CLAIMS, COMPENSATION AND DISPUTES
Claims arise when the Contractor believes they have been impeded in some way from executing the work according to the contract. Sequences of claims, compensation and disputes are given below:
11.7 Dispute Resolution Procedures
11.7.1 Claim Procedures
Claims arise when the Contractor believes he has been impeded in some way from executing
the works according to the contract. Common causes of claims, whether justified or not, are
listed in Table 11.2.
Table 11.2 Common Causes for Claims
Cause |
Potential Responsibility |
Delay in obtaining possession and access to the site |
Employer |
Delay in obtaining work permits, customs clearance |
Employer |
Delay in obtaining drawings and instructions |
Consultant |
Delay of commencement or completion of works by others |
Employer |
Delay in payment |
Employer |
Disputes over quantities |
Consultant |
Errors in setting out with data provided by the Consultant |
Consultant |
Interpretation of specifications |
Consultant |
Unusual weather conditions |
None |
Strikes and civil disturbances |
None |
It is essential that the Employer and the Consultant do not provide the Contractor with any reason for a claim through lateness or negligence in carrying out their responsibilities under the contact.
The claims procedure is illustrated in Figure 11.4. Basic actions which should be followed by the Contractor are:
- Start keeping a detailed record simultaneously with occurrence of an “event” which gives rise to a claim.
- Give notice of intention to claim within specified time limit, usually 28 days of the event.
- Act on the Consultant’s instructions regarding additional records needed to substantiate the claim.
- Submit a claim with supporting information within specified time limit, usually 28 days of notice of intention.
- For an event with continuing effect, submit an interim account of claim on a regular basis.
- Include an application for payment in addition to actions
- Follow of pertinent clauses, which limit the time for claims.
Figure 11.4 Procedure for Settlement of Claims
Contents of Contractor’s Claim
The Contractor’s claim document shall be required to contain the following information:
1. Background
- Provide historical data affecting the subject matter of the claim.
- Make all necessary references to other documents for appreciation of the background
2. Contractual Argument
- State the particular clause or clauses on which the claim is founded.
- Set out a logical argument in detail so that the Consultant and Employer may understand the claim.
- Refer to similar known settled claims in the country under similar contracts.
The following general information is important in the claims:
- Ensure that the actual cost incurred by the Contractor in carrying out the work is recorded to permit separate technical and administrative operations.
- Ensure that a site diary is kept on a regular basis and that proper labour and plant records are maintained.
- The assessment of claims is made from contemporary records and not necessarily from existing rates.
3. Supporting Data
For the substantiation of the claims the following information should be included among other pertinent matters. (The subject headings in the claim is situation specific and appendices may be attached where required):
- Site records
- Photographs
- Site diaries
- Daily weather reports
- Charts and maps
- Consultant’s site instructions
- Working drawings
- Minutes of meetings
- Visitors
- Quality control documents
- Work programme
- Contract drawings
- Correspondence
- Tender analysis of unit rates
- Invoices
- Wage sheets
- Plants
- Fuel and labour records etc.
4. Financial Comparison
The financial comparison is structured as follows:
- The format of claim is specific to the prevailing circumstances.
- The structure is basically a detailed comparison between the cost anticipated by the Contractor during tender with the cost actually incurred.
- Effect of circumstances giving rise to claim and any consequential costs should be highlighted.
11.7.2 Adjudication / Arbitration Procedures
When a dispute occurs between the contracting parties on the certifications, determinations, instructions or opinion of the Consultant, the dispute should be settled in three steps as follows:
1. Refer the dispute to a Dispute Adjudication Board
2. Amicable settlement
3. Arbitration
For smaller and micro contracts, the first two steps are considered sufficient while for large contracts arbitration procedures may become necessary. The following guidelines are suggested for the settlement of disputes:
1. Dispute Adjudication Board (DAB)
- It is desirable to include a list of members of the DAB in the contract so that time spent for appointment of the DAB is curtailed.
- The DAB may consist of one or three members nominated as specified in the contract.
- The remuneration of DAB members shall be shared equally by the contracting parties.
- The DAB shall work only with referral of the dispute by one of the contracting parties.
- Both contracting parties shall provide information required by the DAB.
- The DAB shall give a reasoned decision within a specified time limit which shall be binding on both parties if both parties agree.
- If either party is dissatisfied with DAB’s decision, he may give notice of dissatisfaction to the other party within a specified time.
2. Amicable Settlement
- The contracting parties shall attempt to settle a dispute amicably before the commencement of the arbitration.
- The dispute shall be referred to the arbitrators only if amicable settlement is unsuccessful or no attempt is made for an amicable settlement within the specified time limit.
3. Arbitration Procedure
- If an amicable settlement is not achieved within time specified, the dispute shall be settled through arbitration.
- The arbitrators shall have full power to open up, review and revise any certifications, determinations, instructions, opinion or valuation of the Consultant and any decision of the DAB relevant to the dispute.
- The arbitral award made by the arbitrator shall be final and binding on both contracting parties.
An overview of the procedure for settlement of disputes is presented in Figure 11.5.
Figure 11.5 Procedure for Settlement of Disputes
11.7.3 Price Escalation
Depending on conditions of contract prices payable to the Contractor may be subject to adjustment during performance of the contract to reflect changes in the cost of labour and material components in accordance with the formula:
L1 MP1 = Po (a + b / Lo + c M / 10 ) – Po
Where:
P1 = adjustment amount payable to the Contractor
Po = Contract Price (base price)
a = fixed element representing profits and overheads included in the Contract Price and generally in the range of five (5) to fifteen (15) percent.
b = estimated percentage of labour component in the Contract Price
c = estimated percentage of material component in the Contract Price
Lo,L1 = labour indices applicable to the appropriate industry in the country of origin on the base date and date for adjustment, respectively
Mo,M1 = material indices for the major raw material on the base date and date for adjustment, respectively in the country of origin a+b+c = 1
The coefficients a, b and c shall be specified by the employer in the bidding documents. The sum of the three coefficients should be 1.0 (one) in every application of the formula. The bidder shall indicate the source of the indices and the base date indices in the bid. Base date = thirty (30) days prior to the deadline for submission of the bids. Date of adjustment = specified week prior to the date of shipment (representing the mid-point of the period of manufacture).
The above price adjustment formula shall be invoked subject to the following conditions:
- Price adjustment will be applied only if the resulting increase or decrease in the rate of a specific major item is more than 10%. Major items will be defined in the contract documents.
- No price adjustment shall be allowed beyond the original delivery dates unless specifically stated in the letter of extension. As a rule, no price adjustment shall be allowed for periods of delay for which the Contractor is entirely responsible.
- If the currency in which the contract price (Po) is expressed is different from the currency of
origin for the labour and material indices, a correction factor will be applied to avoid incorrect adjustments of the contract price. The correction factor shall correspond to the ratio of exchange rates between the two currencies on the base date and the date for adjustment.
- No price adjustment shall be payable on the portion of the contract price paid to the
Contractor as advance payment.