Construction Contract Disputes - Reasons, Avoidance and Resolution
By Hilal Itani
Posted: 11th January 2018 08:33
Innovation and technological advancements have reshaped the construction industry in many ways compared to what it was a few decades ago. However, this has not reduced the number of disputes that arise within the industry. Construction is currently regarded as one of the most conflict and dispute-ridden industries, which has resulted in it being one of the most claim orientated sectors.
Everyone involved in the construction process of any construction project – from the owners looking to have a construction project completed to contractors, subcontractors, suppliers, and even those on the financing end of things – all have a vested interest in a project that moves forward on time, on schedule, and without any bumps in the road as far as payment is concerned.
Unfortunately, like everything else in life, curveballs are inevitable to come down the line during any construction project that may cause the schedule, milestones, or payments to be pushed back, accelerated, or wiped out completely.
A conflict is bound to arise if parties start considering two or more competing courses of responses, options, or courses of action which are intended to satisfy predefined situations or events. Equally, a dispute will arise when the involved parties detect any threat posed to their concerns, interests, or needs.
Construction disputes are disruptive and can be costly for the parties involved. Starting out as disagreements, a small “difference” can quickly become a “dispute” if not quickly, efficiently and amicably resolved.
Causes of disputes
The complexity of a contemporary construction project, requiring the orchestration of numerous interdependent components including tools, information, materials, equipment and a large number of personnel working for independent engineers, contractors, and suppliers, add to the complexity of the disputes arising out of or in relation to them. Some key reasons are highlighted below: -
- Disputes over project plans, specifications, and the scope of the project itself:It is absolutely mission-critical that everyone involved in the planning stages of a construction project are as crystal-clear and as complete as possible when it comes to the overall project plan, the project specifications, and the scope of the project itself.
- Change of orders and out of scope work: Inevitably there are going to be at least a few change orders and perhaps requests for out of scope work to be performed during the construction process, and it falls squarely on the shoulders of the contractor hand the owners of the construction project to make sure that these “extras” are outlined just as clearly and just as concisely as the original scope of the project is. When things just get added on haphazardly is when most contract disputes really start to flare up.
- Fuzzy milestones and payment schedules:Milestones for the project – especially milestones that are attached to project payment – will need to be outlined with crystal clarity, will need to be poured into as much cement as the foundation of the project, you need to be adhered to by all involved to keep contract disputes from flaring up. This is the last place that anyone can afford to be fuzzy or unclear about during a construction project.
- Unjustified construction delays or work stoppage:Before a construction project begins, both parties will agree on work completion time frame. This will usually be a date range to give the contractors room for the unexpected. However, some construction contracts include a strict deadline and penalty clauses if the deadline is not met. Even if there are no agreed deadlines, lengthy delays can sometimes be viewed as an abandonment of the project and a de facto breach of the construction contract.
- Nonpayment for work performed:One of the most common reasons for construction contract disputes occurs when a contractor or a subcontractor is not paid for the work done. Sometimes nonpayment is a result of poor quality work or an initial contract breach. If any of these disputes arise, there are processes to follow which will ensure that none of the parties suffer a loss.
Avoidance of Construction Contract Disputes
Dispute avoidance strategies should be executed during the project planning and pre-construction phases. These strategies are geared to minimising disputes through appropriate contract administration. Over time, disputes and claims have taken a relatively informal resolution turn through early cooperation and avoidance interventions. These include;
- Escrow bid documents:This is a fast and low-cost dispute avoidance strategy. This intervention demands that the apparent lowest bidder in a construction project makes available all the worksheets, backup plan, and any other documents necessary in the process of bid selection by the owner the moment the bidding process is opened. This step prevents future disputes as the owner has to certify that all the documents presented are readable while the contractor has to verify that the all qualifications that have been considered for bid selection are contained in the document package.
- Authority Delegation:From experience, a dispute is more likely to escalate if it takes long to finalise its negotiations and sign its settlement agreement. However, a dispute can be avoided when the owner delegates a particular claim change and settlement level authority to the relevant project level managers, and then there is a lower likelihood that this dispute will grow and become harder to resolve.
- Dispute Resolution Ladder:This approach is among the most practical construction conflict avoidance strategies. Here, the contractor and the owner are required to design a formally written ladder of conflict resolution which will detail the counterparts of each party, including the project managers, assistant managers, and executives as well as the predefined time frames allowed for dispute resolution on each level. Through this strategy, issues can be resolved with ease. Those that move to the higher levels can then be handled by the management teams from both parties.
- Partnering:In simple terms, partnering refers to a team approach initiation for mutually advantageous resolution of possible or ongoing project construction problems and difficulties. Through this move, a working environment of teamwork and trust develops, thereby fostering a cooperative bond, preventing disputes, facilitating project completion, and benefiting both parties.
There are several ways to resolve construction contract disputes, but the first step is a meeting between both parties. Before escalation, the contract parties should meet and discuss. If there are others who have the authority to settle the dispute, then they should also be in attendance. This meeting can sometimes help in forming a solution which will save both parties time and costs. It is essential that this meeting be held on a 'without prejudice’ principle so that all parties will be free to make comments that cannot be referred to in a court of law. If a meeting does not yield any results, there are other processes that are available in settling the dispute.
- Mediation:This is a confidential dispute resolution method. A third party mediator will attempt to settle the dispute on behalf of the parties involved. If a settlement is reached, a binding agreement will be created.
- Adjudication: This is usually quick and confidential. Whenever there is a construction contract, adjudication is automatically available. The adjudicator has a certain number of days (usually 28) days to reach a decision and once they reach one, the successful party can get a court order to enforce the decision.
- Arbitration: Some contracts may prefer this as the main dispute resolution process, especially if the parties intend to continue on the project. If the commercial relationship is to continue, then it is advisable to use an arbitrator.
- Court Action: Many people avoid going to court because it can be a long and expensive process if mismanaged. A protocol for construction disputes is usually available and allows the parties to communicate in the hopes of an early settlement. Court action is usually a last resort.
In recent years, the construction industry has made significant progress in developing alternate dispute resolution mechanisms. It is dispute prevention that has been a neglected aspect of the construction industry despite dispute prevention mechanisms available, as construction industry dispute prevention mechanisms are frequently disregarded when drafting construction contracts and dispute resolution clauses.
Avoidance of disputes should be the fundamental goal of contractors and owners. This is achieved through effective and reliable records, communication, and awareness. Potential disputes can be avoided if the conflicts are identified and resolved during their earliest stages; otherwise, a dispute with far-reaching consequences will develop. Amicable resolution of such disputes requires a deep understanding of each party’s needs, past experiences, and the basis for their position.
An accomplished claims/contracts management professional with more than 15 years of experience in contract management and claims consulting services within high-profile corporations. Hands-on leader administers construction contracts and claims along with arbitration cases; sustain project controllership, and strong working relationships among employees. Demonstrate a broad range of technical, personal effectiveness and leadership skills, as well as apply rigorous logic and methods to come up with actual solutions to difficult issues. Exhibits aptitude to deliver support for multiple priorities and cope with change. Possess written and spoken fluency in English and Arabic. Hilal Itani is the Managing Shareholder of H.I.F.C.C. FZE in UAE with its offices in Lebanon and United Arab Emirates. Hilal Itani is a Civil Engineer and possess two masters degrees Engineering Management and Construction Law and Arbitration. Hilal Itani is a member of the Chartered Institute of Arbitrators and a certified Planning and Scheduling Professional in AACE.
H.I.F.C.C. FZE is a newly established company in UAE specializing in claims and delay analysis, contract administration, planning and critical path method (CPM) scheduling, and arbitration. H.I.F.C.C. FZE benefits from the vast experience of its consultants in the fields water supply, office buildings, hotels and resorts, power stations, residential and commercial buildings, wastewater treatment plants, recreation facilities, ports and harbors, roads and highways, and healthcare facilities in Iraq, Turkey, Qatar, Lebanon, the United Arab Emirates, the Kingdom of Saudi Arabia, Kuwait, Jordan and Africa. H.I.F.C.C. FZE provide specialized services in forensic claims consulting and claims management on behalf of contractors, subcontractors, and project owners. Such services include overseeing pre- and post-contract tasks and operations for tenders/projects; handling extension of time, escalation, and termination claims; conducting forensic time impact analysis; productivity matters as well as illegitimate termination cases. H.I.F.C.C. FZE expertise covers various forms of construction contracts such as International Federation of Consulting Engineers (FIDIC) forms of contract and bespoke contracts in Qatar, the United Arab Emirates, and the Kingdom of Saudi Arabia.
Hilal can be contacted on +9613871240 or by email at firstname.lastname@example.org