Construction in Finland: Project and claims management

Selecting your project partners: Keeping the chain strong

In large-scale projects, very different players come together on the various levels of the delivery chain, each with their own expectations and preconceptions. The contractors’ degree of professionality may vary as well as their financial soundness. Probably the most effective tool of risk management is the careful selection of business partners.

When selecting a subcontractor for a crucial portion of your delivery scope, you may want that subcontractor to be liable for mistakes, and you also want them to be financially capable to actually pay the bill if something goes wrong.

Workability over liability

The main objective is, of course, that nothing goes wrong in the first place. After all, in the delivery chain, each company remains liable towards their own respective customer for that same delivery. When you are procuring parts of a delivery via a subcontract, it is highly likely that your own maximum liability will be higher than the liability cap of your subcontractor.

Hence, rather than relying on liability clauses, making the project work is priority. It is obvious that you will want to check your contractor’s background – reference projects, financial data, and the like. When the subcontract is important for you, you may also want to check the actual acting persons. Carefully drafted contractual procedures will ensure that the contractor sends project managers that have the experience they need, and that you have a say in the case of necessary changes in key personnel.

No weak links in the chain

Your subcontractor may again bring subcontractors, and that is fine and normal. However, your risk increases with the size of the deliveries that your subcontractor contracts out. Your subcontractor should be obliged to provide the core of the relevant services themselves.

A healthy delivery chain can be recognised by each link of the chain contributing substantially to the delivery. If you have a subcontractor who does not add relevant value to the delivery themselves but contracts most works out to another player, then the chain becomes too thin at that point.

Much of a project’s success depends on successful communication. Communication of relevant specifications, communication of changed circumstances and their impacts, communication between various contractors working on interdependent parts of the project. With the sub-subcontractor, you do not have contractual mechanisms to ensure that they get the right messages and will be held liable. But in order to make things work, you will anyway have to talk directly to them. When something goes wrong, it will be hard to know who said what and what that means for liability.

Variations in building contracts

The so-called General Conditions for Building Contracts (YSE 1998) govern the majority of construction contracts concluded in Finland. One of the most relevant issues covered by the terms is how to deal with variations to building plans during a construction project. Depending on the type of project and the level of detail of the plans the typical amount of modifications occurring during a construction project is estimated at 2-10% of the contract price.

The most common types of disputes involve

whether the requested works constitute a modification,

whether the requested change is permitted under the contract or under the governing law,

and ultimately the contractor’s right to claim additional compensation.

Obligation to implement a modification

Variations to the design, deficiencies in the plans or surveys or changes in construction regulations may, among other things, trigger the need to make changes to a construction contract in the course of the project. The YSE terms stipulate a procedure which applies when the original contract does not contain a mechanism to handle changes to the building plans or other additional works.

The YSE terms make a distinction between modification works and additional works. Modification works result from a change in a plan referred to in the contract. The modification may be either a change, increase or reduction of works. Additional works, on the other hand, are works carried out by the contractor which did not originally form part of the obligations agreed under the contract. For example, if the parties agreed on the installation of piping in a building, piping works in the yard area would likely qualify as additional works. On the other hand, the addition of further piping interfaces to the systems inside the building could be considered as modification works.

Under the YSE terms, the contractor is obliged to carry out the modification works requested by the client. The contractor may refuse to do so only if the requested modification would significantly alter the nature of the building contract work.

The contractor is entitled to an increase in the contract price provided that there is an increase in contractor’s obligations due to modification of the building plan. Such modification must be first indicated to the contractor by the client. In order to agree on the price adjustment, the contractor must submit a tender for the modification work. No modification work may be commenced before agreement in writing has been reached on the content of the modification and its effect on the building contract – unless execution of the relevant works is instructed as disputed works (see below).

The YSE terms contain no obligation to implement requested additional works. The parties may freely agree on the price, the time of completion and the impact on the project schedule. If no agreement is reached the contractor is not obliged to carry out the additional works – again with the exception that disputed works may be instructed.

Disputed works

If the parties are in dispute over the nature of the work – i.e., on whether it qualifies as modification or additional work – or if the parties cannot agree on the consequences of a modification in terms of price and/or schedule, the YSE terms provide that if the client so requests the contractor must complete the requested work.

The idea is that the dispute should not endanger the project under any circumstances. The consequences in terms of costs and schedule must then be determined later – if necessary, in litigation or arbitration.

If the client orders the execution of disputed work, the contractor should in any event provide the client with an offer in respect of the work the contractor regards as additional. The client then bears the risk that the work is to be compensated as if an agreement regarding reasonable compensation has been achieved.

If it is entirely obvious that the work demanded by the client is additional work, the contractor may also in some cases have grounds to terminate the contract instead of carrying out the additional work. But this is a risky road to take.

Procedural requirements

In practice, parties often deviate from YSE’s formal requirements. For example, the project schedule may be so tight as to make it impossible for the parties to follow the formal agreement procedure, or the parties decide to agree on the modification verbally.

If no written agreement on the price of the modification is concluded, the contractor risks losing the right to claim payment for the work done – even if it is not disputed that the works were modifications to the original plans.

If the client fails to indicate a modification to a contractor, the contractor may under certain circumstances lose its right to claim payment if no written agreement is made. The Finnish Supreme Court has highlighted the contractor’s responsibility to identify the modifications and communicate price and schedule effects.

The parties may, however, agree on a procedure that differs from the YSE requirements. Whether, and to what extent, a verbal agreement or an established site practice for contract modifications can overrule the formal written requirements laid down in the YSE terms, depends on the circumstances of the case. Practice established between the parties, the necessity of carrying out the work, and the benefit of the work to the client may all be of importance when considering setting aside contractual procedures.

Obviously, these considerations are mostly relevant for evaluation after the fact. In a prudently managed project, if it is anticipated that it will be impossible to follow the requirements set out in the YSE terms (or the contract), it is advisable to agree in advance in writing on any deviations from such requirements.

Claims management

It is imperative for any contractor in the delivery chain to arrange for project management that continuously monitors developments in the project and duly reacts if it turns out that something is not as it was intended. Any changes or obstacles to the work must be notified and specified, price and schedule effects must be outlined and discussed with the customer, and agreement must be found. If no agreement is achieved, the contractor may need to refuse execution of changed works unless the customer confirms that such works should be executed as disputed works.

All this is necessary in order to be able to make claims later. This kind of paperwork is often out of the comfort zone of site managers and supervisors whose focus is on getting things done. It is also work that can be experienced as a strain on the day-to-day cooperation between the contract parties, which will usually be fully amicable at this point of time.

Nevertheless, the potential losses for the contractor in case of negligent claim management are so substantial that arranging for claims management is an essential part of diligent project management. It will often be a good idea to entrust this task with a dedicated person not otherwise involved in day-to-day site work, so as to alleviate the aforementioned concerns.

The need for stringent claims management is not limited to a contractor’s relation to its customer. The same need occurs in relation to subcontractors. Most contractual arrangements require that a principal address any quality issues or schedule failures in due time during the project. Waiting until the completion of the works before sending reclamations or refusing takeover carries a high risk in a possible dispute. Hence, project-time claims management is necessary in both directions in the contractual chain.