Construction is prone to a healthy amount of conflict, especially with the vast amount of people and processes involved in just a single projects. But while conflict is one thing most teams push through, construction disputes are an entirely new level of challenge.
When a construction dispute arises, the parties to the contract may find themselves at loggerheads, not knowing what course of action to follow. So let's discuss the ins and outs of disputes, their impact on a project, and how to effectively avoid them and litigation altogether.
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Construction disputes are disagreements between the parties involved in a contract. They most commonly arise in an owner and a contractor relationship, but can also emerge from suppliers, subcontractors, real estate developers, and architects. These disputes themselves are not a breach of contract, but they may lead to a breach of contract, termination, or even claims threatening the contractor’s surety bonds if unmitigated. Parties in a contract, therefore, need to take the necessary steps to reduce the possibility of disputes arising for parties in a contract.
Before we delve into ways to resolve construction disputes, it is essential to closely assess what causes construction disputes. Construction disputes stem as a result of disagreements between the parties involved in a contract. The violation may be a perceived or confirmed violation of the contractual obligations by either party. The three primary factors that lead to construction disputes are issues with contracts, behavior, and contractual problems.
According to a 2023 Construction Disputes Report from Arcadis, errors and omissions in the construction contract document were the number one cause of disputes in North America.
Typical forms of contracts pre-describe the obligations and risks each party is willing to bear. Due to the rigid nature of such agreements, they become unsustainable over extended periods, and it forces the parties involved in the contract to operate under uncertain terms. When conditions of uncertainty arise in a contract, they lead to a shift in the risks and obligations among the parties involved. Consequently, disputes may occur due to the perceived change in risk allocation in the contract.
In the recent Arcadis report, the 2nd most common cause of reported disputes was, "owner/contractor/subcontractor failing to understand and/or comply with its contractual obligations."
Since contracts do not cover every eventuality, problems may arise in areas where the contract remains silent. When such disputes arise, parties may want to gain as much as possible from each other. Equally, the parties may have different perceptions of the facts surrounding the contract. One party may have unrealistic expectations, thus affecting the ability to reach amicable agreements. Also, a party may refuse to perform their contractual duties in a bid to avoid liability.
Project uncertainty is the difference in the amount of information needed to start a project and the available information. The information required depends on the complexity of the performance requirements, project scope, time, and budget. The information available is dependent on planning effectiveness, collection, and interpretation of the information at hand.
When there is a high level of uncertainty, the stakeholders cannot plan for every project detail before work commences. With such a high level of uncertainty, project details and specifications may change, leading to disputes.
Construction disputes can impact projects significantly in terms of both money and time. According to a 2023 Construction Disputes Report from Arcadis, the average value of disputes in North America is $42.8 million -- up 42% from the previous year. Additionally, the average length of disputes in North America was around 13.6 months. While this is a 19% decrease in average length from the previous year, this is a significant amount of time that could seriously stall project progress and funding.
Due to the nature of construction projects, there are various ways in which construction disputes can arise. Below are some of the common types of construction disputes we have.
All of us are familiar with the adage that “time is money.” In modern construction projects, this adage is also true. A change in the finish date may lead to increased project costs. Contractors may incur additional fees from idle labor or equipment. Rental charges of equipment may accrue even though the equipment is lying idle. Supervisors and workers may also be idle, leading to unrecoverable costs. Therefore, these changes in finishing dates put a lot of pressure on contractors and may even affect their other projects. This will result in a considerable loss in profit.
When delays occur, the party responsible should issue a notice in writing, letter, or electronic mail. The written notices clarify and pass on complete information to all the involved project stakeholders. Delays bring about disputes as to who should bear the responsibility for them. Most construction contracts deal with delays by extending the time of completion. The owner can keep the rights to recover the damages from the delays from the contractor. FIDIC conditions of contracts state that a contractor is supposed to give notices on circumstances that may lead to delays beforehand, or else they may lose the rights for time extension or compensation.
Mistakes in design can also lead to additional costs, which become the cause of delays. There is no planning sequence followed for the release of design information, which impacts construction. Design teams may also abrogate their responsibility leaving the contractor in harm’s way to solve design problems independently. In so doing, the contractor unknowingly assumes the risks of impending design failures.
Subcontracted firms engaged in large construction contracts may employ a lot of personnel. Each of these firms may have its own goals and commitments that are not compatible with the goals of other key players in the project. As expected, this may lead to disputes.
Sometimes disputes may come up as a result of the quality of materials used. Specifications may be vague on the conflicts, and each party may have different views on whether the quality is in accordance to contract specifications. The parties may have different opinions as to whether the construction quality and craft are sufficient. This can lead to additional contract costs that may lead to many costly disputes if left unresolved.
The project stakeholders may need to carry out proper risk management before a project commences, and more often than not, this is not done. Projects take longer than planned if there is insufficient accounting of possible risks associated with a project’s complexity. The delays and claims remove the owner’s rights to claim for delays or damages.
It is unlikely for a project to run from start to finish without a dispute arising. Unfortunately, most dispute resolution procedures are an afterthought by contractors who focus on scope and price. However, it takes just one bad experience for one to handle dispute resolution more seriously.
There are primarily four main methods in resolving contractual construction disputes, as discussed below.
Usually, negotiation is the first part of dispute resolution. Negotiation is when the parties in dispute try to reach amicable conclusions between themselves before moving further to other means of dispute resolution. It is the easiest, least expensive, and could yield the most immediate productive results. If it does not deliver results, it at least maps out the actual points of disagreement so that the parties know where they stand.
Mediation is when the parties in dispute involve a neutral third party to help in resolving the dispute. Mediation is not a legally binding method of conflict resolution but is one of the most effective ways to get out of a situation before it worsens. The parties attempt to reach a just resolution outside the court before moving to other means.
Arbitration is the method contractors and lawyers prefer when it comes to dispute resolution. Most contractors list it as the way to address disputes in contractual terms. If the parties opt for arbitration, they must choose a neutral third party with the relevant experience to bring them to an amicable solution. Unlike in mediation, the arbitrator gives the final verdict to the conflict, whereas in mediation, the mediator only assists the parties to conclude. The costs of arbitration are significantly higher, and the decisions are legally binding in some jurisdictions.
Litigation involves trials that are enforceable and legally binding. It is the most thorough, complex, and costly dispute resolution process. It is also very slow, so most parties opt for other dispute resolution processes instead.
Disputes in construction are prevalent, and preventing a conflict is better than solving one in the first place. Sometimes parties end up aborting entire projects if they cannot make successfully deliberate on disputes. Below are some of the best ways of preventing conflicts.
In the 2023 Construction Disputes Report from Arcadis, the number one most effective claim avoidance technique identified by respondents was risk management. With a comprehensive preconstruction phase and systematic checks and balances during all project phases, project teams can help actively reduce and eliminate conflict that can evolve into disputes.
Most construction projects work based on interim payment cycles. A contract should have agreed on dates where payment applications should be made, related payment notices issued, and the actual payment release. This system of predetermined payment dates and terms reduces the likelihood of disputes.
Disputes also arise when the parties fail to maintain communication. Most developers and contractors communicate when the project commences and expect everything to run smoothly according to plan. This is often not the case, and parties should share at every stage of the project to address any challenges that pop up during the construction process.
Having a normal handshake agreement one of the worst mistakes you can make in construction. Always ensure that you put everything in writing. Records should include notices, letters, emails, photos, and daily reports. Construction is an expensive affair, and you risk losing a lot of money if you do not put everything in writing. Record keeping removes any doubts about agreements made by the parties.
Centralizing all records and communication, or at least as much as possible, in a cloud-based construction softwareis also essential for reducing risk. According to the recent Arcadis report on construction disputes, contractor transparency of cost data in support of claimed damages was identified as one of the most important factors in mitigation and early resolution of disputes. Choosing construction management software with robust cost management features is another way to improve overall documentation.
The involved parties should ensure that they understand the contract in place with all the clauses, terms, and amendments. Most projects adopt a standard building contract and make changes to transfer the risks. These changes need to be negotiated and understood. Once both parties understand the contract, they should follow all the contract provisions uninterruptedly throughout the project’s lifecycle.
A project’s success depends on how fast you can identify critical problems and communicate to the appropriate parties to resolve them. Implementation of better communication and mitigation strategies prevents the never-ending disputes likely to drown your project’s success.
