Benjamin E. Pollock and Bill Burns | King & Spalding | June 2016
Assume your major construction project has experienced an unexpected event that threatens to cause delays or increase costs. You have made a preliminary investigation and have tried to manage the impact by quickly engaging with your owner or contractor. But the issue could not be quickly resolved. The potential dispute is now turning into a claim, with your contract partner laying the groundwork for possible litigation. What now?
This article discusses recommended practices for owners and contractors alike in conducting a robust evaluation of the issues underlying the growing dispute. This includes the assembly of the proper team and consideration of the many factors that will impact what the claim might be worth, as well as how much it might cost to pursue. Being prepared and creating a thorough, favorable written record is both the best offense and the best defense, whether the goal is to resolve the matter quickly or maneuver into a position of strength. And as the options of whether to settle, negotiate, or fight take shape, a reasoned and balanced evaluation should guide the ultimate business decision of how the dispute can best be resolved.
Assemble the Team and Define Roles
First, make sure all proper persons are involved in the process. Securing the participation of the right personnel and having clearly defined roles will allow your team to be efficient and effective as the dispute takes shape. It is important to make sure that all interests—project, legal, and business unit—are represented, and knowledgeable people are contributing appropriately to all relevant topics. For example, any proper assessment of a potential impact of an unforeseen event on the time needed to complete the project must include the person responsible for oversight on the schedule. Balance the desire to keep the team small and information controlled and confidential, with the need for accurate information and experienced opinions. Additionally, recognize that resources may need to be allocated to address the issue: while managing time and expenses should be a priority, being pro-active in the beginning of a growing dispute is often much more efficient and less expensive than re-constructing your story and proof later on.
As an initial matter, assign someone to manage the claims, both as an internal coordinator and to send and receive external communications. Generally, it is best to designate a claims manager at the beginning of any project, as that person can “run point” on gathering all facts and documents, drafting related correspondence, and maintaining oversight on how various claims affect each other. Such a role is compatible with that of contract administrator, depending upon your personnel and structure. Note that Project Managers often are not the right people to serve this function for the contractor (nor the site representative for the owner), as one of their primary roles is to ensure that all resources and entities are working together to complete the project. While Project Managers (or site representatives) will be an invaluable source of information and should participate in claims evaluation and negotiation, it may not be prudent for them to undertake the potentially divisive role of staking out the company position on contested issues. Instead, allow them to put the project first.
The claims manager should constantly communicate with legal counsel and the project team, including the persons responsible for managing schedule and costs. It is important that the evaluation remain rooted in the contract and its defined rights and obligations, and is based upon accurate and current facts. Being able to clearly identify and explain how the event may impact the critical path and increase necessary costs will be of obvious importance. And the mitigation of such an impact, as well as recognizing the potential for knock-on effects, must also be placed at the forefront. By making sure the right people are consulted and involved, the needs of both the project and the company’s position in the growing dispute are served.
Considering Use of Consulting Experts
Utilizing an expert in a consulting capacity hired by legal counsel on a “consulting only” basis can provide both the benefit of a privileged “cold eyes” third-party review and also illuminate how a dispute is likely to play out. The development of themes and an assessment of witnesses may bring into focus the strengths and weaknesses of your position. Finally, the use of outside counsel or experts can help manage internal expectations and set a realistic framework for the dispute. For example, a respected outsider may temper misguided enthusiasm by asking a site representative to explain how a marginal event impacted the critical path and therefore should result in extended time. Through all of these means, decision-makers may thus be able to evaluate the company’s likelihood of success or determine how aggressive a position to take. The amount in dispute and likelihood of litigation should be considered when deciding whether/when to bring in outside counsel or experts. But for many disputes, and especially in the context of major construction projects, the outside assistance in investigating and analyzing the issues early on will provide great value.
Time Is Money
In evaluating a claim’s worth, it is important to remember the complex interplay between time and money on construction projects. As an initial matter, however, the disagreement in many claims solely will concern extra costs for additional equipment, man-hours, or other resources. In lump sum projects, the dispute may turn on whether costs should be included in the original contract price, or if there has been a demonstrated impact that justifies a change order providing sums for additional work required. Not only must the contractor prove that an event caused the need for additional work, it also must be able to establish the additional costs that were the direct and necessary result. It is never too early to take a hard look at what the contemporaneous evidence will show and consider how an alleged entitlement must be established. In a time-and-materials contract, the dispute may concern the reasonableness of the resulting costs, either through a clash about the rates (if not set by the contract) or the number of resources truly needed to respond to the unforeseen event. Here, the contractor will need to establish a proper rate and explain that resources used were reasonable and necessary. Accordingly, examining how the event impacts the project and the manner in which resulting additional costs can be persuasively and conclusively demonstrated is critical.
When delay or disruption claims are at issue, a comprehensive examination of time and cost impacts should be undertaken. Indeed, the costs associated with delay should be evaluated independently from any extension of time periods or milestones, as an entitlement to time extension is not always the same as that for costs arising from delay. For example, a force majeure event or concurrent delay may trigger an extension of the project schedule, but is unlikely to entitle the contractor to its costs for those same delay days. On the other hand, an owner-caused delay could award both time and costs for the days at issue. Therefore, it is important to remember that the nature of the unforeseen event can make a big difference on entitlement and ultimately the claim. In short, you should examine the impact to time and costs for delays as separate and potentially different entitlements, after which you can then assess the total “cost” of a delay.
An analysis of delay should then examine the financial impact of time via liquidated damages or penalties. The current schedule at the time of the event must be studied, and a determination made as to whether critical path activities will be affected. Keep in mind that on major projects, there may be critical paths to several milestones bearing liquidated damages, including (but not limited to!) the primary path to project completion. Examine the contract for provisions that may shift risk for delays, including “no damages for delay” clauses. And pay particular attention to limitation of liability clauses that may also affect the value of the claim, including caps on liquidated damages or other potential awards.
By multiplying the daily liquidated damages amounts by the number of projected delay days, and then by factoring in any other risk-shifting provisions, one can begin to quantify the potential cost to the contractor arising from a time delay. Then compare the likelihood for liquidated damages against the potential costs that may be required to make up those delays through re-sequencing, additional work, or other recovery measures. Such an examination may impact the action plan and, thus, how an owner or contractor may react. For example, the threat of liquidated damages may be an incentive for the contractor to speed up progress only if it is a more commercially beneficial option. But if the prospective liquidated damages will be less than the cost of recovering the lost time, the contractor may well accept the penalty and decline to accelerate the work. Under these circumstances, the owner may need to consider providing additional measures or find other ways to incentivize the contractor, should an on-time completion be a significant interest. For extreme cases, an evaluation of the termination provisions may be appropriate. In these ways, the evaluation must take a comprehensive look at the potential impact to time and money, including the many ways that time equals money.
Estimating Value and Risk
Not all claims are worth litigating, negotiating, or even substantiating to your contract partner, and the value and risk going forward may impact the fate of many merited claims. Once an estimate is made regarding the maximum value a claim might be worth in time and money, it may be prudent to view that accounting through the prism of likelihood of success. Sometimes an estimated dollar range that covers worst-to-best-case scenarios is appropriate. In other instances, it may be more appropriate to assign a percentage of likely success and multiply that percentage by the amount that might be recovered. In these ways, you can manage internal expectations, especially at a time in which emotional investment may be solidifying.
Another important step is to evaluate how much the claim might cost to pursue or defend. This should include not only projected expenses for outside counsel and experts, but also the resources that will be drawn from the project team and in-house counsel. The likelihood for arbitration or litigation should be considered. Although few claims will proceed to resolution by a third party, the potential cost to resolve the dispute (and the delayed time frame because no decision will be rendered for months or even years) may impact decisions regarding which claims to dispute and the manner and tone with which you proceed. Be clear regarding the contract’s dispute resolution provisions on forum, governing law, and the language of the proceeding (on international contracts). You should also examine whether the “prevailing party” may be entitled to recover its costs of litigation. Finally, evaluate the ancillary “costs” to escalating the dispute, including any negative impact to the corporate relationship with the owner or contractor, your company’s reputation, and even on the project’s ability to progress under changed circumstances. In these ways, you can help balance project goals with business objectives.
With all of these considerations in mind, you can then better evaluate risk tolerance and proceed accordingly. Many claims, if not most, should benefit from submitting letters and undertaking at least a preliminary examination of the project record to determine and support your position. This is true even if the claims ultimately are not worth litigating, or even negotiating, at a later date. This does not mean that non-colorable claims should be pursued; to the contrary, promulgating positions you know have little merit are more likely to cast a shadow upon the credibility of other worthy arguments than to advance your overall position. But if your preliminary assessment has identified a potentially significant entitlement, it is prudent to ensure a robust written record is created that establishes your position and preserves your rights. Being prepared and thus supported will put both owners and contractors in more favorable positions, regardless of whether you later abandon the claim or press forward in negotiations.
Conclusion
Although the devotion of project time, energy, and resources to investigating possible impacts while a project is ongoing may seem unattractive, such an investment is often important and well worth the expense on major construction projects. Evaluating potential impacts in real time as the project progresses is important for owners and contractors alike whether the goal is to mitigate the impact or preserve the record for future litigation. Indeed, one of the best ways to resolve a growing dispute is to establish a contemporaneous record that favors your position. But under any circumstances, a better analysis and a more accurate evaluation will be possible when the project record is analyzed in real time (or near-real time) by the proper personnel. In this way, you can better manage internal expectations and come to well-informed decisions regarding whether and how to progress a claim.