Principle of Entitlement
Unless amended, all construction contracts contain the provision for changes to be made. This could be from the developer instructing them or by the contractor claiming that a relevant event, compensation event, variation etc has occurred. If it is the latter, and as a developer you’re receiving notices that require your attention, you will have to determine if there is a case for the change. Before agreeing to the value of any change event, you will firstly need to determine what, if any, entitlement there is under the terms of the contract.
How to recognise contractual entitlement
Firstly, you need to identify whether the notified change is a change within the terms of the contract. Under all forms of construction contract, each party must provide notice of a breach or change as soon as they become aware in order the event can be mitigated or even avoided. There are consequences if either party does not notify in a reasonable time frame, including being time barred from entitlement to be paid additional time and money, or more simply to recover their loss and expense.
It’s good practice when issuing a contractual notice to include the following:
- Clearly identify under which clauses in the contract the change is relied upon
Identify the cause of the event and how this links to the clause e.g. ambiguity between design documents or a client risk event has occurred
- Try to state the full effect or likely effect of the change
- Include the expected impact to programme, including risk to key dates, sectional or overall completion dates
- Make sure you have checked who the notice must be served to and how it can be served i.e. email or a hard copy posted etc.
As a developer, if the above information is not provided, you should consider writing back and noting that without substantiating their claim it is not clear upon which grounds you’re to consider entitlement. Once you are in receipt of the information you should review it for factual accuracy and if there are any discrepancies then again write back to resolve these queries.
Claims made where a number of events have been rolled up into one big issue, or ‘global claims’ as they are sometimes referred to, should generally be dismissed. The reason for this is that without establishing the effect of each event on both time and cost, it becomes difficult to establish the true cause and effect and as such it’s easily countered by developers who will point out that such claims do not consider any of the contractor’s own inefficiencies and issues such as resources, quality or general poor management.
Global claims can easily be manipulated to inflate the value of any true entitlement, which is why it is better to stick to the contract and ensure that each event is notified accordingly, even if such a way is more onerous, as it will lead to a more factually based judgement and precise assessment of loss and expense.
Assuming this first checkpoint is passed and you have received a valid notice with all the detailed particulars as to why the claimant believes they have entitlement, then your next move will be to check the contract. You should check the clause relied upon has not been altered, amended or deleted and if it has then look to consider how these changes may affect the claimant. Remember that even if certain clauses are triggered, such as employer risk events for exceptionally adverse weather, under JCT contracts this is an award of time only, without cost, which is why it is always important to check and understand the contractual provisions before acknowledging agreement.
Check the event has been notified within any prescribed timescale as if it has been served too late, they may lose their entitlement. The reason such clauses exist is to compel the parties into dealing with events as they arise as opposed to raising issues at the end of the works and protracting final account negotiations.
Be mindful of any contractually obligated periods for reply whilst you are reviewing the notice. Under some forms of contract (e.g. NEC ECC) the contractor can notify that you have not replied within the contractual timescale, which gives rise to a compensation event, and then notify that in the absence of a response the notified event is accepted in principle.
If you believe there is no entitlement, then a formal response back to each claim separately should be provided, or equally where you have established there is a case the you should write back and confirm this also. Be aware that if a contractor starts work before an agreement has been provided in writing by the client, they will effectively be proceeding at risk i.e. if acceptance of the works is not forthcoming they will lose the right to recover their costs on the basis they proceeded without written confirmation.
Principles in establishing the value
For loss and expense claims you are looking for contractors to establish the value of their claim by way of contemporaneous records. For resources or increases in measured works the records should not be provided on an ad-hoc basis at the point of making the claim; they should be pulled out from those previously supplied to the client e.g. site diaries, reports or interim measures plus labour allocation sheets.
In terms of establishing the value, the provision of invoices and copies of your purchase ledger to substantiate that such costs have indeed been paid will be required to corroborate any claim.
As discussed above, linking these records to cause and effect will help in establishing loss and expense, therefore good presentation is important if you are a contractor looking to convince an Architect/Contract Administrator. If the value cannot be agreed and you end up in formal dispute resolution, then a clearly set out claim will have a better chance of convincing an adjudicator.
For preliminaries costs (i.e. contractors running costs), assessments that apply a percentage should be avoided where possible as this does not reflect how a project is typically delivered because the spike in resource levels typically occurs during the second third of a project. Therefore, to allow for a standard preliminaries percentage taken from a tender analysis and applied to an early stage change event could inflate the value. It is better to review the detailed particulars that are pertinent to each event and establish the true cost impact.
Principles in establishing the time impact
The time to review the principles of how the contractor plans to deliver the works is at the start or before the contract is awarded.
As a developer, what you should be looking for upon receiving an extension of time claim, including prolongation costs, is that they have demonstrated the following:
- A critical delay has occurred versus a non-critical delay
- Evidence of mitigation by the contractor
- Evidence they have considered concurrent delay
A critical delay is one that affects the overall completion date, whereas a non-critical delay may affect activities on the programme but as they are not on the critical path will not affect overall completion. However, there will be tipping point where the sub-critical activities become critical i.e., they come onto the critical path. As a client what you should also be reviewing is whether altering the sequence of the programme could avoid a delay for an extension of time, provided that this does not mean the contractor incurs additional costs. If such resequencing increases the contractor’s costs, it could be taken as an instruction to accelerate.
In terms of mitigation, the contractor has a general obligation to mitigate the effect of client risk events, but the principle here is that such mitigation should not extend to the contractor increasing their resource levels or working outside of its normal and planned working hours. The reason behind this obligation to mitigate is the contractor must not take unreasonable steps to increase its losses and then claim such losses from the client.
Concurrent delay is a situation whereby the critical delay to the programme caused by the variation has run alongside another cause of delay that is solely the contractors risk e.g. an ambiguity was not resolved in time by the client causing a critical delay but the contractor was running late and therefore not ready to start the works in any event. In such a situation, the contractor will be entitled to an extension of time and relief from delay damages, if they are included in the contract, but will not be entitled to be paid their loss and expense associated with any delay.
Many contractors will obviously only model the delaying event into the programme without considering the other points noted above. It’s therefore often left to the client to use the records supplied by the contractor such as site diaries, labour allocations sheets, etc. to review them and establish if there is a case for concurrency. The challenge in terms of allocating fault, including the amount, will often require expert analysis. However, in the same way that contractors are contractually obligated to substantiate their case, as a developer and client, if you believe there is a case for concurrent delay you will also have to provide documentary evidence.
Contractors may also claim for disruption in their prolongation costs. Disruption is generally classified as disturbance or hindrance to the contractors working method of sequence of works which results in lower productivity rates in the execution of the works. In establishing principles here, careful analysis from the client is required to differentiate those costs claimed in prolongation are not also included in any disruption claim. Generally, disruption claims are associated with non-critical delays.
Interesting case law
Under JCT terms, the contractor is obligated to provide records in support of their claims for loss and expense to the Architect/Contract Administrator for verification. Therefore, it is a condition precedent that entitlement is on the basis that the contractor provides certain information within the contractual timescales. The term “provided that” was put to the test in the case of VW Gear Construction v McGee Group Ltd (2010). The argument here was that entitlement to claim for an extension of time and loss and expense hinged on a clause where ‘provided that’ put an express obligation on the claimant to provide information in support of their claim within a certain period.
Subsequently the client time barred the contractor from pursuing their claim for loss and expense further which lead to a dispute. In the TCC it was held that “provided that” was an effective precondition to the recovery of loss and expense as it was clear the parties had intended the clause to operate in this way and therefore the contractors claims for an extension of time and compensation was disallowed.
The point here is that when establishing the initial principle of entitlement, the process of moving to agreement needs to be subject to continual review under the contract. If information is not forthcoming, as is required by the contract, then entitlement to recover loss and expense may be lost.
Whilst delay and disruption issues often become disputes that are subject to resolution through third parties i.e. adjudicators, arbitrators or via alternative dispute resolution, the number of cases could be reduced if the proper principles of laying out a clear case for entitlement at the outset are followed. The flow of communication, including documentary evidence, at the earliest stages is crucial for the success of a claim.
The notification of events, in accordance with the contract provisions, is good contract management and should be enforced from the outset. As a client establishing the principle of entitlement, you should treat this as the most important point, as after this you are taking steps to agree the loss and expense, but before you do so take the time to review and consider all points before reaching a decision. Notwithstanding this, make sure that at each stage leading to final agreement you have received the appropriate level of substantiation to back up any claim.
About Dean Suttling
A member of the Royal Institution of Chartered Surveyors, Dean has twenty years of experience in commercial management and quantity surveying, undertaking roles for contractors, clients, and consultants.
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