Contract-related claims and disputes have become a pressing concern in the construction industry. Many contractors are increasing efficiency by moving away from paper records and phone calls to computer-based systems, and new tools are now available to help mitigate some of the most frequent causes of construction contract disputes.
Read on for insights into getting the most out of construction contracts and reducing risks of disputes and claims.
The role of a construction contract and building blocks for success
The construction firm’s role is to marshal and deploy resources, including employing skilled and knowledgeable labor, operating and maintaining specialized equipment, procuring quality materials and supplies, and partnering with any other specialized firms required. Basic risk management requires the contractor to contract wisely by properly reviewing bids, proposals, and contracts; employment agreements and leases; purchase orders and supply agreements; and insurance, bonds, financing, and project management structure.
The basis of a construction contract centers around a group of documents received in the pre-bid phase that explain customer expectations for the job. On bid day, the contractor prepares a cost estimate that attempts to match those expectations. The plan is never perfect and there will always be differences between the original plan and the customer’s expectations, hence why the formal written construction contract is so important.
In some ways, contract is a verb - when you "contract" with someone, you create a logal relationship. The contract is also the piece of paper that serves as the lasting evidence of that relationship. Included in the definition of the contract are the specific rights, duties, powers, privileges, and immunities pursuant to that legal relationship.
The goal of a construction contract is to create the necessary legal relationships among the owner, architect, contractor, subcontractor, and supplier, structure them appropriately, and then guide the parties to successful management of those relationships.
It should be understood that construction contracts are inherently incomplete and one must plan in advance on how to handle the inevitable changes that will occur. Most good contracts have a process for changes that are likely to happen between the date the contract is executed and final completion. That is part of what leads to the summary disputes at the heart of this discussion.
The use of conditions and the essence of time
A key building block of a construction contract that governs how relationships are managed is the use of conditions. A proper construction contract will include contingent obligations, as well as precedent, concurrent, and subsequent conditions. These different condition types lay out what one party must do once another party has completed a specific task. The conditions clauses themselves create a set of processes and rules followed during the contract term, which may include payments, scope changes, disputes, claims, and termination.
Another fundamental building block is predicated on the underlying principle that time is of the essence in a construction contract. The parties must complete the particular task on time. Failing to meet these conditions can lead to the outcomes on the right of the figure – waiver, notice, and estoppel. If a party to the contract does not complete what they are supposed to do and you do not inform anyone of the issue, you may end up having waived your rights. In fact, even if you do what you are supposed to do, but you have not notified someone that they have an obligation based on a contingency you have met, you may voluntarily relinquish your rights through lack of notice.
For example, think about the process of making a claim when you know there is an error or issue while implementing the contract. Almost every construction contract says you have a number of days to tell someone, or that claim can be considered waived. You must also make sure that those who have an obligation contingent upon your notice actually receive that notice so that they are aware of the obligations that are contingent on that. Estoppel is the concept that once a right is waived, it can no longer be enforced. You must be vigilant in staying on top of all relevant contract obligations. Make sure you do not sit on your rights or you may inadvertently lose them.
Another reality is that, regardless of the complicated obligations in any signed contract, independent contractors are engaged to deliver certain deliverables while maintaining complete control over the means and methods of the work. The contractor can choose the equipment, number of people, and techniques used – as long as the specifications support them. In short, when you have a contract, and you are an independent contractor, you have the right to complete the project in an unimpeded manner –and your customer has an obligation not to impede what you do.
As a reminder, contractors are not required to sign contracts of adhesion (a legal agreement drafted by only one party). Contracts are negotiable, so when it comes to scope, resources, time, cost, quality, and risk, the goal is to put yourself in the absolute best situation you can to manage and stay under control of those parameters.
Five major causes of construction contract related disputes
This list of the top five reasons that construction disputes happen around the world is culled from a variety of surveys by research firms.
1. Failure to administer the contract.
It should be no surprise that this is the number one cause, given the complexity of the number of parties involved, and the complexity of the agreements. It is absolutely imperative that you actively read the entire contract and understand your obligations regarding these six key factors: scope, resources, time, cost, quality and risk.
One suggestion to help in contract administration is to use forecasting and production planning tools to provide actionable data. This enables project managers to quickly run a cost analysis and work with foremen to adjust the production plan to stay profitable. This type of forecasting may lead to difficult and even painful conversations. Use forecasting as a leading indicator. When you see something that looks like it is going to be a problem, indicate it in cost terms through a forecast to trigger the necessary conversations.
2. Incomplete, poorly drafted, or unsubstantiated claims.
Sometimes construction contractors have legitimate claims, but simply cannot prove them. If you do not get certain things on the record in certain people’s inboxes or documented through a letter there can be problems. Be as proactive as possible and make sure you understand and discuss issues clearly as soon as possible. Review the timeline, facts, obligations, and rights and go through the established process in accordance with the timeline to get a decision. If the claim is denied, you can pursue your options, which may include appeal, mediation, arbitration, or litigation.
3. Errors or omissions in the contract documents.
Nothing can replace diligence and a thorough review of contract documents, and raising issues immediately when you find errors. When building means and methods in the schedule, ensure the best possible communication by using a verb-noun structure for activities, cost codes, and even the work breakdown structure (WBS). For example, install drywall, rough-in plumbing, complete exterior brick, complete 1st floor kitchen plumbing. When job costs items are simply nouns, it leaves one wondering what exactly is and is not included in any given activity, and analysis falls apart. And when analysis falls apart, you are left with people’s testimony, which means depositions, which results in expense and uncomfortable conversations. To save time and effort downstream, be clear about the meaning of each activity, cost code, and bid item in your business records, and make sure they are understandable by the average high school graduate.
4. Incomplete design informational requirements.
This amounts to another communications challenge. If something can go wrong, it eventually will. If there are any issues and you have questions, do not allow confusion to reign. Submit RFIs to clarify what does and does not meet the specifications.
5. Failure to understand or comply with obligations.
You need to ensure that you have met all conditions and document if they have or have not been performed at the right time. You must have processes in place to ensure you perform work in accordance with the agreed upon schedule with a certain level of quality control, and then report on the work you did. This provides the entitlement to bill, and then you get paid. The circle keeps going around, from deploying resources through to payment for properly completed work.
Be vigilant and watch out for instances in which others rule the relationship while operating under rules that are not in the contract. This puts contractors at risk – if there is another set of rules, both sides get to try to prove what those rules were.
One important reminder: you cannot thoroughly understand your obligations without some background understanding of the statutory and common law in the jurisdiction in which you are operating.
Tools and strategies for avoiding contract risk
So, how can contractors avoid these problems? New tools are now available to help contractors understand design requirements, understand and meet obligations, administer the contract correctly, and substantiate legitimate claims properly. Two tools that can help are HCCS HeavyBid and HeavyJob, platforms designed specifically for solving the pain points of heavy civil construction operations.
HeavyBid helps structure bid items, and HeavyJob structures pay items, and is also used to schedule milestones and summary bars to match those deliverables.
A comprehensive dashboard enables consistent, live oversight and allows project managers to access everything they need with one centralized system. The system helps construction contractors define tasks in clear and simple chunks, making it easier for customers to pay. It incorporates activity-based estimating and job costing; by building out the activities under bid items and then cost codes related to the pay items, contractors can declare the means and methods, the time to spend on items, the expected cost, the quality level based on materials called out, and the types of equipment resources.
Project managers can use HeavyJob to quickly identify underperforming jobs and analyze the impact of important factors using cost code identification to determine what has caused labor, equipment, or material issues.
Foremen can use the platform to manage their planned work and daily actuals from a tablet, which reduces paperwork, minimizes time spent on daily entry, improves communication between team members, and fosters better decision-making backed by real-time data. The platform is accessible both in the field and in the office, eliminating time-consuming and easy-to-lose paper trails while enabling a centralized ledger for each project. Team members can upload daily entries, including jobsite photos in minutes, so each team member is up-to-date on project happenings.
The tools offer the ability to track pay items related to the activities that are required to use the established means and methods to satisfy the client deliverables and build out the relationships between those activities in those bid items in such a way that contractors can deploy resources, keep track of the resources deployed, keep track activities completed, note the bid items or pay items that have been delivered, and send out a bill relatively quickly.
In addition, contractors can use a new feature specifically to streamline and centralize the process of tracking and managing potential change orders (PCOs). Change order tracking is a critical function of construction project management because contractors often deal with unique requirements for change orders from the project owner. The integrated issue escalation functionality means contractors can easily initiate or escalate issues or scope changes, providing enhanced control over project costs by tracking out-of-scope changes and requesting payment for work beyond the contract.
Project managers can also review issues and create requests for information (RFIs) for project owners, linking those documents to the PCOs when needed.
Pull it all together – stay in control
To minimize construction contract risk, construction contractors should follow these 7 steps to stay in control of the contract and the project:
1. Structure jobs correctly in accordance with the contract – consider pay items (deliverables) and cost codes (activities, aka, means and methods).
2. Track resources (costs) and progress (units), including timecards (labor, equipment, material, subcontractors) and quantities (from timecards and project manager reports).
3. Generate accurate, timely progress billings – set up drivers and factors and track owner quantities.
4. Forecast regularly – focus on cost to complete, identify issues, and analyze options.
5. Track issues, RFIs, and submittals to eliminate confusion, put parties on notice, and eliminate waiver situations.
6. Track relevant occurrences with tags (owner, inspector instructions and any interference with means and methods).
7. Monitor accountability using regular reports, including cost, tag, and forecast reports, as well as business intelligence (BI) reports with application programming interfaces (APIs), and external tools.
Using the newest generation of tools, including HeavyJob and HeavyBid, can enable the coordination that minimizes litigation risk.
