Construction Claims Hierarchy

Executive Summary:  Construction claims are an unfortunate part of the construction process in today’s world.  When you have a claim, know the order of hierarchy in your presentation of the data for maximum remuneration from the client.

What is a claim?  A claim is the process by which a contractor recoups money for changes.  Usually the extra work, in the contractor’s opinion,

  • Was not caused by him
  • Was likely presented in monetary form and rejected by the owner
  • Conflicts with the Contract requirements

The basic layman description of a claim is that it is the step after a change order has been denied.  It’s usually accompanied by lots of narrative, exhibits, and attorneys.

The hierarchy of claim methods.  There are process names and terms used to describe the method a claim is prepared.  Over time, courts have determined which methods are stronger than others.  Here’s a basic hierarchy (from strongest to weakest) of claim preparation methods along with descriptions:

#1 Method Measured Mile – here the contractor is able to demonstrate through timecards, photos, and cost reports his/her ability to execute the work over a reasonable amount of time in an efficient manner.  This productivity is deemed the measured mile because it represents the production the contractor expected at bid time and when there was no impact.  So, for example, say that the contractor was getting 100 lineal feet of pipe in the ground before the impact.  After the impact, the production only averaged 45 lineal feet a day.  This productivity rate of 100 lineal feet a day is known as the measured mile, and the claim is calculated to reimburse the contractor for the 55 lineal feet a day he didn’t produce, but should have.

#2 Method  Discrete Pricing – in this approach the cost of the work is accessible and there exists adequate detail to describe the origin of the costs.  Each discrete task within the construction activity can be explained and merit awarded to the appropriate tasks.  So, as an example, say that we have a claim in which there is excessive rebar congestion and our form and pour has been affected by this.  If we captured along the way – via timecard notes and specific cost code setup – additional costs in bulkhead preparation, gang panel tie respacing, and additional vibrators required on form faces and in the hands of our laborers, therein lies strong documentation of added work.

#3 Method  Factoring – Several factors are available to the contractor, or claims consultant, which can be applied to the cost of the work in an attempt to capture the financial loss/impact within a construction activity.  There exist factors from the Corps of Engineers, NECA (National Electrical Contractors Association), MCAA (Mechanical Contractors Association of America), and others.  MCAA is probably the most recognized method and it deals with the factoring of labor loss.  The MCAA has assigned a percent of loss factors (minor, average, and severe) to varying impacts (stacking of trades, morale and attitude, crew size inefficiency, and many more).  Here’s a link to the MCAA website:  [QR]

#4 Method  Total Cost – this is the easiest to prepare and the hardest to get whole on.  Here the process is simple:  take costs incurred less the bid amount.  That value becomes the claim.  For example, it cost $600,000 to install the pipe and the bid/budget cost was $400,000.  The request by the contractor is for $200,000.  This is normally the weakest method because it puts all blame/responsibility on the client and makes one major assumption – it assumes the bid was correct!  Note:  a total cost claim is an appropriate choice on pure extra work.  If the Contract called out for galvanized handrail and then in the field the Owner’s representative required paint, the cost of the painting subcontractor and any assistance to him or her would be a simple gathering of all of the costs plus markup.

My story.  The most difficult method for me has always been the measured mile approach.  This is the case because most of my career I’ve had problems out of the gates on the issue, so there was never any good data on “what I produced on a good, and normal, day”. 

The discrete pricing method is one I usually excelled at because I was able to have set up a strong cost code system for capturing the additional work.  During a claim situation, the buckets of cost I was requesting were well defined and we were able to be awarded the monies due.

The best advice, regardless of the analysis method chosen, is to have as much quality documentation as possible.  If the project management team is able to identify up front that a claim is coming, proper preparation in cost code architecture combined with documentation training of your field crews will pay off handsomely!