The first claim is the most important.
It’s never the right time, or is it?
2017-07-19. The management of projects in special-purpose mechanical engineering always comes with substantial risks for the contractor. He will need to be circumspect in how to approach the project, as the machinery commissioned by the client tends to be highly innovative, not to mention the tight project schedule and fairly parsimonious budget. So to avoid slipping into the red, contractors must include the methods of structured contract & claims management as integral parts of the project as early as the quotation phase. The following article investigates the aspects that the contractor should certainly address.
The right time for a claim.
The issue of the right time for the contractor to send the client his first claim is a hot potato in industrial projects. Contractors typically respond: “We only got going three months ago. Wouldn’t it annoy our customer if we sent a claim already?” or “We’ll deal with that when we negotiate the final invoice with our customer.” Both of these statements indicate that submitting a claim to a customer is considered “not the done thing”. This may be informed by the determination to avoid endangering the amicable partnership between the client and the contractor. Not only is this attitude commendable, it is essential to maintaining productive harmony in the project. But it is perfectly reasonable to respond with the question of exactly how much “amicable partnership” will remain in the project if it takes until the final stages of completion for the client to find out that the contractor is demanding a significant amount of additional money than was originally calculated during contracting. The client will obviously be annoyed. His expected answer to the contractor will be: “You should have told me earlier. And our budget is used up anyway.”
Don’t get left holding the baby.
What clients and contractors frequently forget is that most project contracts – the professionally structured ones at least – contain clauses that describe the procedure to report disruptions, deviations and changes and that specify the implications for the contractual parties in regard to commercial terms and the project schedule. These clauses also itemise reporting periods and formal requirements. Contractors may invalidate their claims by failing to observe these reporting periods and formal requirements, notwithstanding their actual entitlement to additional remuneration or an extension in construction time.
The first claim lasts.
To avoid falling into the trap of missed notification deadlines, it is necessary first of all to be familiar with the deadlines and formal requirements that apply to the reporting of additional claims. Second, these deadlines must also be applied as defined in the contract. Proceeding in this way is beneficial to both contractual partners, the contractor and the client. It’s good for the contractor because it substantiates and documents claims, and good for the client because he will know early on which additional costs he must add to the calculation of his project. Experienced clients and contractors are familiar with the hurly-burly of typical industrial projects. Both sides need to address the fluctuations this entails by applying structured methods of project and claim management. So why is the first claim the most important one? Quite simply because it sets the tone of the collaboration between the contractual parties over the course of the project. Assuming that an amicable and productive relationship between the client and the contractor is a significant asset in project fulfilment, it is easy to recognise that the first claim – like all other claims over the course of the project – will best uphold this maxim of fair cooperation between the project parties if it is built on an auditable and reasoned explanation. Keeping the cards close to your chest is not the way forward; instead it is imperative for the contractual parties to focus on transparent procedures. Do remember: you have every right to be remunerated for justified, additional claims that are substantiated in line with the terms of the contract.
In a nutshell.
Project contracts can only be conducive to peace and harmony between the parties if they unequivocally define the mutual performance obligations laid down therein. Moreover, these contracts will include suitable provisions with reasonable periods for the management of disruptions, deviations, changes and consequences for the parties to the project. It is fair to ask what a reasonable period might be. If “reasonable” means until acceptance of the special-purpose machinery by the client, would it not then imply that the contractor keeps all his options open to demand additional remuneration? That’s true. It also means stripping the client of all mechanisms for the timely and cost-efficient rectification of problematic issues arising in his sphere of responsibility over the course of the project, e.g. frequently delayed design approvals, diverse change requests to the contractor and suchlike. The opposite method would be imposing extremely short periods for the contractor to report – i.e. substantiate – disruptions, deviations and their consequences to the client. This would also put the cat among the pigeons of amicable relationships, as it would be virtually impossible for the contractor to present compensation claims to the client in an auditable form that protects the claim itself.
There’s a lot to be said for the truism that “contracts are good if they benefit both parties”. But they can only be good if the parties are experienced in commercial agreements (and have the discipline to apply them) and their structure is pre-emptive. This must include the technical disciplines in the project and the simple fact that the employees working in these areas must on all accounts be familiar with the periods and formal requirements to report, document and handle disruption over the course of the project.
(This briefing has been published in German magazine "MM Maschinenmarkt" on 2017-07-07, Author: Juergen Hahn)