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Construction Claims During the Financial Crisis – What Developers Need to Know

     By Prime Consulting Construction and Contracts Expert Witness

PhoneCall N.M.Raj at +48 51 5723082

Developers need to be extremely careful during an economic downturn when Contractors are desperate for work. This may sound confusing, however, the fact remains that the lowest tender is not usually the best tender, especially during the current crisis. Claims-savvy Contractors can convert low tenders/negative margins to profit by pursing an aggressive claims strategy.
Claims During the Financial Crisis

The construction industry is experiencing one of the worst downturns in history; a lot of developers believe that the market is favorable for reducing the construction costs and, to a certain extent, they are right. However, during previous downturns, some contractors tendered for projects at negative margins i.e. from -5 to -20%. Why? Apart from the obvious “survival” aspect, the answer is simple, Construction Claims! The Contractors try to convert negative margins into positive ones by pursuing an aggressive claims strategy. It is true that most projects have claims related problems anyway, however, during an economic slump, the situation becomes exponentially worse.

Reasons for Claims

Unfortunately, claims have always been a part of the construction industry and a lack of awareness of the same amongst Project/Construction Managers (PMs/CMs) has led to considerable financial losses for developers. In a lot of claims situations, the Contractors are entitled to receive an extension of time to their contract duration and additional sums of money for loss and/or expense, however, Contractors generally tend to exaggerate the magnitude of their claims.

There are several issues that give rise to claims, the primary one being “variations”. Contractor’s revel in raising claims for variations and can make a “mountainous claim out of a molehill variation”. Employer related delays in the delivery of design documentation, co-ordination errors in drawings and discrepancies in Contract Documentation result in claims as well.

What’s the Solution?

There are some key areas that developers need to focus on in order to minimize their exposure to claims. The project contracts should be based on well known ones like FIDIC. The contracts should not be amended significantly and the project team should be conversant with the same.

In terms of choosing personnel, it is vital to ensure that the potential PM/CM has regional experience with respect to the management of claims. Among the main issues that need to be queried are details of the PM’s/CM’s Claims Management Procedure. Most PMs/CMs have reactive procedures i.e. they wait until the Contractor submits a claim before reacting. This procedure is ineffective; it may well succeed in giving cardiac arrests to the Developer’s team though!

Developers also need to ask for details of the PM’s/CM’s in-house Claims Consultant; his CV should be perused in order to ensure that he is suitably qualified/experienced. It is also important to find out where the consultant is based; there is no point in having somebody based in the UK or the Middle-East for a project in C&EE.

It is critical to choose contractors/designers carefully in order to keep post-contract variations/errors to a minimum. Do not employ Contractors/Designers just because their tender was the lowest; companies must be chosen based on their reputation, experience, financial stability and success in completing projects.
Another common mistake is reduced project durations for an “accelerated” completion. The project duration should be reasonable; a significantly reduced time-frame will result in more claims for the Developer.
Above all, when it comes to hiring professionals, it should be borne in mind that the cheapest option is usually not the best option; as a wise man once said “look before you leap”!

N.M.Raj is a Managing Partner at Prime Consulting – Construction Claims and Contracts Consultant Raj specializes in construction claims, FIDIC contracts and commercial/contracts management. Raj holds a bachelor’s degree in civil engineering and has close to 20 years of commercial/claims management experience in the industry.

Raj received legal training from the University of Reading (UK) and is a corporate member of the Chartered Institute Of Arbitrators (UK). He has also held memberships with the RICS (UK), CIOB (UK) and the AACE (US).

Raj has worked/consulted on several prestigious projects in Europe (incl. Ireland), Russia/CIS, Asia, Africa, Middle-East and the Far-East. The major projects he has been involved with include the Burj Khalifa (the tallest building in the world - UAE), Zlote Tarasy (Poland), Limerick tunnel (Ireland), the landmark Gazprom tower (Russia), Media city (Egypt) and various other iconic projects around the world.

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While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.
For specific technical or legal advice on the information provided and related topics, please contact the author.

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