Peter McCarthy, Principal, McCarthy Dispute Resolution, writes that in an industry where profit margins are small if contractors don’t get paid their entitlements, they will quickly go out of business.
Irish contractors and subcontractors are well regarded around the globe, but I fear the industry does not value itself highly enough at home. When it comes to the subject of claiming entitlements for additional time and money, most contractors are reluctant.
Fears of upsetting the paying party or the fear of not being asked to tender for future work are common reasons for this. However, I feel the Irish construction industry must seek its full entitlements for it to be a viable industry for all.
Many standard employer design contracts expressly ask the contractor not to include the cost of certain events in their contract sum (eg, changes to the employer’s design, delay due to late instructions, late or delayed possession of the site, suspension of the works, errors in tender documents, incorrect descriptions in Bills of Quantities and unforeseen ground conditions, to name just a few). The reason behind this arrangement is that the paying party does not want to pay for these events upfront should they not materialise. The paying party instead promises the contractor that if the above events materialise, they will increase the contract sum and grant the contractor additional time to complete the works.
However, far too often, I have seen when the above events do materialise, the paying party tries to convince the contractor that he should have included the cost of these events in his tender or as an experienced contractor he should have included the cost of these items in his price. This can result in the contractor not getting paid for these events or, in some cases, not seeking payment at all.
In an industry where profit margins are small, if contractors don’t get paid their entitlements, they will quickly go out of business. This article seeks to highlight what a contractor and subcontractor must do when they have an entitlement, and the importance of contemporaneous records to demonstrate cause and effect for a claim to be successful. It also outlines the various options now available to contractors should the paying party refuse to address their claims and the importance of seeking expert advice as early as possible to manage the claims process correctly.
What to do when you have an entitlement
Construction contracts commonly provide that, if a party wishes to bring a claim under the contract, it must follow a prescribed procedure. This often requires the claiming party to give a particular notice, sometimes followed by a further notice and/or more detailed information, to the other party, which may have to be in a particular format and meet specific requirements as to content. Often, these notice provisions also contain what is commonly referred to as a ‘time bar’ provision, meaning that the claiming party must give the notice(s) within a specified period of time.
If the time bar is a condition precedent, then a failure to comply with the provisions of the contract will mean that the claiming party loses its entitlement to bring the claim, no matter how strong its claim would otherwise have been. The use of such time bar clauses has become increasingly common, and they now appear in most standard form contracts.
Cause and effect
A contractor wishing to claim under their contract will need to show cause and effect (ie, establish that a particular event(s) caused delay/ disruption to the works and demonstrate the effects of such event(s) on the progress of the works). If there is one clear cause of delay, this can be straightforward, but often it is more complex. Sometimes, although the cause of delay may be clear, the consequences of the delay can be difficult to map.
Records, records, records
‘Global Construction Disputes Report 2020’ by Arcadis states that the number one cause of construction disputes in 2020 is poorly drafted or incomplete and unsubstantiated claims. ‘Keating on Construction Contracts’ emphasised that when making claims for time and/or money it “should be based so far as possible on contemporaneous evidence of what actually happened on site during the progress of the works”.
It is therefore essential that good, contemporaneous records are kept and programmes updated whenever required throughout a construction project so that if disputes arise, the impact of events alleged to have caused delay or disruption can be adequately analysed. Lessons learnt from a recent Australian case ‘White Construction Pty Ltd v PSB Holding Pty Ltd  NSWSC 1166’ provide a good insight into the importance of contemporaneous records and what they should include. The case established that a claimant should establish and maintain a detailed site diary or records that detailed who was on site, what they are doing and where; what is holding up progress; and what instructions were issued. Diaries need to be backed up with worksheets/timesheets that record progress broken down by workstream.
‘The Society of Construction Law Delay and Disruption Protocol 2nd Edition’ also provides contractors with practical guidance on record keeping and its importance.
What to do when the paying party is not addressing your entitlements
Cash flow is the lifeblood of every industry, but especially in construction. Too frequently, I have seen contractors suffering in silence in situations where their claims are not being addressed and where the paying party is refusing to engage.
Contractors now have a suite of options available to them in the form of Alternative Dispute Resolution (ADR) that will allow them to take control. ADR is generally used to describe forms of dispute resolution other than court (or arbitration) proceedings. Forms of ADR commonly used to resolve construction disputes are:
- Negotiation – Informal negotiations, often between the parties’ senior representatives within a specified timeframe, may be required or encouraged before more formal proceedings are commenced.
- Mediation – A consensual process in which the parties attempt to resolve the dispute between them amicably, with the assistance of a mediator. It is frequently attempted at an early stage of the dispute.
- Early Neutral Evaluation – A neutral third party, often a construction law expert, provides a non-binding opinion on the merits of the case. It can assist parties who wish to settle a matter, but it does not itself result in settlement without further negotiation.
- Adjudication – A dispute resolution procedure prescribed by statute, the Construction Contracts Act 2013 (Act), that is a process which is available regardless of whether it is expressly provided for in the parties’ contract. You cannot contract out of the Act. Adjudication is available ‘at any time’, and a decision will usually be provided within 28 days from the date that the referring party delivers its initial submission, known as the ‘Referral’. Sums awarded in adjudication are payable in accordance with the decision usually within seven days of the decision.
Which route should I choose?
The route you choose depends on the paying party’s response to your claims. For example, where both parties are in agreement that there is an entitlement, but the dispute relates only to the amount to be paid, mediation might be appropriate, particularly if the parties are not too far apart on the figures and if maintaining the commercial relationship is paramount, or where one party is suffering significant cashflow issues with the other party disputing any entitlement to payment at all. For these situations, where obtaining payment quickly is critical and where the dispute is limited to payment issues, adjudication is more appropriate.
Seeking Expert Advice Early Is Crucial
A specialist expert is only as good as the information you provide them. I mentioned earlier about the need to notify your claims strictly in accordance with the procedures outlined in the contract to avoid them being ‘time-barred’ and the need to keep comprehensive records to demonstrate cause and effect. If contractors have not managed these items adequately, then the specialist expert will have an uphill battle. Early, specialist, advice will help you both identify your entitlements and develop the right strategy to maximise your entitlements. It will also help you to identify any weaknesses in your position, which is critical, particularly in the context of knowing what a good ‘deal’ is if you are minded to settle the matter in without prejudice negotiations or refer your entitlements to ADR.
5 Tips for making construction contract claims
- Don’t apologise for making claims; it’s your entitlement.
- When making claims, strictly follow the prescribed procedures outlined in your contract. failure to do so will result in your claims being lost, no matter how strong your claims are.
- You have an obligation to demonstrate cause and effect. to allow you to do so, make sure to keep contemporaneous records to substantiate your claims.
- Be aware of the Alternative Dispute resolution options available to you. Use your rights under the Construction Contracts act 2013 if the paying party refuses to engage satisfactorily.
- Seek expert advice as early as possible so that your claims are correctly managed.
Peter McCarthy holds a Master of Laws Degree in Construction Law and Adjudication and a Bachelor’s of Science Degree in Quantity Surveying. He has extensive first-hand experience of building and civil engineering techniques, design and build projects, programming and measurement, the drafting and interpretation of agreements and the preparation of interim and final accounts. To learn more, email email@example.com or visit www.mcdr.ie