By Michael Metz-Topodas, Saul Ewing LLP

Few construction projects go as planned because of the many inherent potential problems any project has: defective work, unforeseen site conditions, design errors, and unpaid performance, to name a few. Each such setback has monetary consequences for either the contractor, who ends up doing more work, or the owner, who receives less work, but each for the same price. A construction agreement’s delicate work-price balance faces threats at every turn. All too often, owners or contractors (and more likely their project managers) tend to overlook such minor changes, inconveniences, or contract breaches. Perhaps they hope such mishaps will affect each party equally and cancel each other out. Rarely does a project work out that way, however. Ultimately either the owner incurs costs or the contractor loses profit. To guard against such losses, subcontractors, general contractors, and owners alike should focus on recouping costs from unfortunate project events by adjusting the governing contract through a well-known measure called a claim.

Types of Claims

Claims come in all forms, styles, and sizes, but all share one common trait: they originate in how the contract defines them. In typical construction contracts, a claim refers to a demand or assertion to adjust or interpret the construction contract. Rarely do parties negotiate terms that stray too far from this concept. Claims can proceed “upstream”—from a subcontractor to a general contractor (“GC”) or from a GC to an owner. Or they can move “downstream”—from an owner to a GC or a GC to a subcontractor. Upstream claims include those for delayed or extended performance, uncompensated additions to a scope of work, or a bond or mechanics’ lien claim for unpaid performance. In looking downstream, owners’ or GCs’ claims often arise from delayed completion or defective work. 

Preserving Claims

In knowing the types of claims available, contractors and owners enhance their vigilance for when claims first arise—a critical detail in a claim’s success or failure. Prevailing on a claim depends on giving proper notice of the claim, protecting it from waiver, and keeping effective supporting records. Most contracts require a subcontractor, GC, or owner to notify the other party of a claim within a set number of days of the claimant reasonably knowing about the events or circumstances giving rise to the claim. Failing to provide such notice timely could result in forever waiving the claim. In some jurisdictions, however, failing a notice requirement does not necessarily doom the claim if the non-claiming party had actual or constructive knowledge of the claim or suffered no prejudice from the late notice. Such exceptions apply only in certain situations, however. Experienced counsel can determine the best arguments to salvage claims that miss a contractual notice deadline.

Not only to avoid such waiver problems must a contractor submit its notice timely, but it must also follow the procedures for such notice. Most construction agreements have detailed requirements for who should receive notice of a claim, often the project manager or a designated representative. As well, the contract will direct the exact acceptable methods for delivering notice, usually hand delivery or certified mail, but seldom email. Often construction counsel can help subcontractors, GCs, and owners decipher an agreement’s complicated notice requirements.

Lien Waiver and Release of Claims

Not only can a contractor waive the right to a claim by failing a contractual notice requirement, but it can also do so simply by seeking payment for work performed. For subcontractors and GCs to receive periodic payment for completed work performed, they often must submit to the GC or owner a payment application identifying the exact work performed and the associated amount owed. Typical construction agreements will require a contractor to execute, and submit with the payment application, a lien waiver and release. Project managers often sign these as routine paperwork necessary to the payment process. By signing such a document, however, a contractor waives the right to any and all claims related to work performed, and the related payment received, through the execution date—hardly a routine matter.

So, in executing such lien releases and claim waivers, contractors must ensure the document allows the contractor to write in any pending claims as an exception to those released. The contractor should identify and describe such excepted claims as precisely as possible and expressly exclude them from the claims released. Experienced counsel can assist with making sure the exception language properly preserves any pending claims in light of jurisdictional requirements and contractual language.

Preparing and Presenting Claims

A claim properly noticed and preserved from waiver still can fail for lack of support. Any claim for additional compensation or other contractual adjustment requires effective back-up documentation—contemporaneous, detailed, verifiable, and calculable records. For example, a claim for the costs of extra materials should have supporting invoices or job cost reports. Extra man hours costs require back up from time sheets, certified payroll forms, or other labor records. Claims that include general conditions costs should have trailer, phone, utility, and other associated costs documented. The claimant should also check the contract to ensure it does not require a claim to have certain specific documents or information, such as an explanation of the claim’s basis. Some contractors turn to a claims consultant to collect, review, and assemble the materials needed for a claim. Then, they will have counsel review the submission to ensure it meets all contractual requirements.

Conclusion – Putting It All Together

Successful claims depend on preservation, preparation, and presentation. A contractor must preserve claims from multiple waiver traps, keep proper records and gather supporting documents to prepare the claim, and submit claims as the contract requires them presented. With the help of counsel and possibly a claims consultant, contractors and owners can ensure inevitable mishaps do not undermine a project’s overall profitability and success.
Michael Metz-Topodas is a partner in the Construction Group at Saul Ewing, LLP. His practice includes construction litigation, day-to-day project and claims counseling, contract review, drafting and negotiations, bid preparation and bid protests, and OSHA compliance and enforcement defense. Mr. Metz-Topodas represents general contractors, subcontractors, owners, designers, and suppliers on private, public, and federal projects. He counsels clients and handles construction disputes involving delay and inefficiency claims, design and construction defects, unforeseen site conditions, project scope disputes, bid protests, and payment claims, including mechanics liens, bond claims, and Miller Act claims. He can be reached at michael.metz-topodas@saul.com