Itemizing Anticipated Costs In a Notice of Claim

Construction contracts frequently include a “notice of claim” provision. The contractor is required to provide the project owner or owner’s representative with a written notice of claim within a stipulated number of days of the occurrence giving rise to the claim. If the contractor was not aware of the occurrence, notice must be provided within a stated number of days of the contractor’s discovery of the event. Failure to give timely written notice operates as a complete waiver and release of the contractor’s claim rights.

These contract clauses are not always limited to notice of the claim event itself. They may require an itemized accounting of the increased costs the contractor expects to incur as a result of the occurrence – a statement of damages. That was the case in a recent highway construction contract in Hawaii. The state learned immediately of the discovery of an existing subsurface utility not indicated in the state’s drawings. The state issued directives and paid the direct cost of dealing with the problem. But when the contractor filed a claim for the impact costs, the delay and disruption to the project as a whole, the notice of claim requirement raised its head. The state said the claim was barred due to lack of timely written notice. The contractor responded that the state had suffered no harm, no prejudice, as the state had been aware of the situation from day one. The state said it should have received notice of the type of damages the contractor would claim, enabling the state to track and monitor those actual costs.

Friends, I invite your comments on this issue.  Is it reasonable to expect a contractor to provide an itemization of damages before those costs have even been incurred? If a project owner is on notice of a claim event or occurrence, doesn’t the owner have all the information it needs to protect its interests?

Featured in next week's Construction Claims Advisor:

• Contractor Penalized for Under-Utilization of Listed Lower-Tier Subs
• Contractor Deviation Justified Lack of Progress Payment
• Technical/Price Tradeoff Not Justified

Bruce Jervis, Editor
Construction Claims Advisor

Comments

[Howard I. Littman, AIA]

Sorry, Bruce, but since this is not a 'new' issue, contractors should know they need to include language in their notice reserving the right to supplement any initial cost change estimate with a more complete impact claim at a later date (after the full range of impacts is known). This is required, initially, so that the Owner - who may be aware of an event/condition but not the potential downside - can then determine if it wants to proceed apace or in some different manner.

That 'different manner' could even include removing the subject work from the current contractor's scope of work and seeking estimates from other players that might be more cost-effective (although clearly this is not always possible, dependent on particular circumstances).

Upon receiving the initial notice and reservation of rights, the Owner can elect to sit down with the contractor and/or request a further 'statement' from the contractor in which some magnitude of potential damages is projected (even if not final)... and use that information for its planning and/or re-trenching purposes. It is essential that an Owner have this information for a variety of reasons (not the least of which is the ability of the Owner to, among other things, obtain additional financing, adjust for changes in projected occupancy date, etc. etc. etc. You well know what could happen if the impacts are not thought through early on, and the Owner at some point becomes unable to sustain the project (which might include not being able to pay the contractor for its work timely, or at all).

Respectfully,
Howard I. Littman, AIA

[john p mcgill]

Mr. Littman misses the point- if the subsurface condition is not known and is found during the work, then the contractor in most states is entitled to extra compensation.
In Hawaii, that was the case. But asking for a prediction of the delay before the delay occurs is usually no better than a guess. Certainly the State and the A/E should be able to predict the impact of the unforeseen condition. If the unnknown condition is something that impacts the scheduling- as apparently happened in Hawaii- then delay is a given. Saying that notice had to be provided of additional costs is redundant and was used as a defense to the undisputed entitlement (apparently if the contractor had said we are delayed it could have been paid- the delay impact is not disputed).
Tracking and monitoring costs as they go is a T&M method and if the Owner wanted that done, then when it issued the instructions for the changed condition it could have just as easily instructed the contractor to proceed on T & M.
Notice provisions like the one that got the owner off the hook for the delay costs are traps in other ways too- ie- does the Owner waive the false claim act repurcussions if the contractor predicts a higher delay impact than actually occurs? Will the owner just pay any delay impact that the contractor submits or (more likely) demand a delay analysis to justify it at the end, which makes the notice and estimate at the front end a waste of time? And what happens if the contractor mitigates the delay by re-directing the work? What is the point of the estimate at the front end then? How about inefficiencies- does the contractor waive those claims too becasue it can't predict them at the front end?
It seems like the owner in Hawaii did what a lot of owners do- rely on a strict reading of the contract when it suits thier purpose but relax those interpretations when they don't.
I respectfully disagree with Mr. Littman- the owner and the design team should be able to predict whether there will be a delay or not and that should give them enough of a heads up to plan for additional costs. If the work cannot proceed without the unforeseen condition being addressed then the owner will need to pay for it regardless, so again, the costs can be predicted by the experienced professionals that work for the owner just as easily as they can by the contractor. The costs should not be denied outright just because the contractor does not tell the owner the obvious. The costs should be negotiated not denied. That is simply unfair.

[Bruce Harjehausen]

Nothing can or should be assumed (we all know what that means!).

Here in Washington, we have a case we all refer to as "Mike Johnson". Basically, similar circumstances to the situation in Hawaii. Initial notice was given, but no follow up as required in the Contract provisions. The contractor lost in that case due to lack of adherence to the provisions related to the notice requirements.

We make it a point to bury the Owner in notices, even if that means that our initial estimates are doubled or tripled. You can always come down, but it is hard to go up. That way, the Owner can never claim ignorance to the possible delays.

[Mark Guevara, Esq. PMP PSP]

Bruce H. makes a great point, i.e.,nothing should be assumed. While notice for the subsurface condition may suffice for directs, indirects and other reasonably foreseeable costs/delays, there may be further repercussions that ripple from the initial incident or incidents, e.g., disruptions, cumulative impact, etc. Contractors always complain about costing and recovering these. In all fairness to the owner, however, once these become reasonably recognizable, further notice of the claim and impacts are both fair to the owner and prudent for the claimant if he/she wishes to prevail on the added claims/costs. Over the years, I've observed far too many "surprises" submitted months or years after such events arose. Owners generally view such surprises as bad faith and will usually fight these to the bitter end.

[Howard I. Littman, AIA]

John...
I understand your perspective, but it is commonly understood that among the involved parties it is the contractor - not the Owner or design team - that has the superior knowledge as to the potential impacts of a 'differing condition' upon the work of the contractor.

It is for this reason the construction contract customarily requires the contractor (not the designers) to advise of pending cost and time impacts attendant to differing conditions. To the extent the impact cannot be affirmatively determined at the time of intial notice, the contractor should provide its best estimate, for the reasons I stated earlier.

For the contractor to simply ignore (or purposefully disregard) the Owner's need for the contractor's superior knowledge of potential impacts in such an instance would, I believe, fly in the face of the good faith requirement (in addition to any specific contract provision).

As Bruce pointed out, if for no other reason than risk management, the contractor should bring his knowledge to the table so that all players can assess how to proceed and what to expect going forward. In theory at least, the construction venture is intended to be a cooperative/team effort, and the open sharing of intelligence should be a central part of same.

[M. P. Alviar]

Similar cases happen with us here in the Philippines. I always advise my staff to be prompt with documentation and communication. It is not as easy as that though - as one has to have the skill and experience to foresee the most unforseeable to be able to quickly communicate possible implications. I also advise them to be prompt in submitting quickly calculated but valid indicative cost that are on the safer side. There will be time for refinement and reconciliation later...easier to go down than we expect the other party to go up when they have sought cost approvals from their higher ups.
Also, it helps if in our indicative cost, we place preventive clauses as to the limitations of our estimates.
I can truly relate with your experience.

[John McGrail PE]

These discussions sometimes resemble those of the students at a rabbinacle school. Allow me to introduce another notion. Practically every job I have had the resoponsibility to administer finishes late. Very often the actual reason for this latest cannot reqadily be discerned but is often seen before it is ever actually defined. I often characterise such delay as being the result of industrial friction,a phenomenon so subtle as to have only a tiny marginal daily effect but yet when taken over the life of the job conspires to delay it. Most often when adjudicating such a delay,I find it convenient to paste the blame on a known event that occurred during the life of the job-a differing site condition for example even though the condition could not possibly account for the entire delay. It is for this reason that I partially agree with several of the commentators. At the very least a contractor should supply a reservation of rights as part of the executed change order paying the direct costs of the work and the Owner for its part should accept the reservation(assuming a degree of plausibilty for entitlement)returning periodically to deal with the issue and adjust the time. Alternatively,assuming that my belief is correct,the Owner should insist of including a no cost time extension when there is even a hint of possible delay. The contractor's unreserved execution of the change order allows for the inevitable time extension and the parties can move on to complete the job reasonably safe in the knowledge that at least some of the inevitable delay has been cheaply addressed.