Substantiating a Claim

What is a Claim?

The word ‘claim’ is often used to describe a party’s potential entitlement to additional costs or time but for which there is no express instruction or variation under the contract.  The term is also commonly used to address the potential reclaiming of lost time or costs for events which were contemplated by the parties to the Contract but which were either unknown or unplanned when the Contract was signed. Thus entitlement may arise under contract, or common law from a breach of contract.  A claim is not restricted to a contractor claiming from an employer, the opposite is also possible.

A claim can occur through no fault of either party, such as a weather event damaging the works, unexpected ground conditions, a third-party disrupting access to the works, restrictions encountered which require the works to be constructed in a different manner or sequence, the occurrence of a pandemic incapacitating the work force or governmental bodies restricting movement of people.

In these circumstances it can become difficult for the parties to agree an appropriate entitlement to additional time or money, as neither party feels they are responsible for the event.  It is then a question of risk allocation under the contract, which party has assumed – or has been allocated – that risk.  Agreement as to entitlement is further complicated when a contract does not state who owns a specific risk, the terms are ambiguous, or there are competing causes for the time and cost increase.  The claimant may need to demonstrate its right to claim before embarking on the valuation of it.

There is often discord when the party responsible for the risk and the party who is best placed to deal with that risk, differ. This often begs the question ‘was the risk allocation properly balanced’.  Standard forms of contract such as NEC, JCT and FIDIC, include sensible provisions for allocating that risk which are well known to contractors and employers, however they are almost always amended and therefore failure to carefully read a contract may unsettle the usual balance of risk.

A claim is distinct from a bona-fide change under the contract, for which there is generally a mechanism for the Client to implement that change along with a prescribed method for reimbursing the Contractor.  There are often differing valuation rules or provisions for evaluating the cost of instructed change as oppose to a claim.

Basis of a successful claim

For a claim to success with the least resistance, the following should be identified and clearly presented.

  • Occurrence of an event impacting the works
  • A corresponding increase in cost and/or time
  • A cause of action under contract or law to claim for that cost
  • Timely notification of the claim within the periods specified in contract or statute of limitation [1]
  • A demonstrable link between the cause of the event and its effect upon the works (cause and effect)
  • Sufficient substantiation to support the cost claimed

In this article I will concentrate on the issue of substantiating a claim, the failure of which is a common catalyst for dispute.  Compliance with the contract when substantiating entitlement is essential, sometimes this will constitute a ‘condition precedent’, barring entitlement to recompense unless strictly complied with.  Common obstacles to entitlement are:

  • Untimely notification of an event
  • Failure to implement mitigation measures to reduce any impact
  • An ill-defined risk allocation within the Contract
  • Lack of clarity and records for how the risk event or breach transpired
  • Failure to adequately determine the actual impact of a risk event or breach
  • Flawed methodology for evaluating the loss suffered
  • Lack of substantiation for the loss suffered

The Burden of Proof

The claimant must meet a minimum burden of proof when substantiating its claim, this is either determined by the contract[2] or by default, ‘on the balance of probabilities’[3].  The sufficiency of proof is decided by the tribunal considering the claim in a binary sense, that is the party advancing the claim must meet the threshold, if it does not then the claim may fail.  One may expect the difficulty of proving a claim to increase the further it escalates through various tribunals; this is not necessarily the case.  It is often more difficult to prove a claim to the immediate recipient, than an independent tribunal.  This is because the recipient often has a vested personal or business interest in rebutting the claim whether unconsciously or not, and may be unduly dismissive of any entitlement.  In contrast the courts or an instructed expert must apply the test of reasonableness impartially.

Entitlement to a claim is not always apparent at the time it occurs; a belated realisation may leave the claimant with limited time to determine its entitlement or to sufficiently prepare a claim, which leaves it at a disadvantage.  A claimant may therefore look to initially include all its perceived entitlements, thus lacking clarity, causal link and substantiation, for fear of undervaluing its entitlement.  The basis of calculation may be theoretical, ignoring the principle that entitlement is no greater than its actual loss which must be proved[4].   This can prompt requests for further substantiating information prolonging the claim from becoming a crystallised dispute[5].  The issue of sufficient substantiation may well become the dispute itself, particularly where the parties are not aligned on whether their obligations have been discharged.

 

Prospective vs Retrospective

Where the claim is assessed prospectively[6] there will be no record of costs incurred, only a valuation or assessment of future cost.  Whilst some standard forms of contract encourage and event require this, the acceptance process can become protracted resulting in the works overtaking the process of acceptance, particularly if the administrator are not familiar with this method.  This can result in the assessment reverting to a retrospective[7], or actual cost assessment after the event.  Whilst this should not necessarily be contentious[8], one or both of the parties may object.

If the actual costs are found to exceed the prospective claim amount, the defendant may then be willing to accept the prospective amount, however the claimant will not.  The claimant has suffered cash flow issues in the interim, incurred additional cost collating a prospective and then a retrospective claim assessment, and incurred additional costs exceeding the amount originally forecasted.  Those positions reverse where the prospective assessment exceeds the actual costs.

Whilst the contract provisions may dictate a certain method of analysis, the courts will consider all the circumstances.  For instance, where the contract requires a prospective assessment, but neither party has complied with their contractual provisions for valuing it, the best evidence available should be used to calculate the compensation due[9].

Quantum Methodology

Using an acceptable method of substantiation when assessing delay and cost is critical to the claim, the significance of this is often overlooked.  There is no single defined or universally accepted method for substantiating a claim, however it will be more persuasive if based upon contemporaneous primary evidence closely linked to the events.  This means factual information collated at the time of the event and preferably shared between the parties at that time.

The starting point should be the contract, where the payment provisions may establish what constitutes a reasonable valuation of the claim, for instance a bill of quantities or schedule of rates, considering the parties have already agreed those amounts in awarding the contract.    In the absence of any contractual provisions, either a reasonable market rate, referenced indices or substantiation of actual costs incurred may be applicable.  The courts have generally preferred the substantiation of actual costs[10], this aligns with the principle of compensating the wronged party for its actual loss.

The factual evidence can be time or cost related, for example the period in which the claim occurred may be identifiable from a programme, the impact on other works or the prolongation of a set task.  Alternatively, the time impact could be unknown but the cost of completing the task may have increased.  Where both the time and cost records align, this indicates a solid means of measuring the impact of the claim.  For example a linear task of building a wall with an increased area of 10% may reasonably increase in cost and duration by 10%, all other things being equal.  Any major deviation from those norms may need to be investigated further.

Where the claim includes cost incurred undertaking a specific task, then records may be easier to find and collate.  Whether direct labour or subcontract, there may be a record of what labour was present and which tasks they were performing.

Detailed labour records are often missing or non-descriptive, therefore other information will need to be sourced.  If there is no contention that a task was completed but the resources used are not sufficiently recorded in labour and plant returns, then other information should be sought to determine the actual or likely resources expended.  A project programme may include activities which are dependent on the claimed task, therefore finding the predecessor and successor activities, along with any delay between the two may be informative, it would certainly determine that the task took no longer than the delay between those activities and is a useful guide for targeting a search for other contemporaneous records.  Alternatively, the prolongation of a task in the programme will indicate that something did not progress as planned.  It may be that the plan was deficient, however it does provide a starting point to search for potential issues.  Whilst these high level searches may not be sufficient to substantiate the claim, they do provide a good starting point, without them the task can appear daunting without any indication of where to start.

Materials will be evidenced from delivery notes or invoices form the supplier, alternatively if they are above ground and visible, they can be measured at any time, although the unit cost of those materials will still need to be valued.  If the materials are covered, then contract drawings can be measured on the assumption the works have been constructed correctly.  There is always the option to uncover work as proof of this, but an invasive investigation is a last resort and sometimes unfeasible.

Subcontractors records are important, considering they can form a significant part of the claimed cost, although the inclusion of sums claimed by a subcontractor is not definitive in isolation.  The sums must be due to the subcontractor in order to be compensable, that is the work must have been completed and confirmed that they correctly form part of the claim.  Considering the contract and subcontractor are effectively spending the defendants money, they must demonstrate the cost incurred is reasonable.  There may be contractual obligations to use endeavours of some sort to prevent or mitigate cost and time.  Whilst the burden of proving a lack of endeavours may sit somewhere between the parties, the claimant should be prepared to explain and demonstrate what was actively done to prevent or mitigate its cost. Likewise if an employer is looking to recover costs from a contractor it must prove it has attempted to mitigate any impact or damage.

The claimant should use whatever information is available to meet the burden of proof[11].  Rarely does a definitive account of actual progress for a project or task exist from beginning to end.  Instead substantiating a claim often starts with a verbal explanation of what was perceived to have occurred, followed by the collation of various mediums of information which can be used to support or rebut that perception.  The information can take any form as long as it is factual, aside from the obvious records, such as daily labour and plant returns, diaries and direct correspondence, some other examples are;

Unseen Correspondence

Correspondence between the claimant and its supply chain or internal communications are valuable if contemporaneous and include facts or evidence.  The daily chatter of email may also assist in finding other information and often include attachments containing primary evidence.  This is time consuming so targeted searches will assist.

Progress Photographs

These provide excellent primary evidence and are most useful when a consistent approach is taken on location, frequency, with accurate labelling and filing.  The use of modern mobile phones and applications allow a photograph to be taken and uploaded to a server, tracking the location, date and time automatically.  The workforce is commonly equipped with a powerful contemporaneous and pictorial means of recording progress, this should be encouraged.

Certified Payments

The employers representative or quantity surveyor will be tasked with assessing any payment due to the contractor, that process often involves the provision of evidence and a periodic site visit.  The representatives role should be impartial and follow the valuation rules of only certifying what is due.  If the flow of certified payment supports the claimants case, it can be difficult for an employer or its representative to argue that its assessment of the amount due was incorrect, without admitting its duty in certifying payment was also incorrect.  Activity schedule type payments mechanisms sometimes permit a percentage completed valuation.

Design Drawings and Schedules

A drawing will usually contain a revision history briefly describing the changes made and on what dates they were made.  This can assist tracking progress against the design, where changes are made after or close to the date of constructing that design this indicates increased cost and delays are likely.  If demonstrating entitlement to additional design cost, the same revision history can be tracked to show time spend between revisions.  Modern modelling software can provide finger print records of when designs were accessed and amended.

Test Certificates

Independent tests for ground bearing strength, concrete cubes, drain pressure, building air tightness,  electrical, factory and site acceptance.  This evidence is particularly useful to both parties, considering a claimant will rarely delay a critical test, and the independence of such tests will determine if the relevant works are complete at the time of testing.

Finding the start and end of an event is the primary aim, this will then allow the claimant to narrow the search for documents within that period.  This may still represent a significant period, for instance if a task is late starting then the period may extend from that date to the beginning of the project.  A search may be against the contract award date, delayed access to the works, failure to procure a consultant or subcontractor, late design, a delay in approving that design, weather events, or indeed a combination of all those factors.  Where a claimant has been culpable for some of the delay or increased cost this will not exclude it from claiming for other events for which they were not culpable, although it is necessary to disentangle the various effects[12].  This must be done systematically by demonstrating the impact of each event and acknowledging which are culpable.

Often a claimant will use only the information which supports that its perception of events, whilst dismissing any which may be unsupportive.  This could prove successful should the recipient fail to challenge the claim or undertake its own analysis of the facts, but in reality, the recipient is likely to challenge those facts with its own findings and thus undermine the claimants case.  The claimant is therefore back where they started, but with a deterioration in trust between the parties, with any further submission likely subject to a greater level of scrutiny.

 

Disruption and Prolongation

Where disruption or prolongation costs form part of a claim, the Contractor must attempt to provide a causal link between the event complained of and the damages suffered, the link must not be too remote[13].  Although this can sometimes be a difficult task, without such attempts the burden of proof may not have been satisfied by the Claimant

The submission of Global[14] claims is still a relatively common practice, and generally occurs where a claimant has been unable to collate sufficient records or evidence to demonstrate a causal link between each event and its specific damage.  This often occurs where there is a significant volume of change on a project, with no single change attributable to the disruption or prolongation incurred, it is often referred to as cumulative disruption.

It may be possible to display all those events in a programme format and thus its likely impact on timing and sequence of works, it can be difficult to then allocate the resulting damage or costs incurred against those programme events, particularly if there are unaffected contract works taking place at the same time.  Although the global claim approach is not preferred, it may still succeed if it can be proven that events occurred which caused the claimant to incur costs and that those events are compensable under the contract or at law.

One recognised method of demonstrating disruption is the ‘measured mile’ approach[15].  This seeks to identify a period of non-impacted work to act as a benchmark for measuring what productivity could be achieved.  This should be compared to the period of the claim where productivity suffered, to determine any loss of productivity, or disruption.  This method has a number of limitations; there must be a sufficient benchmark period to monitor; the task must be comparable to that disrupted; consideration of other culpable factors are required such as labour shortages or weather effects which do not form part of the claim; sufficient records must be kept.  Whilst the assessment itself is reasonably simple, the limitations noted can undermine the credibility of the assessment.

The measured mile approach will provide a ratio of disruption which still needs to be converted into cost.  The next step is to assess and dissect the costs incurred during that period of assessment to determine what is compensable.  There will be certain fixed costs for mobilising and demobilising a task which are not affected by the disrupting event in between, these are generally not compensable.  Then there are time related costs, some of which may not be impacted by the disrupting event, for example certain resources may have been required for unrelated tasks which continue during and after the disruptive event.  Those costs may always have been incurred in any event; this is referred to as the but for test.

The costs that remain after removing fixed and but for costs, should then be reviewed objectively against the claimants entitlement.  Where risk events occur, which the claimant has assumed under the contract, these should be excluded from the claim.  These could include isolated weather events, breakdown of plant and equipment, shortage of labour, ground conditions or simply an underestimation of the complexity of the work.

The risks assumed by the claimant may not be absolute though, for instance if the basis of the claim has shifted a task from summer into winter and that task is particularly weather susceptible, the shift in timing may form part of the claim where the claimant planned to complete that work in the summer.  Had the claimant known the work was to take place in the winter, it had the opportunity to include additional costs or risk to cover that at tender stage, but that was not planned.  The assessment would consider the difference of completing that task in winter rather than summer, and not all the weather risk which occurred.

Comparably if ground or physical conditions are a claimants risk under the contract, but the location of the work has changed resulting in substantially different conditions to those known, the difference in conditions may form part of the claim.

Disruption of a task may prolong completion of the works.  The costs associated with a prolonged site presence can be significant and disruptive to the claimants wider business.  The simplest method of demonstrating critical delay is through a delay analysis, if done correctly this will identify the period in which the critical delay occurred and separately its impact on the completion date.  Differentiating between the two is important, as the costs associated with both periods can vary significantly.  The cost attributable to a period of delay identified in the middle of a project is likely to be significant considering the project may be in peak productivity.  The effect of that delay on the completion date is important for identifying any change to the completion date and associated relief from delay damages, but that is not when the cost of delay was incurred.  A project cost naturally decreases as the completion date approaches, due to a reduction in resources, trades on site and associated preliminary costs, therefore that cost reduction was always planned albeit due to a delay event it occurs later.

 

Other Heads of Claim

There are other heads of claim such as site overheads or preliminaries, general overheads and head office costs, profit, interest and finance charges, inflation, claim preparation costs and liquidated damages, amongst others.   These heads warrant further detailed analysis and are not tackled in this article, I shall provide guidane on those heads within a future article.

 

Close

I appreciate that in any general article I will not cover every circumstance that you may encounter, but please free to call me, or any of the CCi Expert team with any question – knowing that it does not cost anything to make an enquiry.

[1] Commercial disputes in the UK have a limitation period of 6 years from the occurrence of the event

[2] Standard form contracts refer to reasonable, fair and likely costs incurred or yet to be incurred

[3] Lord Denning described the civil standard of proof as ‘we think it more probable than not’, in Miler v Ministry of Pensions [1947] 2 All ER 372.

[4] Keating, note 1, para 8-049, in reference to delay and disruption claims

[5] The test for a crystallised dispute is set out in AMEC Civil Engineering Limited v Secretary of State for Transport [2005]

[6] Prospective: this term describes the future impact of an event.  For instance, a delay or change in the design is likely to impact the construction of that design in the future, although its impact may be forecasted presently.

[7] Retrospective:  this term describes an event where the impact has already occurred.  For instance, a task took longer to complete incurring additional labour and plant cost. Records will prove the actual impact.

[8] The claim is intended to place the claimant back in the position they would have been financially, had the events giving rise to the claim not occurred

[9] Northern Ireland Housing Executive v Healthy Buildings (Ireland) Limited [2017] NIQB 43.

[10] SCL Delay and Disruption Protocol – Section 21 states that tender prices have limited relevance to the evaluation of the cost of prolongation and disruption caused by breach of contract.

[11] Within the limits of the law!

[12] Where a culpable and excusable event occur or are deemed to have impacted at the same time, this is referred to as concurrency.  The law continues to develop in this area.  Standard form contracts and amendments may determine the treatment of concurrency.

[13] Hadley v Baxendale (1854) 9 Exch 341, is the established test for remoteness.  The damage or cost sought must arise naturally from the breach claimed and those damages must have been in reasonable contemplation of the parties at the time of entering into contract.  A recent case summed up the previous 150 years of case law on this subject; Attorney General of the Virgin Islands v Global Water Associates Ltd [2020] UKPC 18.

[14] Also referred to as; Composite, Total Cost, Rolled Up Claims

[15] See 18.16 of the SCL Delay and Disruption Protocol

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