You Asked Us: Why are construction disputes so common and so costly?

Our expert panel:

Stephen Blakey, Commercial Projects Director, Network Rail

John Jones, Partner, HKA

Lisa Molloy, Commercial Director, Southbay Civil Engineering Ltd

If mediation were to be implemented as a mandatory first step in dispute resolution procedures, would the staggering cost of disputes in fall?

John Jones: Theoretically yes. Mediation is more cost effective and flexible, and less adversarial. It should reduce the need for prolonged, costly legal proceedings. However, the difficulty in making mediation mandatory as a first step of dispute resolution is that, in some instances, it may actually add an unnecessary layer of expense. Often, it is abundantly clear from the outset that the parties will not reach an amicable settlement.

Lisa Molloy: Both parties need to have a desire to mediate. If any one side is not willing to compromise, the mediation will fail. Genuine compromise not only reduces the amount in dispute, but also reduces the amount of money, time and resources expended in pursuing a resolution.

Stephen Blakey: I believe that any form of avoidance and early intervention has the potential to lower the overall cost of disputes to the industry. It should perhaps be considered in terms of risk as a percentage of Anticipated Final Cost (AFC) rather than a total headline figure. In other words, what is the $50 billion as a percentage of the (non-disputed) AFC? If it’s, say, 5% I would translate the question to: would mandatory mediation help to reduce the propensity for and percentage of dispute? And I would say the answer is probably yes.

Conflicts arising where COVID-19 caused a complete stop to projects seem relatively easy to resolve. Disputes in which the pandemic hasn’t stopped work but has made everything that bit more costly and timely seem likely, on the other hand, to be more difficult. What would the panel advise where this has occurred? And what can be done in terms of prevention?

LM: The parties must maintain an open line of communication. This is key in order to understand constraints, and the consequential effects of constraints. It is only through records that we will have a concise understanding of how the constraint actually affected the works

SB: I would advise the collective pursuit of detailed records that show entitlement via cause and effect. This could include the number of people furloughed, additional resources employed, the consequence to productivity and programme, additional welfare costs, required hygiene and PPE spend, etc. This needs to be granular. As regards prevention, this is about the point at which the impact of COVID-19 on working practices and the associated cost premiums become the norm. For me, this is defined as the point at which the client and contractor formally agree to a re-baselined approach to working and welfare regimes, the recovery of allowable costs and the programme.    

JJ: I think the industry is mostly approaching this issue in a collaborative manner. Raise the problems experienced with the other parties involved and look at routes to resolution. Consider re-sequencing, extended working hours and extensions of time. Finally, keep accurate records of site activities to ensure you are best placed for any disputes that may arise.

Isn’t it the case that virtually all disputes are caused by poor preparation? Is there any data to support the assertion that collaborative contracting does reduce conflicts?

LM: It is true that we don’t afford enough time to the front end of the work. This is reflected in CRUX Insights 2020. Issues are often less to do with poor design than unfinished and underdiscussed design, that isn’t collaboratively communicated down the supply chain. I believe both time and collaborative working are critical. It seems we frequently fail to acknowledge how much time we need in this respect. We need to get better at collaborating in the first instance.

JJ: I wouldn’t say that all disputes arise due to poor preparation, but it is certainly a significant contributing factor. As discussed during the recent WBEF webinar, disputes arise for a variety of reasons. HKA’s CRUX Report  and associated CRUX Dashboard (please hotlink: https://www.hka.com/crux-interactive-dashboard/) provide a great insight into dispute causation, both by sector and by region.

SB: There isn’t enough empirical data to emphatically demonstrate that collaborative forms of delivery consistently result in fewer disputes. The dearth of such data is in part explained by the simple fact that it is very difficult to demonstrate a negative. Despite the challenges, it must be possible to produce a rule of thumb formula that shows the propensity for dispute by form of contract. That would ultimately illustrate one of the key benefits of collaborative working. I think it is imperative that the industry look into this possibility.

Realistically, how long can major clients afford to extend a safety net to their supply chains? For all the talk of culture, surely their patience has to expire sooner or later?

JJ: This will always be about balancing risk and benefit. The impact to a client of supply chain failure may be far greater than the cost of supporting suppliers in the short term. However, there is always potential that clients will not only refuse to pay additional costs due to the impact of the pandemic, but also look to recover damages should projects finish late. My advice would be to review the contract and seek advice at the earliest opportunity.

SB: On the question of patience, I would say that it is more about how you accommodate and normalise the consequences of the pandemic within your contractual regimes. Moreover, given the pending deployment of various vaccines, do you make provision for potential post-vaccine recovery and acceleration? Take this example: let’s say that COVID-19 has resulted in a halving of pre-pandemic productivity over a year, in the middle year of a three-year programme. This has resulted in an agreed extension of time of 12 months: six months for year two and a further six months for year three. If a vaccine is deployed at the beginning of year three, can and should the client expect to recover, or take back, the six months extension? Would, or even should, the contractor offer it up?   

LM: Clients should work with the supply chain to effectively assign risk to the party that can bear it. They should collaboratively work with suppliers to understand constraints, time and budget, and manage then manage those things accordingly. It has to start with the client.