A quick guide to claims arising under a construction contract

These include claims a contractor may make (such as loss and expense, extensions of time and for variations) and claims an employer may make (such as for defective work and liquidated damages). They apply to the jurisdictions of England and Wales.

Why do claims arise under a construction contract?

Construction projects rarely run entirely smoothly: additional works may be requested by the employer or become necessary when things are “discovered” on site; delays may mean the building takes longer to complete; or it may cost more than the parties originally contracted for.

These are common claims:

• A contractor may have a claim against the employer relating to a delay or a change in the works.
• A professional consultant may have a claim against the employer for non-payment of fees or breach of copyright.
• The employer may have a claim against: the contractor for a delay to the works or a defect in the works; and/or the professional consultant for failing to properly design or supervise the works.

What the contractor may claim from the employer

A contractor may make a claim against the employer for more time and money (loss and expense) and for the cost of changes to the works (as variations or as a quantum meruit).

A claim for an extension of time to the completion date

• The parties usually agree a completion date in their contract. If not, the contractor should complete its works within a reasonable time.
• Standard form contracts usually allow for the completion date to be adjusted, to award the contractor an extension of time. The contractor should comply with the contract procedure.
• It is not always easy to work out what caused the delay and whose fault it was; sometimes there are competing causes of delay. If the contractor caused the delay, the employer may have a right to claim liquidated damages from the contractor.

A claim for loss and expense

• A contractor often claims loss and expense at the same time as an extension of time. It is the “money” side of a contractor’s claim for delay and disruption (that is, a claim for the cost of inefficient working and employing more resources).
• Standard form contracts usually allow the contractor to claim for delayed or disrupted work. The contractor should comply with the contract procedure.
• A contractor may roll-up all the unattributed costs and claim them from the employer as loss and expense. If the claim does not break down the sum claimed between the contractor’s various complaints, it is called a “global claim (www.practicallaw.com/8-500-3160)” or, sometimes, a “total cost” claim.

Common heads of loss and expense claimed include:
prolongation costs;
finance charges;
loss of profits;
general disruption; and
wasted management time.

A claim for the cost of variations

• Sometimes called additional work or extras, a contractor may claim for a variation when the employer changes the contractor’s scope of work.
• Standard form contracts usually include a clause that defines what a variation is and provide a procedure to value the variation. If so, the contractor should comply with that procedure.
• Both parties may benefit from a clause permitting variations: the employer can make changes so that it gets the building it wants; and the contractor gets paid for providing extra or different work or materials.
• Claiming for variations often gives rise to disputes over whether: the additional work is outside the original scope of work; and/or the person who ordered the work was authorised to do so.

A claim for payment under a quantum meruit

• Under a quantum meruit claim, the contractor claims a reasonable sum for the work done and the materials it has supplied. The parties (or the courts) usually value a quantum meruit claim at a fair commercial rate.
• A contractor cannot claim a quantum meruit if the parties have a contract to pay an agreed sum, but it will be relevant if the parties have:

not agreed a contract or not agreed all the terms, including the price for the work;
an agreement to pay a reasonable sum for the work done; or
agreed a scope of work under the original contract and the work falls outside that scope (and the parties did not have or did not use a variation procedure in the contract).

• A contractor may claim a quantum meruit if it has worked under a letter of intent.

What the employer may claim from the contractor

The employer may have a claim against the contractor because the works are of a poor quality or are defective, or because the project is delayed.

A claim for poor workmanship and/or defects in the works

• Defective work frequently occurs in construction projects. Defects may range from de minimis items included within snagging lists at practical completion, to significant but undetected (or latent) problems. A defect is generally a breach of contract by the contractor, but could relate to design that was not carried out by the contractor, in which case only a professional consultant or consultants might be liable.
• Standard form contracts usually contain a defects liability clause that obliges the contractor to return to site, at its own cost, during the defects liability period or rectification period (normally six or 12 months) and remedy any defects that arise.
• A contractor who is responsible for design and construction of the works may be liable for a defect that is caused by negligent design, by poor workmanship or by a mixture of both.

A claim for liquidated damages

• A liquidated damages clause (sometimes called liquidated and ascertained damages or LADs) compensates the employer if the contractor completes its work late. It requires a contractor to pay the employer a pre-determined rate of damages that must be a genuine pre-estimate of the employer’s loss.
• A liquidated damages clause is a common feature of many standard form contracts. The employer must ensure that it meets any contractual notice requirements in the contract before it claims liquidated damages from the contractor.
• The clause may take effect as an exhaustive remedy (that is, the clause may be the employer’s only remedy for the contractor’s delay).
• The employer usually deducts or sets off the liquidated damages from sums it owes to the contractor.

What the employer may claim against the professional consultant

On construction projects, professional consultants often act as the contract administrator (valuing and certifying the works) as well as undertaking a design role. Generally, on building contracts, the professional consultant administering the contract is an architect; on engineering contracts, it is usually an engineer. Occasionally, the employer may appoint a project manager or quantity surveyor to administer a contract.

Professional consultants should perform their services in accordance with the implied or express duty of care in their professional appointment.

The professional consultant may be liable to the employer for:

• Failing to design the works in accordance with the professional appointment.
• Failing to supervise the works in accordance with the professional appointment.
• Failing to ensure the contractor built the works in accordance with the building contract.
• Negligent certification of the works.

An employer claims its losses caused by a breach of contract or the negligence of a professional consultant as general (unliquidated) damages.

What the professional consultant may claim against the employer

• If the employer fails to make payment, the professional consultant may claim for non-payment of fees. The parties may dispute whether a particular professional service was included in the fee agreed at the outset, or whether it was extra work.
• The professional consultant will usually retain copyright (www.practicallaw.com/7-382-8372) in the design and its plans and drawings; the employer is typically granted a licence to use these. If the employer does not pay the professional consultant, the professional consultant may argue that the employer’s use of the design is in breach of copyright.

What are the differences on engineering projects?

Most engineering projects are procured on different forms of contracts to construction projects (such as FIDIC, NEC3, IChemE and IMechE, but many of the types of claims that could arise are the same.

Some key differences include:

• Compensation events: claims for time and money (or extensions of time and loss and expense) may be dealt with under a single mechanism.
• Defects liability: the contractor’s ongoing liability for defects may be limited, particularly if the employer can claim performance damages.
• Limited variations: in contrast to construction projects, the employer may have a limited right to make changes to the project.
• Notification requirements: these may include strict time limits and act as conditions precedent to a claim. If they are not met, the contractor may lose its right to bring a claim.
• Performance damages: the employer may be able to claim liquidated damages for the contractor’s failure to meet specified performance targets.