In-house counsel within engineering and construction firms plays a critical role in identifying, assessing, and mitigating risks throughout the lifecycle of a project.  

This involves active risk management during contract negotiations, providing advice on risk strategies, and leading the resolution of claims and disputes. If risks are not addressed collaboratively and promptly, they can escalate into claims and/or disputes, which can negatively impact a company’s working capital and profit margins.  

The challenge for In-house Counsel is in how to have sufficient oversight of the claims and disputes portfolio within their organisation, so as to readily intervene when necessary. 

Key causes of Claims and Disputes 

In 2024, HKA’s annual CRUX report set out an analysis of the causes of claims and disputes on over 2000 projects, with an average CAPEX value of USD 1.28 billion,^[1]NEW CRUX Insight Seventh Annual Report: Changing the Narrative – HKA  indicating that claims and disputes are still prevalent in the engineering and construction sector.

Figure 1 – HKA CRUX Insight as of October 2024^[2]CRUX Dashboard – HKA

The top seven primary causes of claims and disputes can be grouped into three main categories: 

• Scope changes – largely influenced by inadequate definition and/or flow down of requirements (or scope/work breakdown) in a traceable manner, and the unavailability of all stakeholder requirements at the time of contract.  

• Design inadequacies – these can often arise as a consequence of unrealistic ownership of the design risk, the inadequacy of time permitted for design activities (including review and approval periods), the level of completeness of the design at the point of contract or a disconnect between the type of contract and maturity of design. 

• Contract interpretation and management – this can stem from failure to sufficiently address resource capacity and capability gaps, lack of flexibility in the decision-making framework during the project’s lifecycle, or misrepresentation of changes in requirements as design development comments. 

Based on our experience, these causation categories are interconnected. In contract documents, the defined requirements of the client are often flowed down via specifications into design and finally into scope in contracted work packages in a traceable manner.

Whilst the flow down is intended to be linear (defined requirements flow down to defined scope), it often ends up being circular.  

Although the ideal situation is for a clearly defined and fixed scope, the contract often has flexibility embedded to allow for a party to make changes. When a party manages to introduce these changes, the circular process is triggered. For instance, delayed input from all stakeholders (or failure to manage the interests of stakeholders) often results in the redefinition of the requirements, which then alters the specifications thereby triggering scope changes and consequently design changes. This sequence of events can alter the intended way of working anticipated by the parties to the contract and often occurs with limited or no further legal input. In turn, this undermines the contract’s role as a collaborative and flexible control tool through which risk is passed down. 

The importance of Claims Governance 

Given the frequency of these causation issues, the challenge for In-house Counsel is ensuring the suitability of the contract and commercial model is appropriate for the level of maturity of the organisation.  

Effective claims governance is essential as a control mechanism to ensure that the risk-sharing agreed within the contract is actively monitored throughout the project. This helps maximise revenue retention and minimise pressures on working capital, thereby preserving profit margins. 

HKA’s perspective on Claims Governance

Claims are often unavoidable due to human biases, misrepresentations, lack of flexibility, and varying cultural backgrounds. Projects are complex, unique, and long-term endeavours, which make it unlikely that any contract will address every possible eventuality. As a consequence, the senior leadership team will seldom have sufficient oversight to be able to assess the risk and inform the response to a claim to mitigate its escalation into a dispute. 

HKA defines claims governance as the implementation of a control environment for strategic oversight of a claims portfolio. This environment aims to minimise revenue leakage and margin erosion through a decision-making framework that fosters collaboration and innovation. Establishing a governance framework may require leveraging digital tools, data analytics, and experience in claims and disputes. 

The realisation of the key project risks due to the misconception of the risk, misunderstanding of the causes and misalignment of the mitigation measures, often attracts media attention which frequently leads to reputational damage and financial consequences or loss for the project organisation – and in the worst case, insolvency. Thus, this risk to business warrants sufficient attention and specific expertise in relation to the governance arrangements in place. 

Without a strong claims governance framework, disagreements can quickly escalate into disputes. Effective controls are needed to minimise human-related risks and facilitate the timely resolution of disagreements. 

HKA’s Claims Governance framework 

HKA has developed a Claims Governance Framework (the “Framework”) (see Figure 2) to help clients resolve claims and disputes in a timely manner.  

This framework aligns governance pillars with the root causes of risk, their effects, and relevant controls, enabling decision-makers to act quickly to avoid jeopardising contract objectives, threats to the implementation of business strategy, diverting management focus, and in extreme cases, leading to working capital constraints, re-financing challenges or insolvency. 

Figure 2 – HKA Claims Governance Framework

Practical application of the HKA Framework 

One client was facing communication breakdowns, poor cooperation, and inadequate operational processes with a $15 billion claims portfolio, and on average receiving 50 new claims every month. The HKA claims governance framework was implemented, which enabled the provision of better transparency over the claims resolution process and allowed for timely responses to commercial risk exposure.  

The in-house counsel was able to better understand how contract risks materialise, identify contracts that need closer oversight, and improve performance across the portfolio to minimise time and cost overruns. As a result, the client was able to settle 90% of its claims after implementing the HKA framework. 

What could In-house Counsel be doing differently? 

Organisations often take a proactive approach in addressing the project delivery issues by bridging the known capacity and capability gaps with the aid of external support. Currently, external support is often fragmented, which minimises opportunities to identify bias and other issues. This often results in in-house counsel being informed about critical issues too late in the process, often during formal dispute resolution.  

To be more effective, in-house counsel need sufficient resources and information to adopt a proactive, claims-avoidance mindset. This requires a data-driven governance structure that is customised to the complexity of the organisation.  

In-house counsel should begin by objectively assessing the potential for bias, inflexibility, and misrepresentation in the project delivery environment. This assessment data would then be used as baseline data to develop a governance structure to address any competency and capacity gaps.  

Regular monitoring is also essential to ensure the continued effectiveness of the governance structure as the project progresses. The goal is to ensure the right information is available at the right time for decision makers to make well-informed decisions. 

Conclusion 

• An effective data-driven claims governance structure is crucial for achieving project objectives, reducing revenue leakage, and optimising profit margins.  

• This structure must provide accurate and timely information to allow in-house counsel to make strategic decisions and resolve claims effectively.  

• In-house counsel should assess their current governance systems and implement improvements to address any deficiencies. This includes establishing a plan for periodic governance reviews to ensure any changes in the project environment during the project lifecycle are addressed promptly. 

Find out more about HKA’s Claims & Dispute Resolution services or download the 2024 CRUX report   

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About the Author

Gideon Kamya-Lukoda is a Chartered Engineer with experience in the project and programme management and delivery of capital projects, considering the application and implementation of Health and Safety regulations, including the evolving status of the CDM regulations.  

Gideon currently helps Engineering, Technology and Construction Industry sector clients with projects in distress or already in claim/dispute situations, focussing on the design and operation of governance and planning controls.  

Drawing on earlier experience in research, design and standards compliance, Gideon can also assist in the evaluation of the design and operation of control frameworks, such as standards development and implementation framework in project organisations.