OOOR85102
United States
Environmental Protection
Agency
Office of Municipal
Pollution Control (WH-546)
Washington DC 20460
March 1985
Prevention and Resolution
of Contractor Claims
EPA Construction Grant
Program Guidance for
Municipal Grants
U.S. Environr™?-/•' " —
Reg:ors V, Li'/".' ;v
230 South D-r . :•. , •
Ciiicago, Illinois 60604
on Agency
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CLAIMS MANAGEMENT GUIDANCE
PREAMBLE
The purpose of this guidance is to assist the grantee in reducing
the frequency, cost and impact of contractor claims in the construction
grants program. As such it is not a regulatory requirement but should
be used as appropriate to improve project management.
EPA requires that grantees apply good management practices
throughout the program, including the critical area of contractor
claims. A claim, as used in this guidance, means a written demand
or written assertion by one of the contracting parties seeking, as a
matter of right, the payment of money, the adjustment or interpretation
of contract terms, or other relief. A voucher, invoice, or other
routine request for payment that is not in dispute when submitted is not
a claim; however, such a request may be converted to a claim, upon
rejection by the grantee.
Grantees are solely responsible for project management. The
grantee's failure to prevent or successfully resolve contractor claims
in a timely manner will greatly increase project costs with no
corresponding benefits. This is particularly important to a grantee
because EPA may not participate in certain costs associated with
contractor claims.
This guidance is an effort to assist grantees in claims management,
to assist reviewing agencies in making appropriate alienability
determinations and to distinguish between proper and improper management
practices in specific situations. The guidance discusses many of the
common causes of claims, recommends claim prevention and resolution
techniques, and outlines applicable criteria to be used in claim related
alienability determinations.
COMMON CAUSES OF CLAIMS
Although claims occur for many different reasons, the most common
causes are:
1) Defects in plans or specifications;
2) Differing site conditions;
3) Inadequate construction inspection and management;
4) Failure to promptly and fairly address contractor grievances,
requests for time extensions, or other problems;
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5) Failure to enforce contract provisions on scheduling and
completion time;
6) Failure to negotiate time extensions and/or delay costs, if
any, associated with change orders;
7) Failure to mitigate effects of delay;
8) Unusually severe weather conditions;
9) Strikes; and/or
10) Acts of God.
The effects of any of the above causes are usually compounded by a
breakdown of communication at the field level.
CLAIMS PREVENTION
Through experience, good project management practices have been
identified which will reduce the occurrence of claims. A grantee must
assure that good management practices are employed throughout the
project cycle. Even though certain management tasks may be performed in
the grantee's behalf by another party, the grantee remains fully
accountable and responsible. It is, therefore, imperative that any
subagreement for management services specify immediate notification to
the grantee of any and all unresolved change orders or disputes.
Evidence of good management for the prevention of claims should include
the following practices:
1) The grantee evaluating its design engineer's ability to
oversee construction (previous record with claims, cost and
schedule control, for example) and the possible need for
construction management early in the design phase. If found
to be necessary, obtaining services of a construction manager
prior to the start of construction, while design changes to
improve constructibility can still be made;
2) The grantee insuring that an adequate soils and subsurface
investigation is performed during planning and design stages
and the results incorporated into the contract documents;
3) The grantee taking actions to insure accurate and complete
plans and specifications, such as providing for independent
third party review prior to requesting bids, holding prebid
conferences, and assuring other grantee responsibilities are
performed, such as site access;
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4) The grantee insuring that a subagreement provision allowing
for arbitration requires any arbitration based settlement or
award to include findings of fact, allocation of award to each
issue, conclusions of law, basis of award and rationale;
5) The grantee recognizing the importance of scheduling as a key
management tool by specifying that the contractor provide an
adequate schedule commensurate with the complexity of the
project: by enforcing the schedule provisions; and by
requiring periodic updating to show the adjusted project
progress and completion date;
6) The grantee maintaining a fullv and completely documented
record of all aspects of the work, such as photographs and a
daily log of work progress, personnel, and equipment on site;
7) The grantee demonstrating a knowledge and understanding of
common sources of disputes or situations likely to result in
claims during construction (such as inordinate delays in
reviewing shop drawings), and exercising effective techniques
to avoid such situations;
8) The grantee exercising effective management of properly
submitted change orders (40 CFR 33.1030, Clause 3), resolving
all costs and any necessary subagreement time extensions
associated with each change order as the change order is
executed and in the event a contractor reserves impact costs,
executing a change order bilateral as to direct costs and
unilateral as to the impact costs and including the best
estimate of what the impact costs should be; and
9) The grantee providing timely responses to contractor requests
for direction, clarification, and adjustment.
These good project management practices will not only reduce the
number and frequency of contractor claims but will also provide a better
opportunity for an early and less costly resolution after a claim
arises.
CLAIMS RESOLUTION
Good management practices also have been developed for the
resolution of claims. After a dispute arises, a grantee must assure
that everything possible is done to address the issues raised, and to
mitigate future costs of a claim. Since a claim can be a huge potential
liability, the grantee must take full control of the situation and,
using legal and technical staff for advice and assistance, mount a well
organized, thoroughly prepared resolution effort. Evidence of good
management for the resolution of claims should include the following
practices:
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3) The grantee taking immediate steps to mitigate further costs
being incurred bv the contractor or any other party, due to
the claim issues;
2) The grantee performing a timely, coirplete, and thorough review
of the issues raised by the claim to determine the degree of
merit that each issue may have;
3) The grantee negotiating with the contractor on the issues in a
good faith attempt to resolve each issue;
4) If (3) is unsuccessful, the grantee utilizing the services of
a consultant that is independent of the grantee's engineer
and construction manager to provide the grantee a fresh
perspective and confidential review of the merits of each
issue and the potential liability of the contractor, engineer,
and grantee;
5) The grantee making a renewed effort to negotiate a fair and
reasonable settlement of the meritorious issues and a
reduction or elimination of the issues found to be without
merit; and
6) The grantee maintaining a fully and completely documented
record of the negotiation process used to resolve the claim.
Where arbitration is deemed to be necessary, it is ijnperative that
the grantee insure that any arbitration award contains a decision
setting forth in detail its factual and legal basis. Otherwise, it may
not be possible for the reviewing Agency to determine alienability of
costs awarded. Therefore, as a condition precedent to any agreement to
arbitrate, the grantee must obtain agreement by the contractor that the
grantee and the contractor will require, at the time that the request
for arbitration is made, that any award contain findings of fact,
conclusions of law, basis of award, and rationale.
The application of these and other good management practices for
claims resolution will be reviewed in determining whether the grantee
has done everything possible to avoid arbitration or litigation. EPA
has a significant interest in the equitable and expeditious resolution
of all meritorious claims without employing time consuming and costly
arbitration or litigation.
CLAIMS AIJjQWABILITY
40 CFR Part 35, Subpart I, Appendix A, governs the review and
alJLowability of claims costs. Appendix A was first published as an
Interim Final Rule on May 12, 1982, (47 Fed. Reg. 20450), and was then
revised on February 17, 1984, as a revised Interim Final Rule (49
Fed. Reg. 6224).
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When determining grant alienability, the settlement of a claim must
be carefully reviewed by the reviewing Agency for reasonableness and
necessity, as well as sound grantee management. The cost of claims
analysis, resolution, and defense can also be considered allowable,
keeping the same concerns in mind.
The guidance provided in the discussion of Appendix A and the
principles of claims alienability should be used by State and Regional
project officers in their reviews of claims originating from any
construction grant project. The regulations which were in effect at the
time of the grant award should be cited in any determination of
alienability. However, the fundamental criteria used in the
determination of grant alienability for tests of reasonability and
necessity are common to all construction grants. The guidance provided
with respect to Appendix A represents EPA's position on what
demonstrations a grantee should be prepared to make in support of an
alienability determination.
The rules in Appendix A are based upon the fundamental principle
that Federal grant recipients have responsibility to efficiently and
effectively manage grant projects to successful completion, incurring
only those costs which are necessary and reasonable. Accordingly, the
Appendix A rules may be relied upon to determine the alienability of
change orders, claims and related costs under grants awarded both before
and after the Appendix was published.
To provide national consistency and to clarify the intent of
the February 17, 1984 regulation, it has been segmented below and
additional explanatory comments have been made. Pertinent sections of
the regulations are indented, and reproduced as they appear in the Code
of Federal Regulations [40 CFR 483(July 1, 1984)]:
APPENDIX A - DETERMINATION OF ALLOW-
ABLE COSTS
A. Costs Related to Subagree-
ments
1. Allowable costs related to sub-
agreements include:
f. The costs (including legal,
technical, and administrative costs)
of assessing the merits of or nego-
tiating the settlement of a claim by
or against a grantee under a sub-
agreement provided:
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Discussion:
Discussion:
Discussion:
The reasonable costs incurred by a grantee to (a) analyze
the claim and (b) negotiate a settlement can be
characterized as negotiation costs. These costs which
are incurred prior to either party filing a complaint
with the courts or making a demand for arbitration will
be treated as explained in this section. On the other
hand, those negotiation costs incurred after the filing
will be treated as costs under paragraph A 2.c. of
Appendix A (page 9 of this document).
The negotiation costs are allowable to the extent
explained below, provided that a grant amendment is
executed covering the costs before they are incurred.
To be allowable, the grantee must demonstrate that the
pre-filing costs result from a timely and meaningful
negotiation process and there was no evidence of grantee
mismanagement. Of course, the costs of analyzing payment
requests, invoices and requests for change orders, which
are incurred prior to such a routine request becoming a
claim, are normally included as part of construction
management costs or administrative costs and can usually
be funded under the existing grant.
Unless clearly allocable to allowable/unallowable cost
elements within the approved project scope, claims
negotiation costs are allowable to the same extent that
the project is allowable provided:
(1) The claim arises from work
within the scope of the grant;
(2) A formal grant amendment is
executed specifically covering the
costs before they are incurred;
Here, as with all subagreements for supplies, services,
and construction, 40 CFR Part 33 applies to all
subagreements under grants awarded after May 12, 1982.
These regulations require, among other things, access to
records, cost and pricing data, and separate negotiation
of profit.
(3) The costs are not incurred to
prepare documentation that should be
prepared by the contractor to sup-
port a claim against the grantee;
and
Here, the purpose is to emphasize the point that a claim
presented by a contractor is expected to be complete and
adequately stated on its face, and if it is not, it
should be returned with instructions to adequately
document and resubmit. No alienability can be made for
preparing documentation to complete a contractor's claim.
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(4) The Regional Administrator de-
termines that there is a significant
Federal interest in the issues in-
volved in the claim.
Discussion: The Federal government encourages a fair and timely
negotiation process without lengthly and costly
arbitration and/or litigation. In general, EPA has a
strong concern in a thorough assessment process to
evaluate the merits of the claim and the relative
vulnerabilities of the parties involved. Depending
upon the results of the assessment, the Federal interest
may change. The Federal interest will depend upon the
reviewing agency's evaluation of the merits of the claim
and the relative merits of the parties' stated positions
and their negotiating posture.
A significant category of allowable costs related to
subagreements is:
g. Change orders and the costs of
meritorious contractor claims for
increased costs under subagreements
as follows:
Discussion: A "meritorious contractor claim" is a claim which has
been stripped of its spurious or nonvalid parts (i.e., a
meritorious claim is that portion of the total claim for
which the grantee is liable). IT IS THE GRANTEE'S
LIABILITY, NOT THE STATE OR EPA'S. The alienability of
these costs are adjudged in accordance with the following
rules:
(1) Change orders and the costs of
meritorious contractor claims pro-
vided the costs are:
(i) Within the scope of the pro-
ject;
That is, within the scope of the grant - the eligible
portion of the grantee's construction program.
(ii) Not caused by the grantee's
mismanagement; and
Discussion: Here the reviewing agency will evaluate the grantee's
performance during project construction, noting for
example, undue delays in processing change orders, and to
what degree the grantee was in full control of the
project at all times. See the Claims Prevention and
Claims Resolution sections for examples of good
management on the part of the grantee.
Discussion:
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(iii) Not caused by the grantee's
vicarious liability for the improper
actions of others.
Discussion: Here the expression "grantee's vicarious liability" means
the liability for actions of others for which the grantee
must accept responsibility as part of its general
management responsibilities. It has the same meaning as
the later expression "the grantee's responsibility" as
provided in A.2.c. (6) of Appendix A (page 11 of this
document).
(2) Provided the requirements of
paragraph g(l) are met, the follow-
ing are examples of allowable change
orders and contractor claim costs:
(i) Building costs resulting from
defects in the plans, design draw-
ings and specifications, or other
subagreement documents only to the
extent that the costs would have
been incurred if the subagreement
documents on which the bids were
based had been free of the defects,
and excluding the costs of any re-
work, delay, acceleration, or dis-
ruption caused by such defects;
Discussion: Here, following the requirements that the grantee must
manage the project properly, that only reasonable and
necessary costs are allowable, and that increased costs
caused by the improper actions of others are unallowable,
the costs of impacts caused by defects are excluded.
However, EPA will assist in paying the direct costs to
the extent that these costs would have been necessary, if
the bidding documents had been free of defects. EPA will
not assist in paying the impact costs of changes caused
by defects (errors and omissions) in the plans and
specifications.
(ii) Costs of equitable adjust-
ments under Clause 4, Differing Site
Conditions, of the model subagree-
ment clauses required under §33.1030
of this Subchapter.
Discussion: Here, the reviewing agency must determine that: 1) an
adequate site investigation was performed; 2) claimed
costs are reasonable and necessary; and 3) the grantee
and contractors actions were timely and efficient in
resolving the change order to minimize impact costs.
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Discussion: If these conditions are met, EPA will participate in the
direct and (because of the Agency's risk-sharing policy
for differing site conditions) impact costs.
(3) Settlements, arbitration awards
and court judgments which resolve
contractor claims shall be reviewed
by the grant award official and
shall be allowable only to the
extent that they meet the require-
ments of paragraph g(l), are reason-
able, and do not attempt to pass on
to EPA the cost of events that were
the responsibility of the grantee,
the contractor, or others.
Discussion: Note here that as with all costs, the grantee has the
burden of proof in substantiating the alienability of
settlements, arbitration awards and judgments. This
includes documenting that the incurred costs were not the
result of mismanagement by the grantee, engineer,
contractor or others. Furthermore, where delay costs are
incurred, the grantee must document that they did not
occur during a concurrent, overriding delay, and that
they resulted from the controlling item of work (e.g.,
critical path).
In keeping with the agencv's preference for achieving a
fair resolution without arbitration and litigation, the
costs associated with defense and prosecution are
unallowable, except under certain conditions, as follows:
2. Unallowable costs related to
subagreements include:
c. The costs (including legal,
technical and administrative) of de-
fending against a contractor claim
for increased costs under a sub-
agreement or of prosecuting a claim
to enforce any subagreement unle'ss:
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10
Discussion: Defense and prosecution costs (including legal, technical
and administrative) are defined as those costs incurred
after any party files a complaint with the courts or
makes a demand for arbitration against any other party in
defending against a contractor's claim for increased
costs under a subagreement or of prosecuting a claim to
enforce any subagreement.
It is to be emphasized that the term "cost" as used here
and throughout this guidance, means reasonable costs, and
a judgment has to be made by the Regions/States as to the
reasonableness of any costs about to be incurred. This
is especially difficult in defense cases, since the
grantee does not control the legal action and, perhaps,
the contractor increases the amount of its claim as the
action progresses (not an unusual occurrence). Defense
and prosecution costs are unallowable unless:
(1) The claim arises from work
within the scope of the grant;
(2) A formal grant amendment is
executed specifically covering the
costs before they are incurred;
(3) The claim cannot be settled
without arbitration or litigation:
Discussion: Determining whether a claim can be settled is often a
difficult judgment call to make at an early stage in the
proceedings and, during the course of the proceedings,
conclusions concerning the settlement potential mav
change. The reviewing agency should request and review
the following items from the grantee, as an aid to making
the determination that further negotiations would not be
productive:
o A showing of sufficient documentation that timelv
good faith efforts were made to pursue negotiations
in order to avoid arbitration or litigation, such
as:
- memorandum of negotiation (detailed in EPA
Change Order Guidance, p. 10);
timely analysis of merits of the claim by the
grantee's construction engineer (or other
consultant) and legal staff;
proof of timely response;
- record of attempts to perform timely and
meaningful negotiations.
o Engineer's independent estimate of the value of the
claim.
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11
o Third party independent consultant's report, where
appropriate.
o Any other pertinent correspondence between the
contractor and grantee and/or engineer.
(4) The claim does not result from
the grantee's mismanagement;
See this guidance at page 8 addressing A.l.g.(l)(ii) of
Appendix A.
(5) The Regional Administrator de-
termines that there is a significant
Federal interest in the issues in-
volved in the claim; and
See this guidance at page 7 addressing Federal interest
under A.l.f.(4) of Appendix A.
(6) In the case of defending a-
gainst a contractor claim, the claim
does not result from the grantee's
responsibility for the improper ac-
tion of others.
See this guidance at page 8 addressing A.l.g.(1)(iii) of
Appendix A.
NOTE: EPA has proposed a regulation which would generally limit post
increases to five percent and plans to publish the regulation in final
form in the near future. The alienability of claim related costs
discussed in this document would be limited for projects which fall
under the jurisdiction of such a regulation.
CONCLUSION
This claims management guidance is intended to assist grantees in
the management of claims and to assist reviewing agencies in making
appropriate alienability determinations.
Grantees are fully responsible for project management. This
guidance sets forth some characteristics which distinguish between
proper and improper management practices. Improper management practices
can cause the grantee to fail to prevent contractor claims or resolve
them in a timely manner. Where costs associated with contractor claims
are precipitated or exacerbated by the grantee's improper management
practices, the allowability of such costs will be unallowable under the
EPA regulations. For these reasons, it is imperative that grantees
become familiar with the principles explained in this guidance and
exercise good management practices.
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