What are the procedures for handling construction claims when a building project is halted midway?

Thread Content

What are the procedures for handling construction claims when a building project is halted midway? Over the past decade, the real estate and construction industries have become pillar industries of the national economy. With **each round of macroeconomic regulation or adjustment in industrial direction, many unfinished projects have emerged. Some of these projects that were halted or delayed were so due to insufficient funding on the part of the project owners, while others were caused by adjustments in **’s industrial policies; this inevitably led to economic disputes related to the projects. How to handle such issues fairly and reasonably, and resolve the economic disputes between contractors and clients in an appropriate manner, are problems that we often encounter in our daily management work. Drawing on practical handling experience, this paper explores aspects such as the principles for handling claims, the basis for claims, the determination of downtime, and the calculation of losses due to downtime, in order to handle engineering economic disputes more effectively. I. Project Overview: This project is located in Xiangluowan, Tanggu District, Tianjin. It features a frame structure with three basement floors and 35 above-ground floors, covering a construction area of 100,000 square meters. Construction was halted at the third basement floor due to funding issues; the construction crew’s personnel, machinery, and materials were gradually withdrawn from the site. After securing financing, the project owner intended to resume work and held several rounds of negotiations with the construction party. The main points of discussion centered on adjustments to labor costs, changes to the discount rate specified in the original contract, as well as costs related to entering and leaving the site and various losses incurred during the suspension of work. Both parties stuck to their positions and refused to compromise, resulting in unsatisfactory negotiation outcomes and a long delay in resuming work. II. Handling of Project Claims (I) Principles for Claim Handling Two principles should be followed when dealing with claims: first, the costs incurred must be necessary for the contractor to fulfill the contract and must have actually been incurred ； Second, the contractor should not benefit or suffer extra as a result of the suspension of work, nor should they be compensated for actual losses. (II) Bases for claim handling: 1. Provisions of the general clauses in the \"Tianjin Construction Project Contract Model Text\": If the employer fails to pay the project funds as agreed in the contract and construction is halted for more than 30 days, and the employer still does not pay the project funds (progress payments), the contractor has the right to terminate the contract. Upon termination of the contract, the contractor shall properly take care of the completed work as well as the purchased materials and equipment, and ensure their handover; furthermore, the contractor shall withdraw its own machinery, equipment, and personnel from the construction site as required by the employer. The party at fault shall compensate the other party for the losses incurred as a result of the termination of the contract. 2. Relevant provisions of the Contract Law: After one party breaches the contract, the other party shall take appropriate measures to prevent further loss ； No compensation shall be claimed for the increased losses if no appropriate measures were taken to prevent such increase. 3. Provisions of the Tianjin Construction Project Cost Quotas regarding losses due to suspended work. (III) Calculation of claim costs 1. Determination of the downtime period. When the project was halted, various procedures were not in order; too much time had passed, and there were no corresponding visas or claims procedures. Moreover, the tower cranes on site had not yet been removed, and some temporary materials were still stored there, resulting in certain losses for the construction party. It is difficult to determine the number of days of shutdown. Subsequently, according to the principle that the contractor should have a reasonable assessment of the project’s prospects and a rational understanding of the risks involved, and should take active measures to minimize losses, it is therefore obligated to arrange for the deployment of personnel and machinery in a timely manner. No compensation is provided for risks that an experienced contractor can reasonably foresee. For projects that use the Model Text for Construction Contracts, the model text can be referred to; the principle of using 56 days as the period for calculating downtime of labor and machinery can be applied, with 56 days considered as the standard calculation period, while special cases are handled on a case-by-case basis. 2. The issue of site supervision costs. Considering the actual situation, 2 supervisors are assumed to be present at the construction site, while no other personnel are taken into account. 3. Issue of compensation for stalled construction machinery. The scope of compensation for stalled construction machinery is limited to the immovable, unreplaced machinery required for construction before and after the suspension of work. After the work is suspended, the employer and the contractor should promptly count the equipment that has not been removed, and remove the machinery that can be taken down in a timely manner. Movable mechanical equipment reported by the construction contractor is not eligible for compensation. The compensation amount is calculated by multiplying the downtime fee specified in Tianjin’s mechanical shift quota by the duration of the shutdown, and this amount shall not exceed the residual value of the equipment prior to the shutdown. 4. The issue of discontinuing compensation for reusable materials. Scope of cessation of compensation for reusable materials: Concrete that has been poured but not yet cured, as well as scaffolding that has been installed during the suspension of work. Templates and scaffolding that, per the employer’s requirements, need to be kept on site to support subsequent construction activities; in this case, no such approvals were issued, yet a large amount of templates and scaffolding were left on site for an extended period. Based on the actual circumstances, compensation equivalent to 56 days’ worth of rental fees is provided. 5. The issue of compensation for temporary facility costs. First, for projects in which all temporary facilities have been completed in accordance with the requirements of the construction organization plan, the cost should be calculated based on the total amount allocated for temporary facilities as specified in the contract price. Second, for projects where not all temporary facilities have been completed, the compensation for temporary facilities = the cost of temporary facilities specified in the contract price × (actual area of the temporary facilities constructed / area of temporary facilities specified in the construction plan approved by the client). 6. Issue of calculating the cost of semi-finished products from remaining materials. The employer and the contractor (the supervision engineer may also represent the employer; the same applies hereafter) shall, in accordance with the provisions and scope set out in Article 28 of the general terms of the construction contract, inventory the remaining materials prepared by the contractor for this project that cannot be transferred to other construction sites. They shall promptly prepare a list of such remaining materials (semi-finished products), specifying the types, specifications, quantities, etc., of these materials; the list shall be stamped with the official seal of the entity and signed by the person in charge, to serve as a basis for calculating the cost of the remaining materials (semi-finished products). The costs associated with transporting the remaining general materials (semi-finished products) available for the project to other construction sites, to the extent that the contractor makes every effort to do so, shall be borne by the employer. The issue of compensation for losses resulting from interruptions in construction work is common in building projects. Short-term pauses lead to idling of labor and machinery, as well as financial losses, and cause delays in the project timeline. Prolonged suspension of work can even lead to the termination of the contract and the cessation of construction. When dealing with suspension of work, the following points should be observed: First, both the employer and the contractor have an obligation to take measures to reduce or prevent the expansion of losses after a suspension occurs. Second, the contractor should have a reasonable assessment of the project’s prospects and a sober understanding of the risks involved; they should take proactive measures to minimize losses, and therefore are obliged to arrange for the deployment of personnel and machinery in a timely manner. Do not wait blindly, thinking that the employer must compensate for the duration of the shutdown; otherwise, losses that cannot be compensated for will arise. Third, when a work stoppage occurs, both the contractor and the employer should keep accurate records of everything that happens during that period, and it is essential to issue relevant visas in a timely manner, which facilitates the processing of claims. How to properly determine the calculation of compensation for projects that are suspended midway is directly related to the legitimate economic interests of both the project owner and the construction company. Therefore, it is necessary to conduct a more in-depth and detailed analysis of the various expenses that should be included in the compensation for suspension or idling of work, as well as their calculation methods, based on the actual conditions of the project. This will enable more reasonable compensation to be provided, thereby avoiding serious economic disputes between the project owner and the contractor.