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Claims management: The second part of power plant construction change management

By Peter G. Hessler
President, Construction Business Associates, LLC

This article is a part of a series on managing change in power plant construction. After his first article on contract management, Hessler moves on to claims management and how to avoid costly mistakes. Best-selling author of Power Plant Construction Management: A Survival Guide, Hessler’s valuable experience and practical knowledge guides all stakeholders in power plant construction on how to handle claims when schedules and plans change.

Case Study
Claims, not properly managed, can cost more than the original contract itself. Take the case of the electrical contractor who was to install cable trays, cabling and instrumentation at a large power plant, but could not get access as originally planned. Being the “nice” guy, he did lots of work-arounds to continue some kind of job-site progress. However, he just could not install trays and instruments where support steel was not yet in place, and he could not make connections where equipment had not yet been installed.

However, to be a team player, he kept personnel on site to work on anything that might be made available, whenever it was available. He installed, took down and re-installed access scaffolding numerous times, just to achieve some semblance of progress. He performed work that was not in his original contract, just to satisfy his client. But he got further and further behind, both in progress and in payments.

After months of this, he finally felt it was time for some action. He had an expert prepare a claim. Although the job was not yet complete, an independent assessment had shown that there was enough turmoil to justify a claim that almost exceeded the original price of the contract itself. But then the claim was rejected and he was forced to seek legal help.

After lots of time (years), after lots of money (nearly a million) and after lots of ill will, a court determined that the contractor was due some redress. But by then, his surety had already spent many millions to make the job whole. Many of his suppliers had stopped issuing credit and he had been forced into bankruptcy.

One has to ask, “Did it have to end this way?” and the answer is, “No.” It happened because change was not managed, it was just allowed to happen. Today, there’s a lack of experience in managing change. Almost everyone has heard of the many multi-million dollar lawsuits over issues encountered when a power plant was built, or rebuilt, due to changes during the job. Since change will occur, in many different ways, knowing how to manage it is an essential tool in today’s litigious atmosphere of power plant construction. Managing claims is part of this change management process.

Of course, managing claims is never simple, but that doesn’t mean it can’t be done, and done effectively. The first step to claims management is to avoid most claims to begin with. That does not mean all claims should be avoided; some claims are very legitimate, agreed to by all parties up front, and honored accordingly. The issue here revolves around avoiding contentious claims.

Avoiding Contentious Claims
Fortunately, there are steps that owners and contractors can take towards this end. First, learn all you can about each other. Risk shifting by owners, A/Es and GCs, has become the norm. Large firms often create special corporations to build a project, with the specific intent of limiting their liabilities. As a contractor, be sure there’s a way to pierce that ‘corporate veil.’ As an owner, be sure the project-specific corporation meets the needs of the project and its participants.

Next, have a mandatory process of review and negotiations. Insist on a systematic process of reviewing all potential claims. Large new construction projects, and overhauls with unknown scopes (such as what work will be required once the turbine has been opened and inspected), could require the participants to hold weekly meetings to review any items of possible dispute.

Another claims management technique is having a mechanism that encourages both sides to meet and discuss problematic items at varying levels of management. This kind of action can greatly enhance the resolution of claims by negotiation among senior managers of both parties, eliminating the need for a legal resolution.

Be Prepared
Then, be prepared. Being prepared forces one to be cognizant of the potential for claims, whether being in the position of the claimer or being the claimed. One step is maintaining all documentation. It is not sufficient to only keep the “latest” version of a document. For the resolution of most claims, a trail of evidence, a history, must be available. This suggests that all versions and revisions of pertinent documentation must be available. Otherwise, the opposing party may reconstruct their evidence and their version will probably not be yours. The most obvious of documents to which this applies is the construction schedule.

For example, let’s suppose the project is nearing completion and the earlier mentioned electrical contractor has not yet set the motor control center, nor pulled the power cables to the boiler feedwater pumps, all due to lack of access. Now it’s time to fill the boiler with water for the hydrotest, and the feedwater pumps are not operational. The boiler contractor claims for an extension of time and related delay charges to the owner. The owner claims these damages from the electrical contractor. If the electrical contractor did not keep the entire series of schedules, as they were developed and issued, and especially if he did not have other documentation contesting the delays he was under, he will have a difficult time proving that others delayed him. It’s extremely important to keep everything!

Another issue of claims management is providing the proof of cost impact. This can be done by setting up cost codes at the start of the job, and then diligently inputting the data on a regular basis. Once there is even a hint of a claim, each party can compare the related costs to actual input data and verify that they are representative of the issue at hand. That, in itself, does not constitute acceptance of a claim, but it does set up the basis from which to negotiate.

Schedule data can be equally important. Referring to the earlier example of the unavailability of the boiler feedwater pump, the contractor’s schedule should clearly demonstrate how the work was intended to be done. It should be sufficiently detailed to show the use of major equipment, movement of materials and number of crews (manpower loaded). Cost loading it (expected cash flow in/out) will also help. This schedule should be updated on a regular basis throughout the life of the project, with distribution to all parties.

Finally, all claims must be documented and that requires a good record-keeping system. It is therefore very important that each party to the contract takes a hard look at their record-keeping system, runs some tests on it and sees how well it performs. If it does not meet expectations, then it needs to be modified to accomplish its goals.

Three-legged Stool
With this article, we’ve now examined two of the three legs of the change management stool. In June’s article, we examined the first leg and saw how important the contract language can be. In this article, we discussed some thoughts on claims management. In a future article, we’ll examine the third leg of the change management stool by emphasizing the role insurance plays in managing change. All three legs must be managed together to support the stool that represents the change management process that is based on the contract. What is important to recognize is that changes will occur and one must be ready to manage them. The unexpected can be tamed!

This article is based on portions of the best-selling book, Power Plant Construction Management: A Survival Guide by Peter G. Hessler and published by PennWell Books.

Peter Hessler is the President of Construction Business Associates, LLC, a provider of business management services to the power plant construction industry. He has over 30 years of experience in the power plant maintenance and construction industry worldwide, having worked as an owner, contractor and consultant. He holds a Bachelor’s degree in mechanical engineering from Virginia Polytechnic Institute and is a member of ASME and the Lean Construction Institute. In addition to consulting for owners and contractors, Hessler also speaks at industry conferences, is a guest lecturer at Columbia University on the topic of the construction world overseas and has written the best-selling book Power Plant Construction Management: A Survival Guide, available from PennWell Books. He can be contacted at [email protected].