Hidden Risks Behind Sending an Improper Claim Notice

Claim notices are often seen as routine paperwork in construction projects, but their importance cannot be overstated. These formal documents act as the gateway to preserving a contractor’s rights to compensation, extensions of time (EOT), or other contractual reliefs. A poorly drafted or improperly timed claim notice can render a valid claim ineffective, jeopardizing the contractor’s entitlements and creating operational, financial, and legal risks.

In construction contracts, where disputes can escalate quickly, claim notices are not mere formalities but crucial tools for risk management and dispute avoidance. Despite this, contractors and subcontractors often fail to prioritize claim notices, resulting in significant hidden risks that surface later in the project lifecycle.

In this article, we will explore:

1. The significance of claim notices under standard forms of contracts.
2. Hidden risks of sending an improper claim notice.
3. Real-world case studies and practical implications.
4. Detailed guidance on drafting compliant claim notices.
5. Best practices for claim management to avoid disputes.

By the end of this article, construction professionals—contractors, subcontractors, and claims managers—will better understand how to mitigate risks associated with improper claim notices and protect their entitlements.

1. The Role and Importance of Claim Notices

Definition of a Claim Notice

A claim notice is a formal notification issued by a contractor or subcontractor to the Employer (or Engineer/Project Manager) to:

• Notify them of an event that may entitle the contractor to additional costs, extensions of time, or other remedies.
• Comply with specific procedural and time requirements outlined in the contract.

Claim notices serve two primary purposes:

1. Preservation of Rights: Claim notices ensure that the contractor retains their contractual entitlement to relief.
2. Early Warning Mechanism: They provide the Employer with early visibility of potential claims, allowing proactive resolution and mitigation.

What Does a Proper Claim Notice Include?

To comply with standard construction contracts, a proper claim notice must include:

• Identification of the event giving rise to the claim.
• Reference to the contract clause being relied upon.
• Details of the cause and impact (e.g., delay, cost escalation, disruption).
• Submission within stipulated timelines (e.g., 28 days under FIDIC).
• Contemporary records or initial evidence to substantiate the claim.

Significance in Standard Contracts

Different standard forms of contracts emphasize the importance of timely and compliant claim notices:

Failing to comply with these clauses—whether through delays, vagueness, or incomplete information—can result in severe consequences for contractors.

2. Hidden Risks of Sending an Improper Claim Notice

While contractors may be aware of the need to send claim notices, they often overlook the risks of sending notices that are:

• Late
• Vague or unclear
• Incomplete
• Non-compliant with the contract’s procedural requirements

These improper notices create risks that may not be immediately visible but can escalate into significant issues.

a. Loss of Entitlement to Claims

Failure to issue a proper claim notice—especially within the prescribed timeline—can lead to forfeiture of the claim. Many contracts, including FIDIC, have strict “time-bar” clauses.

Example Under FIDIC Red Book (Sub-Clause 20.1): If a contractor experiences delays due to unforeseen ground conditions and fails to notify the Engineer within 28 days, the claim can be rendered invalid.

• Impact: Legitimate claims for extensions of time (EOT) or additional costs may be lost entirely.
• Long-term Consequences: The contractor absorbs the financial and time risks, affecting the project’s profitability.

b. Rejection of Claims for Lack of Detail

Employers and Engineers have the right to reject claim notices that are vague or lack sufficient details. A claim notice that fails to:

• Specify the cause and effect of the event.
• Reference the relevant clause in the contract.
• Provide supporting records (e.g., schedules, logs, invoices).

... may be considered invalid or “non-compliant.”

Example Scenario: A subcontractor submits a claim for delays caused by design changes but provides no supporting documentation or evidence. The Employer rejects the notice, and the claim is never recognized.

• Impact: The subcontractor loses their entitlement to compensation and faces cash flow issues.

c. Escalation of Disputes

Improper claim notices increase the likelihood of disputes. When Employers reject vague or late notices, the contractor may escalate the matter through formal dispute resolution mechanisms such as:

1. Dispute Avoidance Boards (DABs)
2. Arbitration
3. Litigation

Risks of Dispute Escalation:

• Financial Strain: Arbitration and litigation are costly and time-consuming.
• Reputational Damage: Contractors risk damaging their relationships with Employers, reducing future opportunities.

d. Financial Risks and Cash Flow Problems

Improper notices can delay or invalidate claims for payment, putting significant financial strain on contractors:

• Delayed Payments: Claims for additional costs or variations may be rejected.
• Absorbing Costs: Contractors may have to bear the costs of delays, disruptions, or scope changes.

Case Study: A contractor submits a claim notice for material price escalation but fails to include supporting invoices or price indices. The Employer rejects the claim, forcing the contractor to absorb the rising costs.

e. Damaged Relationships with Employers and Subcontractors

Improper claim notices can lead to distrust and strained relationships with Employers, Engineers, and subcontractors. In back-to-back contracts, the failure to submit proper notices can cause cascading effects:

• The Employer rejects the contractor’s claim.
• The contractor cannot recover costs from the subcontractor.
• Subcontractors face disputes and financial losses.

This can create a ripple effect across the project team, resulting in delays, reduced productivity, and legal disputes.

3. Real-World Case Examples

Case 1: Contractor Loses EOT Due to Late Notice

In a project governed by FIDIC Yellow Book, the contractor experienced delays due to unforeseen weather conditions but submitted a claim notice 40 days later—12 days beyond the 28-day requirement. The Employer rejected the claim, arguing that it was time-barred under Sub-Clause 20.1.

• Outcome: The contractor lost their entitlement to an EOT, incurring penalties for late completion.

Case 2: Subcontractor Dispute in Back-to-Back Contracts

A subcontractor relied on the main contractor to submit a claim for additional costs due to scope changes. However, the main contractor submitted an incomplete claim notice with insufficient documentation. The Employer rejected the claim, and the main contractor could not pass down compensation to the subcontractor.

• Outcome: The subcontractor initiated legal action against the main contractor, leading to prolonged disputes and damaged relationships.

4. Best Practices to Avoid Risks

To prevent the hidden risks of improper claim notices, contractors should adopt the following best practices:

a. Review and Understand Contract Provisions

• Identify notice periods and procedural requirements in the contract.
• Train project teams on key clauses (e.g., FIDIC Sub-Clause 20.1).

b. Develop a Robust Claim Management System

• Use software tools to track claim-related events and timelines.
• Automate reminders for claim notice deadlines.

c. Provide Accurate and Timely Information

• Ensure claim notices include: Event description (cause, impact, dates). Contractual basis (clause reference).Supporting records (logs, photos, schedules, cost breakdowns).

d. Use Standardized Templates

Implement templates for claim notices to ensure clarity, consistency, and compliance.

e. Engage Claims Specialists

For complex claims, seek the support of claims consultants to ensure proper preparation and submission.

5. Take Away

Improper claim notices can create significant risks in construction projects, including the loss of entitlements, financial strain, damaged relationships, and costly disputes. Contractors must recognize the importance of timely, clear, and compliant claim notices to preserve their rights and mitigate disputes.

By understanding contractual requirements, adopting robust processes, and engaging professional support when necessary, construction professionals can protect their entitlements and achieve smoother project outcomes.

Remember: A well-prepared claim notice is not just a formality—it’s a crucial step in safeguarding your contractual rights.