles in substantiation of claims. The documents flowing in claim process and dispute resolution process tend to contain the information necessary for proving one’s rights and responsibilities, which is in accordance with their high indexes.
6.Conclusion
This research examined all documents flowing in the representative model to find the availabilities of claim data. The missing data, the level of importance of each document, and guidelines for improving the system were also presented.
There are 18 claim data missing from the mandatory documents specified in FIDIC’s construction contract, FIDIC’s client/ consultant agreement, and ICC’s rules of arbitration. In order to acquire all necessary claim data, additional 14 groups of documents (18 documents) should be included. Furthermore, employers should pay attention to the consultant’s reports, meeting minutes, notice of expert opinions, statements, external data, site diaries, and certificates.
Preparation of the suggested additional documents and paying attention to the documents with high importance index can improveexisting claim management systems, especially those of the employers’ organizations, and can enhance success and fairness to all parties involved in the construction industry.
7.Reference
[1]Adrian, J. J., 1988. Construction Claims: A quantitative Approach. New Jersey: Prentice-Hall.
[2]Callahan, J. T., 1998. Managing Transit Construction Contract Claims. Synthesis of Transit Practice 28. Washington: National Academic Press.
[3]Craig, W. L., Park, W. W., and Paulson, J., 1990. International Chamber of Commerce Arbitration. Second Edition. Paris: ICC Publishing S.A.
[4]Fédération Internationale des Ingénieurs-Conseils [FIDIC], 1998. Client/ Consultant Model Service Agreement. Third Edition. Lausanne: FIDIC.
[5]Fédération Internationale des Ingénieurs-Conseils [FIDIC], 1999. Conditions of Contract for Construction. First Edition. Lausanne: FIDIC.
[6]Khanchitvorakul, S., 2000. Development of Construction Claim Supporting System.Master of Engineering King Mongkut University of Technology Thonburi.
[7]Kululanga, G. K., 2001. Construction Contractors’ Claim Process Framework.ASCE Journal of Construction Engineering and Management,Vol.127, No.4:309-314.
[8]Levin, P., 1998. Construction Contract Claims, Changes & Dispute Resolution. Second Edition. Boston: ASCE Press.
[9]Pogorilich, 1992. The Daily Report as a Job Management Tool.Cost Engineering,Vol.34, No.2:
23-25.
[10]Scott, S. and Assadi, S., 1999. A Survey of Site Records Kept by Construction Supervisors.Journal of Construction Management and Economics,Vol.17:375-382.
[11]Semple, C. et al, 1994. Construction Claims and Disputes: Clauses and Cost/ Time Overruns.ASCE Journal of Construction Engineering and Management,Vol.120, No.4:785-795.
[12]Tochaiwat, K. and Chovichien, V., 2004. Contractors’ Construction Claims and Claim Management Process.Research and Development Journal of the Engineering Institue of Thailand,Vol.15, No.4:66-73.
[13]Tochaiwat, K. and Chovichien, V., 2005. .Construction Claim Management System for Construction Project Employer Seminar.Bangkok.
THIS PAPER IS IN THE PROCEEDING OF THE ELEVENTH NATIONAL CONVENTION ON CIVIL ENGINEER, PHUKET, THAILAND, 20-22 APRIL 2006.
THIS PAPER IS IN THE PROCEEDING OF THE ELEVENTH NATIONAL CONVENTION ON CIVIL ENGINEER, PHUKET, THAILAND, 20-22 APRIL 2006.
THIS PAPER IS IN THE PROCEEDING OF THE ELEVENTH NATIONAL CONVENTION ON CIVIL ENGINEER, PHUKET, THAILAND, 20-22 APRIL 2006.