The Role of General Conditions relative to Claims and ...the-new-arch.net/Articles/v04n02a03.pdf · International Journal of Contemporary Architecture ”The New ARCH“ Vol. 4, No

International Journal of Contemporary Architecture ”The New ARCH“ Vol. 4, No. 2 (2017) ISSN 2198-7688 ___________________________________________________________________________________________________________

___________________________________________________________________________________________________________ R. Komurlu, D. Arditi: “The Role of General Conditions relative to Claims and Disputes in Building Construction Contracts”, pp. 27–36 27

DOI: 10.14621/tna.20170203

The Role of General Conditions relative to Claims and Disputes in Building Construction Contracts

Ruveyda Komurlu*,1, David Arditi2

1)Faculty of Architecture and Design, Kocaeli University

41300 Kocaeli, Turkey; [email protected], [email protected] 2)Illinois Institute of Technology, Department of Civil, Architectural, and Environmental Engineering

3201 S. Dearborn St., Chicago, IL 60616, USA, [email protected] Abstract Claims are often caused by changes in owner requirements, extra work, delays/acceleration, differing site conditions, and contract ambiguity. Some claims sometimes escalate into legal disputes because the negotiation process between the owner and the contractor fails to produce mutually agreeable solutions. The mostly used dispute resolution methods include mediation and arbitration in private projects; and recourse to Boards of Contract Appeals in public projects. In addition, parties can always litigate the case in a court of law. “General Conditions” is a contract document that regulates the administrative functions in the construction contract. The management of change orders, claims, and disputes is generally discussed in this document. Not only does the “General Conditions” specify the processes of change order and claims management, but it also clearly states the method of dispute resolution in case claims cannot be settled amicably. “A201-2007 General Conditions of the Contract for Construction” was issued by the American Institute of Architects to regulate the relations between the owner, the architect, the general contractor, and subcontractors. This document has gained wide acceptance in the building construction industry, and is used in most building construction projects in the U.S. The “General Conditions for Construction” was issued by the Turkish Ministry of Environment and Urbanization for the management of public projects. The government is the most important investor of building construction projects in Turkey and expects this document to be used in all construction projects, including privately funded projects. This study aims to investigate the role of “General Conditions” relative to claims and disputes in building construction contracts by comparing the contents of “A201-2007 General Conditions of the Contract for Construction” in the U.S. and the “General Conditions for Construction” in Turkey relative to managing claims and disputes.

1. Introduction The Project Management Institute (PMI) [1] defines a project as a temporary endeavor performed to achieve a unique product. Detailing the concept, PMI sets a project on three constraints namely scope, budget and time. Quality, in addition to these, is a goal to be pursued through the whole project. These constraints are interrelated, which means altering one, results in changes to at least one other. Starting with the investment decision, and ending with the delivery of the constructed facility, building construction projects are performed on a piece of land, exhibit high complexity, take a relatively long time, require considerable funding, and involve numerous parties [2]. The contracting process is managed by a set of documents (Table 1) [3]. The expectations of the owner, the procedures to be followed, and the properties of the project are described via these documents. The relationship between the most important parties, i.e., the owner, the architect, and the contractor is regulated by contract documents. As seen in Table 1, these documents primarily consist of the drawings, the general conditions, the technical specifications, and contract document forms [4]. Among these, the general conditions regulate the roles, responsibilities and liabilities of the parties throughout the construction process. Thus, the “general conditions” is a very important part of the contract documents [2, 5] as it regulates all administrative procedures to be implemented throughout the project, including payment and scheduling routines, the issuing of change orders, the handling of claims, and the resolution of conflicts and disputes between the parties, among others [2].

The standardization of the general conditions has numerous advantages, including saving preparation time, avoiding omissions, eliminating controversial language, avoiding misinterpretation among parties, achieving consistency in courts of law by building familiarity through general and frequent use, and

Keywords: Building construction; Contracts; Change orders; Claims and disputes; Disputes resolution; General conditions; AIA A201-2007; Turkish general conditions for construction

Article history: Received: 16 July 2017 Revised: 24 July 2017 Accepted: 28 July 2017



Table 1: Construction Documents [3]

avoiding misunderstandings as these documents have an adequate level of detail [4]. There are a number of standard general conditions developed in the U.S., the most commonly used of which are those issued by the American Institute of Architects (AIA), the U.S. government (Federal Acquisition Regulation), and the Engineers’ Joint Contract Documents Committee (EJCDC) composed of the American Consulting Engineers Council (ACEC), the Associated General Contractors of America (AGC), the American Society of Civil Engineers (ASCE), and the National Society of Professional Engineers (NSPE) [2].

Similar to the rest of the world, the traditional design-bid-build delivery system, where the architect manages the construction as the owner’s agent, is the most widely preferred delivery method in the U.S. [6]. Thus, the American Institute of Architects has a strong influence on the building construction industry. The American Institute of Architects (AIA) was established in 1857 with the intent of introducing licensing conditions/procedures and standardizing the contract documents. The first documents introduced by the AIA identified the roles and responsibilities of the architect. Currently, there are more than 100 forms and documents published by the AIA which cover all stages of design and construction [7]. A201 – 2007 General

Conditions of the Contract for Construction is the latest version of the general conditions published by the AIA, the first version of which was published in 1911 as part of their A-Series family of documents [8]. This document is the most commonly used general conditions for building construction in the U.S. [7].

The Government in Turkey is one of the most important investors in building construction projects, providing 42.33 percent of the total construction investments in Turkey [9]. It thus has a strong influence on the building construction industry. The Public Procurement Authority of the Ministry of Finance regulates public projects from bidding to delivery, by means of standard contract documents. The General Conditions for Construction [10] published by the Public Procurement Authority is the most commonly used general conditions in Turkey, since it is mandatory in public projects. Because of this common use, the courts of law in Turkey use this document to evaluate conflicts.

2. Changes, claims and disputes Building construction projects are relatively large and complex. Because of the complexity and the relatively large size of building construction projects, construction



contracts are detailed and complicated. The complexity of the text in the typical contract may cause confusion and lead to disagreements [11]. In order to avoid misinterpretation, the contract documents should state realistic completion dates [12], detailed and constructible drawings and technical specifications, clearly defined quality requirements, and clear cost assignments. Unfortunately however, the majority of the building construction projects are executed through contracts that are not easy to comprehend [11].

Changes in the work cause variations in project activities, increase costs, and disrupt the work schedule [13]. Since drawings and specifications are rarely complete at the time the contract is signed, changes are inevitable in most cases. In addition to other factors, the success of a project heavily depends on the ability to manage changes [14]. Change orders are documents issued by the owner that regulate the performance of additional work not included in the main contract. Once the change order is issued, the change becomes an intrinsic part of the contract [15, 16]. Change orders are among the main reasons for loss of efficiency and cost increase in building construction projects [17]. Although the effects of change orders depend on the type of contract (lump sum, unit price, or cost plus contracts), if the activities on the critical path are affected, the change causes an extension of the total duration of the project [18].

As seen in Figure 1, change orders cause increased direct costs such as costs incurred in purchasing materials, hiring labor, and owning/renting equipment, as well as increased indirect costs such as overhead expenses and profit [19]. Various methods exist for distributing overhead expenses and profit to different line items. However, the assignment of overhead expenses to change orders constitutes one of the main causes of disputes between owners and contractors. Given the consequential damages caused by change orders,

recovery of related costs is the main issue in disputes that involve change orders [20]. The main reasons why change orders are issued include design errors, unforeseen site conditions, and weather conditions. However, the type and size of the project, the contract amount and duration, and the level of competition in the bidding process are additional important factors [15]. Factors like the owner’s changing needs, the design’s incompatibility with local ordinances, rules and regulations may also cause change orders [18].

In general, contract documents are inadequate in identifying the additional costs that can be incurred in change orders. The disagreements that originate from change orders mostly involve related costs and generally lead to claims [21]. The contract administration process starts with the signing of the contract and lasts until the completion of the project. This process focuses on the contract terms and project conditions. It should be noted however that the enforcement of the contract conditions often lacks rigor. Successful completion of the project is the main goal of the contract. The potential contract administration problems require evaluation of six risks, namely (1) proposal risks, (2) surety and liability risks, (3) schedule risk, (4) contractual risk, (5) performance risk, and (6) price risk [22]. Proposal risks include the definition and clarity of the scope of the project, whereas surety and liability risks cover the financial and legal issues. Schedule risks are related to timely delivery, and contractual risk consists of change orders, dispute resolution, and contract termination. Performance risk relates to the conditions at handing over the constructed facility, and finally, price risk involves the timeliness of payments. In order to mitigate contractual risks, the contract should specify the entity that has the authority to make changes, how these changes will be performed, and how disputes will be resolved in case an agreement cannot be reached.

Figure 1. Change order costs [19]



Figure 2. Cause and effect relationship of disputes [11]

Figure 3. The dispute pyramid [26]

Figure 4. Model of the relationship among distribution of control, concern for fairness and potential for dispute [30]



Molenaar et al. [23, 24] state that the owner’s management capability, the contractor’s management capability, and project complexity are the three major factors that cause a dispute. Goyal [25], on the other hand, lists the causes of disputes as (1) changed conditions from those stated in the contract documents, (2) additional work, and (3) errors and omissions. According to Sarat [26, 27], a dispute occurs when a damage takes place, a claim is filed to cover the damage, and the claim is resisted by the other party. Claims are grouped by Love et al. (2011) [24] and Zaneldin (2006) [28] into six types, listed from highest frequency to the lowest, namely (1) changes claims, (2) extra work claims, (3) delay claims, (4) differing site conditions claims, (5) acceleration claims, and (6) contract ambiguity claims [24, 28]. The causes of disputes may be categorized as follows:

• Since projects take a relatively long time to complete, the drawings and specifications are often revised because of changes in the owner’s needs and requirements.

• Some architects, who prepare the drawings and specifications, do not have adequate know-how about installation details for a successful performance on the job site.

• Constructability issues are generally not detected and solved at the early stages of the design.

• Construction documents that regulate the performance of the contractor on site are faulty or do not have the adequate level of detail.

Changes in the scope, inadequacy of drawings and technical specifications, constructability problems, and the owner’s on-site regulations generally require extra work. Delays caused by factors other than the contractor’s fault require acceleration of work. Contractors submit change orders for both extra work and acceleration of work. Claims arise when there are disagreements between the owner and the contractor about the need for a change order, and/or the cost of the change [29]. In addition, the effects of disputes may cause new disputes (Figure 2).

Sarat [26, 27] lists a series of processes to be followed once a dispute arises (Figure 3). These processes start with direct negotiations and may progress to arbitration and litigation.

According to Aibinu’s model for handling claims [30], it is possible to reduce the occurrence of disputes in construction projects by distributing control over the decision-making process (Figure 4). Claims should be evaluated and resolved in a timely manner by setting up mutually agreeable processes, clearly described in contract documents. In addition, claims should be

evaluated and resolved methodically by instituting acceptable content assessment mechanisms. Fairness is defined as the relationship between the input and the outcome. Finally, with the use of an independent claims certifier who performs process and content control, the resolution process could be finalized rapidly and efficiently.

Considering the fact that the contract involves offer and acceptance, the parties agree on contract conditions. However, the parties have different points of view and different goals. Thus, claims in general are neither totally right, nor wrong. They cannot be totally accepted, and cannot be totally rejected neither. They need thorough investigation performed with regard to the special conditions in the building construction industry [11].

Since claims and disputes introduce additional costs and delays in the delivery of the project, avoidance and resolution methods have received increasing interest in the building construction industry [31]. Generally, there are three methods that can be used in private contracts to resolve disputes, namely (1) mediation, (2) arbitration, and (3) litigation [26, 27, 28]. Negotiation between owner and contractor occurs prior to these, and a considerable number of conflicts are resolved by negotiation because the parties negotiating the issue (i.e., contractor and owner representatives) are professionals who handle the issue at hand within legal and ethical boundaries, in a timely manner, and with minimum expense. According to Kennedy et al. (1997) [32], 93% of the disputes are resolved by negotiation. However, the party with the weaker position may be dissatisfied with the result. Mediation requires assignment of independent construction professionals as mediators to review the case, identify the causes of the dispute, and try to resolve the dispute in minimal time. The decision of mediators is not final, nor binding. Arbitration, on the other hand, requires the intervention of arbitrators certified by professional agencies or organizations. Arbitrators conduct an investigation by means of hearings, and make decisions that are final and binding. Considering that the construction process is complex, includes interrelated tasks, and takes a relatively long time to complete, arbitration takes more time than mediation, and costs more. Litigation is the final stage of dispute resolution, and is used if the other methods do not provide a resolution.

Parties to a public contract are not allowed to resolve their disputes by arbitration or mediation. If a party to a dispute in a public contract is not satisfied with the outcome of negotiations, this party can submit the case to a Board of Contract Appeals, an entity created by the government. If the party is still not satisfied by the decision of the judges on the Board of Contract Appeals, then the party can litigate in a court of law.



In courts of law, judges review the claims and responses, evaluate evidence, and resolve the dispute according to the information presented to the court. Judges know the law well and are unbiased and objective. The court system is organized such that decisions can be appealed at a higher court. Litigation takes a long time and is quite expensive. 3. Claims and disputes in “A201 – 2007

General Conditions of the Contract for Construction” and “The General Conditions for Constructions”

AIA's A201 - 2007 General Conditions of the Contract for Construction addresses dispute-related issues in one article, namely Article 15 - CLAIMS AND DISPUTES (Table 2). The first section of this article defines claims, states the notification requirements of claims, and specifies that the contractor should not stop working in case of a claim. The requirements for a claim for additional cost, additional time and consequential damages are listed in this section. The second section assigns the architect as the initial decision maker. The initial decision is made after negotiations between owner and contractor. Dispute resolution methods are used if negotiations fail. Review, evaluation, consultation and investigation principles are specified in this section. According to this section, the architect may reach an initial decision that is acceptable to both parties. If the contractor is not satisfied with the decision, the contractor may file for mediation. The third section focuses on mediation. The mediation process is administered in accordance with the American Arbitration Association’s Construction Industry Mediation Procedures. The distribution of costs and location of the mediation process are defined. The fourth and final section of A201 – 2007 General Conditions of the Contract for Construction states that the contract may specify arbitration as the dispute resolution method. Arbitration is administered in accordance with the American Arbitration Association’s Construction Industry Arbitration Rules. It is stated that agreeing on arbitration, both parties accept that the decision is final and is enforceable by courts of law.

The Turkish Public Procurement Authority’s General Conditions for Construction states that the owner awards time and cost for variations in the work caused by the owner or external factors. Force majeure, differing site conditions, and external factors are subject to negotiation between the owner and the contractor. However, the procedure for negotiation is not described at all, and the owner’s decision is final. The document clearly addresses disputes only in Clause 51 – Resolving Disputes of Article 10 – Contractual Relationships (Table 2). According to this clause, if the contractor is not satisfied with the owner’s final decision, the contractor can litigate at a court of law.

This study investigated the differences between the most commonly used “general conditions” documents in the U.S. and in Turkey (i.e., A201 - 2007 General Conditions of the Contract for Construction in the U.S., and the General Conditions for Construction in Turkey). A comparative study (Table 2) indicates that both documents deal with disputes related to issues such as delays, time extensions, and change orders, but that the American document appears to be more detailed than the Turkish document [33].

4. Conclusion Building construction projects are complex, take a relatively long period of time to complete, and require a considerable budget. Because of these reasons, changes occur in the owner’s needs; constructability issues arise as a result of the designer’s lack of construction site practice; and change orders become inevitable when construction codes are modified, and unforeseen site conditions are encountered. Some of the resulting change orders cannot be implemented with the full approval of both parties because of unpredictable indirect costs and other reasons, and end up in disputes. The most effective method for resolving disputes, is probably to avoid changes during construction. Contractors also report that in addition to design changes, implementing the project in an unrealistic period of time with limited site investigation and design review, and inadequate definition of the project scope are the other main reasons for claims and disputes [34]. These factors indicate that owners have an important role preparing the contract documents in order to avoid claims and disputes.

A201 – 2007 General Conditions of the Contract for Construction that is widely used in the U.S. describes a multi-stage dispute resolution procedure in projects funded by private owners. The first stage is negotiation, with the requirement of timely notice of a claim, and continuation of work. The architect functions as the initial decision maker. Keeping good progress records throughout construction helps the owner keep track of the conditions and problems, and evaluate the case properly [34]. Unless the dispute is resolved, or parties are satisfied with the decision, parties may submit the dispute to mediation. Another alternative is to submit the dispute to arbitration. Mediators and arbitrators are professionals trained by the American Arbitration Association. Parties can always litigate.

Given that the majority of disputes originate from similar causes, information depositories of accumulated knowledge and experience about past cases may help prevent disputes, as well as resolve disputes in a significantly shorter period of time [35]. In projects owned by public organizations, fair, experienced, and



Table 2: Clauses about disputes and resolutions in A201-2007 General Conditions of the Contract for Construction in the U.S. and General Conditions for Construction in Turkey [33]



professionally competent judges employed by Boards of Contract Appeals rely heavily on such legal precedents to resolve disputes. The decisions of these Boards are generally well accepted by all parties to a dispute.

Any public entity in Turkey that procures construction services should refer to the General Conditions for Construction issued by the Public Procurement Authority. Thus, it is the most commonly used general condition in Turkey, not only in publicly projects, but also in projects owned by private entities. Actually, because of the regulatory influence of public agencies, the General Conditions for Construction is also preferred by the private sector [6, 36].

Claims are caused by changes and affect the cost and profitability of the project on the contractor's side, and the total budget on the owner's side. For a claim to be evaluated properly, the contractor needs to submit the claim with the supporting evidence of time and cost effects on the project. The owner, on the other hand, is required to undertake a detailed, transparent, objective, and fair evaluation process for the satisfaction of the contractor [34]. An effective and efficient claims management process aims to achieve a satisfactory negotiation with the contractor. Negotiation is the most important method for resolving disputes because it helps avoid litigation and the use of alternate dispute resolution methods. Negotiation is less costly, less time-consuming, and more convenient and more private than mediation, arbitration, and litigation. However, “disagreement arising during negotiation”, “unsatisfactory evidence to convince other parties”, and “poor negotiation skills” are the main barriers to sustain a settlement through negotiation [34].

AIA A201-2007 places special emphasis on claims and disputes in the U.S. The General Conditions for Construction, on the other hand, is a document prepared by a government agency in Turkey, and thus largely protects the benefits of public owners. There is limited information about claims in this document, which states that in case of a dispute, the owner's decision is final. This method of dispute resolution is similar to the method that used to be common practice in most public work projects in the U.S. long ago. This practice has long been discontinued in the U.S. because it created a perception of unfairness and lack of objectivity, promoted an unfavorable bidding climate with fewer bidders and higher bids, and attracted hostility from courts. Any dispute in Turkey where the owner’s decision is not acceptable to the contractor is directed to a court of law, whereas contractors in the U.S. have access to Boards of Contract Appeals in public projects and to mediation and/or arbitration in private projects before they are directed to courts of law.

Both AIA A201-2007 and the General Conditions for Construction have been developed decades ago and are

being widely used in the respective countries. The development of these documents throughout the years was based on local conditions. Both documents are periodically modified to reflect the changing needs, approaches and methods in the construction industry. In the meantime, the construction industry in the U.S. experimented with alternate dispute resolution methods. In addition to mediation and arbitration, Dispute Review Boards were used in risky megaprojects such as major tunnels or rapid transportation systems. Innovative methods of dispute resolution that are fair, inexpensive, and practical could add a great deal to dispute resolution in Turkey.

Turkish construction firms are familiar with the General Conditions for Construction since they commonly perform in the domestic market, but they also compete in international markets such as Russia, Middle Eastern countries, Europe and the U.S. [37, 6]. There are a total of 40 Turkish contractors in the ENR Top 250 International Contractors list [38]. Thus, Turkish construction companies should have a good understanding of the General Conditions used in other countries and international markets, to be competitive and profitable.

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