by: Maria Olsen, Pels Law, LLC
On behalf of the Pels Law firm and our construction industry clients, I attended the 2020 American Arbitration Association’s Construction Webinar Series: “The Best Defense is a Good Offense – Keys to Claims Prevention and Mitigation.” Below are highlights of suggested best practices construction project owners, project managers, general contractors and subcontractors can adopt to prevent and mitigate claims. Please contact us if you would like for us to draft or review contracts prior to execution, have issues that have arisen in your construction projects, or have any questions.
Create and Maintain a Good Issue Database
The strongest suggestion by the panel (an arbitrator, construction litigation consultant/expert witness and large construction firm’s general counsel) was to keep accurate systematic documentation throughout the project. Daily reports are seen as the best objective proof of claims or defenses. Good record-keeping is essential if disputes arise. Parties have a better chance of succeeding in establishing cause and effect if they have reliable documentation. Categories for the documentation include: Date, type, description excerpt, major project area affected, issue category and cause (owner/contractor/sub). If you must go to arbitration, make sure your project records align with your claims or defenses. These documents may be discoverable and put into evidence, so keep that in mind when making entries. There are many contract management software programs that can help with this process.
Change Order Management
Ninety-nine percent of claims are unresolved and rejected change orders. Make sure to document the origin of the change order. It is likely that no one will accurately remember the details months from now. Attach meeting minutes to the change orders to show why the change order was made and keep the supporting documentation together. Capture cost and schedule impact, or note on the change order if the cost and schedule impact is “unknown at this time” to reserve rights, even if the owner resists. Multiple change orders have a cumulative effect on completion time and costs. To avoid problems later, do not put multiple changes in one change order and do not mix pricing structure in one order. Contract management software can help with this also.
Communication and Notice
Good communication throughout the project can avoid many disputes. The other side can be an ally, so don’t blindside them with issues. If you have bad news, give the other side a heads up phone call before sending any required notice letter. Offer suggested options. Talk about how to resolve problems as they come up. Create a notice template form that complies with the contract and clearly state reservation of rights. Most construction litigation is not one large problem, but an accumulation of small problems that add up to a large delay or cost issue.
Best Practices at Arbitration
Once in arbitration, tell a story “without being a jerk.” We have won cases against Goliath construction companies that lost the case by being jerks. While parties should follow the practices written into contracts, arbitrators don’t favor “got ya” clauses where the other side has constructive notice but literal compliance was not followed.
When it comes to delay claims, realize that schedule updates are part of the contract, so study them before accepting them. Original schedules quickly can become obsolete. The arbitrator will want to see: (1) the schedule baseline and credible updates; (2) that the critical path is valid; (3) impacts affecting the critical path; and (4) that responsibility assignment is accurate.
Have good documentation to back up claims. Clearly establish the nexus between cause and effect for any claims.
Cumulative impact and total cost claims are hard to win. Try to find other theories for your claims, where applicable.
Project Risk Review
One cannot avoid risk in construction projects. However, it is important to weigh risks when choosing among projects to take on by your company. The panel suggested assigning numerical values to various risk elements (e.g., can you get your materials to the site easily, reputation of the parties involved, partner vetting, site conditions, availability/experience of staff, financing structure, dollar costs) and ranking projects in that way as a “go” or “no go.”