The construction industry is full of moving parts, and we’re not talking about heavy equipment. There are contractors and subcontractors, developers, state and local officials, investors, insurance companies, and tons of other pieces that all have to come together just as smoothly and solidly as the building itself.
Cracks in the relationships between these key players can be every bit as damaging as a crack in the building’s foundation.
The unpredictability inherent in construction projects leads to design changes, delays, material cost increases, changing site conditions, payment issues, and innumerable other tension-causing problems. This tension can easily erupt into legal disputes that, if serious enough, can become extremely expensive to resolve. They can even jeopardize the project.
Project stakeholders should do everything they can to jointly identify current and future risks to the project and develop ways to avoid them or reduce their potential impact. For this to happen, everyone involved will need to help identify likely points of conflict and agree to participate in a conflict resolution method that doesn’t depend on litigation.
Litigation is always available, however it should be viewed as the dispute resolution method of last resort. While it may lead to a “winner,” the costs—financial and otherwise—usually outweigh the benefits to clients and the community at large.
In this article, the Alterity ADR team offers five ideas about how to minimize and ideally avoid costly construction disputes. As we’ll demonstrate, the most effective claim resolution begins even before groundbreaking occurs.
Failure by owners, contractors, and subcontractors to understand and/or comply with contractual obligations is the leading cause of construction disputes, according to the 2021 Global Construction Disputes Report compiled by engineering consultancy Arcadis.
While non-performance of a contract for any reason is frustrating, the good news is that many of the causes can be remedied before they become major problems.
Lack of understanding can be addressed through proper training and effective legal advice during the contract creation process and throughout the period of contract performance. Parties and their counsel should encourage questions about contract language at all times and raise concerns in real-time so they can be addressed before a misunderstanding turns into a costly dispute.
Moreover, contracts should be tailored to the specific project. There will always be a need for standard language in any agreement, but custom provisions should be written to address any unique issues. Additionally, contracts should include clear provisions that explain the dispute resolution process agreed upon for this particular project.
Speaking of contract language, today’s construction projects tend to have far more stakeholders than in the past. This creates more opportunities for errors and/or omissions to be introduced into a contract.
As a result, contract language needs to be as comprehensive as possible while remaining clear and concise. Again, parties should never hesitate to ask questions about any aspect of a contract at any point during negotiation or performance.
Finally, as we have all learned during the COVID era, third-party or force majeure events should no longer be thought of as remote possibilities. Revisit your contracts and revise those clauses to reflect the lessons of recent history.
Major industry players realize that every construction project will have issues. What matters is that everyone is prepared to deal with them productively. Effective preparation requires clear communication with internal and external parties. According to Arcadis, parties should train employees on “soft skills such as verbal and written communication, leadership and empathy.”
Dispute avoidance entails compromise, which is only achieved through open, honest communication between project participants who trust each other. Thus, relationship building and collaboration are key in resolving disputes before they escalate to litigation.
Encountering an unexpected site condition is one of the more common risks on construction projects. Often referred to as “differing site conditions” or “changed conditions,” they are generally understood to be physical conditions discovered during construction that were not visible or expected at the time the contract was bid.
Frequently, these conditions could not have been discovered through any reasonable site investigation. Examples include:
- Soil that lacks the adequate bearing capacity to support the building
- Soil that is unsuitable for reuse as structural fill
- Unexpected groundwater
- Other unknown subsurface obstructions like rock formations or quicksand
When unexpected conditions rear their ugly heads, who bears the risk of the delays and costs? Look at the contract.
Traditionally, contractors were expected to protect themselves from unforeseen conditions by incorporating a contingency into their bid. But it’s somewhat unfair to expect a contractor to accurately budget for a true unknown. And, if a contractor is forced to try to account for every contingency that could occur, the owner ends up paying a higher price, even if no unexpected conditions arise.
Asking questions during bidding is the best way to address conditions. Contractors and their attorneys should ask questions such as:Traditionally, contractors were expected to protect themselves from unforeseen conditions by incorporating a contingency into their bid. But it’s somewhat unfair to expect a contractor to accurately budget for a true unknown. And, if a contractor is forced to try to account for every contingency that could occur, the owner ends up paying a higher price, even if no unexpected conditions arise.
- Is soil data available?
- Are there any disclaimers regarding the data?
- Can we get a pre-bid site investigation?
- Does anyone suspect possible problematic site conditions?
Inadequate planning is a recipe for conflict. Without a comprehensive plan, it becomes difficult to assess the project’s budget. It also leads to inaccurate project schedules, which in turn lead to delays and missed deadlines.
Construction management experts advise breaking down the complex moving parts of a project into smaller, actionable components. A quality project plan generally includes:
- The work expected of every entity involved
- Clear lines connecting work tasks to the entity performing those tasks
- Decisions about which technologies will be used to facilitate the project
- Assessment of all resources needed to complete the project
- A timeline and budget
- Contingency plans addressing potential material shortages, labor shortages, and other possible roadblocks
The construction business is notorious for problems related to parties being paid in full and on time. According to Handle, a leading construction industry payment technology provider, payment issues plague the industry for a variety of reasons:
- The presence of multiple, interrelated contracts that are often organized hierarchically, implying that payment accountability starts with a top stakeholder (such as an owner or general contractor) and trickles down from there
- Disputes at the top of the hierarchy impact those lower down; if an owner refuses to pay a general contractor, the general contractor often holds off on paying subs, suppliers, and so forth.
- Lack of clear contract language addressing which party will shoulder which costs
- Change orders and project delays lead to delayed payments
- Construction is subject to economic and market forces that cause material prices to swing wildly and loan funding to dry up, leading to cash flow issues and even project termination.
Sometimes a construction project spawns disputes despite the best efforts of all concerned. In these instances, early resolution can save everyone money and potentially the project itself. We recommend having the situation evaluated by our alternative dispute resolution practitioners before jumping straight to litigation.
Alterity ADR’s professionals are experienced in construction disputes and can advise you as to whether your situation might be amenable to mediation or arbitration. To learn more about your options, give us a call at 888-258-1237.