Risk Avoidance in both the Contracting Phase and the Working Phase
Extra work or changes to patterns of work, which impact cost, are a virtual certainty with any large construction project. Avoiding the unbudgeted costs associated with these circumstances is important and requires persistent attention.
Lawyer Frederick J. Matthews of Christie Saccucci Matthews can answer your questions about extra work and claims. He has the knowledge and experience to provide you with quality advice and representation throughout the process.
There are two stages of focus:
- Risk avoidance: The bid phase
- Claims and risk management: The work phase
Phase One — The Bid Phase
During the bid phase there is a priority need for concentrated focus on perhaps obvious but fundamental principles.
Regardless of the general form of the bid documents, the bidder may have some opportunity to frame its proposal in its own terms, in fair but simple language, without making the bid unpalatable. If the bid is accepted as presented, it should set the stage for any claims in the work phase.
If this is a rigid public sector tender with limited or no flexibility, the following may seem like an unattainable wish list. At least follow the checkpoint exercise below to expose and assess potential risk. If there are too many gaps or questions in the checklist perhaps the project is not feasible or must be bid accordingly.
Suggested fundamental principles of bidding include the following:
A) Know exactly what you are bidding to perform. Review the bid package carefully.
If there are particularly unpalatable or impossible terms or specifications, it may be possible to diplomatically raise these issues with the tenderer and provoke discussion and possible change prior to tender. This may be a delicate issue that needs to be handled in a nonthreatening manner. If supported collectively by several tenderers, it may have more impact.
B) Be alert for and cautious of areas of risk and or uncertainty. Exactly how rigidly is risk allocated. For example:
- How thorough are the site condition and subsurface condition reports and how is risk allocated if actual experience is materially different? If all risk is to the contractor, in any event, how big is the risk as far as probability and cost?
- How much site preparation and maintenance are allocated to the contractor?
- How controllable are the costs of these? Will work sequence changes aggravate these costs by requiring repetitive site refurbishment?
C) Take advantage of every available opportunity to minimize risk in bid preparation. Think ahead. Be conscious of establishing a sound basis to defend against departures from bid submissions, or how a strategy may be formulated to deal with the claim or extra issues when they arise during the working phase. For example:
1) The scope of work must be designed as precisely as practically possible, either by you, if the opportunity permits, such as in a private more flexible tender, or in the bid documents as presented in a rigid public sector tender. If the scope is not precisely defined, risk must be weighted accordingly, perhaps to the point of walking away.
If the scope is unclear during the estimating phase, go on record with the consultant requesting clarification. The consultant may ignore the request, but the record may validate alternative submissions or support an extra claim later. If the clarification indicates extra cost, ensure that the consultant notifies all bidders.
2) Ensure that the basis for the bid is clearly established. If you have any freedom to do it, establish it as simply and clearly as possible. Specifically reference those documents defining your work, the site and conditions (i.e. soil reports). Stick to the essentials and those areas specific to your work.
3) Set your conditions, as much as you have freedom to, in areas such as:
- Access suitable for equipment
- Work to be continuous, and if not, what is the disruption?
- Stable work surface suitable for equipment
- Timely instructions and approvals
- Layout and location to be supplied by others
If you do not have freedom to set conditions, measure the cost risk variables.
Discuss problem or ambiguous conditions with the client. If these discussions lead to a favourable clarification, write a note to the client referencing the discussion and your understanding of the issue based on the discussion.
4) Avoid "the design build trap" (unless you are assuming it purposely).
Anticipate the risk that, should a problem arise during the work phase (the design cannot be implemented or will not produce a functional result), you may be vulnerable to the argument that your commitment was to produce a functional result and accordingly are liable to redesign and build a functional system whatever the scope and cost. To the extent that the bid calls for method proposals from you, qualify any such proposals by making them subject to the approval of the project engineer or other appropriate owner authorities.
If you are assuming a design-build risk responsibility, be aware of the extent of your liability insurance coverage. Are you covered for assumed design responsibility?
5) Identify and list exclusions or assess carefully the failure of the bid documents to accommodate them in areas such as:
- Layout and location
- Obstructions not anticipated by bid documents
- Conditions materially different from bid documents
- Liquidated, penalty or consequential damages
6) Assuming that a draft contract follows, be vigilant to ensure that it conforms to your bid as tendered and accepted (adopt the bid document as part of the contract).
Having the bid accepted and being instructed to start work before the contract is finalized can be an advantage. You can hardly be said to be working other than in accordance with the bid as submitted
As long as the form of the bid appears to be complete, efficient, price-competitive and fair, there is a good chance that it will be accepted as a basis for commencement of work, and when the contract form gets submitted for execution several weeks later, there is a sound basis for insisting that the contract incorporate the specific provisions of the bid.
Even if the above seems like an unattainable wish list in the face of the bid documents, using the same points as a checklist permits exposure and assessment of potential risk.
Phase Two — The Work Phase
There is no single solution or strategy to deal with unanticipated claims and extras arising during the course of the work. Some principles are almost universal, however. These include:
1) Reread the bargain and follow its term. The contract documents can take many forms.
2) Put the customer on notice, in writing, of the extra or change at the earliest possible opportunity. Define the costs, including specifically the cost of delay in making a decision or giving timely instruction. Be specific and request instructions and, where appropriate, a basis for compensation.
3) Document the facts with or without the cooperation of the customer. Log the details and copy the owner even if he doesn't participate. Keep the owner formally advised of all elements of impact and consequence with daily written reports.
4) Where appropriate, do not hesitate to hire technical expertise to undertake an objective assessment of the claim, as to the factual extent of the departure from the bid and the practical and economic consequence. Effective control and presentation of the facts is inevitably very determinative of the course of negotiations or, if negotiations fail, the results of an arbitration or litigation process. Legal cases are quite wide-ranging in result, and good facts tend to influence the way things turn out.
5) Try to ensure that communications go beyond the consultants to those who are directly affected by an efficient and timely end result, usually the owners and those who are waiting to use the finished result. Regretfully, the consultant may not have a vested short-term economic interest in compromise nor in an expedient resolution. Also, if approval is required from the consultant for revision of a method that it was responsible for in the first instance, there may be resistance.
6) Be resilient, firm and fair, but consistently persistent. Expect unreasonable answers. These could include a categorical "no," but also expect silence or soft sympathy without commitment. Both are equally unacceptable, but neither should distract from the need to be persistent and insistent on required instructions, solutions, and a commitment for compensation in writing. Hard positions on your side should be the last resort and only after the best possible stage has been set.
7) If appropriate, consult legal advice early, even if initial tactics may warrant keeping them in the background. Be wary of involving them directly in the process.
8) Be conscious of the circumstance that a departure by the other side from the terms of the bargain (i.e. failure to give timely instructions where required or a disruption of work sequence not permitted by the bargain) may create rights on which to establish a claim. In the legal world, "damages" is another word for compensation. This compensation flows from a breach of the bargain by the other party.
9) Be prepared to do some research. If changes or material differences are apparent, find out as much as possible about any supplementary reports on site, subsurface or other site conditions that may not have been disclosed. If such information has been withheld and it can be shown to have materially affected the bid, legal cases have held that a right to compensation is acquired as a result.
10) Be creative and practical in suggesting compromised solutions. Despite partisan rhetoric, everyone has a problem. There is always a chance that reasonable representatives on all sides will recognize that a fair compromise will produce a better result for all concerned rather than the alternatives. At the same time, in your enthusiasm to be helpful, do not fall into the "design build trap." Make sure that the proposals are approved by the project engineer or other responsible party.
11) When dealing with a "no," or "do the work now and we will talk about the possibility of compensation later," work stoppage may ultimately be the only effective, practical solution. This is a difficult choice, with potentially significant consequences. Sometimes, however, it is the only way to get focused attention to a serious problem.
12) If you are bonded and you foresee having to take a tough stand, inform your bonding company. Make sure they hear of the problem from you first and how you are planning to handle it. You want to keep them as your ally.
13) Be conscious of the Peter Kiewit (1) principle. This is a Supreme Court of Canada precedent that upholds the following principle:
The client demands that you perform certain work, which you feel is an extra. The client also states that you will not get paid any extra compensation for that work. If you submit to the ultimatum and carry out the work in the face of that position, you will have forfeited your right to any extra compensation, even though you may be able to establish later that the work indeed was additional to the contract, you protested at the time and accordingly could have elected to have stopped working. A tough gamble.
At a minimum, it is essential to at least get a commitment that the issue as to whether the work is in fact extra and eligible for compensation accordingly is open for unbiased review after the work is finished; in essence, making an agreement that the Kiewit principle does not apply.
14) Consider various factors that might affect the decision to stop work until a satisfactory change order or other resolution is reached such as:
a) What is the cost risk vs. your available resources? Sometimes the hard choice is easy. The cost risk without compensation is beyond your resources.
b) How tight are the contract terms on the issue at hand?
c) If you are the "sub," are you in a different contract position than the "general?" Do you have terms accommodating change that the general does not? In that situation, the answer "I am on your side. I will support you and you will be paid if I am paid" may not be useful.
d) Has the client failed to fulfil a part of its obligations relating to the problem (a Kiewit exception)?
e) Are you close to completion? If so, the best option may be to protest, clearly document the work, avoid any risk that anyone else is let in to incur completion cost and take your chances on an exception to the Kiewit principle being upheld.
f) Consider legal advice on b, c and d.
15) Avoid outright refusing to work until necessary. The general conditions of many contracts have language that requires you to keep working even though you may have an unresolved claim. If you do stop, try to have first built a case that is based upon someone else's inaction or default. Defer the issue by moving to nonproblem areas of work while pressing for instructions on the problem area, ultimately perhaps suspending work pending approval for modified instructions or a basis for compensation. There may come a time that the other parties may need progress toward completion of the project more than pushing you in to what would, for you, be a costly uncompensated variation.
Remember that the realities are that all parties are usually better off with a real-time compromise solution that is balanced rather than the result of after-the-fact litigation or other expensive processes. A solution achieved in the field during the work phase is more likely to produce an effective result.
Do rigid bid conditions, which allocate all risk to the bidder, benefit the client?
They may assist in fixing end cost, but at a price:
a) They risk limiting the pool of legitimate bidders;
b) They inevitably drive up the cost by forcing the experienced, competent contractors to build in significant allowances for risk and the possibility of confronting an adverse condition, or;
c) They increase the probability of tying the project to an inexperienced or overly aggressive bidder who ends up trapped in a struggle to implement an uneconomic bid with negative consequences for the project and all concerned.
Compare the rigid approach to one of placing a higher onus on the consultants and those charged with the responsibility to define the job.
For example, consider the practicality of a clause requiring the bidding contractors to do all subsurface and site investigation work, gamble or satisfy themselves on these issues, with a clause that mandates the consultants to do a reasonably thorough site investigation and subsurface soil assessment for distribution to all potential bidders and/or offers solutions for unanticipated conditions or material change. In the first instance, multiple redundant analyses are done at redundant cost or the job is bid with a significant risk premium with further potential difficulties or, worse, someone gambles, seriously underbids the job and can't finish, at least not without difficulty and delay.