The best way to manage claims is to prevent them, and the second-best way is to manage them quickly.
Easier said than done.
In this blog post I will delve a little into these two aspects i.e. prevention and expediting, of claims management in construction projects.
First let’s take a look at the common causes of claims in construction projects:
- Defects and loopholes in the contract document
- Delay in the release of areas as per the contract
- Difference in site conditions (compared to what is in the contract)
- Owner wants to complete the project faster than planned
- Delay in the supply of power, water, or other materials
- Works put on hold due to delay in release of drawings and other inputs
- Delay in release of payments to the contractor
- Scope changes
- Levy of liquidated damages (LD) on the contractor
- Delay on the part of the contractor
Except for points 1,2 and 3, all the above causes occur during the execution phase of a project. My focus in this blogpost is on how a contractor can establish efficient claims management during the execution phase.
Solution: Right data accessible at the right time to the right people
The correct information made available at the correct time empowers project managers and controllers to:
a) Reduce the number of claims by identifying problematic areas early i.e. areas that might lead to claims and disputes later, communicating / highlighting the potential problems well in advance to the key stakeholders, including the owner, and a combined plan+perform+monitor+control approach to prevent and/or take corrective actions in case one of the above-mentioned causes occurs.
b) manage claims faster with efficient communication and documentation tracking.
Data-driven claims management
1.Plan for data-driven project management
Cluttered, non-retrievable data is of negligible value in claims management; in fact, such data consumes more resources and time, because first the manager has to figure out a way to bring the data into discernible order. Instead, it would be better to do this proactively i.e. think through the three pillars of data-driven project management (people, process, and technology) during the planning stages of the project.
1.1 People – Who will need what information, when and in which format?
The first step is to identify high power, high interest stakeholders in the project. The key here is ‘interest’: which can be both positive interest as well as negative interest. High power, high ‘positive interest’ stakeholders are an ally for project success, whereas high power, ‘high negative’ interest category can become liabilities, and hence deserve more attention up front, as potential troublemakers. The best way to counter this second kind of stakeholder is aggressive and proactive reporting, especially reporting of the causes and effects. The very fact that you are equipped with data-driven project management is in itself effective ‘armor’ to deal with such resources.
1.2 Process – What will be the process followed for communication?
Which report, when, to whom, follow up, archival, retrieval – all these must be thought through in detail, defined, and finally agreed upon without ambiguity in all projects. The importance and complexity of this exercise is directly proportional to the number of key stakeholders and their geographical distribution.
1.3 Technology – What will be the technology used for managing project’s data and communication needs?
Data which is not usable has zero value. But without the right technology to support the project’s communication plan, your communication plan is doomed to fail in today’s project scenario, which is characterized by distributed teams, cultural / time zone / communication barriers, and multiple stand-alone systems. That is why, while choosing a technology solution for a project’s information management needs, one must prioritize Workflow Automation i.e. ‘automatic capture’ of progress information, which eliminates the need for manual data entry and so prevents delays and errors, and the Cost of Ownership. Go for cloud-based systems with a subscription model which will help control the cost of ownership, and if a scheduling feature is also included in the system, you will be able to reduce the licenses-cost of expensive scheduling applications.
2. Perform data-driven project management
A wish remains a wish unless action is taken. So it is with a project’s communication and technology plan.
One must ensure two key factors for the successful roll out of the communication plan – a single data source (data should not be replicated within the system) and a single system (one project should have only one communication system).
Think of situations were multiple versions of the same engineering drawings get used simultaneously in a construction project. To avoid this one must rely on a single document management system across the organization, preferably one with excellent change / version controlling capability.
(Note: If the organization has multiple fragmented systems already in place it can be a challenge for them to make the switch to a single system, requiring a high level of buy-in from senior management who may see such a change as high-risk. However, the reality is that for those who have made the leap, such a change always turns out to be a worthy investment, especially when compared to the eventual cost of non-conformances caused by fragmented systems.)
3. Monitoring and Controlling the potential causes leading to claims
Projects slip one day at a time. An issue prevented at the source can avoid a lot of unnecessary work. Project dashboards can provide vital statistics about the potential causes that can lead to claims and disputes, and so save the project from slippages and cost overruns.
Potential causes leading to claims are essentially risks. Unresolved risks become issues, issues become claims, and claims become disputes. Depending on the state of the ‘cause’, it can be treated as risk, issue, or a claim. Good project dash boards help monitor Risks (risk heat maps), Issues, and Claims separately. Dashboards which can monitor and control risks, issues, claims, and disputes are very useful in helping managers focus their efforts on solving the burning issues rather than on merely identifying problems. Modern day technology allows organizations and teams to customize their dash boards.
Technology which can exploit artificial intelligence can provide the managers with dynamic dashboards which show them only what they need to see at any moment.
I have provided a sample project dashboard below for reference.
4. Corrective and preventive actions
Though eliminating claims altogether is not possible, one will be able to prevent many potential issues by Planning for Data driven project management, performing data driven project management, and Monitoring and controlling the potential causes leading to claims. Managing corrective and preventive action projects as mini projects within the project by following the Plan, Do, Check, Act cycle is very effective.
Continuous monitoring and controlling of the completion and effectiveness of the corrective / preventive actions will ensure that the potential causes are managed successfully before they become claims. But the reality is that even after all this, many issues are bound to remain, and many of them will end up as claims.
FIDIC describes the procedure for additional claims as:
- Notice of claims by the contractor
- Contractor to keep contemporary records to support claims
- Inspection of such contemporary records by engineer
- Substantiation of claims
- Payment of claims
Some guidelines to prepare the claims:
- It is always preferable to link the claim to contractual provisions
- Prepare the bas for its establishment
- Indicate intention and submit it within the time frame provided by the contract
- Submit with all back up documents, calculations etc.
- Be fair in projecting the figures and do not inflate
Timeliness and completeness are key for effective claims processing. If these stages are not performed within the periods mentioned in the contract, processing them becomes difficult. Claim substantiation takes time and effort if done manually without the help of a well implemented project management information system.
In a nutshell, it is better to prevent the causes leading to potential claims. That will help save lot of unnecessary time and effort. To enable this, project teams must:
- Plan for data driven project management
- Perform data driven project management
- Monitor and control the potential causes leading to claims
And when claims do happen, project teams must:
- Process them within the time frames
- Ensure accuracy and completeness
Unless one is supported with an automated project management information system (PMIS), achieving these efficiencies in claim prevention and processing becomes difficult.
While choosing a PMIS, apart from cost of ownership, one must consider ease of implementation and data integrity, as well as the cost of implementing a good PMIS and creating a data driven culture against the cost of non-conformances.
Varghese Daniel is the co-founder and CEO of Wrench Solutions. Abrachan Pudussery is domain expert in Project Management area and a seasoned trainer. He heads the Wrench Academy, and brings in deep domain expertise and a conviction about higher quality in project management training.
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