The construction industry is a complex and competitive environment in which numerous parties with different talents and levels of knowledge work together. Parties from various professions, each with their own goals, expect to maximize their benefits. However, these differences in perceptions among parties often lead to conflicts that can quickly escalate into disputes if not well managed. Disputes can delay projects, increase costs, and damage relationships, thereby making effective claims management strategies essential for construction companies. By having a comprehensive claims management plan in place, construction companies can proactively manage risks, avoid disputes, and quickly resolve issues that arise during the project. In this article, scholarly insight is offered into the key strategies that construction companies can implement to effectively manage claims and mitigate risks.
Understanding Construction Claims
A construction claim refers to a demand for payment or work related to a construction project. Such a claim can arise from a contractor requesting additional compensation due to changes in the contract or a client seeking additional work from a contractor who has not met the terms of the agreement. Claims related to contracts are a necessary and important part of any construction project. These claims are bound to happen due to the long time it takes to complete the project, various uncertainties, and complex relationships among the people involved.
Construction claims can be classified in several ways. These ways include the parties involved, rights claimed, legal basis, and claim characteristics.
The legal basis is a common way to categorize claims, with three primary categories:
● Contractual Claim: This type of claim arises from specific clauses in the contract, such as those related to ground conditions, variations, and delays.
● Extra-contractual Claim: These claims result from a breach of contract; either expressed or implied, and are not covered by specific grounds within the contract.
● Ex-Gratia Claim: This category includes claims that do not have a legal or contractual basis, but are made on moral grounds. For instance, contractors may make ex-gratia claims for costs incurred due to rapidly increased prices.
There are other claims which include Property Damage Claims, Completed Products Claims, Personal, Advertising Injury Claims, and Medical Expenses Claims, amongst others.
The Need for Effective Claims Management
Claims are increasingly becoming a pervasive and inevitable cost in modern projects involving new and cutting-edge technology, specifications and high expectations from the owner. Given the significant rise in the number of construction claims in recent years, it is imperative to adopt effective construction claim and dispute management practices. Disagreements among parties involved in construction projects are a challenging issue for stakeholders in the construction industry. As such, an effective approach to managing construction claims is the key solution to this problem.
The effective management of construction claims has become an imperative process in today’s projects, which typically entails the allocation of numerous resources and engagement with multiple stakeholders. One of the most efficacious techniques for claims management aimed at preempting claims during the initial stages of a project is proactively eliminating the underlying causes of potential issues prior to their manifestation.
Construction claims management practices differ depending on the country. Developing countries can benefit from efficient construction claims management practices that make resolving claims easier for project owners and contractors.
Factors that Convert Claims into Disputes
The most important factors that convert claims into disputes are identified as delayed interim payment from clients; qualification of teamwork; extension of time; incomplete drawings and specifications; poorly written contracts clauses; change orders; cooperation and communication nature among project team, and late supply of equipment and materials.
In order to deal with or control the claims effectively, owners of construction projects need a multifaceted approach to reduce these claims. Such an approach should include strategies and practices to mitigate risk and address unwarranted claims. The significant issues in claims and disputes are the identification of issues and the party responsible for the claims, and ascertaining the time and cost impact of the claim. Upon identification of claims, the party asserting the claim is required to provide notification to the concerned parties. Additionally, it is incumbent upon the party asserting a claim to provide substantive evidence to support the veracity of their claims.
Effective Strategies for Claims Management for Construction Companies
a) Communication: Clear and open communication among all parties involved in a construction project can help prevent misunderstandings, disputes, and claims. Construction companies should establish communication protocols that ensure a timely and accurate exchange of information between the parties. These protocols should include regular project meetings, progress reports, and change order requests. By keeping all parties informed about project status and any changes, construction companies can proactively address issues before they become disputes. Moreover, in case of any disputes, prompt communication can help resolve the issue before it escalates. Therefore, construction companies must prioritize communication in their claims management strategy to minimize the risk of disputes and ensure project success.
b) Clear and concise contract: Construction companies can establish a clear and concise contract with detailed provisions and obligations that anticipate potential disputes and outline how they will be resolved. Construction claims can have legal implications, which is why it’s important for construction companies to understand the legal considerations of effective claims management. It is highly recommended that legal advice is sought from a construction lawyer to review contracts and explain legal implications in construction claims.
c) Involvement of third-party experts: Construction companies can also consider involving third-party experts, such as mediators or arbitrators, to assist in resolving disputes and claims. Overall, by proactively managing claims and disputes, construction companies can minimize their impact on project success and maintain positive relationships with all parties involved.
d) Record Keeping: Keeping detailed records of all project activities, including communication between parties, can help construction companies avoid disputes and resolve claims more efficiently. Project managers should maintain a comprehensive record of all project-related activities, including daily reports, change orders, meeting minutes, and other relevant documents. This information should be easily accessible to all parties involved in the project and should be kept up-to-date throughout the project’s duration. By maintaining detailed records, construction companies can quickly and easily identify the root causes of disputes and claims, and take steps to address them before they escalate.
e) Prioritizing risk management: Construction companies should also prioritize risk management as part of their claims management strategy. Effective risk management involves identifying potential risks and developing plans to mitigate them. Risk management should be an ongoing process that begins during the planning phase and continues throughout the project’s lifespan. Construction companies should identify and assess potential risks, prioritize them based on their likelihood and impact, and develop strategies to mitigate or eliminate them. By proactively managing risks, construction companies can reduce the likelihood of claims and disputes arising, and minimize their impact if they do.
f) Use of Technology: In recent years, construction companies have been leaning on technology as a strategy for effective claims management. The use of technology has made it easier to streamline communication, document management, and data analysis, which can help minimize disputes and maximize project success. An instance of such technology that has proven useful for claims management is Building Information Modeling (BIM). By utilizing BIM, construction companies can minimize claims and disputes by having all stakeholders work from the same set of digital plans. There are other technologies that can be used for claims management, such as drones, 3D printing, and virtual reality. Drones can be used to conduct site inspections, which can help identify potential issues before construction begins. 3D printing can be used to create physical models of buildings, which can help stakeholders visualize a project before it is built. Virtual reality can be used to create immersive simulations of a construction project, which can help stakeholders identify potential issues before construction begins. While technology can be useful for claims management, it is important for construction companies to ensure that their staff are trained in the use of technology. Additionally, it is important for construction companies to have a clear plan for how technology will be used in their claims management strategy.
Conclusion
In conclusion, effective claims management strategies are critical for construction companies to minimize disputes and maximize project success. Communication, documentation, and technology are essential components of an effective claims management strategy. Construction companies should establish communication protocols that ensure a timely and accurate exchange of information between the parties. Moreover, parties should maintain detailed records of all project-related activities, including change orders, project plans, specifications, and contract documents. By embracing technology and developing comprehensive claims management strategies, construction companies can proactively manage risks, avoid disputes, and quickly resolve any issues that arise during the project. Legal considerations, such as understanding contracts and legal obligations, complying with the statute of limitations, and having a dispute resolution process in place, are also crucial for effective claims management and it is imperative that construction firms seek legal expertise from professionals. By taking these proactive and comprehensive approaches to claims management, construction companies can ensure that their projects are completed on time.
Marvis Oduogu is a Team Lead at Stren & Blan Partners, and supervises the Firm’s Real Estate and Construction Sector. Ibitola Akanbi is an Associate in the Firm’s Real Estate and Construction Sector.
Stren & Blan Partners is a full-service commercial Law Firm that provides legal services to diverse local and international Clientele. The Business Counsel is a weekly column by Stren & Blan Partners dedicated to providing thought leadership insight on business and legal matters.
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