In my August column, I discussed a study conducted by auditors in FHWA Region 4 on the subject of prevention and evaluation of contractor claims. I focused on the subject of contract claims avoidance. In this column, I will turn my attention to auditor "views" on project administration and claims evaluation.
What’s the problem?
The first point the Region 4 auditors made on the subject of contract administration was that certain construction project engineers have problems dealing with contractors, and that those problems can cause project delays and also can be costly. I agree with the view expressed by the auditors, only I would add that certain contractor project managers have problems. While project engineers and contractors working together will not avoid a design error, it can minimize the resulting delays and costs incurred as a result of the design error.
Next, the auditors found that many construction project engineers simply grant extra work days rather than paying additional compensation to contractors. They noted that while appearing to be a "no-cost" solution to a problem, such an approach can be costly, both in terms of time and money. When I first began practicing construction law, problems were frequently resolved in the field near the end of the project with the contractor receiving a time extension in return for waiving claims for additional compensation. More recently, that approach has not worked because the margin contractors have in their bids do not permit them to give up on valid claims for additional compensation. As a result, "time is money" from the contractor’s perspective.
The auditors pointed out that one state DOT had encouraged its project engineers to settle change order problems at the project level and had given the project engineer limited authority to do so. I believe the taxpayers are well served by this approach because timely resolution of issues generally results in a contractor’s "forward pricing" resolution to problems rather than filing claims near the end of the project on a "cost-plus" basis.
Keeping a record
Next, the auditors turned to evaluation of contractor claims. With regard to claim processing, they recommended: Clear procedures for submitting claims with time limits, claim format and a required certification; the DOT’s written response to be prepared with assistance from a qualified, experienced claim processor; review and resolution of claims while the project is still active; accurate documentation/record keeping and; centralized claims evaluation for uniformity and consistency.
With regard to claim auditing, they recommended:
Contractor certification of costs; clearly defined allowable and unallowable claim costs and; proactive auditors who communicate with state DOT project engineers.
I find the auditors’ recommendations interesting. In many states, a contractor is not even permitted to file a claim until final payment is made. That conflicts with the suggestion that claims be resolved while the project is still active. Second, contractors should heed the advice on improved documentation and record keeping. From my experience, contractor field superintendents do not document what happened on a project as well as state DOT project engineers. A contractor is at a grave disadvantage if it must rely on state DOT records to prove facts supporting a claim.
Not without a mediator
Finally, the auditors turn to the subject of contractor claim settlement. They noted at the outset that negotiation was the most desirable and least costly for both parties. They further noted that negotiation works best at the project level. I certainly agree with the notion that negotiation is most desirable for both parties. However, for negotiation to work best at the project level, the project level engineer must have authority to reach a resolution of the matter.
The auditors discussed arbitration mediation and litigation as other means of resolving contractor claims. Over the last several years, I personally have found that many contract disputes can be resolved by mediation, which is far less costly than arbitration or litigation. Most contractors I know are willing to present the contract claim to a mediator as a means of reducing cost and time necessary to get the matter resolved. On the other hand, some state DOT engineers do not feel comfortable mediating claims.
At the end of the report, the auditors noted three common threads that tie their recommendations together. Those were: communication with the contractor; proactivity to the resolve claims as soon as possible at the lowest level; and documentation.
I believe the report contains many good ideas and I certainly agree with the three recommendations made at the conclusion. I would add that most claims I have encountered over the last several years could have been avoided by the state DOT spending more time and/or money to assure the design is both adequate and clearly portrayed in the plans.