Dispute Avoidance

An ounce of prevention...

“Claim Prevention” is frequently termed “Claim Mitigation” by many in the industry, but claim prevention sounds better to us. Webster’s definition for mitigation is “to cause to become less harsh or hostile or to make less severe or painful.” Yes, claims can be harsh, severe, and painful and both parties can become hostile, but our goal is to prevent these feelings altogether and to promote a team atmosphere.

Simply stated, we see the whole claim arena as follows:

  1. Claim Prevention: doing everything possible to avoid any kind of dispute between the two contracting parties, “Dispute Avoidance”.
  2. Claim Mitigation: doing everything possible to quickly resolve a disagreement if one should arise.
  3. Claim Preparation: preparation of a claim against another party, usually the one holding the purse strings, which represents the disputed issues.
  4. Dispute Resolution: the meeting of the two contracting parties to resolve their differences without the necessity or expense of the formal legal system.
  5. Mediation: the resolution of a dispute in the presence of an agreed upon arbitrator in a non-legal setting.
  6. Arbitration: the resolution of a dispute with a courtroom type approach using witness and expert testimony. Can be either binding (both parties agree to accept the outcome regardless of the final decision) or non-binding (the dispute can be raised to a court in the legal system.)
  7. Court: the last place you want to be, where only the lawyers win.

Our primary objective regarding claims is to be the best at preventing them. We will participate with you at every step along the way, but if we are to truly benefit you, we would like to train your staff to become experts at the first step. Let’s look at the five parts of a claim action and discuss how a potential claim can best be handled.

First, a potential disagreement arises. In order to avoid disagreements that turn into claims the most important one thing that can be done is to schedule a daily meeting with the owner’s representative. If a face-to-face meeting is not possible, then a phone conversation should be conducted. A daily report of potential areas of disagreement should be discussed between the parties and a scheduled meeting to address the differences should be set. At the meeting, data should be made available to support the contractor’s position with resolution as the objective.

Second, if the owner shows an unwillingness to resolve differences, the most important issue then becomes documentation. Actually, the documentation should begin immediately upon belief that you are working on an issue outside the scope of the contract. The key components of that documentation are a daily log and daily timesheets that segregate the time spent on extra work or consumed by the delay.

The daily log should hold a detailed description of the events surrounding the cause for extra work or delay. This requires a system for the foreman to obtain a separate cost code to which he can charge the extra time.

In the case of a delay, all too often foremen have stated that it is not possible to identify the delay because the time lost is not easily segregated. What is interesting is that, absent this information, a third party will be required to estimate the delay by utilizing a case study and then incorporate the time lost into the schedule analysis. Obviously, an estimate of the lost time in the field is more accurate than an estimate six months after completion of the project by an individual that was never present onsite, utilizing a case study that is only marginally relevant. The simple solution is to document all time possible, even to the extent of fairly estimating the distribution.

Third, after efforts fail to resolve the issue, the contractor must notify the owner in writing of the specifics of the disagreement and reserve rights to file a claim in the future. This gives the owner notice that the matter is not to be taken lightly, but this should by no means be considered the final step. What is important is to once more attempt a resolution, in writing, giving a deadline for a response. It should clearly state that a non-response would be considered denial by the owner of the contractor’s right to collect damages. You are far better off having a definitive position from the owner regarding each potential claim, otherwise you’ll be left with a false understanding, often verbal, that a resolution will be forthcoming. This is a common tactic of an owner since their prime objective is to get the project built and may have concerns about the contractor’s willingness to perform during disputes.

It is important to begin preparation of cost data while the project is in progress. Without doing so, two negative conditions arise. First, without it, it will be difficult to resolve any open issues as the contract is completed. Often owners will show willingness at the end of a contract to address claimed damages on issues that they share partial responsibility for by identifying and settling all issues for which they may share responsibility, leaving only issues that they can clearly defend. Those issues are usually the largest so, although the owner’s objective is self-serving, it is good to settle as many issues as possible; it makes for a simplified claim and it should not hurt the contractor’s valid positions. Second, preparing cost data as you go gives you the ammunition to prepare and present a claim in a timely fashion. Another tactic owner’s use is to limit the amount of time available for the contractor to submit a claim to as little as 30 days past final acceptance. Without preparing the cost data as you go, there is little chance to meet a claim deadline that is so tight. Complex claims can take months to prepare so preparing the cost data while the job is in progress is the best approach.

Fourth, a claim is prepared by the contractor to recover lost or withheld funds and negotiations begin if both sides are amiable. The claim is in the form of a detailed narrative and schedule analysis, often identifying impact to the schedule and associated costs. Following submission of the claim, every attempt should be made to discuss and negotiate settlement with the owner; if a discussion is not carried on, the claim will likely result in legal action. Do not be mis-led about the ability to informally resolve a claim at this juncture. Usually, the fact that a detailed and professional claim document has been prepared with adequate backup is enough to bring in owner representatives that are higher up in the hierarchy. These types of individuals normally think more globally and have far less emotional attachment to the individual issues, understanding the cost of litigation and the resources required defending a lawsuit; therefore they are usually motivated to compromise and reach a settlement as long as the contractor is willing to compromise too. Typically, disputed costs get resolved at this juncture for 45% to 55% of claimed cost.

Fifth, the claim is mediated, arbitrated or resolved in the courts. At this point, the attorneys are heavily involved and the path to dispute resolution becomes paved with money. The further down the path you go, the more money you will be leaving behind for the attorneys. From our viewpoint, this is no longer a dispute resolution; this is a distribution of potential settlement money to attorneys and it should be avoided if at all possible.

You can e-mail us and we will provide you with our best-guess estimates as to the cost of the preparation for your claim, based on our experience. We’ve seen too many contractors just turn over disputes to attorneys, even before a claim is prepared. Druml Group will help you set up a regimented system for handling disputes. Our goal is to resolve disputes and minimize attorney’s fees. If that’s your goal too, contact us and we will help.