Common Construction Claims and Design Disputes

Construction projects are risky to say the least. Large capital expenditures, short schedules, new projects, and numerous people and companies coordinating materials, equipment, design, and construction are the norm.* It is not surprising that the vast majority of projects have claims and disputes – whether the dispute is settled at the project site or in a courtroom. This article discusses the seven causes of design disputes and construction claims, arising in contract and tort. The claims discussed below overlap, though they are discussed separately. Contractors, subcontractors, design firms, and owners should take notice of these common claims, watch out for early stages of disputes, and be diligent in managing the unavoidable ones.

1. Design Defect Dispute& Construction Defect Claim

For most projects, there is a consulting contract or a design services agreement between the owner and an architect or engineer. The owner usually suffers design related damages under three defect scenarios. The first comes in the form of a design error or omission, resulting in a change order for the contractor at the owner’s expense before construction begins. The second design defect causes a monetary loss to the owner – because a portion of the building needed either replacement or modification after construction. A good example of a design defect requiring a component replacement could be a reinforced concrete beam that was designed with insufficient reinforcing steel (tensile loads). An example of a design defect requiring a modification is an electrical design with insufficient capacity in an area of the project (requiring additional capacity via a subpanel). The third type of design defect that harms the owner (or design professional) arises from injured third parties who have sued the owner (or design professional) because the defect harmed the third party. A stairway that has collapsed due to an improper stringer design, with subsequent harm to customers, is an example of the third type of defect. Unlike the design defects discussed above, which are contained in plans or specifications, a construction defect occurs from a contractor’s incorrect equipment installation, building construction, or building system installation. The owner typically sues in both contract and tort for the repair cost or replacement cost. For example, water damage inside a plant caused by a contractor’s improper welds on chilled water piping to a chiller constitute grounds for the owner to sue for construction defect damages.

2. Negligent Supervision Design Dispute

When an engineer or architect has a professional duty of care or a contractual obligation to supervise aspects of construction, the engineer or architect may be liable for third-party damages arising from such supervision. For example, if a civil engineer has contracted with an owner to supply construction administration services, such as site visits, and if the soil was not properly compacted and tested, then the owner may sue the civil engineer for negligent supervision when the slab or footing is damaged after settlement.

3. Change in Work Errors & Omissions Construction Claim

Instead of the owner seeking compensation or damages (though the owner will invariably seek such compensation from the designer), the focus here is on the contractor’s seeking compensation for its changes in work. The change in this type of dispute was caused by an engineer or architect’s failure to provide a design that is free of mistakes (errors) or failure to supply a complete design (omissions). An example of a design error that resulted in a change order for the contractor, and a contractor demand for compensation for the change from the owner, is an electrical design drawing that showed an incorrectly sized transformer. An omission could be that the air handling unit should have been located exactly 15 feet from the east wall of the mechanical room as the owner needed space for future equipment, but the mechanical engineering drawing did not include exact location dimensions. The cost of the change order to the owner in the two examples above will depend on the magnitude of the errors and omissions as well as the extent to which equipment has been purchased or the degree to which the project has been completed.

4. Delay Construction Claim

Delay claims are quite common as the basis for a single cause of action and as a part of a larger group of claims. A delay claim is normally based in contract, and it generally takes two forms. First, the contractor may be late completing the building or agreed upon portion of the building, and the owner seeks consequential, actual, or liquidated damages from the contractor. Invariably in such cases, the defendant contractor will file a third-party claim against one or more of the subcontractors. Second, for example, the contractor seeks schedule relief and monetary compensation from the owner due to a change in work or delay that the owner or owner’s representative caused. As the critical path moves these completion dates further in the future, subcontractors also seek compensation. For this reason, a critical path method schedule is the centerpiece for a delay claim. Here are a few examples of delay claims: (1) The contactor achieves substantial completion after the contract’s scheduled substantial completion date; and (2) A subcontractor incurs schedule delays and additional labor costs due to poor project management by the contractor.

5. Unforeseen Site Conditions Construction Claim

One of the top construction project site risks is unforeseen site conditions. This claim normally arises as a breach of contract or change order dispute that the owner and contractor have. The issue is simple: the contractor encounters a condition at the construction site that was hidden prior to discovery of the condition, and the contractor requests compensation and a schedule extension. The more complicated element of a site condition dispute is: Who bore the risk of the unforeseen condition in the construction contract? This is a battleground issue during contract negotiations. Owners typically want to shift all the risk to the contractor without paying the contractor for bearing the risk. On the other hand, contractors typically do not want to bear any part of the site conditions risk. Creating more confusion, the owner typically provides the contractor with a geotechnical or environmental analysis report, but the owner warns the contractor that the contractor cannot rely on the report. For example, on an apparent greenfield site, there are two large fuel tanks buried under the building location; however, at the time of contract signing, neither the owner nor the contractor know about the tanks.

6. Payment to Contractor and Payment to Subcontractors Construction Claims

Whether caused by financing, cash flow, incomplete work, or garden variety payment neglect, payment claims arise when the owner doesn’t make progress payments to the contractor or the contractor doesn’t make payments to a subcontractor. Payment claims are contract-based, and a problem can quickly snowball into a project catastrophe if the basis of the dispute is not quickly resolved. Payments are critical as most companies – contractors, subcontractors, and suppliers – cannot finance the project. Cash flow is king. For example, often the owner does not pay the entire amount of a contractor’s invoice because the owner is unhappy with the quantity and quality of the work on the invoice.

7. Site Safety Construction Claim

Site safety claims usually do not arise unless a worker is seriously injured or killed at the construction site, which is indeed a tragedy. However, regardless of fault, OSHA will do an investigation, and the worker or the worker’s family will likely file suit. According to workers’ compensation statutes in every state, workers cannot sue their employers for injuries. However, workers can sue other project participants. Consider this example: A curtain wall subcontractor’s employee who falls because he was not correctly tied off cannot sue his employer. But, the worker can sue the contractor, other subcontractors, or the owner (any project participant that may have contributed to making the site an unsafe place to work).

In conclusion, because design disputes and construction claims affect all project participants, it is critical that these disputes and claims are on your risk management & contract negotiation radars.

*The information in this article does not constitute legal advice and is for general educational purposes only.