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Strategy Delivery and Commissioning

79. Claims Management in the Construction Phase

9.1. Importance of Claims Management

A claim in the context of PPP contract management is somewhat of a misnomer. Well-structured PPP contracts allow for specific consequences for specific failures by one party to meet its obligations to the other party. These failures normally give rise to a compensation event or to a breach of the PPP contract, not to a general claim for damages. Therefore, it is possible for a party to implement a form of claim on the grounds that the other party has caused it such harm or loss that it would be impossible to obtain relief without instituting a claim for damages. It is beyond the scope of this PPP Guide to examine the legal merits of such an argument, and this section will focus on how to deal with the various forms of claims that may arise.

The first observation is that the likelihood of some form of claim increases with the degree of involvement of the government in the running and financing of the PPP. Such involvement, be it in the approval of designs, provision of ancillary infrastructure to the private partner, the obtaining of necessary consents (such as environmental approvals), the provision of land, or the provision of capital or operating grants, gives rise to risks of the government not meeting the required standards of compliance.

The role of the contract management team is thus critical in ensuring the compliance of the government and correctly documenting all events in meeting such obligations. If land is being provided, then all land-related documents and agreements must be well recorded. Similarly, obligations related to obtaining approvals must be met and documented.

Even with contract management systems working well, it is possible that some claims or notices of relief or compensation events will be received. The contract management team should have the resources and processes to permit good claims management.

Claims management allows claims and potential claims to be identified and evaluated. By assessing their merit early on, claims or potential claims can be avoided or resolved quickly. Alternatively, the decision can be made to pursue other routes to resolution. Table 7.8 is a non-exhaustive list of claims that may be raised by a private partner. This is not to say that all claims listed are legitimate claims in terms of the PPP contract. Claims that are not legitimate should be rejected by the contract management team.

BOX 7.8: Potential Claims that Might Arise

Upon receipt of any claim or notice of breach, relief, or compensation event, the contract management team should follow the steps set out below in Table 7.9.

 

TABLE 7.9: Process of Evaluating a Claim

Process

Description

Identification

Determine the source of potential claim. For example, design error/omission, scope gap, documentation conflict, hidden/differing site conditions, abnormal weather, and so on.

 

Legal compliance check

Determine whether or not the claim has any basis in the PPP contract or in law. Consult legal resources on the matter.

Evaluate merit

Determine potential success of claims based on established legal precedent and contract documentation.

Evaluate magnitude

Determine worst case and best case magnitude from each party’s perspective.

Strategy development

This may range from a settlement agreement to following the dispute resolution process.

 

In general, government officials are seldom empowered to reach settlement agreements on claims, as these often have significant financial implications. As such, the dispute resolution process (DRP) is the default in all claims. Both parties need to follow the prescribed DRP to ensure that all time lines are met and all procedures complied with. The worst possible outcome is a default judgment under the DRP without the merits of the matter being decided upon.

A common form of claim is that which arises between a private partner and its sub-contractors, or between sub-contractor and supplier or sub-sub-contractor. The reason for this is that these sub-contracts often follow the form of more conventional construction or Engineering, Procurement and Construction (EPC) contracts where claims for specific performance and/or damages are far more common.

In such cases, it is appropriate for the government to refuse to join such claims and disputes. Rather, it will focus on ensuring that the private party continues to deliver according to the conditions of the PPP contract.

 

Prevention of Claims

The private party is best positioned to prevent claims arising by using the form of contract as well as project and quality management tools to identify and mitigate disputes and claims proactively. Table 7.10 sets out some such tools.

 

TABLE 7.10: Types of Claims and Possible Preventative Solutions

Type and Cause of Claim

Key Control

Preventive Solution

General Claims

Missing Scope,

Breach of Contract

Contract

Provide appropriate change order and change directive procedures in a contract, and incorporate flow down of procedures to trade sub-contracts.

Mismanagement

 

Project Governance

Clear. well-defined policies and procedures. Proper compliance with change directive and change order procedures pursuant to contract documents.

Improper Labor Charges,

Improper Material Charges

Procurement

Well defined RFPs.

 

Over Billing

Financial

Transparent financial reporting.

Design Errors or Omissions

Architect/Engineer Error

Quality Control

Proper review and acceptance procedures for design review and work sign off.

Architect/Engineer Omission

 

Project Management

Integrated design management and scope change processes. Proper compliance with change directive and change order procedures pursuant to contract documents.

Improper Specification by Government

Procurement

Well defined RFPs and thorough proposal review/clarification.

Delay Claims

Delay due to Government or Private Partner action or inaction

Scheduling

Thorough and integrated scheduling processes that utilize proper scheduling tools and techniques.

Delay due to Improper Allocation of Resources

Planning

Utilization of resource loading and manpower optimization tools for optimal staffing.

Impact Claim

Disruption of Government Facilities

Risk Assessment

Perform analysis and contingency plans in relation to high-risk scenarios.

 

Interference by Government with Private Party Means and Methods

Risk Assessment

Disruption of Private Party Productivity (Sequencing of work and trades)

 

Develop and maintain an all-inclusive project execution plan for each phase of the project.

Differing Site Conditions

Hidden Conditions

 

Contract Management

Provide proper contract language allocating risk of unforeseen conditions, differing conditions, weather, and schedule delays.

Differing Site Conditions than those shown on Plans and Specifications

 

Planning

During planning, conduct a thorough analysis of site conditions and engage adequate third party verification.

A case study of claims management by a government is set out in appendix A, namely the Southern Cross Station in Melbourne Australia as reported in the Audits of 2 Major Partnerships Victoria Projects by the Victorian Auditor-General in November 2007.

 

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