Construction Claim Case Study
Introduction
An international chemical company awarded time and material engineering and construction contracts to a large Engineering, Procurement, and Construction (EPC) firm for a $4 million engineering and $30 million construction upgrade to its styrenics plant. The engineering costs doubled and grew to $8 million. At 95% engineering completion, an additional $10 million of construction costs were identified. The owner approved the capital construction budget spend.
Just prior to construction turn-around, the EPC firm notified the owner of an additional $10 million in costs forecasted for the construction of the upgrade. Furthermore, the project was significantly behind schedule. Ultimately, the construction forecasts and costs continued to grow to $60 million during the turn-around, and the owner enacted its audit rights and withheld final payment.
Key Issues
The following issues framed the dispute between the owner and EPC firm.
- Scope changes and material increases were minimal as well as owner involvement in the EPC’s work.
- The EPC firm’s direct and indirect manhours significantly increased during the project.
- The EPC firm’s cost, schedule and resource forecasts were continually revised during the project, while productivity metrics showed planned progress.
Role
Our consultants’ role was to independently determine the following:
- The cause for the EPC’s manhour increases.
- Determine if the owner was entitled to withhold any amounts.
- The amount for which the owner may be entitled to withhold based on substandard work and EPC responsible delays.
- Assist the owner in negotiations.
Deliverables
The Request for Equitable Adjustment addressed the EPC firm’s project planning, scheduling, resourcing and cost forecasting. The document identified several areas of substandard work that contributed to the cost growth on the construction contract.
The project schedules were reviewed and analyzed. The schedules were identified as well below industry expectations and lacked the level of detail or accuracy that a project such as this necessitates for adequate planning of resources. The reported schedule critical path was not accurate nor could be used to efficiently manage resources or calculate anticipated completion dates. Despite this, the EPC firm’s scheduling budget significantly grew on the project.
The proportion of indirect manhours to direct manhours was substantially above industry standard, while project progress declined. This further substantiated the lack of management of resources.
An analysis of the cost forecasts identified that the EPC firm underreported the projected final project costs until the project was in the turnaround stage. The EPC firm also misrepresented its productivity efforts for both pre-turnaround and turnaround work.
An analysis of the engineering effort showed that engineering rework was also a major contributor to construction rework costs and excessive procurement cost growth.
The REA quantified $10 million of work that was associated with:
- Construction rework due to engineering and workmanship issues
- Construction labor productivity losses due to failure to manage resources
- Replacement costs associated with terminated subcontractor
- Damaged materials due to poor material handling
Results
Our consultants presented the REA and updated analysis at mediation. The focus was on entitlement, causation, industry standards, and resultant damages. The dispute settled at mediation with the EPC firm agreeing to some withholding of monies.