April 2002
In my last two columns, I focused on the tax implications of construction claims and how contractors are weathering the current economic downturn. With the increasing prevalence of construction claims and the difficulty of collecting them, now is a good time to review what contractors need to know in preparing the various types of claims. There is one rule of thumb that applies across the board: the more thorough the documentation, the better the chance of getting paid.
Situations where a contractor has sent out a bill but has yet to receive payment (claims for unpaid progress billings and retention) are the most common type of claim and should be the easiest to document. In these situations, the scope and price of the work has usually been approved. Many times clients will key payment to specific milestones, such as substantial completion of punch list items. In these cases, contractors should be ready to produce required documentation to receive payment. If the client has a legitimate reason to withhold payment, the contractor will have to address the owner's concerns, and also document how a delay in payment will adversely affect its own business before the claim is approved.
Also common are claims for change orders that were approved for work but not approved on price. While it may be ideal to determine pricing at the onset of change orders, this is not always practical, considering the need to move the project along. It is critical to fix the pricing mechanism as soon as possible, whether it is cost plus fee, time and materials, or unit rates. It is also advisable to get it in writing. Tracking change order work separately may boost the chances of getting paid.
Contractors are also faced with filing claims for change orders of extra work. Often, these orders are necessary to keep the job moving, but not approved beforehand. The hectic pace in the field frequently results in an expanded scope on an ad hoc basis, making it all the more difficult to collect on unapproved increases in scope, loss in productivity and delays. Good communication between field and accounting personnel, and a proactive stance are the basis for getting paid for work that is unauthorized, but necessary to maintaining the momentum of the project. After a start point for the extra work is determined, it is advisable to document in writing all communication about the work in question as well as the reasons for undertaking the work, right down to the specific construction drawings. Field logs detailing extra work and references to it in daily field notes or subcontractor reports are good back-up.
Recouping money for productivity losses is difficult. One method the courts have accepted is a comparison of productivity during a control period of no disruptions with the productivity during a period of client-caused delays or disruptions. Of course, this assumes that such a control period exists and can be measured, but is not always easy.
Substantiating claims for delays is still more difficult. Even if the delay can be attributed to another party, quantifying and pricing the delay is a major undertaking. A contractor must demonstrate how the delay critically impacted the planned performance of that job and be able to quantify that impact. Only claims for such critical delays are considered for compensation.
In measuring critical delays, the input of project managers, superintendents and others close to the situation is key. To recoup delay-related claims, contractors will have to show concrete impacts of the delay, such as incurring higher material and labor costs, costs for idle construction equipment, as well as costs associated with general site conditions and home office overhead.
Claims are a fact of life for contractors. The best claim will always be one that is so thoroughly documented, so accurately presented with irrefutable dollar amounts, and delivered in such a timely manner, that no one can dispute it Ñ neither the client or the courts.
About the author: Mr. Anchin is managing partner of Anchin, Block & Anchin, LLP, a New York City certified public accounting firm that specializes in meeting the needs of contractors in the tri-state area.