A recent study into the construction industry has identified a decline in the number of disputes progressing to formal dispute resolution (DR) processes by almost 50%. A drop in contentious matters may appear good news for the industry because it suggests the parties are getting on better. The reality however is that parties are simply not pursuing more formal DR mechanisms as a means to resolve their differences: instead they are adopting early dispute avoidance strategies.
The Arcadis Global Construction Disputes Report 2019: Laying the Foundation for Success, has confirmed parties are pursuing DR for smaller matters contemporaneously rather than waiting until the end of a project to pursue the other side. The report identified global trends in the industry over the last 9 years and has found many of the leading causes of DR have remained the same since 2017 meaning traditional issues rather than recent technological advances such as BIM are the likely causes of disputes. The survey considered the causes, duration and value of construction disputes. It also highlighted the best ways to avoid, mitigate and resolve disputes. We have considered these issues further below.
Arcadis' findings on time, value and methods of dispute resolution
The study identified that the average value of construction disputes in the UK fell by 47% in 2018 to £14.1m. This figure is far below the international average of £26m. This reduction has mirrored the international trend over the last six years which has also seen a significant decrease. When determining the value, the study considered the additional entitlement to that specified in the contract for the additional work or event which was being claimed.
The report also identified the UK as having the shortest average length of time to resolve a dispute at 12.8 months when compared to other jurisdictions. This is promising news for those parties afflicted by disputes. When determining time, the report considered the period between when the matter became formalised under the contract and when it was settled or the hearing concluded.
This duration might appear lengthy to some in the industry but it represents a significant reduction when compared to the average trial duration at court. This report also identified a reduction in the number of adjudications and a corresponding increase in the use of negotiation as a DR method. This is a more cost effective DR method, which is good news for the industry.
Fewer adjudications in the construction sector
Adjudications are a popular paper based method for parties to have their dispute resolved by an independent third party. However the study identified a drop in the use of ad hoc and contract adjudications in the UK. 'Smash 'n' Grab' adjudications as the industry calls them occur where the payee pursues the other party for the full amount where no valid payment or pay less notice is served. This method was very popular however the decision in S&T (UK) Ltd v Grove Developments Ltd  has reduced the scope for these adjudications.
In addition, there is discontent in the industry with the costs arising from adjudications and the tendency to move away from the fast paced procedure due to parties agreeing extensions to the statutory prescribed 28 day deadline for a decision. Adjudications were intended to provide a way to resolve money claims relatively swiftly and cheaply, but have become mini trials often used for complex matters more suited to alternative DR methods.
A common attitude in the industry is that it is only the lawyers who win because often neither party finishes an adjudication thinking they have concluded it victoriously.
Analysis of the report's findings
As parties face a challenging economic climate with the threat of a Brexit, 'No Deal' exit looming and other political uncertainty, the industry might expect parties' disagreements to escalate to formal dispute resolution more readily. Similarly, when considering the value of large construction projects which progressed in 2018 in the UK such as HS2, the remedial work on Big Ben and the Trafford Park Metro link scheme, in addition to the continuing impact of Carillion's liquidation, the decrease in the average value of disputes is perhaps surprising.
This reduction in the total value of disputes has been caused by several factors; not least the parties getting on better together. The decrease can partly be explained by the UK seeing delayed investment decisions resulting from Brexit uncertainty. This insecurity has inevitably resulted in fewer new projects being initiated, particularly in the private commercial sector. This may have correspondingly skewed the data because there is less scope for disputes to occur if fewer projects are initiated.
No surprise to the industry
News that there are fewer construction disputes might surprise contentious lawyers and worry those who specialise in DR, however the findings should come as no surprise.
The standard form construction contracts encourage early dispute avoidance techniques which reduce the volume of lengthy and costly DR, which is advantageous to the sector. Recourse to a neutral third party through a one day mediation is popular where the parties can discuss the issues round the table with the assistance of an independent third party who helps resolve matters amicably.
The industry is very aware of the disruptive and draining nature DR can have on a business. Likewise, parties do not wish to risk reputational damage and future contracts by enduring protracted DR if it can be avoided. Therefore news that parties are using these cheaper methods is encouraging.
The report acknowledged the key element for determining if the outcome of a dispute is a success for the participants involved is "balancing the cost of resolution against the value of the outcome." Parties don’t want to incur vast fees out of proportion to the value of the dispute.
The report highlighted a trend seen by the WBD Construction Team for parties preferring to resolve disputes as they arise along the project rather than by way of large complex final account disputes at the end of a project. This has resulted in the monetary value at stake being reduced which is good news for the industry.
Causes of construction disputes
Human factors and the misunderstanding of contractual obligations were identified as the number one cause of disputes. This is bad news for the industry because these reoccurring factors remain significant over the last two years and suggests more work is needed to tackle them.
A significant cause of construction disputes in 2018 was administrators not following the contract procedure correctly. The Project Manager and the Engineer's conduct was determined to be at the heart of how disputes crystallise over 75% of the time.
Top 3 causes of construction disputes
- Failure to administer the contract properly
- Employer/ contractor/ subcontractor failing to understand or comply with its contractual obligations
- Errors or omissions in the contract documents such as a failure to serve the appropriate notice under the contract.
The findings "suggest construction contracts are too complex for the parties and administrators to understand, or simply that parties still adhere to historic traits rather than embracing new ideologies." A lack of willingness to embrace new technological ideas may be adversely affecting the industry and should be tackled to alleviate problems. The findings also emphasise a need to involve experienced industry advisers in the initial stages of contract formation to prevent miscommunication and misunderstandings arising. As projects become more complex, with more parties involved in the construction process, contract interpretation will inevitably become harder, therefore having experienced parties on board will help to avoid pitfalls early on.
Methods used to avoid conflicts
The participants commented that the primary method to avoid conflict was "a willingness to compromise". Parties should engage in early negotiations to resolve problems wherever possible. Whist the evidence suggest some parties already do this, further work is needed here. Also, being transparent with cost data supporting claimed damages was recognised as being a factor which reduces disputes occurring.
Methods used to resolve conflicts
It is encouraging that the parties are beginning to use digital tools to manage risk such as Project Management Information Systems and Digital Field Data Collection Systems. These tools reduce risks throughout the contract and minimise the stumbling blocks often suffered early on which is beneficial to the trade enabling parties to focus on managing design or funding issues which can affect a project.
In addition, the industry is beginning to embrace smart contracts which will also contribute to contracts becoming more streamlined. Efficient contract administration will help avoid the current snags with can occur with contract misinterpretation throughout the life of a project.
With advances in technology through the use of BIM and 4D/5D/6D modelling the allocation of risk is likely to take place earlier on in the contract relationship. This will result in parties collaborating further before cost and time pressures become significant and is a good example of where multi party collaboration can help resolve disputes as they arise. The industry is commended for its adoption of BIM in projects which brings together all site stakeholders ensuring objectives of deadlines, budget and compliance can be managed and met. BIM can also simplify construction site management.
Practical steps to manage risks on construction projects
- Be prepared for negotiations. If disputes escalate be ready to provide contemporaneous records. Keep copies of minutes of meetings accessible because record management can have a large impact on the outcome of a dispute.
- Set up the project from the outset efficiently, confirm roles, supervision requirements, deadlines and agree templates for notices so all parties are aware of their expectations.
- Ensure the contract is followed when counting days including bank holidays and an administrative process is followed when people are on holiday to ensure deadlines e.g. pay less notices are not missed which could automatically entitle a party to a payment.
- Determine the process for DR and which senior parties should discuss matters and by when.
- Conduct regular internal review meetings to ensure all contract requirements are being followed and no unexpected issues arise, rather than the contract being forgotten about until an aggrieved party chooses to raise their head.
- When disputes do arise, parties should reassess at a critical time the likelihood of recovery and the commercial consequences of their actions to ensure a cost effective strategy is adopted.
Ways the construction industry can improve
Tackling the human factor with further investment and training is the single biggest change the industry could make to reduce the number of dispute matters. The study identified providing training on complex contract administration as being the primary improvement parties could make to ensure all parties are aware of how to properly administer the contract. All users need to be certain of what is required and by when under standard form contracts.
Parties should be educated to prevent poorly drafted contracts and inadequate project management and administration from being exercised which are likely to lead to disputes. Avoiding complex and excessively detailed contracts will also help to reduce confusion for those administering contracts.
However, tenders are often chosen on a price metric basis. Regardless of other factors, often the lowest price wins. Therefore, given the current economic climate we are uncertain if contract administration will be tackled any time soon.
Unlike fine wine, disputes do not improve with aging. The industry should keep pushing for early resolution of contract disputes wherever possible and embrace technological advances. Such changes will reduce the likelihood of disputes occurring. If they do arise, involving lawyers early on after risks have come into fruition can often help reduce the overall cost and business time spent on the dispute enabling a business to concentrate on what it does best.
The Arcadis report can be accessed here.