Globally the average construction dispute rose to $32.1 million last year, but the time it took to settle the average claim dropped from 12.8 months to slightly less than one year. Moodboard/AP Images
A new report indicates that the cost of construction disputes has risen while the average resolution time has fallen slightly.
June 10, 2014—The global average construction dispute rose by $400,000—to $32.1 million—between 2012 and 2013, but the time it took to settle the average dispute dropped from 12.8 months to slightly less than one year, according to a new report released by ARCADIS, the multidiscipline consulting firm based in Highlands Ranch, Colorado. (Construction disputes are claims for payment filed by the contractor that the project owner does not believe are its responsibility to pay.)
In the United States, the dollar figures changed dramatically and the time it took to resolve them increased as well. In the U.S. market, the average construction dispute jumped from $9 million in 2012 to $34.3 million in 2013, and the average length of time required to settle that dispute increased from 11.9 months in 2012 to 13.7 months in 2013.
“There are less and less small projects and there are more large programs where you have multiple players involved,” says Roy Cooper, P.E., a vice president of ARCADIS who specializes in dispute resolution. “When that happens, you have a bigger potential for claims, [and] when issues come up, you have increased claim amounts. And because of the complexity of the issues on a larger program and the number of people involved, it takes a long time to get through the whole dispute-resolution process.”
Construction disputes were down sharply in the aftermath of the recession in the United States. Operating under uncertainty during the recovery, firms were unusually focused on maintaining profitable relationships with clients and less inclined to submit claims. As the U.S. construction sector improves; however, disputes are increasing.
The report, “Global Construction Disputes 2014,” is an annual publication that ARCADIS prepares to better quantify construction disputes and identify trends in the industry. The research reveals some interesting developments in the past year. The Middle East, which had the highest average dispute value and the longest resolution time in 2012, is now second to the Asian market in both measures.
The average dispute value in the Middle East dropped to $40.9 million in 2013 from $65 million in 2012 and $112.5 million in 2011. Dispute resolution time is down slightly to 13.9 months. The average dispute in the Asian market climbed from $39.7 million to $41.9 million. Resolution times dropped, but at 14 months, they are the longest in the world.
“The trend that I saw is the fundamental thing that causes claims to still remain the same, and that is a lack of contract administration,” Cooper says. “If you look through the report, you’ll see all kinds of references to the people factor. That’s where disputes happen—breakdowns in communication. There are always going to be issues on construction projects that come up, but it is how you deal with them, how fast you deal with them, [and] how the parties interact.”
Party-to-party negotiation was the most prevalent method of dispute resolution in 2013, up from the number three position a year ago. In 2012 the most prevalent method was adjudication, but last year that method dropped to the third position. Cooper says that the prevalence of party-to-party negations in the European market is behind the swift resolution times there. Although the average dispute in Europe is $27.5 million, the resolution time is just 6.5 months.
“The number-one way that they resolve disputes is in face-to-face negotiations. Any time you can do that ... before attorneys are involved ... that reduces not only your timeframe for resolving disputes but also your costs for resolving disputes,” Cooper says.
Red tape is also a factor, Cooper says. “If you live in a society with a very formal legal system that’s not very agile, the appetite for going through it in litigation is less and less. You will want to resolve those disputes outside of the system as much as possible.”
The report notes that most contract disputes stem from the basics: incomplete information in project documents that are part of contracts, misunderstandings with respect to what the documents mean, and a failure to properly administer the documents.
“[Everyone] is looking for that magic bullet ... clause. ‘What is that clause that is going to keep me away [from] claims?’ It’s one thing to have a great contract on paper, but if I really don’t understand my responsibilities and carry them out and you don’t either, there’s still going to be a gap,” Cooper says.
He also notes that as the construction industry continues its slow recovery from a deep recession, budgets remain stretched—and that leads to a more aggressive approach to disputes. “There is a lot of pressure on all the participants during the planning stage with budgets—budget constraints on designers, budget constraints on owners.” Cooper recommends that consultants keep this in mind and plan accordingly. “Have adequate contingencies in place so when problems do come up, they can be dealt with,” Cooper advises.
“Many of the disputes involve some element of time. So either somebody is speeding up ...or they are slowing down,” Cooper says. Sophisticated owners recognize this and engage firms to examine a project’s construction schedule for potential problems before work begins.
The report notes an uptick in the number of projects in which a joint venture drives a dispute. Cooper notes that joint ventures are typically formed for larger projects, which are already prone to disputes because of their size and complexity. And if the joint-venture parties don’t agree on an issue, he says, “That really complicates the dispute-resolution process.”
Cooper says the best advice with respect to disputes is to perform as much due diligence as possible to avoid them. And if a dispute arises on a project, move to face-to-face negotiations and handle it as quickly as possible.
“A lot of times in the middle of a project, it’s really hard for parties to say, ‘I want to reestablish the playing field.’ That might mean an owner has to write a check [or] grant a time extension in the middle of a project. And then a contractor may have to make a concession in the middle of a contract, to get the project back on track. A lot of times ... the parties don’t realize [the] predicament they are in.”