On Notice: Why Notice and Claim Procedures in Construction Contracts Matter

Originally published by the Daily Journal of Commerce on October 19, 2023.

Most construction contracts include provisions detailing how and when a contractor must provide notice of claims, or events that may lead to future claims, for additional compensation and/or time. These contract provisions are intended to ensure that all project parties have sufficient information to make decisions in the face of unexpected events, conditions, delays, impacts, and the like, and to facilitate the resolution of claims at the project level rather than in the courts or arbitration. But in some cases, they can operate more like a trap for the unwary, and in others they increase the administrative complexity of the project beyond what the parties can practically accommodate. As such, it is critical that all parties to a construction project ensure they are aware of the applicable provisions of their contract(s) and that they are able and ready to comply with those provisions when the unexpected inevitably arises. This is truer now than ever before in the wake of an epidemic and amid price fluctuations and supply chain pressures.

Although modern construction contracts typically include notice and claim provisions of one sort or another, contracts differ with respect to the formality and complexity of the provisions. Some contracts will include complicated, multistep procedures for providing initial notice of an event, condition, delay, or change to the work; following up with a preliminary claim and cost estimate; and then submitting a final claim. Some will require the contractor to formally protest decisions by the owner in writing and follow up with a written claim. The contract may include specific forms and often specify tight time frames for submittals. Often, compliance with the notice and claim procedures is a prerequisite for proceeding to formal dispute resolution, including mediation, arbitration, or litigation, and failure to comply can result in waiver of the claim.

At the project level, pressures to remain on schedule and on budget in the face of unexpected events or changes can create temptation to dispense with or curtail strict compliance with notice and claim procedures. It can be a significant administrative feat for a contractor to provide immediate formal notice of a condition it suspects may cause delay down the road and can be even more difficult to forecast the likely cost impacts. It can be burdensome and awkward to present claim notices for a project that is otherwise proceeding well. But failing to comply with notice and claim provisions can bring significant legal risk and do great damage to the working relationship between a contractor and an owner, particularly if the contractor attempts to make a claim during prosecution of the work or after completion of the project.

In Washington, the perils of noncompliance are particularly severe. For decades, Washington courts have held to the rule that parties must strictly comply with mutually agreed notice and claim provisions. In the pivotal 2003 case Mike M. Johnson, Inc. v. County of Spokane, Washington’s Supreme Court held that even where an owner has actual notice of the basis for a claim, delay, or impact, the contractor must strictly comply with formal notice and claim procedures to preserve its claims.

Courts have repeatedly upheld the rule since the Mike M. Johnson decision. Most recently, Division One of the Washington Court of Appeals issued an unpublished decision in Graham Contracting v. City of Federal Way. In that case, the contractor provided a notice of delay, but the owner decided that no additional time or compensation would be granted. The contract required that the contractor immediately submit a signed, written protest to any decisions by the owner with which it disagreed. However, the contractor waited weeks to respond. The parties attempted to reach a negotiated resolution, but when that failed and litigation ensued, the owner asserted that the contractor had waived the claims. The court held that despite the notice of delay, the protest was not timely and the contractor therefore waived its claims for additional compensation. The case underscores that, especially in Washington, compliance with contractual notice and claim provisions is crucial.

For these reasons, it is important for all parties to take stock of the notice and claim procedures in their contracts and carefully consider what steps need to be followed to ensure strict compliance. Where possible, the parties should negotiate and craft processes that fit the project and the realistic needs of the parties, taking into account the burdens imposed by the requirements. Once the ink dries on the contract, the parties need to make efforts to ensure they are prepared to follow the specified processes. Contractors and owners alike need to ensure they have sufficient administrative capacity and internal procedures in place to do what the contract requires. Too often, parties are caught flat-footed when they encounter a condition, delay, or impactful event and scramble to determine how to proceed under the contract. For all parties, going into a project with eyes wide open as to the applicable notice and claim requirements is key to both preserving and resolving claims.