A contractor on a private work of improvement can expect to encounter some type of design flaw, unexpected condition, or other change in the scope of work. Under typical circumstances, these changes usually require an approved change order. So, what happens when the contractor’s change order proposal is denied? The contractor must decide whether it is worth disputing the denied change order. If it is worth disputing, then the contractor must formally make a contract claim in order to preserve its claim rights. Otherwise, the contractor may waive its claim altogether. Construction contracts generally have strict procedures defining how and when a contract claim must be asserted. These procedures vary based upon the type of contract, project, parties involved, and project schedule, among other things. Therefore, it is critical that a contractor read, understand, and follow the claim procedure in their contract exactly as required – this is especially true on public works of improvement (which are not discussed here).
This article will discuss the general contract claim procedures provided for in the AIA A101 – 2017 Standard Form of Agreement Between Owner and Contractor, as well as the claims and disputes section provided in the AIA A201 – 2017 General Conditions of the Contract for Construction, as they relate to a private work of improvement.
What is a Contract Claim?
A contract claim is generally a claim for additional time and/or cost asserted by one party to the contract against the other and made pursuant to the contract’s express terms and applicable statutes, if any. Importantly, a contract claim is distinct from a denied change order proposal. Once a change order proposal is denied, the contractor is additionally required to formally assert its contract claim in order to preserve its rights for additional time and/or cost. If a contractor fails to timely provide a contract claim, it may waive its rights to additional time and/or cost for the extra work it performed.
Why Would a Contractor Assert a Contract Claim?
The need to assert a contract claim generally arises when the contractor’s change order proposal for additional time and/or cost is incorrectly denied. A contractor must then determine whether it will challenge the denial or accept the denial. If the contractor decides to challenge the denial, then the contractor must follow the express terms of the contract’s claim procedure. Many contractors incorrectly assume that because they have a denied change order proposal, they automatically have a claim; not so. The denied change order proposal must be formally asserted exactly as required by the contract’s terms.
How is a Contract Claim Asserted on a Private Work of Improvement?
A contract claim generally may be asserted on a private work of improvement after the initial decision maker (“IDM”) denies the contractor’s change order proposal. A contractor who wants to recover additional costs from a denied change order must utilize the contract claim procedure. Each contract is different, and the contractor must diligently review and comply with the claim procedure. Below is a summary of the contract claims procedure which can be found in the A101-2017 Standard Form of Agreement Between Owner and Contractor and A201-2017 General Conditions of The Contract for Construction.
1. Denied Change Order Proposal
When a change order for additional time and/or cost is denied by the initial decision maker, the contractor has two options: (1) pursue the denied change order using the contract claim procedure; or (2) take a total loss on the extra work performed by choosing to take no action on the denied change order. A contractor who is deciding to pursue the owner for additional cost and/or time should review their contract documents thoroughly to not miss any important deadlines associated with the contract claim procedure.
2. Time Limit to Make a Contract Claim
A claim by either the owner or contractor discovered prior to the expiration of the period for correction of the work (the period of correction is the time during construction and up to one year after completion (Id. at § 12.2.2.2)) shall be initiated by notice to the other party and initial decision maker, with a copy sent to the architect, if the architect is not serving as the initial decision maker, within 21 days after the occurrence of the event or 21 days after the claimant first recognizes the condition, whichever is later. (Id. at § 15.1.3.1.)
3. Claims for Additional Cost
In addition to making a claim within 21 days, the contractor is also required to submit its contract claim before proceeding to execute the portion of work that is the subject of the claim. (Id. at § 15.1.5.) This means that once a change order proposal is denied, the contractor must make its contract claim before it starts the disputed work, even if the disputed work is started before the 21-day deadline expires. Note, prior notice is not required for claims relating to an emergency endangering life or property arising under section 10.4.
4. Claims for Additional Time
If the contractor wants to make a claim for an increase in the contract time, notice pursuant to section 15.1.3 must be given, i.e., within 21 days after the occurrence of the event or 21 days after the claimant first recognizes the condition, whichever is later. (Id. at § 15.1.6.) The notice must include an estimate of cost and of probable effect of delay on progress of the work. In the case of a continuing delay, only one claim is needed. If weather conditions are the basis for a claim for additional time, the claim must be documented by data supporting that the weather conditions were abnormal for the period of time and could not have been reasonably anticipated. (Id. at § 15.1.6.2.)
5. Initial Decision Marker’s (IDM) Response
The IDM will review the contractor’s claim, and, within ten (10) days of the receipt of a claim, will take one or more of the following actions: (1) request additional supporting data from the claimant or a response with supporting data from the other party; (2) reject the claim in whole or in part; (3) approve the claim; (4) suggest a compromise; (5) advise the parties that the IDM is unable to resolve the claim if the IDM lacks sufficient information to evaluate the merits of the claim or if the IDM concludes that it would be inappropriate for the IDM to resolve the claim using their sole discretion. (Id. at § 15.2.2.)
If the IDM requests a party to provide a response to a claim or to furnish additional supporting data, such party must respond within ten (10) days after receipt of the request and must either: (1) provide a response on the requested supporting data; (2) advise the IDM when the response or supporting data will be furnished or; (3) advise the IDM that no supporting data will be furnished.
Upon receipt of the response or supporting data, if any, the IDM will either reject or approve the claim in whole or in part. (Id. at § 15.2.4.) The IDM will render an initial decision either approving or rejecting the claim or indicating that the IDM is unable to resolve the claim. The initial decision will: (1) be in writing; (2) state the reasons therefor; and (3) notify the parties and the architect, if the architect is not the IDM, of any change in the contract sum, contract time, or both. The initial decision will be final and binding on the parties but subject to mediation, and, if the parties fail to resolve their dispute through mediation, to binding dispute resolution. (Id. at § 15.2.5.)
6. Mediation
Claims, disputes, or other matters in controversy arising out of or related to the contract, except those waived as provided for in sections 9.10.4, 9.10.5, and 15.1.7, will be subject to mediation as a condition precedent to binding dispute resolution. (Id. at § 15.3.1) Within thirty (30) days from the date of receipt of an initial decision, either party may demand in writing that the other party files for mediation. If such a demand is made and the party receiving the demand fails to file for mediation within thirty (30) days after receipt, then both parties waive their rights to mediate or pursue binding dispute resolution proceedings with respect to the initial decision. (Id. at § 15.2.6.1.)
7. Arbitration
If the parties have selected arbitration as the method for binding dispute resolution in the agreement, any claim subject to, but not resolved by, mediation will be subject to arbitration, unless the parties mutually agree otherwise. Arbitration will be held in the place where the project is located, unless mutually agreed upon by the parties. A demand for arbitration must be made in writing, delivered to the other party to the contract, and filed with the person or entity administering arbitration.