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Claims and Counterclaims Preparation, Analysis, Assessment and Successful
Settlement of Disputes
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What is a Contract?
A contract is a mutual business agreement recognized by law under which one party undertakes to do work (or provide a service) for a second party for a “consideration”.
A contract is an agreement between two parties, one called the contracting party or owner and the other the contracted party or the contractor to perform a previously determined scope of work for a previously determined amount of money.
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Why do we need written contracts? Basic lack of trust Clearly establishes the risks and obligations of each
party Provides means by which performance can be assessed
and measured Provides means by which breaches can be identified Provides means by which default can be established Establishes the owner’s means of control Establishes the contractor’s scope of work
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What does a written contract do for us? A written contract provides the document
by which risks, obligations, and relationships of both parties are clearly established, thus ensuring the performance of these elements in a disciplined manner.
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Contract Language “Time is of the essence” Contract time of completion Contract milestones / Phasing Scheduling specifications (CPM or bar
chart) Notice provisions
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Contract Language Time extension requests (time impact
analysis)
Time extensions / change orders Liquidated damages “No damage for delay” clause Delays by other contractors clause Disputes clause
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Goals of Contract Management and Administration The effective management and
administration of contracts results in reducing risks, maximizing cost savings, minimizing claims, and improving economic return.
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How do contracts minimize risks? A contract provides the means to manage and allocate
risks. You you want to “share” the risks appropriately through your contractual relationship.
Your contracting strategy needs to be built around the relationship between the terms and conditions, and the accompanying risks and cost impacts.
The type of contract and the specific language used should flow from these relationships.
Failure to manage risks in this manner can result in cost overruns, loss of market, or loss of quality.
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Risk Areas
Cost - possibility of overruns and other financial losses
Time - delays in schedule and resultant loss of market
Quality - loss of desired quality of engineering and construction
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Contracting Strategy Priority of project management goals
Cost, schedule, quantity Status of project definition Schedule and cost constraints
Facility startup date and availability of capital State of the economy
Market urgency for product Number of competitive bidders Workload of competitive bidders Vendor backlogs
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Analysis of CostDIRECT COST INDIRECT COST
Costs which are incurred for specific
items of work
Costs which cannot be
allocated to specific jobs
Differencebetween allcosts andall income
Costs which cannot be
allocated tospecific items
The Work The Site The Firm The Motive
Profit MarginItems of Work
At the Job Operating
COST FEE
TOTAL CONTRACT SUM
OVERHEAD COSTS
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Types of Contracts
Lump-sum fixed price Unit price Fixed price with escalation (price
adjustment) Guaranteed maximum price (target price) Cost plus incentive fee (time/cost goals) Cost plus fixed fee Cost plus percentage of cost
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Elements of Cost
Labor Costs Material Costs Equipment Costs Overhead Costs - Direct and Indirect Profit
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Fixed Price vs. Cost ReimbursableDefinitions Fixed Price
Agreement to perform the scope of work at a set price regardless of Contractor’s actual cost.
Cost ReimbursableAgreement to perform work on a reimbursable basis.
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Fixed Price vs. Cost ReimbursableBasic Conditions
Fixed PriceFair and reasonable price can be established using a detailed scope of work, complete design and specifications and known environmental and business conditions.Adequate professional inspection & supervision provided by other parties.Risk: Contractor assumes maximum amount of risk, and has incentive to perform economically.
Cost ReimbursableScope & cost of work not defined sufficiently to allow fixed price quotes.Qualified contractors unwilling to accept financial risk of fixed price.Owner wishes to exert more control, develop design as project progresses, or achieve technology transfer from contractors.Owner is required to be more sophisticated in contractor selection and oversight.Risk: Owner accepts most risk
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Fixed Price vs. Cost ReimbursableAdvantages Fixed Price
Less risk on the Owner, at least on the surface.Substantial amount of case law and administrative protocol.Overall cost known before project begins.Minimal Owner involvementOwner realizes price competition.Contractor has incentive to finish early.
Cost ReimbursableConstruction can be phased.Changes can be accommodated more easily.Reduces adversarial relations:Contractor & Owner are partners.Reduced Contractor contingency included in price.
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Fixed Price vs. Cost ReimbursableDisadvantages Fixed Price
Adversarial relationsContractor may bear risk for conditions beyond his controlChanges more likely to end in dispute.Contractor has no direct financial motivation to provide superior quality or service.Extra time required to complete the plans and specs.
Cost ReimbursableGenerally, the construction costs are higher.Increased Owner involvement.Final cost not known until project is finished.More detailed negotiations and contractor selection process.More cumbersome administrative and bookkeeping requirements.
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Fixed Price vs. Cost ReimbursableApplicability Fixed Price
Routine projects.Conditions with an abundance of qualified contractors.Public works projects.
Cost ReimbursableHigh-risk industrial or manufacturing projects (petrochemical, power, offshore).Situation where qualified contractors are scarce.R&D projects (aerospace, military).
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POTENTIAL DISPUTES / CLAIMS
KEY AREAS TO ADDRESS IN CONTRACT DOCUMENTS Scope Definition & Realistic Timeline Existing Site conditions Design Errors and Omissions Specifications Drawings Contract Language Bid Documents & Q/A 19
POTENTIAL DISPUTES / CLAIMSSCOPE DEFINITION & REALISTIC TIMELINE Completeness of Scope Definition Adjoining work added after NTP Additional work added during the job Developing Realistic Timeline/durations
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POTENTIAL DISPUTES / CLAIMS
EXISTING SITE CONDITIONS Reluctance by owners to identify all
unknown site conditions Verifying As-Built Conditions Inconsistent/Generic Geotechnical
Reports Incomplete Site Surveys
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POTENTIAL DISPUTES / CLAIMS
DESIGN ERRORS & OMISSIONS Completion of Design Design criteria in conflict with Local
agencies Deferred Approvals – Fire Sprinkler Over-Design versus Under-Design Omissions Delegated Design
Example of Claim Dispute – PIPE SUPPORTS Specifications outline Spacing Requirements for Pipe Supports Drawings only show a few Pipe Supports Drawing Note specifies that “No Attempt Made to Show All Pipe Supports” Major Claim - $10 Million SOLUTION: 1) Drawing Note should have been on
the same page where pipe supportswere shown.
2) Additional note that contractor shallcalculate the loading and determinenumber of supports required.
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POTENTIAL DISPUTES / CLAIMS
SPECIFICATIONS Conflicting Standards/sections Unclear Hierarchy Specifications referenced to drawings Specifications in conflict with local codes Specifications not updated Specifications that state “and or equal”
material, equipment etc.
POTENTIAL DISPUTES / CLAIMSDRAWINGS Not to Scale – Misleading Lacking Specification Notations Incorrect Revision Conflict with Specs Scope omitted Detailing errors
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POTENTIAL DISPUTES / CLAIMSCONTRACT LANGUAGE Lacking clarity Conflicting sections Overly onerous specs Vague conflict resolution
language
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POTENTIAL DISPUTES / CLAIMSBID DOCUMENTS & Q/A No involvement by third party stakeholders
(private companies, public utilities, city planners)
Schedule of values to reflect the entire scope in the drawings
Escrow of Bid DocumentsProposed manpowerWas the complete scope bid? 27
POTENTIAL DISPUTES / CLAIMS – Conclusion
WHAT CAN THE OWNER DO TO AVOID/MITIGATE CLAIMS?1. Third Party Constructability Reviews2. Clarity and Completeness of Contract
Docs3. Develop a Risk Mitigation Register4. Comprehensive Sign Off by Stakeholders5. Have a Risk Mitigation Manager in place
early 28
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Typical Claims Against Owner
Poor project planning Scope changes Constructive change orders Errors and omissions Contract accelerations and stoppages Site access or availability Other construction interference and delays Strikes and acts of God Low bidders
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Typical Claims Against Contractor Late completion - liquidated damages Out of specification materials Defective work Property damage
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Delays
Excusable Delay Beyond control of owner or contractor
Inexcusable Delay Beyond the control of the contractor Owner caused changes to work Differing site conditions Suspension or termination of work by owner
Concurrent Delay Two or more delays in same time frame
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Claims Analysis
Brief of the case Owner’s position Contractor’s position Analysis and evaluation Recommendations
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Claim Prevention Suggestions
Carefully analyze and consider exactly what you are building and precisely how it will be built so the contractor does not have to assume or guess about any aspect of the job.
Complete the project design before the contract is bid, and if some parts of the project cannot be completely designed at bid stage, clearly identify them and its possible impact.
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Claim Prevention Suggestions
Conduct a thorough review of the design prior to the bid stage to identify and correct any design errors or inadequacies.
Give bidders sufficient time to carry out a complete review of the bid package and an investigation of the construction site.
Allow enough construction time, remember in this context, time is not money. Do not assume that bidders will simply increase their bids to cover a short schedule.
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Claim Prevention Suggestions
Identify with enough anticipation what type of contract will best suite the project.
Think about every sentence included in the contract, why it is there and whether it is necessary.
Clearly identify in the contract every operation that the contractor must accomplish to complete the job.
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Claim Prevention Suggestions
Draft for clarity, not confusion. Use standard list of definitions, and always use the same defined word consistently.
Consider material arrival schedules as part of the contract. Identify long-lead items and possible vendors in the bid package. Avoid sole-source procurement unless absolutely necessary.
Clearly identify who will be responsible for material delays.
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Claim Prevention Suggestions
Analyze all potential bidders before preparing a bid slate. Examine contractors’ prior contracting experience, claims history, management capabilities and financial ability.
Carefully analyze contractors’ technical proposal paying particular attention to the proposed method of construction and the planned number of man-hours claimed necessary to execute the job.
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Claim Prevention Suggestions
Seriously question the contractors’ excessively low bid.
If you are forced to accept a low-ball contractor, anticipate a claim and work on it from the beginning.
Be reasonable when analyzing the contractors’ complaints about changes and omissions. Negotiate settlement as soon as possible and keep in mind that the older the issue, the more difficult it will be to settle.
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Claim Prevention Suggestions
Appreciate the contractors’ right to perform the contract in any fashion he deems appropriate, as long as the methods and results conform to contractually specified standards.
Keep in min that the owner has the obligation to provide: a suitable construction site, accurate plans and specifications, well-defined scope of work, and inspection without interference.
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Claim Prevention Suggestions
Understand how many factors can affect a contract and delay and disrupt the work. Cooperate to establish an atmosphere of understanding and mutual respect.
Keep strict control of: progress reports, daily meetings, schedule revisions, cost estimates, change orders and their justifications, correspondence.
Develop a solid document control plan.
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What is a Delay Claim? In simple terms:
Contractor: A request for compensation and/or time due to owner-caused delays
Owner: An assessment of liquidated damages or a claim for actual damages due to contractor-caused delays
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Types of DelaysExamples of Owner-Caused Delays Site access Differing site conditions Shop drawing approval Design errors and omissions Extra work / change orders Failure by owner to timely provide materials Changed conditions, e.g., working hour
restrictions Work suspension
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Types of Delays Examples of Contractor-Caused Delays Procurement/Submittal problems (material &
equipment) Subcontractor delays Lack of adequate resources (labor, material,
equipment) Poor work sequencing Lack of productivity Rework Financial difficulties
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Types of DelaysThird-Party Delays Permit acquisition
Utility relocations
Adjacent contractors
Government Actions/Inactions
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Types of Delays - Analysis Excusable / Non-excusable delays
Compensable / Non-compensable delays
Force majer (Beyond either party’s control)
Concurrent delays
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Change Order Administration
An organized effort to eliminate unnecessary cost and time impact as a result of processing project work outside the scope of the contract.
A Change is not a Claim.
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Contract Change Clause
Fixed price contract require a change clause.
Establishes the owner’s right to make changes and provides a mechanism for their administration and resolution.
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Types of Changes Formal
Via contract change clause Constructive
Action of owner that has the effect of directing a change, although not initially documented as such.
CardinalChange totally out of scope of original
contract.Should re-negotiate entire contract.
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Change Orders
Virtually all project have change orders. Need to recognize their implications. Set up an effective management system to
handle them. Minimize cost/time impact and prevent
costly legal action. Modification of the contract.
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Sources of Change Orders
Unanticipated site conditions Owner requested design modifications,
additions or deletions Clarification of contract documents
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Disagreements
Change or design development Scope of the change Material cost Equipment rental rates Acceptable profit Overhead cost Consequential effects of the change
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Change Orders
Prior approvalAdverse effect on construction
Unilateral change orderUrgent situations or conditions
After the fact
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Change Order Process
Change OrderIdentification
C.O.Request
C.O.Design
Cost/Schedule Analysis
Bid Period
Bid Analysis
PrepareBid Package
Bid Closing
C.O. Award
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Cost of Changes
Time
Engineering Construction
Flexibility
Cost
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Requirements for a Successful Claim
The burden of proof is on the contractor
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Requirements for a Successful ClaimThree elements needed:
Liability (Entitlement)
Causation
Damages (Quantification)
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Requirements for a Successful ClaimLiability Contractual duties and obligations
Notice provisions Site access, accurate plans and specs Adequate resources, workmanship
Causation “Cause and effect” Link between delay and damagesDamages Substantiating documentation for extended
costs Actual costs or daily rates
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Contractor’s Delay Claim Submission
Why the owner is responsible for delays and associated costs
Schedule analysis Damages Substantiating documentation Transparency
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Owner’s DefenseDetermine Type of Delay:
Excusable Non-excusable
Owner-caused Force majeur Contractor-caused
Compensable Non-compensable Non-compensable
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Owner’s Defense
Identify Concurrent Delays:
Excusable
Caused by Owner and Contractor
Non-compensable
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Owner’s Defense Liability Review - Contract terms Causation Review - Schedules, daily reports,
shop drawing logs, meeting minutes, etc. Damage Review
Receipts, invoices, cost reports, etc.Reasonable estimates
___________________________________________Owner Costs that Offset Contractor Damages: Overhead paid as part of change orders during
the extended period Liquidated or actual damages
Owner’s Damages / Counterclaim
Why the contractor is responsible for delays and liquidated or actual damages
Schedule analysis
Damage calculations
Substantiating documentation© www.asia-masters.com
Contractor’s Defense Contract Terms / Plans & Specs
Ambiguities, conflicts, errors & omissions
Change orders, RFI’s, etc. – Effect on schedule and costs
Schedule AnalysisOwner-caused delaysConcurrent delays
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Delay ClaimCase Study
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Case StudyThis is the story of a construction project that was planned to be completed in 24 months.
Unfortunately, stuff happened and it was completed much later.
Because of this, the contractor incurred extra costs and requested additional compensation from the owner.
The following describes the process that was used to resolve this delay claim.
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The As-Planned Schedule(What was supposed to happen)
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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24A M J J A S O N D J F M A M J J A S O N D J F M
1 Mobilize
Excavate & sheeting
Erect structural steel & pour mezzanine
Backfill & paving
Mechanical equipment
Gates & cashier booths
Elevators & escalators
Power & lighting
Finishes
Demobilize 10
9
2
Winter Winter
Case Study: Subway Station Expansion Project
7
8
3
4
5
6
Months
As-Planned
The As-Built Schedule(What actually happened)
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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N
Access Delay (1 month)
1 Mobilize
Differing Site Conditions (2 months)
Excavate & sheeting
Re-design Delay (2 months)
Erect structural steel & pour mezzanine
Backfill & paving
Mechanical equipment
Gates & cashier booths
Strike (1 month)
Elevators & escalators
Power & lighting
Rework (1 month)
Finishes
Demobilize 10
Lack of Progress (1
month longer than planned)
6
9
Extended Period = 8 months
7
8
Original Contract Period
As-Built
Delays
Case Study: Subway Station Expansion Project
3
4
5
2
Winter Winter
Months
The As-built Schedule shows that there were six delays that resulted in an eight month delay to the project.
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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N
P A Mobilize
Excavate
FinishesP = Planned
P Demobilize AA = Actual
Gates & cashier booths
As-Planned vs. As-Built
Mechanical equipment
P Power & lighting
Elevators &
ANew Labor Agreement
Backfill & paving
Erect structural steel & pour mezzanine
P
P
P
A
A
P
Months
<--- 8 month delay --->
P
A
AP
A
A
Extended Period
Case Study: Subway Station Expansion Project
A
Original Contract Period
P
Winter Winter
Because the project finished eight months late, the contractor submitted the following claim to the owner:
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Cause for Added Costs Months Monthly Cost
Damages Claimed
1 Field Office Overhead (trailer, supervision, etc.) Total delay of eight months 8 $ 50,000 $ 400,000
2 Labor Escalation after May 1st Labor Agreement Delays to finish trades 8 $ 5,000
3 Idle Equipment Re-design delay 2 $ 10,000 $ 20,000
4 Winter Work Winter concrete (blankets, heaters, etc.) $ 10,000
5 Constructive Acceleration No time extension issued / threat of LD's $ 10,000
6 Lost Productivity Adverse weather, out-of-sequence work, etc. $ 10,000
7 Home Office Overhead Total delay of eight months 8 $ 20,000 $ 160,000
8 Consultant Fees Claim preparation $ 50,000
9 Interest @ 5% on Delayed Payments Job financing $ 33,250
10 Bond at 1.5% Eight month delay $ 10,474
$ 708,724
Claim Item
TOTAL CLAIM
Case Study: Subway Station Expansion ProjectContractor's Claim
Before analyzing the contractor’s costs, the owner performed a Delay Responsibility Analysis as follows:
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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N
Access Delay (1 month)
1 Mobilize
Differing Site Conditions (2 months)
Excavate & sheeting
Re-design Delay (2 months)
Erect structural steel & pour platforms & mezzanine
Backfill & paving
Mechanical equipment
Gates & cashier booths
Strike (1 month)
Elevators & escalators
Power & lighting
Rework (1 month)
Finishes
Demobilize 10
Lack of Progress (1
month longer than planned)
6
9
Extended Period = 8 months
7
8
Original Contract Period
As-Built
Delays
Case Study: Subway Station Expansion Project
3
4
5
2
Winter Winter
Months
Delay Responsibility Analysis
Delay TypeAccess DelayDiffering Site ConditionsRe-designStrikeLack of ProgressRe-work
ResponsibilityOwnerOwnerOwnerNeitherContractorContractor
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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N
Access Delay
1 Mobilize
Differing Site Conditions
Excavate & sheeting
Re-design Delay
Erect structural steel & pour platforms & mezzanine
Backfill & paving
Mechanical equipment
Months Gates & cashier booths
Owner 5Strike
Contractor 2Elevators & escalators
Neither 18 Power & lighting
Rework
Finishes
Demobilize 10
8
2
Lack of Progress
Case Study: Subway Station Expansion Project
3
4
5
Months
Delay Responsibility
Analysis
Delay Responsibility
9
Extended Period = 8 monthsOriginal Contract PeriodWinter Winter
6
7
New Labor Agreement
Based on its Delay Responsibility Analysis, the owner apportioned the contractor’s claimed costs and estimated the contractor’s entitlement to additional compensation as follows:
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Months Monthly Cost
Damages Claimed Months Monthly
Cost Estimate Reason
1 Field Office Overhead (trailer, supervision, etc.) 8 $ 50,000 $ 400,000 5 $ 50,000 $ 250,000 Owner delay = 5 months
2 Labor Escalation after May 1st Labor Agreement 8 $ 5,000 5 $ 3,125 Apportioned owner delay
= 5/8
3 Idle Equipment 2 $ 10,000 $ 20,000 2 $ 10,000 $ 20,000 All costs substantiated
4 Winter Work $ 10,000 $ 10,000 All costs substantiated
5 Constructive Acceleration $ 10,000 $ 7,500 Some costs substantiated
6 Lost Productivity $ 10,000 $ - Causation not shown
7 Home Office Overhead 8 $ 20,000 $ 160,000 $ - Delay, not a work suspension
8 Consultant Fees $ 50,000 $ - Not part of the Work
9 Interest @ 5% on Delayed Payments $ 33,250 $ - Not substantiated
10 Bond at 1.5% $ 10,474 $ 4,359 Cost substantiated
Subtotal $ 294,984
$ (30,500) Contractor delay = 2 months
$ 708,724 $ 264,484
Owner's Estimate of EntitlementCase Study: Subway Station Expansion Project
Liquidated Damages @ $500 per day x 61
TOTAL ENTITLEMENT
Contractor's Claim
Claim Item
TOTAL CLAIM
The contractor requested more than $700,000 in additional compensation due to project delays.
The owner estimated that the contractor was entitled to approximately $260,000.
They negotiated a settlement somewhere in between . . .
. . . and everyone lived happily ever after.
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The End
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