7.

Contract Changes Management

8. Claim and Dispute Management System

By Habtamu.A 1
 Introduction
The two most important issues considered in
contract change management are Uncertainties
and Changes.
Uncertainties are issues that can either be
difficult to reasonably predict or unknown during
the planning phase of Procurement and Contract
Management.
Changes are issues requiring alterations during
the implementation of Procurement and Contract
Management.

By Habtamu.A 2
 Uncertainty
Uncertainty is the difference between the amount
of information required to perform the task and
the information already available by the planning
team.
One can clearly understand that uncertainty is the
major factor that conflicts with prediction or
planning.

By Habtamu.A 3
 Uncertainty & changes
As projects are planned under a certain level of
uncertainty, it implies that all projects take over
risks during implementations.
This can be one of the major reasons why changes
occur during implementations.
A quantitative estimate of a risk and the
subsequent pricing for it is a difficult task
particularly in developing countries  

By Habtamu.A 4
Mitigation of Uncertainties/Risk
Absorbing/retention: Provisions in the
form of Contingencies, Alterations, etc are
made and used to absorb changes caused by
uncertainties.
Dividing or Splitting: When a project
uncertainty is high or there is less past
experience, dividing projects into packages
or different phases or to make them smaller
sizes, etc is to divide or split to minimize
the uncertainties.

By Habtamu.A 5
Postponing: When Contracts could not
clearly state specifications, quantities and
estimates, they often place Provisional
quantity or provisional Sum to postpone
uncertainties.
Transferring: Lump Sum Contracts, DB
and BOT delivery systems are some form
of contractual approaches to transfer
uncertainties from Owners to Providers.

By Habtamu.A 6
Quantifying Risks
Once the likelihood of occurrence of risk is
established, the next step is to predict what
impact that occurrence will have on:
◦ The construction cost,
◦ Schedule,
◦ Quality,
◦ Safety,
◦ Client relationship, or
◦ Contractor’s ability to fulfill the
obligations of the contract.

By Habtamu.A 7
 Quantifying Risks …

When any of these risks occurs, the consequences

will usually involve the following:
◦ The need to perform additional work,
◦ The need to redo work that has already been
done,
◦ Delays to the schedule,
◦ Quality defects,
◦ Cost overruns, and
By Habtamu.A 8
 Quantifying Risks …

To focus attention on the risks that

potentially could have the greatest negative
influence on a project, the CM must be able
to quantify and rank each risk.
A common method for doing this is to
assign numerical values to each factor
relative to probability and impact.
Once these numbers are assigned, the CM
can then calculate an overall risk rating for
each factor.
By Habtamu.A 9
 Determining the probability index
The probability index represents the likelihood
that the risk will occur based upon the
evaluator’s expertise, experience, and judgment.
A numerical score from 1 to 3 is assigned to
each risk factor as follows:
◦ High risk (3) when its probability of
occurrence ranges from 75 to 100%
◦ Medium risk (2) when its probability of
occurrence ranges from 50 to 75%
◦ Low (1) when its probability of occurrence is
less than 50%
By Habtamu.A 10
Determining impact potential
The impact potential of each risk factor
is based upon the evaluator’s expertise,
experience, and judgment.
A numerical score from 1 to 3 is
assigned to each risk factor as follows:
◦ High impact (3)
◦ Medium impact (2)
◦ Low impact (1)

By Habtamu.A 11
Determining impact potential …

 Risks associated with third parties have a higher

uncertainty and thus are often given high-impact scores.
 Once probability and impact scores are assessed, a risk
rating can be determined by multiplying the probability
score by the impact score:

◦ Probability × Impact = Risk rating

By Habtamu.A 12
 Quantifying Risks example

Identified Risk Probability Impact Rating

Confusing, contradictory, or
2 1 2
incomplete plans and specs

Differing subsurface
2 2 4
conditions

Adverse weather 1 1 1

Community protests 2 3 6
Once risks are rated, it can be determined which ones to
focus on and how best to mitigate them.

By Habtamu.A 13
Risk Mitigation Strategies
The risks that pose the greatest threat are the ones
that you want to focus your risk mitigation
strategy on.
It is often helpful to chart risk ratings to establish
a visual display of where the greatest danger is as
you plan your project and strategize to mitigate
negative influences.

By Habtamu.A 14
Simple Risk Diagram

By Habtamu.A 15
Requirement Changes Management Systems

 There are almost no times that projects are realized

without requirement changes.
 In virtually all contracts, that is why provisions for
requirement changes are retained so that Project Owners
can prerogatively make changes during implementations
◦ E.g. Clauses 51 and 52 of the General Conditions of
FIDIC Red Book provided provisions for Alterations
(Additions and Omissions) to enable Project Owners use
the Engineer (the Consultant) to make requirement
Changes.
◦ Requirement changes can either be additional or
extra or excess and/or omission works.

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Rights & Obligations of the parties
Requirement changes can cause review of designs
and/or create additional or changes in designs
and/or just work orders to instruct contractors to
carryout the requirement changes.
While project owners retain the right to
requirement changes, the contractor is obliged to
accept as per the conditions of the contract.
The contractor is entitled to request and agree
upon new or existing rates for such changes.

By Habtamu.A 17
 Change Orders
Written instructions, agreed by the Project Owner
or His Representative, directing the Project Doer
to make changes with or without the Consent of
Regulatory Bodies.
There are three kinds of Change Orders:
1. Unilateral Change Order: provides the right
to any of the parties to make changes without
causing any effect
2. Bilateral Change Order: require the
agreement and/or consent of the two
contracting parties
3. Multilateral Change Order: require the
agreement and/or consent of the three or more
contracting parties
By Habtamu.A 18
Effect of Requirement changes

Based on the different types of change orders

modifies contracts in either of or the
combinations of the following three ways: 
◦ Time changes only,
◦ Time changes accompanied by Cost
Compensations, and
◦ Cost Changes only.

By Habtamu.A 19
 Time Changes Management System

Contractual Agreement defines the Contract Time of a

project.
The Completion Time of projects include:
◦Dates between Contract Agreement and Handing Over of
Site,
◦Mobilization Period(s),
◦Contract Time, and
◦Justified and Agreed Supplementary or Extension of Time.

By Habtamu.A 20
 Construction Time Competitions

 Dhos = Dcont + Thos;

 Dstart = Dhos + Tmob;
 Dcomp = Dstart + Tcont + Tjust + Tsupp
 If Dact < Dcomp  Bonus, if any
 If Dact > Dcomp  Time Overrun and Liquidated Damage
Dhos = Date for Handing Over of Site
DCont = Date for Contract Agreement
Thos = Time between Contract agreement and handing over of site
Dstart = Date for Start of Construction Works
Tmob = Time for Mobilization
Dcomp = Date for Completion Time
Tjust = Time for Justified Delay; and
Tsupp = Time for Supplementary Works or Agreements.

By Habtamu.A 21
 Time Delays and Overruns
Time delays can occur in components of a project
or trades of works, but when their cumulative
effect makes the actual completion time beyond
the contract completion time, it is called time
overrun.
Generally, time delays can be classified into:
Concurrent and Serial Delays

By Habtamu.A 22
 Time Delays and Overruns …
Concurrent delays are delays that occur simultaneously
when they were carried out parallel.
Their effect for the project can be assessed using that part
of the work which causes longest delay and its
consideration are made as such
 For instance, if a project owner agreed to supply material
and irrespective of its delay, if the project faced adverse
weather condition; the project can not be executed.
 Therefore, both delays could not be counted as serial
delay but concurrent and the one that causes longer
delay is considered for time delay computations.

By Habtamu.A 23
 Serial Delays
Justifiable and Non - Justifiable Delay
• Justifiable delays are delays that occurred due to causes
which are beyond the control of project doer.
If delays are caused by project owners, the contractor or the
consultant or the supplier is directly justified for the effects
on delay of the project.
 Force Majeure will also be one of the causes for justifiable
delay.

 Non-Justifiable or Non-Excusable Delays are delays that

occurred due to negligence to fulfill contractual obligation
and are within the control of the contracting parties.
Contractors or Consultants or Suppliers will be liable for
Non - Justified delays.

By Habtamu.A 24
Claim and Dispute
Management System

By Habtamu.A 25
 Introduction …
Claim is mostly concerned with entitlements
and liabilities arising under, or as a result of,
a legally valid contract.
A construction claim is therefore can be a
demand for payment of additional
compensation, adjustment of the parties'
respective contractual obligations, Extension
of Time or compensating delay damages, or
any other change with regard to the
contractual conditions or terms
By Habtamu.A 26
Introduction …
Claim in practice can also be understood in
different ways based on the perceptions held by
contractual stakeholders.
◦ A claim is an assertion to a contractual
right.

By Habtamu.A 27
Types of claims
1.Time Related Claims: Claims associated
with delay or in time completion of
projects where either of the following six
entitlements or Penalties are subjected to:
◦Time Extension only
◦Liquidated Damages only
◦Time Extension and Cost Compensation
◦Concurrent Compensations
◦Bonus
By Habtamu.A 28
2. Cost Related Claims: Claims associated with
monetary compensation where either of the
following entitlements or penalties are
entertained:
◦Additions requiring rate adjustments
◦Price Changes
◦Provisional sum adjustments
3. Default by Contracting Parties: Claims
associated with non performances of contractual
obligations such as:
◦Delay in Payment Certificates
◦Suspensions and Terminations
By Habtamu.A 29
Claim Administration Processes (CAP)
Claim administration process is understood as
the process for the compensation of any damage,
and/or changes resulted during the
implementation of Construction projects
The CAP is then understood as the process
starting from a willful act of the claimant
through claim notification by either of the
contracting parties up to and including claims
approval and acceptance by both the contracting
parties for agreed or enforced compensations or
otherwise called claim enforcement.
By Habtamu.A 30
CAP …

•Claim Notification
•Claim Preparation •Claim Enforcement
•Claim Submittal •Claim Closure

Claim Submittal Claim Processing Claim Enforcement

•Claim Handling
•Dispute Resolution
•Claim Approval

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Claim Submittal
This is a process by which the claimant is
obliged to claim within a reasonable period of
time (28 – 30 days in most contracts)
followed by her/his preparation for all
substantial documents.
This constituted that a claim has been filed for
its consideration if all these three sub
processes called Claim Notification, Claim
Preparation and Claim Submittal are fully
undertaken by the claimant.
By Habtamu.A 32
 Claim Processing
 This process initiates checking of the claim whether:
◦ Legally or contractually supported or not;
◦ documents provided are valid and reliable to substantiate
the claim for consideration or not; and
◦ overall procedural requirements have been followed or not
 After verifying, proper computations and evaluations will be
carried out to present the proposed compensation  Claim
Handling.
 The contractual parties will pass through different dispute
resolution system depending on their acceptance over the
proposed compensation varying from the simplest mediation
by the consulting engineer to the final court ruling in the
form of litigation

By Habtamu.A 33
 Dispute resolution (DR) systems
1. Preventive: Partnering, Use of DR advisors and Use of
Facilitators for early neutral evaluation and advise to
prevent the happening of claims.
2. Amicable: Negotiation, Mediation, Conciliation and use
of Mini-Trials to administer the claim in a less formal,
simple procedure, more flexible, less adversarial and
strictly confidential mode so as to avoid the time and
cost implication of claim processing.
3. Judgmental: Adjucation or use of Dispute review board,
Arbitration and Litigation where the formal adjucatory
or common law system is applicable to bring the closure
of claim processing.

By Habtamu.A 34
Stages in DR

• Binding arbitration in lieu of

• No attorneys involved
• mediator facilitates
the negotiation
litigation
• Less expensive than litigation
• Each party is represented by an
attorney
• witnesses are called
• The decision is final.

Mediation Mini-trial
Arbitration

• one step up in terms of the amount of time and cost

invested
• Combines aspects of both mediation and litigation
• attorney is employed
• executive from each of the firms involved

By Habtamu.A 35
Claim Enforcement
This is a stage where the approved claim is
enforced and finally becomes a closure
therefore two sub processes are included
The claim enforcement process will
entertain the inclusion of the approved
claim into payment certificates where their
enforcement is due

By Habtamu.A 36
The End

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