Preserving Your Bottom Line

Preserving your Bottom Line:
When a Claim, Change, or Dispute Arises -
Common Problems and Practical Solutions
Presented to the
Mid-Atlantic Steel Fabricators Association
by George E. Pallas, Esquire
January 29, 2014

Session Talking Points
 Early Problem Identification
 Contract and Document Management
 Methods for Capturing Costs
 Methods for Associating Costs
 Methods of Revenue Recognition
 Recommendations for Reducing Legal Fees
 Communications between Finance and Project Teams
2

Scenario 1
Owner and Contractor agree that a specific condition
was not contemplated by the Contract Documents.
Owner and Contractor agree that extra work is
required.
3

Scenario 1
The Owner verbally tells you to make the change but
not to worry about paperwork at this time because the
job is on a tight schedule.
Do you accept the direction and perform the change?
4

Scenario 1
What if it is a minor change that does not affect your
cost or the time to perform the work?
6

Minor Changes in Work
AIA A201-2007 §7.4 “Minor Changes in the Work”
The Architect will have the authority to order minor
changes in the Work not involving adjustment in the
Contract Sum or extension of the Contract Time and
not inconsistent with the intent of the Contract
Documents. Such changes shall be effective by
written order and shall be binding on the Owner and
Contractor. The Contractor shall carry out such written
orders promptly.
7

Scenario 1
Best Practice:
Demand a written directive to perform the minor
change, signed by the Owner, in accordance with the
provisions in the Contract Documents that govern
“Changes.”
Because a minor change does not involve change in
contract amount or time, there is no impact to job costs.
8

Scenario 1
 What if the changed condition is not minor, but the
Contractor and Owner agree on the changes to the
Contract Price and Contract Time?
 Do you proceed with the work before you receive the
signed Change Order?
9

Change Orders
AIA A201-2007 §7.2.1 “Change Orders”
A Change Order is a written instrument prepared by the
Architect and signed by the Owner, Contractor, and Architect,
stating their agreement upon all of the following:
.1 The change in the Work;
.2 The amount of the adjustment, if any, in
the Contract Sum; and
.3 The extent of the adjustment, if any, in the
Contract Time.
10

Scenario 1
Best Practice:
Wait for a signed Change Order.
Notify the Owner in writing of the changed condition.
Send a Change Order Request to the Owner.
Follow the Notice Provisions in the Contract.
11

Scenario 1
Review your Contract Documents to ensure that notification of the
changed condition is timely and contains all of the required
information.
Does the Contract require a specific solution with a detailed price estimate
and a time-impact analysis to the Project Schedule? Or, does the Contract
require a general notice with details to be provided in the future?
Is a Request for Information (RFI) sufficient? Although it identifies
differing conditions, an RFI is not the method to notify the Owner that your
Contract Price and Time will be affected by a changed condition.
If your Notice does not strictly follow the Contract Documents, then you
may waive your ability to request a change to your Contract.
12

Scenario 1
 What if the Owner requires the Contractor to
immediately begin the changed work, but a Change
Order cannot be issued before the work begins?
13

Scenario 1
Best Practice:
Demand that the Owner provide you with a written
directive to proceed with the work under agreed-upon
terms.
Submit a Change Order Request that reflects the
agreed-upon terms.
14

Scenario 1
Remember:
Beware of waiving your Claims through the issuance of
Change Orders.
Once a Change Order is executed, the law assumes
that the Change Order accounts for all costs associated
with performing the extra work—including delay,
acceleration, and inefficiency claims.
15

Scenario 1
Sample Language to Preserve Rights to Bring a Claim:
As you know, our Change Order Request No. 3 contained a
notation that “the price quoted excluded all claims for delays,
disruption and inefficiency.” You have advised us that the Owner
and/or Architect will not process this Change Order Request with
that language included. As a consequence, XYZ Electric is
resubmitting Change Order Request No. 3 without that provision.
This letter is intended to place the Owner and Architect on notice
that XYZ Electric’s price for this Change Order excludes any and
all claims for delays, disruptions, and inefficiencies. XYZ Electric
reserves the right to submit a Claim for these costs at the end of
the Project.
16

Scenario 1
 Ensure that your onsite Project staff transmits copies
of all Notices, Change Order Requests, and Change
Orders to your home office.
 Why?
17

Scenario 1
 To permit the home office to track and manage your
cost and time.
18

Scenario 1
 Create new cost codes in your Cost Reports to separately
track all of the extra work.
 Notify your onsite personnel that they must separately
track all of the extra work by utilizing the new cost codes.
 Ensure that your scheduler creates a “placeholder” in your
schedule to track the impact of the extra work.
 Consider utilizing internal, cost-loaded schedules that will
timely notify you if your line-item costs are out of
proportion to their allocated durations.
19

Scenario 1
 Should a Contractor make changes on its own in
order to maintain the progress of the work, without
notifying the Owner?
 No! Why not?
20

Scenario 1
Several reasons:
The Owner has been deprived of its ability to assess
the condition and implement different changes to
mitigate impact.
The Contractor may have waived its ability to seek
what otherwise would have been a valid Change Order
Request.
The Owner may suffer damages as a result of the
change. It may affect other trades’ work, or it may result
in other, unforeseen damages.
21

Scenario 1
What if a Change Order cannot timely be issued, and
the Owner refuses to issue a written directive to
proceed?
22

Scenario 1
 You should not proceed with the work.
 If you decide to proceed, then you must timely,
accurately, and fully document your position, and
provide notice in accordance with the Contract
Documents.
 Provide as much detail as possible, and identify all of
the communications between you and the Owner.
 Prepare and submit a Change Order Request in
accordance with the Contract Documents.
23

Scenario 1
What if a Change Order has not been issued by the
time you prepare your next Payment Application?
24

Scenario 1
 You must identify the changed work on the Payment
Application by listing the COR, and include a copy
with the Payment Application.
 Read any Release of Liens and/or Waivers that must
be submitted with the Payment Application.
25

Scenario 1
 Many of these documents will contain a provision that
the Contractor waives all claims up to the date of the
Payment Application.
 You cannot sign any Release of Liens and/or Waivers
without reserving your rights to claims for additional
payment and time, which includes pending Change
Orders, Change Order Requests, and all extra work
that you have performed.
26

Scenario 1
 Include a statement on the Waiver forms that states the
Contractor does not waive, and specifically reserves, all
claims for additional compensation and additional time for
work performed for [insert the description here].
 Include as much detail that would be necessary for a third
party to understand that you are reserving your rights for
money and time with respect to specific work.
 What if the Owner rejects your additional language?
27

Scenario 1
Best Practice:
If you need to be paid, then you should sign the Waiver without
the additional statement, but you must transmit it with a
contemporaneous letter that states the Owner rejected your
change, but that you need to be paid, so you have signed the
Waiver but you reserve all of your rights.
In the letter, you should identify all of the Claims for which you are
reserving your rights.
The law is not clear whether this procedure will protect your rights
to payment. So, you should consult with your attorney.
28

29
FROM:
(Subcontractor/Supplier)
TO: (Contractor)
PROJECT:
OWNER:
1) In consideration of the sum of $_____________ and other good and valuable consideration
described herein, the undersigned does hereby agree to a partial release of all claims,
Mechanic’s Lien Rights, Equitable Liens, Labor and Material Bond Rights resulting or arising
from labor and/or materials, subcontract work, equipment or other work, rentals, services or
supplies heretofore furnished by the undersigned in and for the construction, design,
improvement, alteration, additions to or repair of the above described project including but not
limited to any claims arising from delay, interference, inefficiency, acceleration or other
impacts incurred by the undersigned on the Project from the beginning of time to the date of
this release, except any claims related to the release of retainage to the undersigned. This
partial release is conditioned upon receipt of the payment set forth above.
Partial Release of Liens and Claims

30
2) In further consideration of the payment made or to be made as above set forth, and to induce
__________________________ to make said payment, the undersigned agrees to defend and
hold harmless the owner, __________________________, the Construction Lender, if any, and
__________________________’s surety, if any, from any claim or claims hereinafter made by
the undersigned and/or its materials suppliers, subcontractors or employees, servants, agents or
assigns of such persons against the Project. The undersigned agrees to indemnify or reimburse
all persons so relying upon this release for any and all sums, including attorney’s fees and
costs, which may be incurred as the result of any such claims.
3) It is acknowledged that the designation of the above project constitutes an adequate description
of the property and improvements for which the undersigned has received consideration for this
release.
4) It is further warranted and represented that all such claims described in paragraph 1 above as
may be asserted against the undersigned or the undersigned’s subcontractors and/or material
suppliers’ have been paid or that arrangements, satisfactory to the owner and
__________________________ have been made for such payments.

31
5) It is acknowledged that this release is for the benefit of and may be relied upon by the owner,
__________________________, any construction lender and any principal or surety on any
labor and material bond for the Project.
6) In addition to the foregoing, this instrument shall constitute a partial release of all debts, rights,
claims, damages and demands of the undersigned against __________________________,
__________________________’s surety, if any, and the owner, in law or in equity arising out of
or pertaining to the above referenced project to the extent described in paragraph 1 above.
Dated this _____day of ________, 200___.
FIRM:
BY:
TITLE:
STATE OF :SS
COUNTY OF :
The foregoing release was subscribed and sworn to me before this day of , 20__,by (as of .
(Notary Public)
My Commission Expires:

Scenario 2
The Owner and Contractor agree that a specific condition was not
contemplated by the Contract Documents, and that the Contractor
is required to perform extra work.
However, the Owner and Contractor do not agree on the change
to the Contract price and the Contract time.
32

Scenario 2
 This is a common scenario on construction projects.
 A change is required, but the Owner and Contractor
dispute the “value” of the extra work, and the time it
will take to perform the extra work.
 What do you do in this instance?
33

Scenario 2
 The Construction Change Directive (CCD) is the typical method
to address this situation.
 The CCD is signed by the Owner, and directs the Contractor to
perform the extra work. The CCD leaves open the change in
Contract price and the Contract time.
 As a result, most contracts direct the Contractor to separately
track its costs and time when performing the extra work directed
by a CCD.
34

Construction Change Directives
AIA A201-2007 §7.3.1 “Construction Change Directives”
A Constructive Change Directive is a written order prepared by
the Architect and signed by the Owner and Architect directing a
change in the Work and stating a proposed basis for adjustment, if
any, in the Contract Sum or Contract Time, or both. The Owner
may, by Constructive Change Directive, without invalidating the
Contract, order changes in the Work within the general scope of
the Contract consisting of additions, deletions or other revisions,
the Contract Sum and Contract Time being adjusted accordingly.
35

Scenario 2
 Ensure that your home office is aware of the CCD,
and you have incorporated the necessary
“placeholders” in your Cost Reports and your
Schedule to account for the extra work that will be
performed under the CCD.
36

Scenario 2
 Create new cost codes in your Cost Reports to
separately track all of the extra work performed under
the CCD.
 Notify your onsite personnel that they must separately
track all of the extra work by utilizing the new cost
codes.
 Ensure that your scheduler creates a “placeholder” in
your Schedule to track the impact of the extra work.
37

Scenario 2
 Review your Contract Documents to ensure you
understand the costs that you are permitted to recoup
under the CCD.
 Ensure that you are tracking all of the permitted
costs, and all of the impacts to the Project Schedule
that result from the CCD.
 Do not sign the CCD. Why?
38

Scenario 2
 If you sign a CCD, it may be interpreted as a Change
Order.
39

Scenario 2
 When you estimate the time to perform the extra
work directed by a CCD or a Change Order, make
sure that you include the impact on the Project
Schedule.
 Although the extra work might only take a few days to
perform, when it is “imported” into the Project
Schedule, it may have a greater impact.
 As a result, make sure that your scheduler performs
a time-impact analysis of the extra work on the
Project Schedule.
40

Scenario 2
 Remember: a critical path delay is only compensable
if it causes a delay to the Project completion. Your
time-impact analysis should identify whether the
critical path has been affected.
 Many contracts require that the Contractor include an
analysis of the change on the Project’s critical path.
41

Scenario 2
 If you do not ask for all of the time for which you are
entitled—including impacts to the Project’s critical
path—you may be bound to the time you requested.
 Put another way, you may waive a Claim for
additional time caused by the extra work if it is not
included in your request.
42

Scenario 2
After the CCD has been issued, and you set up all of
the correct cost codes, how are you going to keep the
Owner updated on the progress of the work, and the
fact that you are incurring costs and time?
43

Scenario 2
Because many contracts require accurate tracking of
CCD-directed work, you should prepare daily Time-and-
Material (T&M) Tickets that accurately reflect the
manpower, time spent, tasks performed, supervision,
materials utilized, transportation costs, machinery and
equipment costs, and rental costs.
44

Scenario 2
 The Owner or its Authorized Representative must
sign T&M Tickets.
 Sometimes the Owner or its Authorized
Representative will “stamp” the T&M Ticket with a
statement that says something like they are only
signing to verify that the work was performed and
the materials were supplied, but they are not
signing to approve payment.
 Do you care?
45

Scenario 2
 No!
 This is an acceptable practice, as long as they
sign the T&M Ticket.
 Why? When the Owner signs the T&M Ticket, it
cannot later dispute the accuracy of the time spent
and materials that were utilized.
46

Scenario 2
 What if the Owner or its Authorized Representative
refuses to sign the T&M Ticket?
47

Scenario 2
 Ask why, and try to resolve the issue. It may be a
simple dispute over a quantity of materials, or labor
hours.
 If it cannot be resolved, then make a note on the
T&M Ticket that they refused to sign.
48

Scenario 2
 Once the daily T&M Ticket has been signed (or not),
what do you do next?
49

Scenario 2
 Send them to your home office, where they will be compiled,
and the time and expenses will be accounted for in your Costs
Reports and Schedules.
 On a daily basis (but no more than a weekly basis), the home
office should send them to the Owner with an accompanying
letter.
 This way, the Owner is kept apprised of the progress of the
CCD, and has an opportunity to dispute the T&M Tickets.
 If the Owner does not dispute the T&M Tickets, they “own” them.
50

Scenario 2
 You should also prepare a Schedule Impact Analysis to
identify the impact that the CCD’s work had on the
Schedule, in order to “prove” and document the impact to
the Owner.
 When the work is complete, you must submit all of your
supporting cost documents (including the T&M Tickets)
and the Schedule Impact Analysis to the Owner in the
form of a Change Order Request.
51

Scenario 2
 What do you do if the Owner does not issue a Change
Order, or issues one for less money or time than what was
requested?
52

Scenario 2
 Review the “Disputes” or “Claims” provisions of your
Contract and the Contract Documents.
 You may need to immediately file a Claim in order to
preserve your rights.
53

Definition: Claim
AIA A201-2007 §15.1.1 “Definition”
A claim is a demand or assertion by one of the
parties seeking, as a matter of right, an adjustment or
interpretation of Contract terms, payment of money,
extension of time or other relief with respect to the
terms of the Contract.
54

Notice of Claims
AIA A201-2007 §15.1.2 “Notice of Claims”
Claims by either the Owner or Contractor must be initiated
by written notice to the other party and to the Initial
Decision Maker with a copy sent to the Architect, if the
Architect is not serving as the Initial Decision Maker. Claims
by either party must be initiated within 21 days after
occurrence of the event giving rise to such Claim or within
21 days after the claimant first recognizes the condition
giving rise to the Claim, whichever is later.
55

Scenario 2
 Try to avoid Contracts that require you to provide notice
within a short period of time.
 Try to avoid Contracts that require you to provide the full
amount and scope of the damages within a short period of
time.
 Understand what the Prime Contract requires for Claims,
because you may be bound by those requirements.
56

Scenario 3
The Contractor believes that a specific condition was not
included in the Contract Documents, requiring it to perform extra
work. The Contractor believes it is entitled to a change to the
Contract Price and the Contract Time.
The Owner believes that the specific condition was included in
the Contract Documents, so the Owner demands that the
Contractor perform the work. The Owner will not agree to any
changes to the Contract Price or the Contract Time.
57

Scenario 3
 This is a typical scenario that contractors face every
day: is the “extra work” included in the Contract
Documents, or not?
 In this situation:
 Will the Owner issue a Change Order?
 Will the Owner issue a CCD?
58

Scenario 3
No!
The Owner will not issue a Change Order.
The Owner will not issue a CCD.
59

Scenario 3
 What do you do in this situation?
60

Scenario 3
 Send a letter to the Owner confirming your
conversation.
 State that the Owner directed you to perform the
work, even though the work is not included in your
Contract.
 State that you will perform the work under protest,
and that you will file a Claim.
61

Scenario 3
 Unfortunately, in this scenario, there is little that the
Contractor can do except to initiate a Claim under the
“Disputes” or “Claims” provisions of the Contract.
62

Scenario 3
 Review your Contract to ensure you provide timely
notice of your Claim and fulfill all other conditions to
file a Claim.
 Strictly follow the Claims procedure in your Contract.
63

Scenario 3
 Are you required to perform the disputed, extra work
while you are in the Claims process?
64

Scenario 3
 Most Contracts contain a provision that requires
Contractors to continue to work while Claims are
being decided.
 Review your Contract and the Contract Documents
for this provision.
65

Scenario 3
Best Practice:
In this situation, the better course of action is to
perform the work (if it is financially feasible), and
maintain complete and accurate records of the costs
and time to perform the extra work.
Why?
66

Scenario 3
 If you do not perform the extra work, the Owner will
engage another Contractor to perform the work—
probably at a higher cost than what it would have cost
you to perform the work.
 The Owner may commence a lawsuit (or arbitration)
against you for Breach of Contract to recover the
additional costs, which may include delay costs
associated with the time to engage another Contractor.
67

Scenario 3
You should track all of your costs and time—just as you
would if the Owner issued a CCD directing you to
perform the work. These will be important in the proof
of your Claim.
T&M Tickets
Job Costing
68

Why we don’t get paid for extra $ spent
CHANGE NOT RECOGNIZED AS CHANGE BY CONTRACTOR
 Lack of Contractual Knowledge at the Field Level
 Keeping the Peace in the Field
 Incomplete knowledge of the scope of work
 Incomplete knowledge of rights and responsibilities
 Changes buried in the schedule (chasing the critical path)
ONLY PARTIAL RECOVERY OF CHANGE COSTS BY CONTRACTOR
 Contractual change payment provisions
 Inadequate schedule maintenance
 Owner’s inability or unwillingness to make decisions (higher authority)
 Inadequate cost control / tracking
 Documentation
 Contractors typically good at running work but not administering contracts
 Just the facts. Creativity is dangerous in this environment.
NON-COMPLIANCE IN CHANGE RE-IMBURSEMENT PROCESS
 Contractual notice provisions
 Contractual cost calculations
 Documentation
PARTIAL OR NON –REIMBURSEMENT OF CLAIMS
 Notice provisions
 Keeping the peace negotiations
 Claims do not cost the front line owner reps anything. Defer to higher authority and sort it out later.
 Negotiation transparency is dangerous

UPDATE JOB COST SYSTEMS
Once a change has been identified and the Client/Owner notified, the Project Team must contact their business unit Cost Analyst to create the cost code they
will use to track the change work. The following cost codes are to be used when tracking changes to the contract:
78 01 00 000 TIME & MATERIAL
This cost code would be used any time that the Client/Owner directs us to perform extra work and compensates us on a cost plus basis. This type of
agreement is commonly referred to as a Time and Material (T &M), Force Account or Cost Plus agreement. The labor, equipment and materials associated with
that work are tracked and verified on a daily basis. All T&M cost codes should be numbered sequentially beginning with 001, regardless of the Field Manager
performing the work. Risk Assessment: minimal payment risk; minimal performance risk
78 02 00 000 CHANGE ORDERS
This code would be used whenever an extra would be billed as a set amount, and this amount is either approved or the approval is pending. This cost code
must be used unless the actual costs of the change(s) cannot be segregated from the contract work.
Risk Assessment: minimal payment risk; moderate performance risk
78 03 00 000 CLAIMS
This code is used when entitlement for payment is in dispute. We must separate and track costs in order to substantiate future claims. The payment status at
the time of performing the work is undetermined. Risk Assessment: high payment risk; minimal performance risk
78 04 00000 NON-REIMBURSIBLE WORK
This code is used for work that has no budget. Perhaps the item was missed in the bid or an unforeseen condition arose. In either case, this code should only
be used to track work for which we have no payment entitlement from the Client/Owner. We must track costs in order to substantiate the negative impact that it
has on the project's profit. Risk Assessment: minimal payment risk; minimal performance risk
78 05 00 000 REWORK
This code is used to track work that was installed improperly and must be re-installed or repaired. The last three digits of the rework code must contain the ID
number of the Field Manager who originally performed the work (if they are at fault). We must track costs in order to substantiate the negative impact that it
has on the project's profit. Classifying rework also gives us the ability to identify negative trends.
Risk Assessment: minimal payment risk; minimal performance risk

George E. Pallas, Esquire
Partner
Cohen Seglias Pallas Greenhall & Furman PC
30 S. 17th
St., 19th
Floor
Philadelphia, PA 19103
gpallas@cohenseglias.com
215.564.1700
www.cohenseglias.com
71

Preserving Your Bottom Line

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