Construction Claim Types and Causes: A Study of Tala Hydroelectric Project, Bhutan

One of the key areas of controversy that arises in the field of construction industry is from the claim situation. The inherent problems of most of the construction projects are their uncertainty, complex in nature involving a wide variety of business parties that often extend over a lengthy period of time requiring detail plans and specifications, skillful supervisions and efficient coordination. Thus, in such complex process, the occurrences of claims are common phenomena that hinder the completion of project on time and cause cost overruns. Although the symptoms are well known, the real causes and associated costs that arise due to such claims and disputes are not well understood. Construction contract itself is often very long, complex documents which are not well understood by the parties leading to differing interpretation by the different parties and consequently, disagreements or disputes arises regarding contractual obligations or expectations. When one party feels that the contractual obligations or expectations have not been met by the other party, and believe that they deserve monetary and/or time compensation, they may submit a claim.

It is generally accepted and agreed by both the contractors and the contracting agencies that handling of the claims arising out of the construction projects is a serious problem, and that efforts are needed to improve both methods of preventing claims and procedures for settling them when they occur. It not only drains the energy and resources of the parties in trying to solve them but also brings about adversarial relationship between them. Often, the claims that cannot be settled by negotiated adjustments has to be dealt with higher appellate (arbitration, courts etc) which sometimes takes years to resolve. Thus, it is the common interest of both contractor and owner to device means to avoid claims as far as possible in the first place and manage claim process when it occurs.

With the accelerated hydropower development policy in place to achieve the target of 10,000 MW by the year 2020 in Bhutan, a lot of constructions of hydropower projects are in the pipeline and is expected to see the construction boom within next five years. The construction of Pungtsangchu I and Dagachhu are already in full swing. Punatsangchu II and Mangdechhu projects are expected to begin by early 2010 and the studies are being done on many other projects. It has been estimated that around Nu 442 billion will be invested to generate around 10,406 MW by year 2020 (DGPCL website, 2009).

In view of the expected mega constructions that would be taken up in Bhutan, it is pertinent that we look back to the past projects and learn from the experiences. Hence, this study on the construction claims in the recently completed Tala hydroelectric Project was very important and would be helpful to the project participants in preventing and resolving claims in the upcoming projects.

Mr. Sonam Tobgay made a case study which main objective was to find which causes of claims are important and which types of claims were frequent during the construction of Tala Hydroelectric Project in Bhutan. The objectives of his study were summarized as follows:
- Carry out the comprehensive analysis of the claims, their types and the causes that occurred in Tala Hydroelectric Project.
- Study the frequency and severity of each claim and rank them accordingly.
- Study how the claims have been settled/resolved (study the different modes of resolution applied with references to contract clauses)
- Provide solutions to reduce/ minimize or prevent the claims for the future hydropower projects in Bhutan.

Conclusions:

Two types of claims have occurred in this project namely Change claim and Impact claims. Though Change claims (23/35) were more frequent than Impact claim (12/35), the severity (amount) of the claim and duration for settlement was more with the Impact Claims.

The common causations of claims was also analyzed and result showed that five (05) broad groups namely ‘Differing site conditions’, ‘Delay from Project Participants’, ‘Changes in Design and Specifications’, ‘Force Majeure(Flood)’ and ‘Omissions/Ambiguous Contract Provisions’.

The claims due to ‘Differing site conditions’ ranked first followed by claims due to ‘Delay from Project Participants’. This result supports the similar studies done for hydropower projects in India and Vietnam where they also found ‘Differing site conditions’ as the main cause of Claims (Pillai et.al, 2001 and Thinh V.B, 2004). The Adverse Geological Occurrence (AGO) was the main differing condition claims that triggered and gave rise to both change claims and impact claims in different forms.

The different mode of claim settlement adopted in this project was also studied. Almost all the claims resolved were through negotiation. Only three (03) cases out of thirty-five (35) cases accounting to USD 1,890343.19 (5% of claim amount) went to Arbitration or Litigation, rests of the claims were resolved through mutual agreement or direct negotiation. The findings supports the of study done by Zaneldin (2006) in UAE where he found that more than 77.1% of the claims are resolved using negotiation while only 4.9% of claims are resolved through litigation.

Analysis revealed that duration of claim settlement varied from minimum of six (06) months to as long as four (04) years. The claims that were settled through negotiation took much shorter time than the arbitration cases which took as long as four (04) years. Among others, most of the claim cases that took longer duration for settlement sprung from the ‘omissions or ambiguous/conflicting contract provisions/clauses’(1.64 years) followed by claims due to ‘Force majeure’(1.63 years).

Overall, only 39% of the total claimed amount was successfully achieved by the contractor through negotiation. Rest of the claim either got rejected by the owner in the first place or contractor dropped the case during the process of arbitration or litigation. This indicates that the bargaining power of the contractor is much less than the owners since most of the claim cases were not pursued after being rejected by the owner for fear of future adversarial relationship.

The severity and frequency of claims in different contract packages were also studied and found that major portion of claims appeared from civil works (21/35 cases) with over 81% of the total claimed amount while the rest (19%) was from the hydro-mechanical and electro-mechanical combined. Claims from ‘differing site conditions’ which ranked first were more prominent and high for the contract packages which dealt with underground tunneling works while the claims due to ‘delay from project participants(owner)’ dominated the claim for the electro-mechanical works. This is due to the fact that most all the electro-mechanical items were purchased from foreign countries like Japan, Germany, Italy etc which needed long procurement lead time whereby the supply order for these items and mobilization notifications for other resources were done in order to meet the original schedule. Meanwhile, due to delay in completion of preceding civil works for varied reasons, the electro-mechanical works got delayed leaving the mobilized resources to remain idle. Thus, the claim for compensation for the idling charges of the resources.

All the claim issues being analyzed were originated form contractor side. The contractor put up the claim to client with factual narrative of ‘how’, ‘why’ and ‘when’ claims have arisen along with attachments of detail calculation of claim amount, site records, correspondences, photographs if any, change orders etc. On the other hand, the client verifies the claims referring to the various documented proofs and contract clauses, and makes their own justification. The final approval goes through different hierarchy of officials of different departments for their comments and vetting.

Recommendations for minimizing/avoiding claims in future projects:

Having studied the claim cases in Tala Hydroelectric Project, Bhutan, the author has learnt a lot with regard to how and why the claims happened in this project and the various factors that contribute to the occurrence of claims. The different ways and means adopted by the parties to resolve the claims have also been studied. From the knowledge gained by studying the claim issues in this project, the following are the recommendations for minimizing the occurrence of claims in future projects. However, in view of the constraint of the study: limited study period focused only on one project, the implementations of recommendations would further need the suggestions and inputs of the experts.

1.Involve site people in early recognition of potential areas of claim occurrence and risk sharing by partners.
2.Substantive pre-project site condition and hydro-geological investigations.
3.Proper planning, timely schedule updates and coordination according to the actual progress.
4.Develop clear, complete and unambiguous contract.
5.Have regular constructive meetings at site and device ways and means to prevent claims.
6.Have change orders or variation orders from the client before doing any work beyond the contract.
7.Clear provision in the contract defining the time frame for settling claims.

His thesis abstract is copied and pasted below.

Abstract

Due to the nature of hydropower construction projects being complex, uncertain, having long gestation period, involving many parties and requiring the integration of different work components (Civil, Mechanical and Electrical) together to work as a whole unit, claims are one of the common occurrences in such projects. Since claims are undesirable issues in construction projects, it is the common interest of all the parties involved to prevent/minimize from occurring at the first hand and resolve them in a most amicable way after their occurrence.

In this research, the study was done in Tala Hydroelectric project, Bhutan with the objectives to find out (1) How and why the claims occurred (2) What are the claim types (3) How are the claims raised (4) How are the claims resolved (5) What are the common causes of claims and (6) to provide recommendations for avoiding/minimizing claims in future projects with the experiences from this project. The study result shows that two main types of claims namely: Change Claims and Impact Claims have occurred in this project while the main/recurring sources of claims was found to be from ‘Differing site conditions’ coming mainly from the unforeseen hydro-geological conditions during the underground tunneling works. The methods and measures adopted in resolving the claims issues was mostly through the negotiated settlements while few cases of arbitration did also occur. The fact that most of the claims have been resolved through negotiation indicates that the parties enjoyed cordial relationship which enabled the project to successfully complete despite many hindrances due to encounterance of worst geology.

With the findings and the lessons learnt from this construction project, it is hoped that it will guide and help improve in the project performance and claim management in future hydropower construction projects in Bhutan.