Frequently Asked Questions - Claims
Some contractors/sub-contracts provide for the employer/contractor to be entitled to a discount upon certain conditions being fulfilled. This provides a classic example of the importance of reading the Contract.
To take DOM/1 As an example, Amendment 10 changed the rules regarding discounts and was issued in 1998.
Before Amendment 10, the mechanism for payment under DOM/1 was detailed at Clause 21. Clause 21.3.2 provides expressly that the discount can only be made if the contractor complies with the payment obligations; in that payments are made within 17 days of the date due. If the contractor does not comply with the provisions of the sub-contract in respect of the payment dates, then discount cannot be deducted which would entitle the discount to be claimed back together with interest.
In not allowing the deduction of discount, a sub-contractor minimises his exposure to making a loss. Furthermore, it reduces his break even point on the project, increasing the opportunity to make money and become profitable.
A much more difficult question is whether the contractor has to comply with the obligation every month before he can deduct the discount from the total. If a payment in one month is made late, is it simply the percentage reduction in relation to that month that can not be made or does the contractor lose his right to deduct any discount at all? In any event, it is essential to track times of payment in discount circumstances.
The percentage of discount identified in the Articles of Agreement Part 7 is 21/2%, unless a different percentage is inserted. A lower rate should always be negotiated because why is a discount being given? It should not be because of habit or custom.
The edition of DOM/1 which incorporates Amendment 10, however, is totally different It does not provide for payment terms to be met for the discount. Therefore unless this has been specifically amended, the Contractor is always entitled to deduct discount.
It is therefore vital to not only know which standard provisions, if any, is incorporated into the sub-contract but also which edition and which amendments are incorporated.
The right to deduct discount applies to all payments whenever made and may be lost by late payment, but this would depend on the specific terms of the contract/sub-contract.
If the discount is related to prompt payment, then is each payment considered in isolation, or if one payment is late is no discount allowed whatsoever? Once again, need effective procedures are needed to monitor when payments are due, and to check whether or not the contractor/employer should be deducting any discount at all. Also ensure you have a standard letter to send out if discounts are deducted although payments are made late.
When discounts are taken ensure that they are not deducted before retention is deducted. If the opposite is carried out it would equate to giving the employer/contractor a large figure for discount - not a good idea if you are trying to improve your cashflow or profitability.
Obviously it is going to cost you money initially to submit a claim, both your own management costs and those of any advisors you have retained, but the important thing to remember is that on a good claim the costs of submitting it are small compared to what you will recover. If you have a good claim the initial outlay is well worth it.
There are three things that you need to do in order to submit a claim.
1. Use the Contract
Many of the standard forms will expressly provide for the recovery of loss and expense.
There are two key points to remember whenever dealing with a loss and expense claim under any contract:
- the contract itself will usually set out a number of procedural steps which need to be followed closely in handling all such claims;
- the contract itself will state the different basis upon which a claim for loss and expense may be brought.
For example JCT 98 at clause 26.2 states the basis upon which a claim for loss and expense may be brought.
2. Submit it early
What happens if no claim is submitted until after the job is finished? The first result if no claim is submitted until after the job is finished is that the Contractor is unlikely to be paid any money on the claim until after the job is finished too i.e. Practical Completion. This does not assist the cashflow for the contractor, but is of great benefit to the employer. Under most forms of contract, it does not mean that the claim is barred absolutely. It may mean that the value of the claim is reduced because the provisions of the contract have not been complied with. Thus by implication this would reduce contractors cashflow and profitability. There may be arguments from the employer in that:
- interest is not payable on sums claimed;
- if the employer had the claim at an earlier stage, other actions would have been taken which would have reduced the amount of the claim payable and that, the contractor is not entitled to as much money as is being claimed. Simply stated the employer was not given the opportunity to mitigate his losses.
One of the certain effects is that the memories of the people involved will start to fade and there will be none of the freshness which you would get with a claim which is put in as the work progresses. At worst the people involved may have left the company taking with them your best source of evidence to prove your claim.
Contractors should submit claims as promptly as possible, even if the employer/contractor denies responsibility. Immediate action may pressure the employer/contractor to resolve an ongoing problem and stop the future consequences.
3. Have good records
The better your records are, the more likely you are to be successful in a dispute. You need to spend time and ultimately money making sure that you have the right number of staff to produce good records. This will invariably assist in claims. You need to make a decision as to whether it is more commercially viable to hire more staff or to possibly lose money later, on jobs.
The first step, is to claim everything that is due to you. In practice, the amount that you will recover will depend not only on when you submit a claim, but also on your evidence. This highlights the importance of good record keeping. Often you will have a claim for something without realising it. Potential heads are:
- unforeseen events;
- delay caused by design team;
- error in documentation;
- tendering process;
A well thought out and well prepared claim, can include any or all of these heads and bring in substantial rewards. In a claim you may recover:
- straight forward monetary loss i.e. full recovery for any measured work or variations;
- wrongfully deducted discounts;
- damages for breach of contract;
- the costs of the claim;
- an extension of time is also a valid head of claim and will not only be the foundation for claims where there has been a time element, but will also help to protect you against any claims against you for ascertained or general damages.
None of the above will be recovered unless you take action, and take it promptly.
The use of dayworks to value variations is often resisted by quantity surveyors and architects as they believe it provides the contractor with greater reimbursement than he might otherwise secure.
Dayworks are only dayworks and will only be paid when you are executing a variation and when the variation cannot be valued under the contract by measurement, reference to the bill, tender breakdown or similar.
Daywork sheets are often more than records of men, materials and machinery engaged in certain activities for certain lengths of time. It is generally easy to calculate the amount each daywork sheet represents. That does not extend to an entitlement to payment for that daywork sheet. There is a multi-step process to be gone through to establish entitlement. This is:
Is the work on the Daywork Sheet that for which the contractor is entitled to be paid, or is it work which is to rectify defects?
Is the work to be paid for on daywork, or is it work which is covered by items in the bill of quantities? If it is covered in the bill of quantities, and the evaluation mechanisms in the contract apply, then the contractor is not entitled to be paid on a daywork basis. Equally, if the daywork price is less than the rate in the bill, the employer is not entitled to pay only the daywork rate.
If the proper way for payment is on Daywork Sheet then, and only then, are the sheets themselves of importance. The starting point is that the sheets must be accurate and honest. One of the biggest problems in relation to dayworks is the fact that there is a general perception that daywork sheets are neither accurate nor honest.
Many architects and engineers will resist dayworks. There must be a clear instruction and proper records every time to prove an entitlement.
The "normal" way to value variations is to use bill of quantities rates. The usual rules are:
- where the varied work is of similar character to, is executed under similar conditions as, and has not significantly changed the quantity of, works set out in the contract rates and prices for the work the rates are to be used.
- where the varied work is not then the rates and prices for the work shall be the basis for determining the valuation; or
- where the varied work is not of similar character, it shall be valued at fair rates and prices.
Helpful guidance on the valuation of variations under an ICE contract has been given in the case of Weldon Plant Limited - and - Commission for New Towns.
Two questions beg to be asked:
- When is it reasonable to apply Bill Rates? Where a Contractor has a particularly good set of rates and the work has not substantially changed he can rely on these for valuations of variations. The corollary being that if the Contractor has under priced a rate item he is also stuck with this regardless of whether it is advantageous the Employer. The rules are contract specific.
- What is a fair valuation?
In answering the first of these questions it has been said:
"So too is an Employer stuck with rates and prices which have been accepted by him as part of the Contract. Unless the Contract permits, he cannot extricate himself from the bargain that has been made."
Change valuation under the NEC Contracts is different.
Apart from being an essential planning tool for any construction project, programmes can have a specific contractual meaning. The most important programme, but also one of the most unusual, is a programme which actually forms part of the contract. This is a two edged weapon, since if any dates shown on a contract programme are not achieved then the contractor is automatically in breach of contract. One important programming item which is almost always included in the contract is a completion date. This is described in clause 23 of JCT 98; and in clause 43 of the ICE 6th Edition.
During the tender process it is good practice for the contractor to draw up a tender programme. This does not form part of the contract but is usually used by the contractor to estimate the contract duration and the critical elements and sequence for the Works. If the programme is detailed with reference to each part of the contract, it becomes of tremendous importance whenever the job begins to change as a result of changes by the Client, actions of the others on site, or unforeseen weather or ground conditions. This tender programme is commonly used by contractors to show how they had originally intended to do the work and consequently, when compared with an as-built programme or progress programmes, shows how much they have been prevented in using the method of work they had intended to complete the works as planned. This is a very important tool in establishing a claim for loss and expense because of disruption to the works or for attempting to prove an extension of time or acceleration claim. How accurate this tender programme is, very much depends on the priority allocated to it at tender stage, the skill of a contractor's estimator and the ability to accurately reflect the elements of the work on paper. Whilst this will cost money for preparation, management or administration without careful preparation these costs will be subsumed by the cost of preparing a claim and the undoubtedly lesser amount that will be recovered. After all, the side with the better record wins.
The contractor must base his rates and contract sum on something. It, therefore, should not come as a surprise to clients or their professionals that whenever changes occur in the progress of the works, it costs the contractor money or has a cost implication. These are costs that clients must be prepared to pay. Most contracts have a mechanism for allowing the contractor to recover losses incurred in this way.
It is therefore vitally important that tender and successive programmes are carefully maintained and inter-related as the work progresses. The importance of these is often lost in the thick of battle during the contract.
Accurate and objective records on when work started and stopped are of great benefit for everyone. This sort of basic but fundamental record is often surprisingly badly kept. Don't let this happen!
To recover money at the claims stage! The contract price will almost definitely be based in part on how long it is intended that the job will take. This is on the premise that if the job takes longer it will cost more. A record of when you started and finished will be invaluable when formatting a claim for disruption/delay/prolongation or loss and expense. In order to prove how effectively you carried out the work, you will also need records of when you started and finished each part of the contract. One essential record for both the offensive and defensive action is a programme.