Topic 10.9: Managing contractual claims

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When managing projects generally and contracts in particular, a dispute between parties will often give rise to a claim.

A claim is a demand for something due or believed to be due, usually as a result of an action, direction, or change to the agreed terms and conditions of a contract.

In projects, the demand is usually made for additional compensation for work claimed to be outside  the contract, or an extension of time (EoT) for completion, or both.

One falling axe in the meeting

Claims can be viewed from two perspectives: the party making the claim and the one defending against it.

The distinction between a claim and a change is the element of disagreement between the parties as to what is due (and whether or not anything is due).

If agreement is reached, then the claim disappears and becomes a change request.

If not, unresolved issues can escalate into a formal claim and become a fierce contractual dispute among the stakeholders.

Formal claims may proceed to negotiation, mediation, arbitration or litigation before they are ultimately resolved.

Although agreed-upon changes to the contract documents occur frequently, disputes among the stakeholders of a project are almost as common.

Clearly, the best way to prevent claims is to eliminate them entirely.

The emphasis should therefore be on how to keep issues from arising that could develop into claims.

The well scoped, risk-allocated, and diligently executed project plan is far less likely to result in any claims.

A well-balanced double seesaw consists of different sized metal balls
Yeah, right.

Nevertheless, project activities are often carried out in complex, highly sensitive and rapidly changing environments.

Perfect conditions and control are nearly impossible to obtain.

Factors that can negatively affect the project and give rise to potential claims include:

Lack of follow-through

Random changes to performance or schedule

Unknown conditions

Resource problems, and

Slow decision-making.

Most stakeholders are aware that the project will be challenged by such factors, but how one reacts to these conditions can either lead to or help prevent the claim.

Early recognition of potential problems and open communication regarding possible alternatives or changes to the plan create a collaborative environment in which claims are less likely to occur.

There is a three-step process to managing contractual claims.

Most claims are the result of an unresolved request for a change, or are a result of a contract document interpretation.

Sometimes, a contract is not administered in a timely manner, causing time and/or cost impacts on the project.

Project performance is another area where claims may arise due to either the quality of work performed or the progress of the work not being obtained.

Regardless of the origin of the potential claim, detailed identification and articulation of the claim is necessarily the first step in the process.

Identification of a claim starts with sufficient knowledge of the project scope and contract requirements, which leads to an appreciation that some activity may involve a change in scope or the contract. 

The written claim should describe the work believed to be outside of the contract / plan, where it occurred, and when it took place.

Reference to the section of the contract that supports the contention should accompany the claim.

It is also important to document the activities that were affected (including dependencies) and who performed the work. 

The claim should also address the project schedule and the additional contract time, if required, to perform this extra work.

In industries such as construction, which generally has well developed claims management protocols, a standard template for claims may be pre-agreed.

Once an item or issue has been reviewed and identified as a potential claim, a decision must be made to determine if a claim is worth pursuing.

As an assessment of the possible stakeholder consequences, positive and negative, is included in the claim, the next step is to quantify the potential claim in terms of extra compensation, a time extension to the contract completion, or both.

Claims often tend to create barriers for prompt resolution due to the differences in the cost and time impact perspectives among the stakeholders.

Nevertheless, there are proper and logical ways of determining the cost of the extra activity or damages.

The process basically uses a cause and effect approach to determine the full effect of the claimed extra work or delay activity. 

Sometimes the claimed item has an indirect or direct effect on other aspects of the project, making such works costlier by changing sequences or delaying other tasks.

To the extent that these indirect effects can be justified and quantified, they are properly part of the total cost of the claim.

There may be an understandable disagreement as to whether or not the claim in question is a change to the contract, or whether the claimed amount of compensation or time requested is correct or not.

When this situation arises, a step-by-step process is set in to motion to resolve these questions. 

It is obvious that the longer this process takes, the more expensive and disruptive it is to both parties. 

Therefore, the goal is to settle these issues soon and at the lowest point in the organisational hierarchy as practicable.

We will look in greater detail at how these contractual claims might be resolved in the next topic.