Note: This paper is in the Proceeding of “CIB-W107: International Symposium on Globalisation and Construction”, Bangkok Thailand, 17-19 November 2004.
STRATEGIC DATA FOR EMPLOYERS’ CONSTRUCTION CLAIMS
KONGKOON TOCHAIWAT and VISUTH CHOVICHIEN
Department of Civil Engineering, Chulalongkorn University, 254 Phyathai Road, Patumwan, Bangkok 10330, Thailand. ,
ABSTRACT
This research aims at examining and identifying the cost components of construction claims and necessary data for substantiating and pricing claims. The research was done by identifying and analyzing the cost components for each contractual claim type handled by employers. The availabilities, the appropriate method for calculation, and the data required in substantiating and pricing process of each cost component were analyzed. In addition, the ranks of the important cost components and the contract provisions are also identified. The required data collected from the analysis were then classified into subgroups by their sources.
It was found that there are a number of cost components, which can be classified into either the employers’ claim cost components or the contractors’ claim cost components. The availabilities of each component of each contractual claim type were also presented. The data required in substantiating and pricing claims handled by the employers were classified into seven groups by their sources and their topics. The strategic data acquired from this research, especially that are necessary for substantiating and pricing high ranked contractual claims and their related cost components, should be paid high level of attention in order to enhance the effectiveness in the employers’ claim management process and to reduce the project time and cost.
Keywords:Construction claim, contract, construction data, FIDIC
Introduction
Construction claim is the seeking of consideration or change by one of the parties involved in the construction process [Arditi and Patel,1989]. Several research works show the order of magnitude of the effects of construction claims on cost and time of the projects. For example, the results of the survey of the claims in 24 construction projects in Western Canada in 1994 found that the large majority of claims involved some delays and in a lot of cases delays exceeded the original contract durations by over 100%. As to the project cost, more than half of the claims were additional costs of at least 30% of the original contract values [Semple, Hartman, and Jergeas, 1994]. In addition, a study shows that transit agencies in the United States and Canada experienced an average cost overrun of 7% of contract values from settlement of disputes and claims from heavy civil contracts [Callahan, 1998]. In Thailand, the survey of the claim behaviors of 21 construction companies showed that the average cost overrun from contract value caused by claims was about 7% [Khanchitvorakul, 2000], close to Callahan’s finding. Nowadays, the substantially increasing volume of claims are the result of the rising complexity of the projects, the price structure of the construction industry and the legal approach taken by many employers and contractors [Levin, 1998].
Although construction claims have significant effects on the projects, they are not always given adequate considerations. For example, a study shows that records available on sites seldom allow an as-built schedule to be constructed easily [Scott and Assadi, 1999]. The daily report is often given the least amount of attention although it may be the most important document on the project [Pogorilich, 1992]. A survey of construction claim management practices in Thai construction companies showed that the lack of awareness of on-site people is considered the major problem of claim management. Inadequacies of supporting evidences, stemming from unaware project personnel as well as improperly designed documentation systems, are the next serious shortcomings causing loss of chances to recover incurred damages. The management level was also recommended to pay more attention to these aspects for having an effective claim management system [Surawongsin, 2002].
From the employers’ point of view, it is appropriate that they should establish an effective claim management system so that they can be aware of the potentially adverse job conditions and have opportunities to take proper actions to protect or remedy the works in advance instead of simply complying with contractor’s claims. From literature review, it can be seen that the majority of the claim management systems focus on supporting the contractors’ claim process. Because of the difference between the employers’ and the contractors’ roles, rights, duties, availabilities of the information, their relevant types and aspects of claims, and methods of analyzing and pricing claims, the management system that is suitable for them must also be different. While the contractors always claim against the employers for the delays, changes in scope-of-work, acceleration, and differing site conditions, the types of claims generally claimed by the employers against the contractors are claims for delayed project completion, defective work, and abandonment of the project [McDonald, 1984].
This research presents the results of analyzing the required data for the employers to manage their claims in accordance with “The Conditions of Contract for Construction for Building and Engineering Works Designed by the Employer” (“The Construction Contract”) prepared by the Federation Internationale des Ingenieurs-Counseils (FIDIC) in 1999, which is one of the most accepted standard forms of construction contract. In addition, this research examined the strategy of identifying the cost components of the employers’ claims, cost component quantification, and acquisition of necessary data for substantiating and pricing the claims.
RESEARCH METHODOLOGY
The steps to examine and acquire the data necessary for the claim substantiating and pricing processes consist of:
1. Identifying and analyzing the components of cost claimed for each employers’ and contractors’ claim type specified in “The Construction Contract” [FIDIC, 1999]. In this step, the types of contractors’ claim cost components for each type of the contractors’ claims presented by Adrian(1988) were used as a framework in identifying and analyzing the employers’ claim cost components.
2. Analyzing the availability, the appropriate method for substantiating or pricing, and the data required in substantiating or pricing or recognizing each cost component of claims.
2.1 Analyzing the availability of each claim cost component for each claim-related contract provision. In this analysis, the list of contractual claim in FIDIC’s forms of contracts proposed by Booen(2001) and the types of contractors’ claim cost components for each type of contractors’ claims [Adrian, 1988] were used. Each claim cost component was labeled as “Not Included”, “Sometimes Included”, and “Always Included” for each employers’ or contractors’ claim-related provision.
2.2 Finding the ranks of the most frequently found cost components and contract provisions by representing “Not Included” by “0”, “Sometimes Included” by “1”, and “Always Included” by “2”. Then the summation of such values for each cost component and each contract provisionare calculated.
2.3 Reviewing and Selecting the appropriate method for substantiating or pricing each claim cost component from literature. The criteria for selecting the appropriate method of calculation were the correctness of result, advantage, disadvantage or limitation, and acceptance. The discussion of each selection is, however, beyond the scope of this paper.
2.4 From the substantiating or pricing method selected in 2.2, analyzing the data necessary to be inputtedinto the relevant calculationprocess of each method. Some data were classified into the same group in order to reduce the number of the data.
3. Analyzing the sources of each required data. Four sources of data, e.g. the employer, the contractor, the engineer, and sources, were used in this analyzing step.
4. Identifying the availability to the employer and the engineer (as an employer’s representative) of each data by considering its sources. The data which are not available to the employer or the engineer were then replaced with another alternative data that are directly or indirectly available to those parties.
5. Classifying the data collected from the above analysis into eight subgroups according to their sources(data directly and indirectly acquired by the employer or the engineer) and their relationships with the construction process (data related to the employer and the engineer, contractor and the subcontractor, project, and miscellaneous respectively).
Employers’ and Contractors’ Contractual Claims
In order to determine the standard contract management process used in this research, the process specified in “The Conditions of Contract for Construction for Building and Engineering Works Designed by the Employer” or “The Construction Contract” prepared by Federational Internationale des Ingenieurs-Conseils (FIDIC) was adopted as a framework for the analysis. This form of contract is recommended for building or engineering works designed by “the Employer” or by “the Engineer”, as his representative, and “the Contractor” has obligations to construct the works in accordance with a design provided by the employer [FIDIC, 1999]. The former edition of this form of contract, “Conditions of Contract for Works of Civil Engineering Construction (Fourth Edition)” or “The Red Book (Fourth Edition)”, was mandated in the “World Bank Standard Bidding Document for the Procurement of Works” published in January 1995, and then was recommended by the World Bank for the purpose of drafting the new edition [Bowcock, 1998]. This is a reason why this form of contract has become one of the most accepted contract forms, which has been used worldwide.
There are several provisions related to the construction claims, both against employer and contractor, in The Construction Contract (1999). Booen(2001) listed the sub-clauses related to several types of claims, as shown in Table 1. It also presents the party against whom each provision claims and the purposes for which each provision claims.
Table 1. The Provisions related to Claims from “The Construction Contract (1999)”
No. / Sub-Clause / Claimed By / Claim ForEmployer / Contractor / Cost / Time
1. / 1.9[Delayed Drawings or Instructions] / - / / /
2. / 2.1[Right to Access to the Site] / - / / /
3. / 4.7[Setting Out] / - / / /
4. / 4.12[Unforeseeable Physical
Conditions] / - / / /
5. / 4.19[Electricity, Water and Gas] / / - / / -
6. / 4.20[Employer’s Equipment and
Free-Issue Material] / / - / / -
7. / 4.24[Fossils] / - / / /
8. / 7.4[Testing] / - / / /
9. / 7.5[Rejection] / / - / / -
10. / 7.6[Remedial Work] / / - / / -
11. / 8.4[Extension of Time for Completion] / - / / - /
12. / 8.5[Delays Caused by Authorities] / - / / - /
13. / 8.6[Rate of Progress] / / - / / -
14. / 8.7[Delay Damages] / / - / / -
15. / 8.9[Consequences of Suspension] / - / / /
16. / 9.4[Failure to Pass Tests on Completion] / / - / / -
17. / 10.2[Taking Over of Parts of Works] / - / / / -
18. / 10.3[Interference with Tests on
Completion] / - / / /
Table 1. The Provisions related to Claims from “The Construction Contract (1999)” (Cont.)
No. / Sub-Clause / Claimed By / Claim For
Employer / Contractor / Cost / Time
19. / 11.3[Extension of Defects Notification
Period] / / - / - /
20. / 11.4[Failure to Remedy Defects] / / - / / -
21. / 11.8[Contractor to Search] / - / / / -
22. / 12.4[Omissions] / - / / / -
23. / 13.1[Right to Vary] / - / / /
24. / 13.2[Value Engineering] / - / / / -
25. / 13.7[Adjustments for Changes in
Legislation] / / / /
26. / 14.8[Delayed Payment] / - / / / -
27. / 16.1[Contractor’s Entitlement to
Suspend Work] / - / / /
28. / 17.1[Indemnities] / / / / -
29. / 17.4[Consequences of Employer’s
Risks] / - / / /
30. / 18.1[General Requirements for
Insurances] / / / / -
31. / 18.2[Insurance for Works and
Contractor’s Equipment] / / - / / -
32. / 19.4[Consequences of Force Majeure] / - / / /
Employers’and Contractors’ Cost components
There were seventeen cost components proposed by Adrian in 1988. However, six cost components collected from the contract provisions of “The Conditions of Contract Contract for Building and Engineering Works Designed by the Employer” (The Construction Contract (1999)) were added in order to improve the analysis. The relations between the contractors’ claim related provisions from The Construction Contract (1999) and the contractors’ claim cost components are the result of subjective analyses by the authors, taking account of their availabilities in each provision.
The ranks of the cost components which have the highest frequencies among the contractual claims and the contract provisions which have the highest number of the related cost components, for both contractors’ and employers’ claims, can be analyzed by assigning the values to the cost component and contract provision matrices. The cost components which are seldom or never found in the claim specified in the related sub-clause were assigned “0” value while the cost components which are sometimes and always found in the claim related to such sub-clause were assigned “1” value and “2” value respectively. The values were then summed in both row direction and column direction to find the rank of the cost components and the rank of the contract provisions, respectively.
The analysis shows the cost components with the highest frequencies among the contractors’ contractual claims and the contract provisions with the highest number of the related contractors’ claim cost components in Table 2 and Table 3 respectively. These cost components and contract provisions are found in several contractual claims and should be given special attention.
Table 2. Rank of Contractors’ Claim Cost Components
No. / Cost Component / Score1. / 1) Equipment Rental Cost
2) Cost for Owned Equipment Used / 35
35
2. / 1) Additional Material Unit Price
2) Additional Subcontractor Cost
3) Variable Job Overhead Cost
4) Profit / 34
34
34
34
3. / 1) Additional Direct Labor Hours Due to Lost Productivity
2) Increased Labor Rate
3) Interest or Finance Costs / 33
33
33
Table 3. Rank of Contract Provisions Related to the Contractors’ Claims
No. / Contract Provision / Score1. / 1) 19.4[Consequences of Force Majeure] / 31
2. / 1) 7.4 [Testing]
2) 10.3[Interference with Tests on Completion] / 30
30
3. / 1) 1.9 [Delayed Drawings or Instructions]
2) 4.7 [Setting Out]
3) 4.24[Fossils]
4) 8.4 [Extension of Time for Completion]
5) 8.5 [Delays Caused by Authorities]
6) 8.9 [Consequences of Suspension]
7) 10.2[Taking Over of Parts of the Works]
8) 13.3[Variation Procedure]
9) 13.7[Adjustment for Changes in Legislation]
10)16.1[Contractor’s Entitlement to Suspend Work]
11)17.4[Consequences of Employer’s Risks] / 29
29
29
29
29
29
29
29
29
29
29
Note that almost all high-rank contract provisions are related to delay claims, scope-of-work claims and accerelation claims. In addition, sub-clause 4.7[Setting Out] and 4.24[Fossils] are related to the changing-site-condition claims.
On the other hand, the cost components of the employers’ claims were identified by using the contractors’ cost components as a framework. But only fifteen components were collected from the employers’ cost components. After being added seven cost components acquired from analyzing The Construction Contract (1999), there are twenty-two cost components used in substantiating and pricing the employers’ claims.
After performing the same analysis of the contractor’s claims, Table 4 and Table 5 respectively show the three employers’ claim cost components which are frequently found and the three contract provisions with the highest relationship with the employer’s contractual claims. It should be noted that the important employers’ claim cost components are related to the overhead cost. These cost components and claim-related contract provisions should be given special attention.
Table 4. Rank of Employers’ Claim Cost Components
No. / Cost Component / Score1. / 1) Variable Job Overhead Costs / 11
2. / 1) Additional Employer’s Personnel Hours / 10
3. / 1) Variable Company Overhead Costs
2) Fixed Company Overhead Costs / 8
Table 5. Rank of Contract Provisions Related to the Employers’ Claims
No. / Contract Provision / Score1. / 1) 8.7[Delay Damages] / 21
2. / 1) 11.4[Failure to Remedy Defects] / 20
3. / 1) 7.6[Remedial Work] / 18
Data Required in Employers’ and Contractors’ Claim Management Processes.
67 pieces of data are found to be necessary in managing the employers’ contractual claims, which can be divided, by their sources (data directly and indirectly acquired by the employer or the engineer) and their relationships to the construction process (data related to the employer and the engineer, contractor and the subcontractor, project, etc. respectively), into seven groups, as shown in Table 4. Data in the “Data Directly Acquired by the Employer or the Engineer” category are the data which the employer or the engineer produces or posssesses while the data in “Data Indirectly Acquired by the Employer or the Engineer” category are the data which are produced or possessed by other parties. It should be noted that the employer or the engineer can acquire all data related to the employer and the engineer themselves directly. Therefore the cell in the “Data the Employer or the Engineer Acquire Indirectly – Data Related to the Employer and the Engineer” group were not filled.
Table 6 shows that there are several data required by the employers in substantiating and pricing the claims specified in The Construction Contract (1999). Some data can be collected from either the employers or the engineers, as the employers’ representatives, while some data must be collected from the contractors or other external sources. The data which must be collected from the contractor but which there is no contract provision specifying the contractor’s obligation to provide to the engineer must be substituted by other data more conveniently acquired by the engineer. Some data, such as the contract value, the name of the bidders, and the bid price of each contractor in the project bidding in the past are always overlooked although they are necessary in substantiating some cost components of the claim. The engineers or the employers should inspect their claim management system whether such necessary data are sufficiently collected.
Table 6. Data Necessary for Managing the Claims by the Employer
Data Directly Acquired by the Employer or the Engineer / Data Indirectly Acquired by the Employer or the EngineerA. Data Related to the Employer and the Engineer / A1. General Information
1) Actual Employer’s Cash Flow
2) Employer’s Cost in the Segmented Cost Code
3) Employer's Cost of Capital
4) Original Employer’s Cash Flow
5) Works Done by the Employer
A2. Free-Supplied Material
1) Date of Employer’s Free-Supplied Material Purchase
2) Employer’s Free-Supplied Material Unit Price
3) Employer’s Free-Supplied Material Sent to the Contractor
4) Employer’s Free-Supplied Material Return to Employer
A3. Equipment
1) Employer's Equipment Actual Hour
2) Employer's Equipment Hourly Ownership Cost
3) Employer's Equipment Hourly Operating Cost
A4.Personnel
1) Employer’s Personnel Rate
2) Employer’s Personnel Hours
3) Employer’s Personnel Hours of Increased Employer’s Personnel Rate
A5. Engineer
1) Date of Instructions Issued
2) Details of Instruction Issued / -
B. Data Related to the Contractor and the Subcontractor / 1) Works Done by Other Contractors / 1) Contractor's Cost of Capital
2) Details of Works Done by the Subcontractor
3) Total Price of Contracts the Contractor Receive
4) Works Done by the Contractor
C. Data Related to the Project / C1. General Information
1) Date that the Work can be Used as Intended
2) Productivity Records
3) Required Rate of Return of Project
4) Test Result
C2. Cost
1) Adjusted Unit Cost / 1) Cost Pattern of the Opportunity Profit Loss Project
2) Expected Climatic Condition
3) Normal Productivity
4) Normal Equipment Rental Cost
5) Normal Labor Rate
6) Normal Material Unit Price
7) Percent Overhead+Profit+Tax / Direct Cost
Table 6. Data Necessary for Managing the Claims by the Employer (Cont.)
Data Directly Acquired by the Employer or the Engineer / Data Indirectly Acquired by the Employer or the Engineer
C. Data Related to the Project (Cont.) / 2) Normal Hourly Equipment Operating Cost
3) Normal Hourly Equipment Ownership Cost
C3. Document
1) Date of Documents Received
2) Date of Documents Submitted
3) Details of Documents Received
4) Details of Documents Submitted
C4. Site Condition
1) Climatic Condition
2) Site Condition
3) Site Condition of Neighborhood Sites
C5. Defect and Delay
1) Cause of Deficiency in Works
2) Details of Deficiency in Works
3) Delay Duration Attributable to the Contractor
4) Problem of Use of Works
5) Reasons of Delays
C6. Site Event
1) Date of Each Use of Works
2) Date of Special Events Occurred
3) Details of Special Events Occurred
4) Purpose of Each Use of Works
D. Miscellaneous / 1) Estimated Payment to Other Contractors
2) Original Value of Works
3) Payment Amount
4) Payment Date
5) Payment Purpose
6) Payment to Whom
7) Bid Price of Each Contractor / 1) Date of Law and Regulation Changed
2) Details of Law and Regulation Changed
3) Law or Regulation
4) Bid Price of Each Contractor in Past Bidding Project
5) Expert’s Opinion : Engineering
6) Expert’s Opinion : Law
7) Expected Interest Rate of Central Bank at Profit Loss Project Duration
8) Interest Rate of Central Bank
Conclusion