Staking out a claim

Inadequately prepared tender documentation, administrative decisions that are not issued on time and unilaterally prepared agreements – these are among the typical reasons why contractors decide to pursue claims against their ordering parties. In turn, investors often hold construction companies responsible for delays in contract implementation, errors or inconsistency in the construction work in terms of the project specifications. Even though it is everyday practice for the construction sector, the level of preparation of companies when it comes to formulating and pursuing claims varies and errors in this field can incur heavy costs. What sort of errors are these? Two examples of such fundamental errors include the signing of a unprofitable contracts and the failure to report or document claims during the contract’s execution. “It can very often be the case that the general contractor, in its pursuit of a contract, completely loses its head and fails to negotiate the right provisions in the contract. Too often it happens that under the time pressure of carrying out a contract, they fail to pay enough attention to documenting the claims that they have the right to pursue,” says Norbert Sawicki, a lawyer from the RMS law firm, which specialises in construction claim cases. In the end the company is not only unable to receive payment for the additional work they have carried out, but then it also has to deal with penalties for missing deadlines. However, such problems could be avoided with the adoption of an efficient claim management system.

A day without a claim is a day wasted

Claim management is mainly about putting in place certain processes to allow you to identify the possibilities for claiming and of pursuing these claims effectively. “Everything actually boils down to two things. Firstly, negotiating the best possible contractual terms. Secondly, establishing a department within the company for monitoring the opportunities for reporting claims, to document what is happening at the building site and to correspond with the other party to the contract as well as to support the building site manager in decision making when it comes to potential claims,” says Jerzy Binkiewicz, a consultant working with Warsaw-based company CMT, which offers claim management services. Of course, the method used depends on the size of the contract. Sometimes it is enough for the project manager to personally supervise the claims. However, they are often too busy for the process to go smoothly. “It has to be remembered that the construction of a PLN 60 mln hotel is similar to the management of a medium-sized Polish enterprise with a turnover of PLN 60 mln per year. There are the employees, subcontractors, suppliers and there should also be a person responsible for documenting claims,” insists Norbert Sawicki. For larger contracts it is better to have a group that is responsible for the process. It can collect and order the documents, and make sure that the building site manager and the people involved in the construction process document all the events that could have an impact on the work (e.g. prolonged construction time, additional costs).

It is often pointed out that Western standards for claim management are still higher than those in Poland or the other countries of the former Eastern Bloc. In particular, Germany is seen as a place where these kinds of procedures are assiduously taken care of. There is even the saying, apparently German, that: “A day without a claim is a lost day”. Ferdinand Baggeroer, the owner of CMT, and who worked for many years in Germany before starting his business in Poland, confirms this difference in approach. “It is not unusual before the first shovel goes into the ground to have already have received a hundred letters explaining why the shovel cannot go there. And then there are also the tactics of the contractors, who send out so many letters and later try to convince the court by saying: I have sent 15,000 letters, look at them – I have solid reasons to claim,” explains Ferdinand Baggeroer. This is also a way of putting the other side under pressure, which may be beneficial during claim negotiations.

To escalate or not?

However, it is possible that excessive claim pursuits cause more harm than good to the claimant. Because this can alienate the other party and end the contractor’s chances of winning other contracts. “There are two things that need to be differentiated. One is creating the purely technical possibility of pursuing your claims, that is, putting in place a system that makes this possible. The other is for the management board or other decision making body to take the strategic decision to pursue a given claim or not,” explains Jerzy Binkiewicz. Sometimes, in order to maintain a long-term relationship one of the parties decides to drop some justified claims if they believe that they could make up for the losses through taking on subsequent contracts. “However, in each case it is important for the other party to know about your claims. If you decide, for example, to accept the additional costs of laying an underground installation that is not included in the contract, the ordering party should be informed about how much it cost and how long it took. This means that you should document any claims and write letters to the ordering party to make them aware of what you have done for them,” says Norbert Sawicki.

However, one problem in taking this approach could be having a bad advisor. “Sometimes a contractor who does not want to disturb the atmosphere does not write letters to the ordering party, does not claim anything or even speak about the problems. Despite how it looks, such an approach could turn out to be a breeding ground for conflict in the future instead of preventing it. “I know from experience that if we are dealing with two professional entities, the ordering party should not take offence from the fact that the contractor reports such claims. Through this process, provided it started at the building site, it is much easier to resolve or contain any claims at the building site, thus avoiding lawsuits,” says Robert Moj, a lawyer at Clifford Chance. The key issue for the parties is to observe the terms of the contract. “If certain things are not provided for in the contract, claims should be made and letters written to the ordering party that these services are additional. But this very rarely happens. Everybody says: we will sort things out sooner or later somehow. Unfortunately, this is usually just wishful thinking,” explains Arkadiusz Osiński, a board member of Trebbi Polska. The regularity of the correspondence is also important. “Until the problem is solved, such as the lack of a permit for cutting down trees making it impossible to hand over the building site and start the construction work, we send out a letter about this problem once a week. We report that the disruption of the construction process is still taking place and the delay resulting from the disruption is not the contractor’s fault. If companies carrying out construction projects acted in this way and reported difficulties on an ongoing basis, then when conflicts arise a team such as ours would have a much easier task when it comes to preparing an analysis of building process disruptions,” says Arkadiusz Osiński. The materials collected in this way make it possible to carry out a thorough analysis of the disruptions and the schedule, showing how much they have impacted the date of the completion of the work. “Documenting the effects of the disruptions is particularly difficult when it is a scattered claim, that is, when there are many small events or circumstances that have a local impact. If each took place separately, they would probably be of no great significance for the contract, but because there are many, their impact on the execution of the contract is substantial. The analysis of this impact and including it in the schedule is, however, difficult,” admits Andrzej Grabiec, the contract management director at Strabag.

Quality must cost

When asked whether there are projects that are completed without any changes or claims, the experts we spoke to usually replied that they have yet to come across one. Even with ‘easy-going’ projects there are some changes and claims which, however, do not result in any conflicts arising. According to a report recently published by KPMG, two thirds of projects globally are not carried out within the expected budget or timeframe. Regardless of this, certain local trends resulting from the economic climate are evident. The more competition on the market, the more that construction companies compete with each other and the more they are inclined towards riskier behaviour. Underestimated offers and tender procedures won at the lowest price possible store up problems for the future. Furthermore, market players who are up against the wall are more inclined to fight for their money.

“For the last couple of years, after a relatively quiet period we have been seeing more and more claim management contracts,” says Ferdinand Baggeroer. The claims vary in value and it is hard to discern any clear patterns. “It can even happen sometimes that the client’s claims amount to, say, 120 pct of the value of the contract. This means that the client is not only unwilling to pay for the work completed, but is seeking 20 pct remuneration for what they have lost. This is rather extreme, but from our experience it is not unusual to have claims totalling 10–20 pct of the contract price,” says Ferdinand Baggeroer.

At construction company Strabag, claim management is one of the responsibilities of the contract administration department. The firm has its own specialists but in some cases also uses specialist outsourced companies. “As well as professional contract administration, it is important for the production staff, for example, engineers who are involved in the construction process rather than in formal issues, to be aware of the issues involved,” explains Andrzej Grabiec. Money is the main reason why small and medium-sized companies have mostly chosen not to employ specialists. The costs for such services would mean reducing their competitiveness on the market. Claim issues in these cases are then sorted out by the current team while carrying out their other tasks. However, it is often the case that in the middle of a contract nobody is monitoring the claims properly, because they don’t have the time. “This is one of the reasons why so many companies fail to obtain additional money even in situations where they have the right to receive it. And probably one of the reasons for the large number of bankruptcies of small and medium-sized companies,” believes Jerzy Binkiewicz.

According to Ferdinand Baggeroer, investment in claim management tends to pay off. “Right now we are sitting on a very big site, where we have been employed almost from the very beginning as claim managers. It is a very rare approach. We had already successfully processed two or three claims for this client in the past, so they decided to work with us right from the very beginning of this project. They have learnt that the earlier you employ somebody who takes care of this, the better the result,“ says the owner of CMT. And yet, it is cheaper to set up your own claim management structures inside the company than to outsource it. However, one of the advantages of outsourcing claim management is a certain independence from the site management, which allows a higher level of objectivity. It is also helpful when you want not only to identify the mistakes of the other side but also to have an objective assessment of your own activities. ”People don’t understand sometimes that identifying your own mistakes at an early stage protects you better, because it helps you to modify something and avoid waiting until the moment when the other party points out your mistakes – and then is often too late to react,” explains Ferdinand Baggeroer. Therefore, according to him there is still room for outside experts, even if your own processes and structures are already in place. “In a model situation the firm’s first move should be establishing a suitable organisation within the company, responsible for the current work of preparing the grounds for claims as well as for claiming itself. And yet, at some point it could still be beneficial to employ an outside specialist, to verify all that work and express an independent view on what else could be done, or to prepare fresh and complementary claims,” says Jerzy Binkiewicz.

Usually, there are problems

According to the ‘2015 Global Construction Project Owner’s Survey: Climbing the Curve’ report, which has been recently published by KPMG International, less than one third of construction projects in the world are carried out on time and within budget. This is particularly obvious in the public sector, where 50 pct of projects are completed with a margin of 25 pct of the original cost budget and only one in ten projects are completed with a margin of 10 pct with reference to the original dates. A survey has shown that in 2014 more than half of construction project owners came across at least one problematic project in spite of their confidence that they had applied the appropriate planning and control tools with regard to the projects they have carried out.