The Magical Triangle of Claims Management

 

2016-03-11. "Magical triangles" are familiar from many subject areas. Project management is no exception. Here, the interactions of the three factors, "time"; "budget”; and quality”, must be harmonised in the project. However, it is less known that this "magical triangle” can be adapted to the matter of claims management as well.

 

Claims Management's Magical Three Corners. What are they and how do they interact?

 

A compensation claim is characterised, among other things, by the fact that it is based on an issue which one contractual party believes entitles him or her to a claim for compensation against the other contractual party due to damages suffered. This issue must be dealt with in a project's claims management system. "Dealt with” here means: "documenting", "communication", and "explaining it descriptively in a verifiable manner".  So corner No. 1 is the "Fact".

 

Another attribute of a claim is the fact that a factual reason for a contractual party's claim for compensation against the other contractual party for damages suffered must be provided for the aforementioned issue. This reason must be identified in the contract's claims management system or in the applicable legal system and appropriately applied to the issue. The factual reason is corner No. 2: the "Basis for the Claim".

 

One more corner is missing to complete the triangle. In addition to purely preparing the claim on paper up to this point, it must be enforced against the other contractual party or rejected by the same. To this end, the claim must be negotiated between the contractual parties and/or suitable means must be used to ultimately settle a litigious claim. Corner No. 3 is therefore "Enforcement/Defense” of the claim.

 

The "Magical Claims Management Triangle” is complete: "Fact", "Basis for the Claim” and "Enforcement/ Defense"

 

What do these three corners mean for a claim's probability of success? The following assumptions are made: The presentation/documentation of the issue, the utilised contractual or legal basis for the claim and the rejection/enforcement of the claim exhibit many different qualities. Claims management is its interactive interplay. 

 

The corners in the "Magical Claims Management Triangle” that are shaped the flimsiest in a claim situation will determine the success of the claim being addressed. One can infer from this matter that the area of the "magical claims management triangle” characterises the expected success or even failure of the claim made.

 

What does this mean for the practice of claims management?

 

The "Fact" corner: The triggering issue for a claim must first be documented in an auditable manner and communicated to the other contractual party in a suitable and prompt manner. One example of documentation is photos of the delay in construction, marked with a non-modifiable time stamp. Additional documentation can be, among other things, a written notice of delay, which also plays a communication role with the other contractual party, among other things (to avoid going beyond the scope of this specialist article, the requirements for the information contract and arrangement of a notice of delay will be addressed in a future specialist article). If the matter concerns hindering issues that cannot be depicted on a photograph, such as delayed design approvals, extraordinary meteorological circumstances at the construction site or transport route, then these must be substantiated with the proper documentation. This documentation belongs in the claim file. When all of this has been done, then the occurrence, development, the effects and the manner in which the impediment was overcome should promptly be written down on a document in clear language and in a verifiable manner, taking into account the persons who were directly involved in overcoming the obstruction. This should also include the efforts that were taken to minimise the damage that has arisen from the impediment. Verifiable, detailed evidence of the consequences of the impediment must be attached to the document. Examples of such are detailed timesheets, a disruption-adjusted construction schedule, and invoices from third parties for additional services rendered for dealing with the impediment. The important thing here is the verifiability of the documents, language that is objective and easy to understand, and avoiding "sugar-coated” and/ or "dramatised" information. A neutral third party should be able to understand the issue with moderate training. 

 

The "basis for claim” corner: Here is already the first interaction with another corner of the "Magical Claims Management Triangle". They must be accompanied by an evaluation of the applicable legal bases for the claim, both when providing a notice of delay and assessing the consequences of the impeded incidents. If they are not provided or provided to an adequate degree, the best documentation and communication of the facts will not contribute to the claim's success. To verify the basis for the claim, all relevant contractual documents in their respective rank within the precedence of contractual documents, as well as the applicable stipulated law, should be factored in.

 

For preventative purposes, and in order to not be burdensome with the depths of contract review for each single disruption that has arisen, it is recommended that a claim handbook be created just in time for the start of a project, which lists the suitable contractual and legal bases for claims for the basic types of disruptions in the respective project. For each role in the project ("The Commissioning Engineer", "the Steel Worker”, "the Design Engineer", "the Construction Site Manager", etc. or even on the client side, e.g. "the Project Manager", "the Scheduling Expert", etc.), the project claim handbook must define what course of action should be taken, how it should be taken and when it should be taken in the event of the respective type of disruption.  In short, the project team must be familiarised with the bases for potential claims in a preventative and easy-to-understand manner.

 

The "Enforcement/ Defense" corner: The aforementioned claim handbook should include a chapter on the strategy of an individual company per contractual interface. Deriving from this strategy, measures on how to deal with inbound and outbound claims must be derived while taking into account the measures in the identified bases for the claim. The time period for dealing with a claim is important; it would be beneficial for both contractual parties to deal with a claim as soon as possible. This applies to both contractual parties because all the participants still remember the disruptive event well and can contribute to the assessment of the ramifications. Dealing with claims in a timely manner also creates transparency concerning the monetary and scheduling situation in the project. No one is caught off-guard by such an immense, large additional claim; rather, the individual claims can be dealt with in a detailed manner and evaluated.

 

Even the "Enforcement/ Defense" corner of the "Magical Claims Management Triangle" has preventative components. This is reflected in the consideration of disputes between the parties within a contract. The contract should provide for suitable mechanisms for low-cost and time-efficient settlement of disputes. It may provide for an adhoc-DAB, specific arbitration or similar instruments. The course of action to be taken when no consensus can be reached during a dispute should also be clear to the parties in the project from the very start. The contents of claim negotiations must also be prepared per claim along with personnel for the negotiation team. Everyone in the negotiation team should be familiar with his role in the negotiation team, the negotiation goals, the negotiation partners of the other contractual party and the negotiation strategy.

 

Summary:

 

When you take into consideration the interactions between the corners of the "Magical Claims Management Triangle” and when you continually develop the form of each corner, little will stand in the way of efficient claims management. An additional advantage is the fact that, thanks to this professionalisation, even partner-like relationships between contractual partners are not disturbed, since this professionalisation goes hand in hand with setting aside the emotional components of a claim conflict up to an actual, fact-based process in overcoming delayed project processes. 

 

The success probability of a claim can be, for example, mathematically quantified as follows:

 

EClaim = A * GCV

Explanation:

EClaim = Probable enforceable claim volumes

A = Area of the "magical claim management triangle". Maximum value is standardised at value 1.

GCV = Handled claim volumes

Important: Always make sure that your own "Magical Claim Management Triangle” consistently interacts with that of your contractual partner as well.