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2.3. The Claims and disputes
2.3.1. An Introduction
This chapter investigates and analyzes the main subjects clarifying the concept of construction claims and disputes classifying them into their particular types. The chapter identifies the main causes of construction claims and disputes reviewing the effects of them on the construction industry shedding the lights on the Egyptian construction industry.
2.3.2. The concept
There are many definitions identifying claims and disputes; however, there is the definition that (AIA Document A201 ™, 2007) stated identifying the concept of claims as “demand or assertion by one of the parties seeking, as a matter of right, adjustment or interpretation of Contract terms, payment of money, extension of time or other relief with respect to the terms of the Contract. The term “Claim” also includes other disputes and matters in question between the Owner and Contractor arising out of or relating to the Contract” (Construction Law Today, 2015) Although it is a narrowband definition, it makes claims have three components; the first one is entitlement and the second is damage while the third is relief. There is another definition identifying claims as “request, demand, application for payment or notification of presumed entitlement to which the contractor, rightly or wrongly at this stage, considers himself entitled with respect to an agreement has not yet been reached” (Hughes and Barber, 1992). Concerning disputes, they occur constantly in the construction industry and they increase frequently (Zack, 1993) while (Ndekugri and Russell, 2006) stated that a dispute arises after a party rejects the claim so, there is a relevance combining them. Disputes are defined as “any contract question or controversy that must be settled beyond the jobsite management” (Diekmann and Girad, 1995) and they are also defined as “a problem or disagreement between the parties that cannot be resolved by on-site project managers” (Construction Industry Institute, 1995).
2.3.3. The Causes and effects
Construction claims as (Gulezian and Samelian, 2003) indicated, occur according to various reasons that increase the costs of the project. (Samantha, 2002) illustrated that while the project is running, contractors often face some situations that they find difficult to expect because those situations are uncontrollable. She identified the reasons for claims and grouped them into fifteen categories:
1) Lack of fulfilling the contract
2) Shortage of providing the materials
3) Volatile Weather Conditions that may obstruct the project and in some cases, cancel it
4) Changes that the owner requires
5) Changes essential for fulfilling the contract
6) Ineffective management and ineffectual site administration
7) Site conditions contrary to expectations
8) Failure of the project and its unlikelihood to continue
9) Poor design and specifications
10) Lack of communication of data between parties
11) Disagreement between parties involved
12) Termination of the contract by the contractor or the owner
13) Acceleration of the project
14) Lack of systemization
15) Imperfect cooperation between parties during performing tasks
(Ren, 2000) analyzed the reasons for claims from social, manufacturing and Enterprise scheme perspectives:
- 1. Social factors including the pressure that the society casts on the construction industry. The society expects that the industry achieve its projects on time and within the cost and quality. That exhausts the industry and add risks on the projects and additional burdens on the parties
- 2. Manufacturing factors including the extensive patterns of the parties, the increasing scope of the projects and the growing ambiguity of the construction conditions. That implicates the complicated and interconnected relationships that procurement structures introduce, unequal risk allocation and technological complexity that may cause inconsistency and imperfection
- 3. Enterprise scheme factors including the changes that the owner requires, the charges that the parties fail to perform and unexpected and incalculable site conditions. That combines the improper and irrelevant planning and specifications that prevent the project from moving forward and the acceleration that negatively affects the timing and execution of the projects
Many researchers conducted their studies to exemplify the reasons for claims. (Diekman et al., 1985) stated that claims often occur when there is a poor design and a change that the owner adds during the construction while (Halligan et al., 1987) confirmed that the main reasons are scheduling issues, poor documents and bad conditions. (Thomas et al., 1994) supported that ambiguity and deficiencies are the main construction claims resulting in misunderstanding of the terms of the contract while (Kumaraswamy and Yogeswaran, 1998) suggested that inefficient management, omission and weather are the most important reasons.
Concerning disputes, there are different reasons for disputes such as ambiguity, contractual issues and pragmatic attitudes (Mitropoulos and Howell, 2001). (Blake Waldron Dawson, 2006) referred to time and budget overruns as the most significant reasons for disputes as they may cancel the projects and cause heavy losses for the owner and contractor. (Rhys Jones, 1994) asserted that adverse cultures resulting in lack of communication, inadequate workmanship resulting in lack of performance and impractical expectations that the owner aspires to are the common reasons for disputes and (Vorster, 1993) emphasized the same assumption explaining that lack of communication, lack of skilled labours and unrealistic expectations of the owner cause disputes and increase them. In consequence, claims and disputes witness a constant escalation in construction. That escalation includes various negative effects arising from claims such as the indirect costs. There are different objects affecting the projects when claims occur including increasing the wages of labour and enduring additional expenses. Those objects make the projects extend so, they become a resource for labour insufficiency and unproductiveness. That results in various adverse effects that correlate to the main constraints of the projects:
Figure 1: Construction claims and disputes and Projects constraints (Gjertsen, 1990)
Disputes affect the total cost of the projects and extend the time. When disputes are neglected, tension increases and relationships deteriorate (Cheung and Suen, 2002). Disputes cause overruns and defects as they extend the duration and aggravate the payment issues (Harmon, 2003). (Poh, 2005) concluded that disputes affect the owner as they require additional costs that result in losses. Those costs cause distrust and misunderstanding between the parties as they blame each other and refuse to cooperate. Concerning claims, they affect the total costs. That is evident when analyzing the results that (Semple et al., 1994) explored when he investigated 24 construction projects in Western Canada:
Figure 2.1: Construction claims and total costs (Semple et al., 1994)
According to the figure above, it is apparent that the owner endures the total costs of the claims representing 11% of the total contract value. That indicates that the costs that the owner endures because of claims reach the half of the total claims that the contractor appealed. That, in turn, indicated that there are contractual obstacles facing the procedures of identifying claims and accurately assessing them.
Figure 2.1: Construction claims and time (Semple et al., 1994)
Concerning the figure above, it is apparent that the total duration that claims cause reached 2955 days. That means that there is a 48% negative increase in the duration and that when claims are neglected, they exceed the duration by 100%. For contractors, claims resulting in exceeding the duration may cause fiscal troubles budgetary including limitation of the capital and liquidity deficit.
2.3.4. Main types of claims
There are different methods that clarify claims and classify them. When classifying claims regarding the parties involved, there are claims submitted by the owner and claims submitted by the contractor. (Hughes and Barber, 1992) clarified claims and classified them into three main categories:
- 1. Contractual claims concerning the suitability of the contract and its availability for execution. When the contract includes ambiguities and contradictions, obstacles face the contract documentations and cause troubles of misunderstanding them and accordingly, unfulfilling them
- 2. Ex-contractual claims concerning the violation of the contract and its termination that relate to the owner
- 3. Ex- gratia claims that the contractor raises when he suffers from the projects problems and financial losses
(Chappell et al., 2005) supported that classification and he developed it as follows:
- 1. Contractual claims that result from the express provisions of the contract that point out the direct losses
- 2. Common law claims that address the breach of the contract and enforce the law concerning the items of the contract that should be settled
- 3. Quantum Meruit claims that provide solutions when the projects achieve their activities; however, costs are disagreed to between the parties involved
- 4. Ex-Contractual claims that emerge from the terms of the contract. Those claims are affected by the conditions of the projects and they cause financial losses for the contractor while the owner has the choice to share those losses and pay for them or refuse to pay for them
(Zaneldin, 2006) in his study of construction claims, asserted that there are eight categories that those claims fall under:
- 1. Ambiguity claims arising out of the contract misunderstanding
- 2. Delay claims
- 3. Acceleration claims
- 4. Claims arising out of changes that the owner and contractor add
- 5. Additional work
- 6. Site conditions
- 7. Damage
- 8. Inefficiency
2.3.5. Claims and Disputes in the Egyptian construction Industry
Concerning reasons for claims in the Egyptian construction field, the usual reasons for claims in Egypt attribute to the changes that the owner requires and consultant as well, low quality of design and specification and delay of the consultant in approving the shop drawings. (Hassanein and El Nemr, 2008) declared that the most significant reason for claims in Egypt represented in further workload. They concluded that managing claims in Egypt suffers from poor notification procedures and inadequate documentation as well. Those reasons affect the projects resulting in loss of rights and escalation of potential risks. More specifically, the reasons for claims in the Egyptian construction industry approximately represent 80% of the whole reasons as they include changes that the owner makes and the consultant representing about half of the reasons, poor design and specifications representing about 21% of the whole reasons and postponement of acceptance of those specifications representing nearly 8% of the reasons (Abd El-Razek, M E, Bassioni, H and Abd El-Salam, 2007). They held semi-structured interviews with experts exploring the main seventeen reasons for claims in the Egyptian construction industry:
- 1. Overdue in paying the contractors
- 2. Poor design and specifications
- 3. Making errors and cancellation in the contract
- 4. Postponement of acceptance of shop drawings
- 5. Confined and restrained access
- 6. Backward supply of the equipments and materials
- 7. Unequal bidding
- 8. Poor communication and lack of coordination between the parties involved
- 9. Unsatisfactory profits
- 10. Adjustments made by the owner or consultant
- 11. Acceleration of the operations
- 12. Insufficient time for the arrangement of the bidding
- 13. Conditions variables
- 14. Excessive complexity of the construction industry
- 15. Problems of the investigation work
- 16. Unanticipated changes
- 17. Raise in the price of the materials
Those reasons affect the industry and cause delays when implementing the projects; therefore, it is crucial to consider the delay claim management as a principal factor for making the projects achieve their objectives (Baki, 1998). To make an effective delay claim management, we should consider three elements; the first is claim avoidance, the second is claim arrangement while the third is claim authority. Claim avoidance is the initial process that provides the contract documentation and the work plan that includes the definite outputs and alternatives. That process reviews the project documentation and analyzes the changes and updates. Claim arrangement prepares the ballpark figure to evaluate the schedule and budget effects. It identifies the time phase considering delays and loss of the productivity. Claim authority affirms the good practices and open communication channels that clarify the responsibilities and provide the solutions when delays appear.
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