Chapter Five

UNIVERSITY OF GONDAR
IOT
DEPARTMENT OF CIVIL
ENGINEERING
Habtamu E.
Habtamu E.
April 2020
2020
2
Chapter Five
Management of Claims and Disputes in Construction
Industry
Outline
3
 Introduction
 Contractual Problems in Construction Industry
 Claims in Construction Industry
 Types of Construction Claims
 Source of claims
 Creation of claims
 Management of claims
 Dispute in construction industry
 Causesof disputes
 Mechanisms of dispute resolution
5.1. Introduction
4
Construction projects are

increasingly complex
complex contract documents.
complex claims and disputes.

5.2. Contractual Problems in Construction Industry
5
A vast majority of contractual problems arise from omissions

in and misinterpretation of the clauses, pertaining to the
following subjects:
 Changes in Contract work
 Differing in unusual site conditions actually encountered
 Suspension of Work
 Variation in quantities
 Damage due to natural disasters and force-majeure

…Cont.
6
 Termination for the convenience of the client
 Possession prior to completion
 Escalation of price due to inflation
 Acceleration of work progress
 Ambiguity in specifications and drawings

…Cont.
7
If these conflicts are not clearly managed:
 Claims are made by contractor and
 if claims did not get clearly resolved disputes arises.

5.3. Claims in Construction Industry
8
 During the execution of a project, several issues arise that

cannot be resolved among project participants.
 Such issues typically involve contractor requesting for

either time extension or repayment of an additional cost,
or sometimes both.
 Such requests by the contractor are referred to as “claim‟.
…Cont.
9
Risk, Conflict, Claim and Dispute Continuum Model

5.3.1. Types of Construction Claims
10
Claims may be classified by the:
 Related parties,
 Rights claimed,
 Legal basis, and
 Characteristics of claims.
…Cont.
11
By determining their relevant legal bases, construction

claims can be:
 Contractual claims
 Extra-contractual claims
 Ex-gratia claims
 Extension of time claims

…Cont.
12
Contractual Claim:
 Claims that fall within the specific clauses of the contract.
In well-accepted standard contracts, there are a lot of

provisions for the appropriate compensation such as:
 Ground conditions, valuation,
 Variations, late issue of information, and
 Delay in inspecting finished work.

…Cont.
13
Extra-contractual Claim:
 This type of claims has no specific grounds within contract,
but
 Results from breach of contract that may be expressed or

implied,
 E.g. the extra work incurred as a result of defective

material supplied by the client.
…Cont.
14
Ex-Gratia Claim:
 Claims that there is no ground existing in the contract or
the law, but
 The contractor believes that he has the rights on the moral

grounds,
 e.g. additional costs incurred as a result of rapidly

increased prices.
…Cont.
15
Extension of Time Claim:

The date for completing the project will be specified either:
 In the tender documents before the contract is awarded
or
 Within a reasonable time of completion if not agreed.

Note: It will facilitate claims for damages by the Employer
for any delays created by the contractor.
5.3.2. Sources of Claims
16
The claim may arise due to the owner or the contractor on

account of any of the following causes:
 Defects and ambiguities in the contract document.
 Delay in release of areas as per contract.
 Desire to get the work done at a faster pace than the

contact requirement.
 Delay in supply of power, water and other materials from

the owner.
…Cont.
17
 Hold on works due to delay in release of drawings and

other inputs.
 Delay in release of payments to the contractor.
 The scope of work may be substantially modified by the
owner.
 There may be loss of profit and investment to the owner
due to delays caused by the contractor.
 Construction claims can also arise on account of inclement
weather.
5.3.3. Creation of Claims
18
If contractor request for settling the claim is rejected or not

acknowledged by the client; then
 Promptly address the written appeal to the client’s higher
authority within the period specified for such action.
 An appraisal meeting should preferably be held at the

time of submitting this appeal
 The supporting documents for all the claims should be

precisely prepared in detail and compiled.
5.3.4. Claims Management
19
In order to deal with or control the claims effectively:

 Parties concerned with them should establish good
construction claim management processes in their
organizations.
The major issues in claims and disputes are:
 Identification of issues and the party responsible for the
claims, and
 Ascertaining the time and cost impact of the claim.
…Cont.
20
Claim management process in perspective of a contractor:

1. Claim Identification:
 Based on Instructions in the form of drawings as well as
oral or written instructions provided by the
owner/engineer.
2. Claim Notification:
 Inform the engineer within the time frame stipulated and
clarify an intention to claim extra rates for the same.
…Cont.
21
3. Claim Substantiation:
 Establish the claim including an entitlement under the
contract, giving reference to the relevant clauses.
 Backup documents like letters, vouchers and drawings are

also enclosed.
 For period-related claims such as extended stay costs and

interest on delayed payments shall be included
…Cont.
22
4. Analysis of time and cost impacts of the change:
 Perform schedule analysis to calculate the time impact
while break down the cost to calculate the cost impact.
5. Pricing of the change:
 Detailed cost description for understanding, negotiating,
and justifying extra contract costs.

…Cont.
23
6. Negotiation of the claim:

 Presenting the claim to the employer, and mutual finding
the solution of such claim.
7. Decision of Engineer/Owner:
 convey the decision on the claim to the contractor within a
time frame specified in the contract.

…Cont.
24
8. Further Action by Contractor:

 If an agreement cannot be reached; propose an
alternative dispute resolution method.
 If this fails, the choice remaining is to implement the

contractor’s “disputes” mechanism or take the matter to
court.
5.4. Disputes in Construction Industry
25
Dispute:- implies assertion of a claim by one party and
refusal by another.
5.4.1.Causes of Disputes
26
It is often observed that tenders are hastily made and

sufficient attention is not paid to ensure that:
 All the required information and details are appropriately
incorporated in the tender document
 The documents are internally consistent i.e. there is no

contradiction in the provisions of general conditions, special
conditions and drawings, and
 Specifications, where required, are available.
5.4.2.Mechanisms of Dispute Resolution
27
 Apart from the normal legal process, emphasis here is on
the alternative dispute resolution mechanisms generally
available in construction contracts.
 Such mechanisms could include negotiation, mediation,
conciliation and arbitration.

a. Prevention
28
Allocating fair contract risk:

 Unfair shifting of risk, transferring of all responsibility on
a party that is not generally expected to control that risk,
can lead to the impairment of the project itself.
Drafting Dispute Resolution Clauses:
 In addition to identifying responsibilities and allocating
risks, a contract should contain language for addressing
disputes and claims at the relevant stage in a project.
…Cont.
29
Team Building:
 Team building is another dispute-resolution technique that
can be instituted at the beginning of a construction project
to help allow for better cooperation and coordination
among the parties.
b. Negotiation:
30
 A focused discussion on the dispute among all interested

parties, without the involvement of third parties.
 It is voluntary and non-binding.”
 The process may be bilateral (between two parties) or it
could be multilateral (many parties).
 An informal process in the legal sense, unless agreement is
reached through the process.
 Fast and does not involve additional expenses.
c. Standing Neutral
31
Dispute Review Board(DRB):

 It is essentially a process where an independent board of
three people evaluates disputes
 The board is constituted at the commencement of the
project, much like a panel of three arbitrators.
 Each party selects one board member.
 The board Periodically visits the site to take information;
ensure familiarity with the project, and the parties.
…Cont.
32
Advantage:
 The parties themselves become familiar with the board's
view on particular issues before presenting their dispute to
the board which then;
 Aids the negotiation and settlement process which the

parties undertake.
…Cont.
33
Dispute Resolution Advise:

 Involves a neutral third person who advises the parties to a
dispute and suggests possible settlement options.
 The advisor would be paid for equally by the employer

and contractor
 Does not make interim binding decisions, but advises on the

means by which settlement could be achieved.
d. Non-Binding Resolution
34
Mediation and Conciliation:

 An informal process in which the parties are assisted by
one or more neutral third parties in their efforts towards
settlement.
 Do not sit in judgment but try to advise and consult

impartially with the parties
 they have no power to impose an outcome on disputing
parties.
…Cont.
35
Adjudication: the adjudicator

 A neutral individual who is not involved in the day-to-day
running of the contract.
 Neither an arbitrator, nor a state-appointed judge.
 Enjoys his or her powers by virtue of the agreement

between the parties. the decision is binding on the parties,
unless or until revised in arbitration or litigation.
e. Binding Resolution
36
Arbitration:
 It is much like the judicial system, technical disputes can
be resolved by single arbitrators, or a panel of several
arbitrators, and
 The parties are free to determine the number of
arbitrators, it should be ensured that the number is odd
 An arbitrator needs to have a sound understanding of
collection and interpretation of evidence, examination
and cross-examination of witnesses, etc.
f. Litigation
37
 Litigation is often the final resolution step should previous
procedures have failed in achieving a desirable outcome.

Advantages of ADR
38
 Maintains a business relationship: processes such as

mediation can maintain existing business relationships as
the parties are aided towards a settlement.
 Speed:
 Lower cost
 Confidentiality: The proceedings of mediation are
confidential. Contrastingly, litigation is in the public
domain and arbitration may become public if there is an
appeal.
…Cont.
39
 Flexibility: Arbitration and litigation are based upon the
rights and obligations of the parties to the dispute. On the
other hand a mediated settlement focuses on the parties'
interests and needs.

40
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UNIVERSITY OF GONDAR

Construction projects are

complex contract documents.

complex claims and disputes.

A vast majority of contractual problems arise from omissions

 Differing in unusual site conditions actually encountered

 Damage due to natural disasters and force-majeure

 Termination for the convenience of the client

 Possession prior to completion

 Escalation of price due to inflation

 Acceleration of work progress

 Ambiguity in specifications and drawings

If these conflicts are not clearly managed:

 Claims are made by contractor and

 if claims did not get clearly resolved disputes arises.

 During the execution of a project, several issues arise that

 Such issues typically involve contractor requesting for

Risk, Conflict, Claim and Dispute Continuum Model

Claims may be classified by the:

 Legal basis, and

By determining their relevant legal bases, construction

 Extension of time claims

In well-accepted standard contracts, there are a lot of

 Ground conditions, valuation,

 Variations, late issue of information, and

 Delay in inspecting finished work.

 Results from breach of contract that may be expressed or

 E.g. the extra work incurred as a result of defective

 The contractor believes that he has the rights on the moral

 e.g. additional costs incurred as a result of rapidly

Extension of Time Claim:

 In the tender documents before the contract is awarded

 Within a reasonable time of completion if not agreed.

The claim may arise due to the owner or the contractor on

 Delay in release of areas as per contract.

 Desire to get the work done at a faster pace than the

 Delay in supply of power, water and other materials from

 Hold on works due to delay in release of drawings and

If contractor request for settling the claim is rejected or not

 An appraisal meeting should preferably be held at the

 The supporting documents for all the claims should be

In order to deal with or control the claims effectively:

Claim management process in perspective of a contractor:

 Backup documents like letters, vouchers and drawings are

 For period-related claims such as extended stay costs and

4. Analysis of time and cost impacts of the change:

 Perform schedule analysis to calculate the time impact

while break down the cost to calculate the cost impact.

5. Pricing of the change:

 Detailed cost description for understanding, negotiating,

and justifying extra contract costs.

6. Negotiation of the claim:

 convey the decision on the claim to the contractor within a

time frame specified in the contract.

8. Further Action by Contractor:

 If this fails, the choice remaining is to implement the

Dispute:- implies assertion of a claim by one party and

It is often observed that tenders are hastily made and

 The documents are internally consistent i.e. there is no

 Apart from the normal legal process, emphasis here is on