Strategy, Legal & Operations

Construction contracts and claims: What you need to know

Construction jobs are prone to issues and disputes. Schedule delays, changes, and other conflicts can result in a legal claim. Typically, a claim comes down to money and the ability to recover additional expenses or financial losses. Claims can also be made for time extensions. Your contract should define what is considered a claim and how to handle a claim when the situation arises.

Limiting liability for general contractors

With respect to claims, a general contractor who drafts a subcontract needs to remember two things to streamline the claims process:

  1. Identify a time period in which all claims must be submitted.
  2. Limit liability to what can be recovered from the owner.

The following sample provision accomplishes both of these goals:

Any and all claims for additional compensation or subcontract time which subcontractor has against contractor shall be made in writing no later than seventy-two (72) hours from the first event giving rise to the claim. Any and all claims submitted thereafter shall be deemed waived. Subcontractor recognizes that any and all timely submitted claims shall be submitted to the owner and that subcontractor’s right to recover on any such claims is expressly contingent upon contractor receiving payment and/or a time extension from owner. Contractor shall have discharged its obligation to subcontractor with respect to the claim when contractor has paid and/or given to subcontractor its pro rata share of any recovery contractor may have received from owner for such claim.

Protecting subcontractors

If you are a subcontractor, however, the above provision provides little comfort. Basically, you are putting your claim into the hands of the GC to negotiate. Nowhere in the provision does it say the GC will do its best to negotiate and resolve the claim quickly. Consequently, as a subcontractor, you’ll want to add something like the following to your contract:

Contractor shall address any pending subcontractor claim before requiring subcontractor to proceed with work on any new, subsequent claim.

This statement protects you from a situation where you have several unresolved claims but are still required to keep working, paying your labor, and providing materials. That can get very expensive. Adding a pending subcontractor claim provision will slow down the pace of work until the issues important to you get resolved. It also gives you leverage to get claims addressed faster.

Exaggerated and false claims

Violations of the False Claims Act can have serious legal repercussions for contractors. Make sure you have a strong compliance and review program in place to assure all claims you make are accurate and legitimate. Carefully document all claims, conduct internal compliance audits, and correct any violations immediately. These actions will also help defend against any false claim allegations.

As with anything involving contracts, understanding the laws and provisions related to claims will reduce your risks and protect your rights.