By Jim Zack, Senior Advisor, Navigant Construction Forum
Claims do not magically appear during construction. The seeds of many disputes and many claims are planted prior to contract execution – as defective or incomplete design, a design that is not conforming to owner’s needs -- all are in the documents that go out to bid.
The most cost effective time to mitigate claims is prior to bidding.
Biddability and Constructability Review
This is not new. The Army Corps of Engineers and other large public owners have been utilizing such reviews for many years. To start with, nothing prevents disputes better than high-quality contract documents. Once the job is nearly designed, get a group of experienced construction managers and apply construction experience to the design prior to the bid process. It is important to review design and bid documents from the contractor’s perspective since the contractor is the user of the documents. When the design folks are done with the design documents, their scope of work is done. When the design goes out, the contractor has to read these documents and translate them into the final project.
The construction management team should look at:
- Interfaces between trades and disciplines
- Detail vs. general specification and requirements
- Drawings vs. specifications
- Impact of general conditions and general requirements on cost of running the project
- Determining if there is sufficient information to successfully bid and build the job
Design firms often say that they perform such reviews. But few actually engage an independent construction management team to review documents. Have you ever written a letter or report and proofed it to later learn that you missed errors? It is very difficult to review your own work. The same can be said of a design firm review. It is better to bring fresh eyes in to review the design work.
Experience shows that an investment in a biddability and constructability review more than pays for itself in reduced changes and disputes.
A common problem that often occurs at the end of a project is when the operations staff arrives and starts asking for changes. But, changes issued after substantial completion lead to delay and more cost than earlier changes. Experience shows “late changes” frequently are two to ten times higher than “early changes.”
Why are late changes so common? The operations staff often is not involved and does not have input in the planning, design and design review process. Designers generally do not know operations and constraints other than in theory.
Potential Solution: Assign a senior member of the operations staff to your design team. Get additional operators involved in the design review to determine if the project is operable and maintainable and address issues identified in review prior to bidding the job.
Claims Prevention Review
Owners that are “serial builders” (i.e., hotel, movie theater or restaurant chains, office park or strip mall developers, rapidly expanding school districts, highway departments, etc.) are in a position to use their past change order experience. Pull old files and ask yourself – could this change order have been avoided if something had been done differently during the planning and design process? If the answer is “yes,” take a look at your current project before you bid to see if the same problem is in the current, about-to-be-bid project. This review should include:
- Review of the last three to five projects built
- Look at all change orders issued and claims settled
- What issues could have been avoided during design?
- Would issues in prior projects be an issue in this upcoming project?
- Have documents been modified to eliminate source of change or dispute?
- If “no” make the change prior to bidding
For both owners and contractors, a careful drafting and reading of the schedule specifications is imperative. Contractors can lose their rights; owners can lose their shirts. The intent of schedule specifications is to measure progress on the job but also to mitigate future delays and resolve past disputes. Decisions concerning project controls must be made prior to bidding and should be created or revised for each project based on specific variables such as size, complexity of project, need for schedule information and control of the project. There is no “one size fits all” scheduling specification.
Review your scheduling requirements with a competent scheduler to make sure you understand the terms and considerations and then talk with an attorney.
The owner, design professional and construction manager need to consider issues such as defining scheduling terms including critical path and near critical path; delay; float and concurrent delay; ownership of float; early completion schedules; and risk of delayed early completion claims. This review should also include the following:
- Time impact analysis for change orders
- Forensic scheduling method for delays
- Level of schedule detail
- Frequency of submittal updates
- Specialty schedule requirements
- Restrictions on activity durations
- Submittal of as-built schedule
- WBS coding and organization
- Scheduler experience requirements
- Full- or part-time scheduler
- Onsite or remote scheduler
- Milestone dates
- Physical or contractual constraints to be included in contract
- Resource loading of schedule
- Joint reviews and updates with or without major subcontractors
- Pay off the schedule requirement
- Mandatory subcontractor sign off on schedule submittals to prevent games
- Mandatory parallel prime contractor review and sign off on schedule submittals
- Reduction of contract duration clause to stem off unrealistic early-completion schedules
These are the things that should be thought through during the design process as you are writing the specifications and making decisions and then tailor the specifications to fit those decisions. The decisions should reflect the degree of involvement and the amount of control that the owner wants over the schedule. The less control the smaller the specifications required.
The scheduling specification helps mitigate claims if properly thought out and included in contract documents.
Payment for Changes Article
The contract clause that specifies payments for change orders and dispute settlements is intended to determine who owes what to whom. This is a commonly used clause but rarely looked at until the first change order cost quote is provided. This article must be reviewed and tailored to meet the owner’s needs in order to mitigate disputes based on vague contract language concerning payment for changes and claim settlements. This article puts the contractor on notice of what and how the owner will pay for changes prior to bidding. The article must be clear, meet the owner’s needs, and be fair to the contractor if you want the contractor to deal in good faith with the owner.
The following are issues to be addressed in this critical article:
- Labor vs. field overhead category
- Fixed vs. negotiated overhead rates
- Fixed vs. negotiated profit rate
- Impact costs – how calculated and when paid
- Time extensions – when paid, how justified, and how calculated
- Time extensions/increased duration – when and how justified, under what circumstances, and how calculated
- Standardized format for change order cost quotations
- Owner’s authority to issue unilateral changes
- Full and final settlement issue vs. contractor’s ability to reserve rights
- Negotiated vs. stipulated subcontractor mark-up rate
- Mark up on subcontractor and sub-subcontractor work
- Calculation of extended daily field and home office overhead – how calculated, when owed, subject to mark up?
- Equipment pricing – when in use and when idle
- Unallowable costs listed
Cost-control decisions need to be made in the design stage to include them in the payment for changes article. If properly worded and enforceable you can spend time during construction on entitlement (facts and causation) to changes and claims and not fighting over every dollar that is being asked for payment. It helps avoid disputes over how much time and cost is owed and mitigates disputes based on vague contract language concerning payment for changes and claim settlements.
Many claims are based on the impact of multiple RFIs. The basis of the claim generally is that the contractor anticipated a “fully designed” project when they bid the work and did not bid the proper level of field staffing and lower productivity rate resulting from numerous RFIs. The contractor argues that the excessive RFIs adversely impacted the contractor and is entitled to equitable adjustment to make them whole.
One way to look at this is to analyze your past projects to determine the average number of RFIs per $1 million and extrapolate the number to fit your new project. Owners can state in the contract documents that the contractor should anticipate “x” RFIs on the project based on past history, with perhaps a set number +/- 25% range. This provides warning to the contractor and helps avoid and mitigate claims.
Pre-purchase Owner Delay Time
Analyze past projects to determine the amount of owner-caused delay. Establish a bid item that is an allowance for owner-caused delay based on your history. This requires the contractor to bid the daily delay cost and multiply it by the number of days specified and included in the bid.
Include this in the bid to avoid unrealistic rates. Identify the bid item as an “allowance” for owner-caused delays meaning that they aren’t automatically entitled to the delay. The contractor can only draw from the “allowance” if compensable delay is justified under the terms of the contract. This avoids disputes over daily costs, avoids audits as the cost is predetermined through competitive bidding, and the evaluation of delays is more objective since the cost of delay equals the allowance rate.
Predict the Weather
Owners are typically quite focused on “when will the project be complete?” As a result, owners want some assurance that the baseline schedule plans for certain known causes of delay, such as weather. We all know from history that weather can certainly impact construction jobs. Unusually severe or abnormal weather typically is considered excusable, non-compensable delay where the contractor is entitled to time, but no money and the owner is not entitled to liquidated damages. The issue that comes into play is how do you define “unusually severe weather” and how is it proven.
When weather is an issue, courts and arbitration panels often will compare the project weather on the jobsite with a five to ten year average for that area at that time of year. This can be very time consuming.
Consider planning for weather in advance by including a chart in the Schedule Specification stating how many days/months the contractor should expect to lose. Specify that in the month of January, the contractor should expect to lose x days, February, x days, etc. You need to consider rain, snow, cold, heat, high winds, etc.
The delay clause should specify that the contractor is not entitled to a weather delay until lost days/month exceeds the days shown on the weather chart and the contractor demonstrates critical path impact as a direct and sole cause of the lost days. This helps avoid the arguments over what is and what is not considered unusually severe weather. It also helps to provide a better estimate in the baseline schedule at the project start of when the project will be completed under “normal conditions.”
Escrow Bid Documents
Contractor bid take off/bid documents may be of value when pricing change orders and claim settlements. The idea is that the owner captures critical bid documents and safeguards them for the life of the project through escrow. Contracts should include a provision that anything not in escrowed documents is not admissible in event of a later dispute.
An escrow document system can be established in the contract and should:
- Ensure confidentiality of documents
- Limit access to named persons
- Stipulate who, when, why and how access can be gained
- Preclude either party from accessing documents on their own
- Ensure that no copies of escrowed documents can be made by owner
- Stipulate that the escrowed contents remain contractor’s property at all times and will be returned at the end of the job
This helps resolve disputes concerning what was bid, how it was bid and what contractor planned to do, etc., and sets the baseline for calculating damages.