Claim management

1. CLAIMS MANAGEMENT
EMCM5103 TOPIC 7

2. VARIATION IN PROJECT MANAGEMENT
Definition of Variation: An alteration to the scope of work originally
specified in the contract whether by way of addition, substitution or
omission to the works, or through a change in the manner in which the
works are to be carried out.
Definition in Persatuan Akitek Malaysia’s standard form of contract (PAM
98) – An alteration or modification of the design, quality or quantity of
the works as shown in the contract drawings and described by or
referred to in the contract bills.

3. VARIATION IN PROJECT MANAGEMENT
• Variation is almost an inevitable part of any project claims. It usually
affects the completion date which will indirectly have a crucial
impact on the claims expenses. Variation clauses are a common
feature in construction contracts.
• An understanding of variation was one of the principal sources of
profound knowledge to be acquired from studying project activities
as part of organisational activities. The variation refers to the range
of uncertainty in any project’s activities. It is also based on the
chain of dependent events.

4. VARIATION AND ITS CAUSES – THE
MALAYSIAN PERSPECTIVE
Bad decision-
making
Inadequate
specifications
Lack of
discipline
Improvements
to avoid
obsolescence
Genuinely
unforeseeable
circumstances
COMMON
BASIC
CAUSES
OF
VARIATION

5. FACTORS OF VARIATION
3 main factors of variation are :
(a) Change of plan by the owner
Needs of the owner may change in the course of the design or construction;
(b) Substitution of materials by the owner
Different preferences on the materials or additional quantities of works or
materials; and
(c) Changes to the design by the consultant
Changes that were usually made in order to improve the design.

6. OTHER FACTORS OF VARIATION
Other various factors of variation are :
(a) Changes in the design during the later part of the tendering stage;
(b) Inadequate investigation on the site of the project, design works, tender and contract
documents;
(c) Inaccurate interpretation and specification of the scope of the contract works;
(d) Uncoordinated designs;
(e) Changes in employer’s requirements which arise during the post-tender award stage;
(f) Lack of understanding of the employer’s requirements;
(g) Acceptance of tender offer without proper clarifications and negotiations on the changes;
(h) Narrow profit margins due to competitive environment with larger number of players;
(i) Parties to the contract are relatively “claim-conscious”;
(j) Changes related to statutory or local authority requirements;

7. FACTORS OF CAUSES TO VARIATION
(k) Contract administrator did not meet the relevant contract obligations;
(l) Absence of a general standard of professionalism among parties to the contract;
(m) Economic or market downturn; and
(n) Negative influences due to political factors.
A change in specifications and designs is said to be the main factors that lead to
construction claims. Hence, it is very crucial to ensure that all parties are in the
know and possess the ability to perform their duties and obligations as per the
requirements of the contract so that various factors of claims mentioned earlier can
be minimised.

8. TYPES AND CLASSIFICATIONS OF
VARIATION
Variation in a project can generally be classified according to the types of variation causes. The most
common cause of variation in Malaysian projects particularly is the changes in the design which can be
classified into three categories:
(a) Changes as a result of the improvements made within the design process ;
(b) Changes caused by owner demand ; and
(c) Changes initiated by the consultant throughout the process .
There are two basic types of variations, namely directed variation and constructive variation.
(a) Directed variation usually happens when the client directs the contractor to perform works that
differ from the original specifications stated in the contract or adding extra scope to those already
stipulated contract. It is also deductive in nature; and
(b) Constructive variation occurs when an informal dictate authorising a modification to the original
contract was triggered by an act or, more specifically, the failure to act. It is easier for the contractor
to claim in writing within the time frame specified in the contract.

9. BASIC TYPE OF VARIATIONS
BASIC TYPE OF
VARIATIONS
DIRECTED VARIATION
client directs the contractor to
perform works that differ from the
original specifications stated in the
contract or adding extra scope to
those already stipulated contract. It
is also deductive in nature
CONSTRUCTIVE VARIATION
occurs when an informal dictate authorising
a modification to the original contract was
triggered by an act or, more specifically, the
failure to act. It is easier for the contractor
to claim in writing within the time frame
specified in the contract.

11. EFFECTS OF VARIATION
Frequent variations leading to the variation order (VO) would initiate additional
payments to the contractor and increase the project’s cost as a whole apart
from delaying the completion date.
Variation Order is the formal document that is used to modify the original
contractual agreement and becomes part of the project’s documentation. It is a
written order to the contractor signed by the owner and issued after the
execution of the contract, authorising a change in the work or an adjustment to
the contract sum or the contract time.
It is to be understood that whenever there are variations or additional works
during the construction phase, it will result in project cost increase and may
also affect the entire project’s schedule.

12. DEFINITION AND TYPES OF CLAIMS
Claims can be defined as a demand for something due or believed to be due.
Claims differ from variation in terms of the element of disagreement between the relevant
parties as to what is due as well as whether or not anything is due. If an agreement is
reached, the claim disappears and becomes a change that leads to variation.
Project team and other relevant parties are responsible for meeting contract obligations in
order to minimise contract claims and resolve disputes. Needless to say, disagreements
are inevitable and should be expected in contract management but the disagreements can
be resolved effectively and without any disputes or litigations if all parties are well versed
with contract claims and dispute procedures. According to Turner (2003), claims can be
divided under three headings, namely ex gratia, excessive variations and client’s default.

13. TYPES OF CLAIM
TYPES OF CLAIM
EX-GRATIA CLAIM
These are claims made when the contractor
can find no contractual basis for the claims
but due to some unexpected events in
which there is a moral or commercial
obligation on the part of the client to pay the
compensation.
For example, the project adopted the fixed
price contract strategy before the
unexpected rise in oil prices. As such, due to
the unexpected event, the contractor
suffered losses. The client is not held
accountable to pay for this type of losses by
the contractor but it may oblige to pay
based on the goodwill relationship of the
two parties.
EXCESSIVE VARIATIONS
These are claims for overheads which are
based on the additional managerial time
and expenses required to deal with the
problems created by excessive number of
variations. To establish such claims the
contractor must provide evidence of the
additional managerial time expended.
For example, an outdated major plant or
equipment needs to be updated because
it is crucial initiative in order to complete
the project on time. As such, the changes
will incur additional costs for the project.
CLIENT’S DEFAULT
These are claims concerning the client’s
obligation to perform, for instance , in
making the site available as well as
supplying information and facilities for
project implementation. If these services
or facilities are not provided on time and
to agreed specifications, there is a high
chance that the contractor will incur
additional costs. For example, it is
difficult for the contractor to proof on
paper that although it may be obvious
that work has been disrupted and
delayed, it may be very difficult to
pinpoint each cause to a specific effect ,
let alone itemising additional costs
incurred.

14. CLAIMS MANAGEMENT
Claims management is unavoidable and necessary to accommodate
unforeseen changes in project conditions. In a contractual sense, it
refers to contractors requesting for either time extension or
reimbursement of additional costs.
Sometimes it can be vice versa. If the owner agrees to the claims of the
contractor and grants him extension of time or reimbursement of
additional costs, or both, the issue is solved. However, if the owner
does not agree to the claims put forward by contractor, it will lead to a
dispute.

15. RULES AND PROCEDURES IN MANAGING CLAIMS

17. STAGES OF CLAIMS PROCESS
There were various problems which occurred at every stage of the
claims process in the construction industry in Malaysia.
The basic six stages of the claims process are :
Ø Identification stage
Ø Notification stage
Ø Examination stage
Ø Documentation stage
Ø Presentation stage
Ø Negotiation stage.

18. CLAIMS MANAGEMENT PROCESS
There are also other guidelines such as the guidelines by Project
Management Institute (2000) which suggested that there are various
inputs on the claims management process at different stages of project,
namely:
a. Claims Prevention
b. Claims Mitigation
c. Claims Pursuance
d. Claims Resolution

19. (a) Claims Prevention
An effort made during the early phase of the project which starts with the formulation of
contract documents and the development of integrated project plan with sufficient
knowledge of the purpose;
(b) Claims Mitigation
An effort made during phase 2 and phase 3 whereby the best approach is to mitigate the
possibilities of arising claims throughout the progression of the contract;
(c) Claims Pursuance
An approach established in phase 3 and phase 4 which consists of two major areas, namely
claims identification and claims quantification. Natural eventuality may arise when claims
pursuance becomes necessary.
(d) Claims Resolution
An approach established in phase 3 and phase 4 whereby there are justifiable
disagreements as to whether the claims in question is a change from the original agreed
contract or whether the claimed amount of compensation or time requested is correct. The
process begins with negotiation (possibly at more than one level) before moving on to
mediation, arbitration and litigation, depending on the remedies afforded by the contract.

20. 1 Claim
Prevention
-an endeavor made during
phase-1
2 Claim Mitigation -efforts made during phase-2&3
3 Pursuing Claims -an approach for phase-3&4
a) Claim
Identification
-an approach for phase-3&4
b) Claim
Quantification
-an approach for phase-3&4
4 Claim Resolution -an approach for phase 3&4
Therefore the logical processes for claim management
at different phases of project are:
a) Ph-1 Pre-tender -initial concept, design of contract-
documentation,
pre-tender meetings and up to
invitation of tenders
b) Ph-2 Contract
Formulation
-preparation and submission of
tenders, tender
assessments, pre-contract
negotiations and contract
formulation
c) Ph-3 Construction -during construction up to substantial
completion
d) Ph-4 Post
completion
-settlement of outstanding issues
after substantial completion &
finalization of accounts

21. THANK YOU