Risk Allocation and Increased Claims in the Construction Industry

It is uncommon for a contractor to have a set of contract documents that has been fully and properly coordinated with all other aspects of the construction project. As a result, there is often a need for immediate changes on a project to resolve conflicts and interferences that should have been eliminated in the design phase. Also, many contract documents are vague and ambiguous in their intent and contain errors or omissions that add to the cost of the work. Additionally, one need only ask an experienced craftsmen or project manager to learn that the decrease in design quality affects the performance of construction.

Modern contract documents contain many disclaimer clauses that attempt to deny responsibility for the sufficiency and accuracy of the detailed information contained in the project plans and specifications. Examples of disclaimer clauses include those that tell the contractor or subcontractor not to rely on the information contained in the contract specifications, or that the drawings are schematic and not specific in nature, or clauses that instruct that the contractor is responsible to see that all work is installed in accordance with local codes, regardless of what is shown on the contract documents.

Owners and developers have established the importance of a short construction duration due to financial concerns and the small time-to-market windows of positive cash flows. This has increased the use of fast–track construction and caused plans to be sent out to bid much sooner than is appropriate, causing a lack of coordination and inexactness in details. Moreover, the short duration can create a schedule that is unrealistic and raises the need for the stacking of trades to complete the work on time. The presence of trade stacking can amplify the impact of any changes that occur.

The current construction climate of small profit margins (industry average of 2–3%) is a result of the increase in competition for contracts. The current competitive environment precludes contractors from having adequate contingency to absorb costs arising from non-estimated conditions such as delay, poor quality designs, and excessive change orders. With no mode of impact dissolution, contractors are forced to dispute the project impact costs caused by owner actions through change orders or other disruptive activities.

With both clients and engineering/construction companies continually looking to avoid risk by shifting responsibility to the other party, construction claims will become more common and the impacts of lawyerization will become more prevalent. This special edition of the Journal of Professional Issues in Engineering Education and Practice seeks to explore the problem of claims and disputes from a multidimensional perspective. The main purpose is to introduce several methods for quantifying the impact of typical construction claim sources. This issue also investigates in details two of the most common sources of claims, namely different site conditions and change orders and its cumulative impact.

In this special issue, Kallantzis, Borcherding, and O’Connor address the uncertainty of subsurface ground conditions in construction projects in their paper “Evaluation of Differing Subsurface Ground Conditions in Construction Contracts.” Their research compiled common data from legal cases involving subsurface conditions and generalized results were produced. Written primarily from a contractor’s point of view, this paper provides an overview of the pertaining law and presents the persuasive arguments that can be useful for both owners and contractors involved in subsurface ground condition litigation.

This editor looks at the cumulative impact of using legal consultation to settle construction claim disputes. His research explores the problem of lawyerization by analyzing trends and identifying the causes, and impacts of attorney involvement in the construction industry. The results will suggest methods for mitigating lawyerization which will benefit all parties involved in the construction process.

In their paper, “Quantified Impacts of Project Change,” Professors Ibbs, Nguyen, and Lee look at quantifying the impacts of project changes. Causal linkages are illustrated in order to identify the responsible parties and resulting impacts from project changes. Several lost productivity quantification methods are explained including a new approach to the measured mile analysis. The purpose of Ibbs’s paper is to identify the correct method to quantify loss based on the available project data. Selecting the right method is necessary to provide a credible argument for estimating damages before a court.

In their technical note, “How Reliable Is the Total Cost or Modified Cost Method?” Thomas and Volkman analyze the reliability of the total cost method for quantifying contract damages. This paper focuses on the correctness of the contractor’s bid and points out the limitations of use in addition to the burden of proof that must be provided. Based on the author’s benchmarking study of specialty contractors, the results argue that almost any bid can be argued as correct even if a large bidding error occurred.

Günhan, Professor Arditi, and Doyle examined how to avoid change of orders in public school construction in “Avoiding Change Orders in Public School Construction.” With limited funding to build new schools and renovate existing facilities that do not meet current demands, it is important that projects be completed in the most efficient and cost effective manner. The purpose of this paper is to identify and evaluate the causes of change orders in school construction/renovation and suggest preventative measures to reduce cost.

Currently, many owner groups attempt to reallocate as much risk as possible on the primary builder, who in turn will push this risk off onto the lower-tier parties in the contract arrangement. As a consequence, the parties with the least amount of control and influence over many of the risk producing factors and decisions must carry the majority of the construction risk burden. As a result of this burden, the lower-tier parties account for the increased risk by increasing their contingency, and the primary builder will similarly increase its contingency to cover the risk that the owner originally passed to it. Therefore, the owner ends up paying for the risk in the end because it receives higher bid prices.