When Should Contractors Not File a Claim?

Although construction lawyers pursue claims for their clients everyday, there are times when a contractor should not file a claim.

A construction claim can provide a contractor with its fair compensation and most of the time pursing a valid claim is a contractor’s best course, but there are situations where it does not make good business sense – even when the claim is a strong claim. There are times when it makes more sense for a contractor to cut bait.

The following list shows why it is important to be careful in thinking about claims from the beginning and throughout a project. Many of the reasons not to file a claim can be avoided with early planning. To take just one example, a contractor should maintain its records as though it will have to prove its damages in the future. If a contractor does not prepare for its claim from day one, then the contractor could end up in a situation where pursuing the claim is not worthwhile because it cannot prove its damages.

Here are five situations where a contractor should consider not to pursuing its claim:

1. Cannot Prove Damages or there were no damages – The contractor can’t isolate its damages, it can’t back them up, it doesn’t have sufficient documentation; or there was little or no financial damage. On government projects, the Federal False Claims Act and the Virginia Fraud Against Taxpayers Act (Va. Code Section 8.01-216.1, et seq.) have sharp teeth making this a serious consideration on government projects. If a contractor submits a claim without legitimate damages on a government project, then the company can end up with serious fines or even jail time for the individuals involved.
2. The Contractor is partially or wholly at fault – Or even if it is not the contractor’s fault, the contract shifted the responsibility onto the contractor.
3. Contributing Cause of the Claim – There were things that the contractor’s employees did to exacerbate the problems leading up to the claim.
4. Pyrrhic Victory caused by a victory over a judgment-proof debtor – Even if the contractor wins the claim, it may not be able to collect from the entity that caused the claim because of bankruptcy, etc.; This problem has become especially true in the construction economy since 2007.
5. Cannot Prove Delay Claims – The contractor can’t prove that the overall project was delayed.

Before filing a claim, contractors should carefully assess whether pursuing the claim is the most sensible option. If the contractor is working on government projects, then that analysis is serious because of the False Claims Acts. There are also many times when pursuing a claim is a not a good business decision. You certainly don’t want to throw good money after bad. The above points also highlight the importance of good record-keeping to prove a claim. Without those documents, a claim is more difficult to prove, but if a contractor has a thoroughly documented claim, then pursuing the claim is easier (which means fewer attorney’s fees) and the contractor has increased the likelihood that it will get paid.