By Steven Pinnell
Unfortunately, you may find it difficult to retain a good claims consultant, encounter large fees, or be dissatisfied with the results. In this article, I’ll discuss the value of teaching your home office and project staff how to prepare more successful change order requests, how to retain a claims consultant for large and complex claims, and how to manage their work to ensure better results. Plus, I’ll describe several techniques to help you prevent most disputes, resolve those that do occur, or win at arbitration or litigation, should these options become necessary.
Partnering and the Dispute Management Program
Partnering is a team-building process engaging all parties involved in a construction project (the owner, designer, contractor, subcontractors, etc.) that helps prevent disputes and provides tools to help resolve those that do arise.
The Ideal: The partnering process starts with a commitment from the management of each party to cooperate and then bring the project team members together for a pre-construction workshop. During its time together, the joint project team prepares a common mission statement and implements improved procedures for communication and conflict resolution, all of which provides a strong foundation for successfully completing the project.
The Reality: Partnering isn’t always well implemented and sometimes fails to limit conflicts. Many contractors, relying too much on the partnering approach, fail to protect their contract rights or maintain adequate records to ensure payment for changes. In addition, some contractors are reluctant to press for change orders when partnering or working on negotiated projects.
While most contractors are well aware of the benefits of partnering, few are familiar with the new techniques that make partnering more successful, or with “intervention partnering” that makes it possible to salvage a project gone sour. Even fewer know how to implement a comprehensive approach to dispute management to enhance the effectiveness of partnering, while ensuring fair payment.
To ensure success, partnering needs to be accompanied by a Dispute Management Program. This comprehensive approach is summarized in Figure 1 and briefly explained below.
Better Partnering Practices
Here are the six steps that are essential for better partnering:
1. Your top management team has to be totally committed to partnering, then to training and motivating all managers and supervisors.
2. You must retain the best qualified partnering facilitator – someone who knows construction, has excellent communication and people skills, is truly neutral, and dedicated to a successful project.
3. Both you and the facilitator must convince the owner’s management that partnering will benefit the project and their organization, then persuade them to commit their project team to partnering.
4. The partnering facilitator must focus on specific, real issues affecting the project, while addressing and resolving all issues identified in the pre-workshop interviews with top management.
5. All key subcontractors must become fully involved and committed to working in a partnering mode.
6. The partnering facilitator should consult with all parties on a regular basis, convening a mini-workshop, if necessary, to ensure that the partnering process is successful.
Dispute Management Programs
A Dispute Management Program is a set of companywide policies and procedures that, combined with staff training and additional changes, leads to better dispute management. It is based on a partnering approach and includes a broad spectrum of techniques and solutions to avoid and resolve disputes (or to win in arbitration or litigation, if necessary). When properly implemented, a Dispute Management Program practically guarantees recovery of the cost and time for extra work, delays, and impact. It does this by:
- Identifying and eliminating, or limiting, contractual risks from onerous contract clauses.
- Verifying that estimating and cost accounting procedures track extra work and impact costs.
- Providing procedures and systems for good communication, recordkeeping, and dispute resolution.
- Training project personnel to identify extra work, give timely notice, and track extra costs and delays.
- Maintaining compatibility with partnering, while ensuring fair payment for all work.
Prepare and Negotiate Change Order Requests
A Dispute Management Program should have detailed, standardized procedures for preparing and negotiating change order requests. This helps preparers (usually project team members) avoid missing critical information and results in a better document. Efforts should be characterized as “change order preparation” instead of “claim preparation” to minimize adverse reactions and allow the possibility of recovering the preparation costs.
Select Claims Preparers and Train In-House Experts
The most important step in developing a successful claim is selecting the best-qualified expert to prepare it. If a Dispute Management Program is in place and the right person is selected, all else will follow.
First, decide to develop in-house expertise for claims preparation. Even a small contractor should have at least one person reasonably skilled at preparing claims. This will often be the owner, but also may be an estimator, project manager, or engineer. This in-house expert will prepare most claims and assist a consulting expert on large, complex claims to save costs and gain valuable experience. After identifying the in-house expert(s), send them to training, have them do outside reading, and give them experience (under a more experienced claim preparer if possible).
You may still need a consulting expert, especially when the dispute is large and complex, requires special skills, or if your staff is simply too busy. When selecting an expert, look for these qualifications:
- Broad construction experience and knowledge of construction management practices. Hopefully, this expert will have some knowledge of the specific type of construction in dispute, but a highly skilled claims preparer without specific experience will do a far better job than a less qualified claims preparer with experience in that type of work.
- Critical path scheduling expertise. This qualification is important if there are significant delay or acceleration issues.
- Expertise in estimating changes, including crew size/productivity estimates in lieu of unit pricing, Eichleay Formula calculations, and the measured mile and learning curve adjustments for inefficiency cost analysis.
- Contracts and claims experience with knowledge of contract law and generally accepted procedures for preparing and presenting claims. If testifying, the expert should have arbitration and litigation experience.
- A good memory, since the expert must review and absorb large quantities of information while quickly grasping essential elements.
- A personality that excels at research and painstaking analysis, while being a convincing witness or negotiator. (It may be difficult to find all these characteristics in one person, so a team approach may work best.)
- Good writing skills to prepare a claim document that is clear, concise, and convincing.
- Good people skills with a practical understanding of human behavior and motivation.
Hire the expert as soon as possible, preferably before putting your attorney to work. An expert will cost far less per hour than an attorney and will do a better job on non-legal issues. A good expert will determine the facts, gather supporting documentation, and identify legal issues so that your attorney can focus on what’s important. If you already have an attorney on board, by all means hire the expert before starting discovery.
There are many sources of information on experts, including your bonding company, local construction attorneys, and other contractors. After identifying two or three experts, ask for their credentials, experience, and references. Check out their references. Meet briefly with each one to discuss the case in general terms, plus one or two significant points. Getting input at this point will help you evaluate their ability to contribute to the effort.
Do not turn a claim over to an expert, either in-house or consultant, and then walk away. You’ll need to brief your expert on the project and the dispute, then provide key documents including the change order request and preliminary claim documents. If possible, have the project team prepare a briefing paper. Ask the expert to prepare a work plan, budget, and schedule for completing the analysis in phases, with specific milestones. You’ll want to receive progress reports at each milestone, so you can provide redirection if the facts don’t turn out as expected or if the expert gets off track.
Prepare a Preliminary Analysis before Proceeding with a Claim
A phased approach, with an opportunity to check progress against the plan and to revise as necessary, is far better than initiating a full-fledged effort. In a phased approach, the claim preparer verifies the significant issues; develops preliminary findings, including recovery theories and the probable recovery amount; and establishes a work plan, budget, and schedule to complete the claim.
Avoiding an open-ended effort helps control costs and time, while eliminating dead-end efforts. In addition, it may be possible to negotiate a settlement using the preliminary analysis, thus saving the time and cost of preparing a complete claim. Most importantly, you won’t waste time and money on a weak claim or walk away from a strong one.
Start your preliminary analysis with an initial briefing or kick-off meeting, during which the project is described and other critical information is presented. This information should include the chronology of key events and activities; the issues in dispute (quantifying cost and time if known); the project participants and their roles; the wording of key documents; the current strategy; and your expectations of the time, cost, support required, work product, and anticipated results. During this meeting, you should prioritize the issues for analysis, provide the most important documents, and identify those individuals who will constitute the claim support team.
I strongly recommend that the claim preparer make a written report, called a narrative text, for:
- Reporting all administrative information, including work accomplished, work planned, and action needed for review by the decision maker and claim support team.
- Recording facts, as they are determined from the documents and interviews.
- Organizing facts by issue, then chronologically, for review.
- Analyzing each issue with references to source documents or interviews for all statements of facts.
- Eventually converting the narrative text into a claim document by deleting extraneous information, rewriting for clarity, and adding an Executive Summary.
Narrative text improves communication between the claim preparer, the claim support team, the attorney (if one is involved), and the decision maker. It enables the claim preparer to record and organize factual information, analysis, and conclusions. In addition, it stores and provides easy access to key facts, names, telephone numbers, etc. If claim preparation is delayed or considerable time elapses between preparing the claim and negotiating or testifying, the narrative text is crucial for quickly refreshing memories. The only downside is the possibility of discovery if in litigation, but this can be dealt with, in most cases, without significant risk.
Narrative text normally has the following organizational structure:
1. Administrative: Work planned, work accomplished, problems, questions, etc.
2. Preliminary Findings and Conclusions: Completed as you perform the analysis.
3. Issue Analysis: A separate section dedicated to each issue with a description of the issue, the chronological summary notes for that issue, the analysis, and conclusion.
4. Summary Notes: Both chronological (e.g., of dated documents) and non-dated (e.g., a summary of key specifications and contract clauses).
Organize Documents for Chronological Review
Organize the documents chronologically with the oldest on top. This allows you to approach the project in the same order that the work occurred; but, you now have the added advantage of seeing it from all viewpoints, including all the documents from all the parties involved.
Determine the Facts and Analyze Entitlement
While reviewing the files, you’ll want to create chronological summary notes for each significant reference to an issue. Enter the date in the left margin, then indent the summary, source reference code, and issue code. These summary notes, organized chronologically by issue in the narrative text, allow you to review only the notes regarding a specific issue. This, of course, eliminates vast quantities of irrelevant detail, highlights the essential facts, and simplifies understanding.
You may also wish to create a “Detailed As-Built” schedule (similar to that in Figure 2 on page 18) from the daily reports, correspondence, and other relevant documents. This displays all pertinent information on a single drawing and can be used, along with the chronological summary notes, to prepare your analysis of entitlement and causation.
Other schedule analysis tools include the Banded Bar Chart Comparison schedule and the ELIPSE schedules that combine a comparison schedule with labor hours worked, impacts, productivity, and weather or other environmental effects.
Make preliminary damage estimates before analyzing entitlement, so you can prioritize your efforts. Final computations generally follow proof of entitlement and causation. Damages include the direct costs of added work, impact costs, acceleration or delay costs, other costs such as additional overhead, and markup for overhead and profit. You should also include between-the-line costs such as unpaid retainage and contract balances due, interest, attorney fees, and claim preparation costs, minus credit for non-conforming or unsatisfactory work.
Impact and inefficiency costs are the most difficult to estimate and often require special expertise. I recommend a Rational Approach methodology that uses modified total cost claims for some items, expert opinions when necessary, industry studies and formulas when available, measured mile analysis when productivity of impacted work can be compared with non-impacted work, and scientific analysis. This scientific method uses time and motion studies, learning curve effects, and other work improvement techniques to analyze and reconstruct the basic components of work.
Present the Claim and Negotiate an Equitable Adjustment
Effective negotiation starts long before the claim is prepared by involving the owner in the process so that both of you can work toward a win/win solution. Early in the process, you can often obtain vital information about the owner’s position and even factual data not otherwise available, except through discovery. Keep in mind, however, that your primary goal is to maintain a partnering approach.
1. Be prepared. Understand the reviewers’ positions, and verify that they are willing to be fair and empowered to commit the owner.
2. Meet and present the claim. Discuss the change order request or claim at a joint presentation and review meeting. Establish a positive atmosphere, obtaining a commitment for a fair review, clarifying ambiguities, avoiding misunderstandings, and establishing a procedure and schedule for resolution. Do not argue the issues – for now, at least, but listen carefully to legitimate concerns.
3. Follow through. Answer questions and provide supplemental information, as required. Keep advancing your case using partnering strategies.
4. Negotiate. Use win/win techniques to reach a mutually acceptable solution.
Partnering and a comprehensive program to avoid and resolve disputes will go a long way in improving profitability and reducing the possibility of catastrophic loss. This requires more than good intentions and limited resources, however. It takes a continuing, highly focused commitment to develop, implement, and sustain a Dispute Management Program.