Claims management, sales and other imponderabilities.

“We’d like to embed claims management as a way of securing commercial project results in our company,” or words to that effect are what the managers of a plant manufacturing company say when once again customer projects have only achieved breakeven by the “skin of their teeth”.

“Yes, but we have to make sure that we don’t annoy our customers with claims,” says the company's sales manager. “Because they’ll never buy from us again!” This statement reflects the view that “claims” are apparently unfair. 

The project client, from whom the contractor would like to receive greater compensation during the course of the project than was contractually agreed, is surprised by this claim, to put it mildly. It is never pleasant to discover that a purchase will be more expensive than originally planned after signing the sales agreement. The client quickly - and unconsciously - makes a comparison with similar situations in their private life. “If I buy a fridge, it costs exactly the amount specified in the sales agreement, regardless of whether the retailer has incurred additional delivery costs as a result of being stuck in a traffic jam,” would be a typical comparison that might be considered to be a naive assessment of the situation.

The fact that the claiming contractor simply wants to improve their margin as a result of their additional claim against the client is merely an assumption. This may well be the case, but is not necessarily so. Therefore, it is worth taking a closer look at the contractor’s demand for additional claims. The first question is: why is the contractor asking for more money? The project agreement or underlying legal system must form the basis for any claim against a contractual partner, in order for it to be plausible. It is therefore necessary to check which legislation (contractual clause or statutory provision) the claiming contractual partner is using as the basis for their claim for compensation for additional expenses in the project. Along with which circumstances during the course of the project they are citing and presenting as the reason for their claim. Asking “why” also means explaining “why is the other contractual partner responsible for the additional expenses?”

If the claiming contractual party has both described and documented the circumstances responsible for their additional claim in a verifiable and transparent manner, then the recipient of the claim cannot fail to acknowledge, at least in private, that the “claim is legitimate”. But only a clear basis upon which the claim is founded will turn the annoyance with the claim into a value-neutral event that should be handled in partnership. If the circumstances responsible for the claim and the basis upon which it is founded have been presented to the contractual partner in a transparent manner, it is necessary to check the extent of the compensation claims for involuntary complications suffered during the project. To enable the claim recipient to do this, the party submitting the claim is obliged to provide appropriate evidence of the extent of their additional claim. In this instance, “appropriate” means: “can be verified in detail”  (please refer to: "The Magic Triangle of Claims Management")

If a contractual party in the project submits a claim against the other contractual party without any basis for this claim, if the description of the circumstances responsible for this claim is still vague and if only estimates of the additional expenses incurred during the project are provided, their claim is highly likely to be simply an expression of greed. Nobody likes greedy partners. Dealing with greedy partners is something to be avoided. But if the claiming partner presents good arguments for their additional demand, which fit the cited contractual basis, this creates trust. If this is accompanied by watertight claim documentation, the allegation of greed is rapidly dismissed. A contractor who is not greedy and submits justified, verifiable claims to the client has nothing to fear in terms of their sales success. 

If a contractual party in the project submits a claim against the other contractual party without any basis for this claim, if the description of the circumstances responsible for this claim is still vague and if only estimates of the additional expenses incurred during the project are provided, their claim is highly likely to be simply an expression of greed. Nobody likes greedy partners. Dealing with greedy partners is something to be avoided. But if the claiming partner presents good arguments for their additional demand, which fit the cited contractual basis, this creates trust. If this is accompanied by watertight claim documentation, the allegation of greed is rapidly dismissed. A contractor who is not greedy and submits justified, verifiable claims to the client has nothing to fear in terms of their sales success. 

When clients and contractors negotiate a project agreement, they discuss their mutual expectations with each other. Clauses such as “We expect you to construct a plant for us within 30 months that will manufacture 2,500 tons of product per day in the following quality” and “Our expectation is that we will receive EUR 187 million payment for such a plant from you in return and that you as the client will have built the access roads to the construction site within 12 months of the project agreement coming into effect” are shared between the future contractual parties. During the negotiation process, these mutually drafted expectations are finalised and agreed. Once consensus has been reached, the project agreement is signed. The contractual parties are now aware of their mutual expectations. Or at least they think they are.

But in reality, the parties are only aware of the expectations discussed during the negotiations and documented in the project agreement. However, the project agreement does not include any unspoken expectations. Perhaps the parties are unaware of these? Disappointments are therefore inevitable. It is impossible to bring court proceedings. All that remains is annoyance and as a result a tarnished partnership with an accompanying loss of trust on both sides.

Claim management that will not tarnish partnerships is based on transparency and sincerity during the project’s sales phase. If the client and contractor have honestly shared their mutual expectations of the joint project, found a common denominator and documented this in the project agreement, then claim management becomes less intimidating. Long-term relationships require both parties to get to know one other and mutually agree what they can expect from each other if something goes wrong in the project. “Then we’ll never win the contract,” says the sales department. We say, give it a go.