5 Traps for the Unwary in the NDDOT Claims Process

5 Traps for the Unwary in the NDDOT Claims Process

April 17, 2018

By Jeffrey A. Wieland

jaw-bp-portrait

 

Jeff Wieland is a Shareholder in the firm’s Construction Law and Commercial Litigation Department, licensed to practice in Minnesota and North Dakota . Jeff can be reached at 612.359.7605 or jwieland@fwhtlaw.com

 

 

 

The second law of thermodynamics says that the entropy of a closed system always increases.  In layman’s terms – stuff happens.[1]  Construction projects definitely follow that law.  Stuff frequently happens on construction projects, and that can change the bargain between the parties.  For example, a contractor bids a job at a certain price because the soil borings showed dry sand throughout the project.  But once the digging starts, the contractor discovers subsurface boulders and water.  The project being built is not quite what was bid, so the contractor wants an adjustment in compensation.  That’s when the claims provisions of the contract come into play.

Contracts are supposed to define the rights, responsibilities, and remedies of the parties.  In theory, that should make for harmonious business relations because everyone knows where they stand.  All too frequently, however, contracts become overly complex, and that complexity becomes a weapon that one party can use against the other.  The claims provisions in the North Dakota Department of Transportation (“NDDOT”) Standard Specifications for Road and Bridge Construction, 2014 edition, are a good example of that phenomenon.[2]

Sometimes when stuff happens on a project, the contractor and NDDOT can amicably agree on an adjustment in compensation.  But sometimes, the contractor and NDDOT cannot agree on whether a contract adjustment is required or on the amount of additional compensation owed.[3]  The contractor is obligated to finish the project, even though the work or conditions may not be what the contractor envisioned when the project was bid.[4]  The dispute is resolved after the work is complete through the claims process.[5]  That can be a severe hardship for contractors because they may have to wait months or even years to recover the costs they incurred performing the work affected by the claim.

I’ve litigated several claims for contractors against NDDOT.  In every instance, NDDOT asserted non-compliance with some provision of the claims process as a defense to the contractor’s claims.  In other words, NDDOT’s position was that even if the contractor performed more or different work than was indicated in the contract, the contractor was not entitled to any additional money because the contractor did not strictly follow every step in the claims process.  NDDOT has an obligation to safeguard the public’s money against frivolous or non-meritorious claims, but the claims process can also become fundamentally unfair to contractors.  NDDOT writes the Standard Specifications, and if contractors want to work on NDDOT projects, they have no choice but to accept those specifications as part of their contract.  NDDOT has an incentive to make the contractual claims process very complicated because the more steps there are in the process, the greater the likelihood that the contractor will miss a step, giving NDDOT a technical defense to the claim.

The diagram below is a summary level flow-chart of the NDDOT claims process.[6]  NDDOT has a similar diagram in its Construction Records Manual.[7]

Click for a larger version of this image

 

This process is complicated and it contains several traps for the unwary contractor.

Trap 1:  Notice of Intent to File a Claim

The stated purpose of the Notice of Intent to File a Claim (“NOI”) is to give the Department notice of a claim issue so that it can decide how it wants to handle the problem, and so that it can track the added costs.[8]  Given the Department’s obligation to safeguard the public’s money, that is entirely reasonable in theory.  I don’t think it works that way in practice, though.

The Department is usually very thorough at tracking costs on its projects.  I have not seen any evidence that the Department tracks costs differently after an NOI has been submitted.  The Department is also usually pretty good at tracking progress and issues on its projects.  Problems are usually discussed in regular status and coordination meetings and in correspondence.  I’ve always thought it disingenuous when the Department argues that it is somehow prejudiced and that a claim should be denied because the contractor did not submit an NOI on a problem that was openly discussed and documented in the minutes of multiple meetings.

One type of claim is especially troublesome from an NOI perspective.  The Standard Specifications allow contractors to ask for a price adjustment when large changes in quantities occur.[9]  A large quantity change, defined as a deviation of plus or minus 25% from the original estimated quantity, is deemed a significant change to the work that can justify a price adjustment.[10]  But submission of an NOI is a condition precedent to eligibility for a price adjustment.[11]  The problem is one of timing.  Some pay item quantities are tracked in real time with records like tally sheets and load counts, but they usually aren’t totaled and compared with bid quantities until the end of the month when a progressive estimate is generated.  Other pay item quantities are only determined much later by doing cross-sections.  A large overrun or underrun of those pay items may not become apparent until after the work is completed, rendering the notice and enhanced cost tracking justifications of the NOI moot.  The value of an NOI on this type of claim is questionable, but the specifications require it.

In every case I’ve litigated with NDDOT, the Department asserted lack of proper notice as a defense to the contractor’s claims.  The Department argued that the contractor failed to submit an NOI, that an NOI was incomplete, or that an NOI was not timely.  Sometimes we were able to overcome those defenses, sometimes not.  The consequence of losing a fight over an NOI defense is often complete denial of the claim.[12]  The moral of the story is this:  Filing NOIs is like voting – do it early and do it often.  Submit an NOI on every potential claim as soon as it arises with as much information as possible so that the Department cannot later raise lack of proper notice as a technical defense against the claim.

Trap 2:  Tracking of Costs During Claim Work

After a contractor submits an NOI, the next trap for the unwary is in the record keeping that is required during the work affected by the claim.  If the contractor and the engineer cannot agree on a negotiated price for the claim work, the Standard Specifications require the contractor to keep records on the claim work as if it were being done under Force Account.[13]

There are two distinctions here that are important.  First, the engineer may direct the contractor to perform the changed work under Force Account.[14]  That means that the Department does not dispute the contractor’s entitlement to payment for the work, and that it agrees to pay the contractor at Force Account rates.[15]  Second, the engineer may only direct the contractor to track costs under the Force Account provisions.  In that case, the Department is reserving its right to dispute the contractor’s claim.[16]  That means that there is no agreement between the parties on compensation for the changed work.

The Standard Specifications direct the contractor to track its costs on disputed claim items under Force Account principles, but they do not say that the Department will pay, or that the contractor’s claim is limited to, those amounts.  For example, the Force Account provisions provide for payment of contractor owned equipment at 70% of the hourly ownership cost in the Rental Rate Blue Book.[17]  That price may be different than the contractor’s bid rate.  The contractor should certainly report the hours the equipment was used, but it should also reserve the right to claim an amount different from the Rental Rate Blue Book in its claim.  Ultimately, an arbitrator will decide the fair rate for the equipment.

Besides keeping detailed records of the claim work, the contractor must compare and reconcile its records of labor, materials, and equipment with the engineer daily.[18]  From there, the contractor must also submit weekly summary statements of costs on the changed work.[19]  These record keeping and reporting requirements are particularly onerous for smaller contractors that do not have the margins or financial wherewithal to support a dedicated project manager.

Trap 3:  Tracking Delays During Claim Work

Some claims are not overtly about money; they are about contract time.  But as the saying goes, time is money.  Contractor claims for additional contract time due to delays or added work become issues of money through increased general conditions costs and through liquidated damages.

Just as with cost reporting, the Standard Specifications impose onerous reporting duties on contractors for claims for extensions to contract time.  The contractor is obligated to give notice of the delay “once the Contractor becomes aware of the delay, not at the conclusion of the delay.”[20]  The Standard Specifications have draconian waiver language related to notice of delays.[21]  After giving notice, the contractor must keep daily time records of the labor, material, and equipment affected by the delay, as well as the operations and station locations of the impacted work.[22]  These records do not have to be compared with the engineer’s at the end of each day, but rather each week.  Strangely, the Standard Specifications require that the comparison be done each Monday.[23]  The contractor has to provide written notice to the engineer within 10 days of any disagreements between the contractor’s and engineer’s records.  Failure to provide that notice means that the Department’s records become conclusive.[24]

The contractor is also required to submit to the Engineer each Monday a written report that describes the overall effect of the delays.  The report must give: a) the number of days the contractor is behind schedule; b) a summary of operations that have been or will be delayed; c) how the Department’s acts or omissions delayed each operation; and d) itemization, calculation, and documentation of all costs incurred due to the delay.[25]

Trap 4:  Submission of Claim Documentation

After the claim work is completed, there are two deadlines for submission of the claim.  The contractor must submit the total amount of additional compensation and time requested with a detailed explanation within 30 calendar days of completing the affected work.[26]  If the contractor has been diligent about the daily and weekly reports discussed above, that should not be difficult.

The second claim submission deadline is 90 calendar days after the Department issues its final estimate for the project.[27]  By statute, the contractor’s claim submission must be made under oath and “must state the monetary amount of the claim, the reason for the claim, when the loss was incurred, and a short statement of the factual situation under which the claim arose.”[28]  The Department radically expanded that statutory requirement in the 2014 edition of the Standard Specifications.  The claim submission must now include, at a minimum:

  1. A detailed narrative describing the issue, including:
    1. The dates, locations, and work affected by each claim issue.
    2. The date or dates when the conditions became evident, or the date or dates events occurred, that resulted in each claim issue.
    3. The dates of all notices submitted by the Contractor to the Engineer and the dates of all responses issued by the Engineer for each claim issue.
    4. The name and work assignment of each Department representative knowledgeable of the facts related to each claim issue.
    5. The name and work assignment of each Contractor employee knowledgeable of the facts related to each claim issue.
    6. References to the relevant provisions of the contract that support each claim issue and a statement of how the provisions support each claim issue.
    7. Schedules and updates prepared in accordance with Section 108.03, “Progress Schedule,” and Section 108.06, “Determination of and Extensions to the Contract Time,” describe [sic] delays or time extensions related to each claim issue.
    8. The identification of relevant project documentation and communications related to each claim issue.
    9. A statement indicating whether each claim issue is based on provisions of the contract or on an alleged breach of contract.
    10. For time extension claims, the number of days requested and the basis of each claim as determined by an analysis of the construction schedules.
  2. Copies of all project documentation that support the narrative.
  3. Bid documentation used to prepare the bid, if the contract did not require escrow of bid documentation in accordance with Section 103.08, “Escrow of Bid Documentation.”
  4. The amount of compensation requested and detailed explanations and calculations of the requested compensation in accordance with Section 109.03, “Compensation for Contract Revisions.” The Department will not allow “total cost” claims.
  5. Copies of information previously provided under Section 104.04.B, “Dispute Resolution.”[29]

Naturally, the Department put waiver language into the Standard Specifications.  “Failure to supply the following information for each claim issue constitutes a waiver of claim for additional compensation for each submitted claim item.”[30]  That seems particularly harsh since much of the required information would already be in the Department’s hands from the NOI and the daily, weekly, and end of work reports and summaries discussed above.

Submitting a claim under the 2014 Standard Specifications is not a trivial exercise.  Contractors should consult their legal counsel early to make sure there is enough time to gather all of the required documents and to assemble them into a coherent and persuasive package.

Trap 5:  Post-Claim Arbitration Deadline

The contractor must remain vigilant even after the fully documented and certified claim is submitted to the Department.  The Department must respond to claims under three million dollars within 60 days.  It has 180 days to respond to claims over three million dollars.[31]  If the Department denies a claim, the contractor must serve the Department with a demand for arbitration within 90 days of notification of the Department’s denial of the claim.[32]  Failure to meet that deadline could result in the arbitrator refusing to even consider the claim.

Conclusion

The NDDOT claims process is long and complicated, but contractors can navigate it.  The keys are knowing the steps and then being diligent about meeting requirements and deadlines.  Anytime a potential claim arises, contractors should contact their legal counsel to ensure that the claim is preserved and submitted properly.

 

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[1] This is the polite formulation of that saying.

[2] Throughout this article I will refer to these as the Standard Specifications.  Note that the 2014 Standard Specifications have significant differences from the 2008 edition.  The Standard Specifications are incorporated by reference into every NDDOT road construction contract.

[3] Not all contract adjustments are monetary.  Contract time is also frequently adjusted.  Time issues, however, often become money issues through assessment of liquidated damages.

[4] See Standard Specifications § 104.02.A.

[5] See Standard Specifications § 104.05.

[6] Contractors should review the Standard Specifications and the special and supplemental provisions incorporated into their contracts carefully.  This flow-chart is necessarily only a top-level summary and cannot capture all of the details in the claims process.  Contractors should consult with their legal counsel as soon as a claim issue arises to make sure the right to make a claim is properly preserved.  This chart is necessarily compressed.  If you would like a larger version of it, please email me and I’d be happy to send it to you.

[7] See NDDOT Construction Records Manual, Section 8 at Appendix 6 (page 40 of the document), available at https://www.dot.nd.gov/manuals/construction/constr-records/2014/section8.pdf.

[8] See N.D.C.C. § 24-02-26.1; Standard Specifications § 104.04.

[9] See Standard Specifications § 104.02.C.

[10] There is an added caveat.  Price adjustment for large quantity changes is only available on “major items of work,” which are defined as pay items that constitute at least 5% of the original contract amount.  See Standard Specifications §§ 104.02.C and 101.04.  The deeper implications of that caveat were discussed in one of my previous Briefing Papers, available at http://fwhtlaw.com/briefing-papers/numbers-dont-lie-an-analysis-of-estimated-versus-actual-quantities-on-north-dakota-department-of-transportation-projects/.

[11] See Standard Specifications § 104.02.C (“If the Contractor believes an alteration in the work is a significant change that necessitates a contract revision, the Contractor shall notify the Engineer in accordance with Section 104.03, ‘Contractor Requested Contract Revisions.’”).

[12] See Standard Specifications § 104.04.A (“Failure to notify the Engineer properly of the intention to file a claim constitutes a waiver of a claim for compensation or a time extension and releases the Department from responsibility for providing compensation or a time extension for any related claims filed under Section 104.04, ‘Notice of Intention to File a Claim’, and Section 104.05, ‘Claims for Adjustment.’”).

[13] See Standard Specifications §§ 104.03.A.2, 104.03.B, and 109.03.D.

[14] See Standard Specifications § 109.03.E.1 (“The Engineer may direct the Contractor to perform the revised work on a force account basis.”).

[15] That can have important cash flow implications for the contractor.  The Department is obligated to pay Force Account work within 30 calendar days of receiving contractor-approved statements of costs.  See Standard Specifications 109.03.E.9.

[16] See Standard Specifications §§ 104.03.A.2 and 104.03.B.

[17] See Standard Specifications § 109.03.F.4.b.  Reliance on the Rental Rate Blue Book to determine equipment costs is an unfair burden on contractors.  Calling it a book is a misnomer because it is actually an online database.  Access to the database costs several hundred dollars per month.  See https://equipmentwatch.com/equipment-manager/.

[18] See Standard Specifications § 109.03.E.7.

[19] See Standard Specifications § 109.03.E.8.

[20] See Standard Specifications § 108.06.B.1.

[21] See id. (“The Contractor waives entitlement to a time extension or compensation for delay or costs incurred before the Contractor notified the Engineer of the delay.”).

[22] See id.

[23] See id.

[24] See id.

[25] See id.

[26] See Standard Specifications § 104.04.B.

[27] See N.D.C.C. § 24-02-26.1; Standard Specifications § 104.05.A.  The Standard Specifications section says, “The Department will only consider written claim submittals received within 90 calendar days from the time the Department submitted the final estimate to the Contractor, as outlined in Title 24 of the NDCC.”  What happens if the Department does not issue a final estimate in a timely manner?  Can contractors force resolution of a claim by submitting it before the Department issues a final estimate?  This is not a trivial hypothetical because the Department is often very slow to issue final estimates.  One of my previous Briefing Papers, available at http://fwhtlaw.com/briefing-papers/three-problems-retainage-nddot-projects/, discusses this issue in depth.

[28] N.D.C.C. § 24-02-26.1.

[29] Standard Specifications § 104.05.A.

[30] Id.

[31] See N.D.C.C. § 24-02-26.1.

[32] See id.

 

This discussion is generalized in nature and should not be considered a substitute for professional advice. © 2018 FWH&T

 

 

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