United States
Environmental Protection
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

                      CLAIMS MANAGEMENT GUIDANCE

     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.

     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;

     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.


     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;

     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

     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

     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.

     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).

     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)]:

               ABLE COSTS
                    A.  Costs Related to  Subagree-

                 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:

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;

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.

                           (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

                           (1) Change orders and the costs of
                         meritorious  contractor  claims pro-
                         vided the costs are:
                           (i) Within the  scope  of the pro-

               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.


                           (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

                           (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

                           (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.

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:


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

               o    A showing of sufficient documentation that timelv
                    good faith efforts were made to pursue negotiations
                    in order to avoid arbitration or litigation, such

                    -    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


               o    Third party independent consultant's report, where

               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.


     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.