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A short discussion on Construction Claims and Disputes

Understand how the effective contracts administration and management safeguards interests of all stakeholders.

Construction disputes make up a significant component of the claims and disputes dealt with in Arbitrations in India.

The Government is investing into new facilities for improving the infrastructure of the country. At the same time, commercial and real estate projects are on the rise in India. There is a construction boom taking place. All such construction projects require highly specialized designs, detailed plans and specifications, high-risk construction methods, effective project planning and management, skilled supervision, and effective coordination. Construction projects are complex, uncertain, have extended construction periods, involving many parties, requiring Civil, Mechanical and Electrical engineering experts to work in close co-ordination.

These various parties involved in construction contracts deal with complicated challenges and technicalities making it riskier for contractors and clients. Larger and more complex projects involve more parties and more ways the project could go wrong. Also, contractors have to construct progressively sophisticated and risky projects with a reduced number of resources and profits.

Construction contract disputes can start right after a contract is formed and may continue till the end. Therefore, the smooth sailing of a project to begin with depends on a number of factors like exclusive new contract formation, bidding, and compliance to contractual documents during execution.  The best chance to prevent claims comes to an end once tender-documents are finalized and the contract is awarded.

The next phase is the execution of the project without change in the scope of work, ensuring timelines are followed, vendors and contractors and other agencies are appointed on time and there is no deviation from the contractual conditions. Out of the four phases- Pre-tender, Contract Formulation, Construction, Post completion of a construction project, most claims occur during the construction phase.  

Invariably, this construction phase entails time and cost overruns, developing into disputes which result into claims. Claims may distract the parties from execution which can result in avoidable delays. Claims can create adversarial relationships among the parties involved. 

Construction claims take considerable time and resources to resolve. It is therefore in the common interest of all involved parties to prevent them, minimize them, or resolve them as amicably as possible. Identifying common claims and their triggers is essential to minimize and avoid them. Therefore, delay analysis is an important aspect of the construction process. Sometimes delays occur for which neither party is in control.

A Construction Claim can be defined as a petition by any party to the contract for compensation for damages caused by failure of the other party to fulfill obligations as defined in the contract. The contractor may claim compensation for a delay when aggrieved. The compensation awarded is mostly in the form of an extension of time (EOT) and not additional payment. This is where the dispute begins. Construction claims are looked at by the stakeholders to be one of the most worrying and unpleasant events of a project.   

If a construction claim management process is in place in a project, disputes and claims can be avoided and mitigated. This will depend on how the project teams approach the project from the outset. This includes building into their teams dedicated project management, claims and legal specialists from the outset of a project to identify particularly risky or sensitive areas and put in place strategies to manage those risks during project delivery. Dealing with tension points and issues and resolving them as they emerge can preserve and secure relationships between contractor and the client and between the other stakeholders.

It is seen that, depending on the situations Contractors make claims against the client and subcontractors make claims against the contractors. The client has enough security against the contractor in the form of Bank Guarantees, retention money and progress-based payments. In case the claim goes beyond the secured amounts due to non-performance of the contractor, then the client can file a claim against the contractor. Letting claims to build up unresolved during a project is creating a challenging hurdle to successful project conclusion.

It is therefore in the interest of the respective parties to perform according to the agreed terms of the contract and complete the project on time with an understanding of all the stakeholders. This can be achieved through effective contracts administration and management.

As per lean production principles, continuous process flow ensures that any deficiency in the system gets highlighted immediately. Consider building construction in this example. It is standard practice to commence finishing activities only after at least four next slab cycles are complete.

Why is this so? Is there a reason for this “buffer” or is it due to our lack of confidence that subsequent slabs will be completed just in time? Lean construction would stipulate minimizing the time between these two phases so that the entire project team is focused on completing the slabs in time. Attempting this would also immediately point out the bottlenecks that need to be resolved to make the entire system more efficient.

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