Financial Accounting Treatment of Differing Site Conditions Claims: A Contractor’s Perspective

The high competition in the construction market entails contractors quoting reasonable, if not trimmed, prices when bidding on construction projects in order to be awarded the contract. This pricing strategy quite limits the successful contractor’s ability to absorb future additional costs, as these cannot be included in the periodic payment applications made by the contractor. This can be explained by considering the case of unforeseeable physical conditions, as a highly occurring example, whereby the contractor incurs unanticipated additional costs and, as a result, submits a claim. In order for a claim to be properly substantiated, contemporary records typically form a critical part of the evidence to be utilized in evaluating the contractual entitlement. Among various such records, the financial statements, maintaining the increased costs incurred, can play a considerable role in supporting the contractor’s contractual right to an equitable adjustment. However, due to a lengthy inquiry and negotiation conducted by, or on behalf of, the owner, the contractor is unlikely to recover the claim proceeds in the same—or even the following—fiscal year, and it is thereby encouraged to financially treat this unresolved claim during the current accounting period to preserve its position in the market among lenders and investors. Therefore, this paper takes the initial steps for addressing such inevitable situations, by: (1) examining the differing site conditions clause under two sets of standard contract conditions published by the International Federation of Consulting Engineers (FIDIC) and the Engineers Joint Contract Documents Committee (EJCDC), (2) extracting the corresponding claim process stages, and (3) analyzing the various scenarios that a contractor is likely to face under both standard contract systems and accordingly illustrating how unresolved claims can be best accounted for in the contracting company’s financial sheets, in a way that leads to a positive impact on the periodic income.