What Causes Construction Disputes, How They Are Resolved & How COVID May Affect the Process

While the ins and outs of the construction industry inevitably vary among different sectors and across the globe, one universal similarity remains - the significant amount of time construction professionals spend handling disputes. To inform the industry in the United States and around the globe, Arcadis conducts a survey and produces the Global Construction Disputes Report annually. In the most recent edition (which is available at www.arcadis.com), contracts emerged as the common theme. Many respondents said that COVID caused them to reevaluate their existing contract language. Also, survey participants reported taking more time to resolve disputes because parties failed to follow procedures mandated by contract. The shift from the themes of relationships and compromise in 2019 to a renewed focus on contract language in 2020 was pronounced.

What Causes Disputes in Construction

Arcadis’ research shows that the top cause of disputes in North America for 2020 was a failure to understand and/or comply with contractual obligations. As the unprecedented effects of COVID were felt in the construction industry, many looked to the contract language for guidance and found it was not as clear as they had assumed and, unfortunately, it did not adequately address the impacts of the global pandemic. While most affected projects had their completion dates adjusted, vague language in some contracts did not give clear guidance on whether contractors were also entitled to extra compensation, leading to disputes. Many of these disagreements are still unresolved.

Two related items tied for the second most cited cause of disputes – owner directed changes, and errors and/or omissions in the contract documents. With an increase in mega-projects of greater complexity and multiple stakeholders involved, there was more potential for design coordination issues as well as errors and/or omissions to occur. In addition, designs on many alternative project delivery jobs were not fully developed prior to start of construction. Therefore, when a project experienced a design change, there was greater potential for it to negatively affect the work which had already begun.

Third-party and force majeure events were cited as the third most common cause of disputes. This is very much in line with a failure to understand and/or comply with contractual obligations, the top cause of disputes last year.

The results received from other parts of the world showed the same top cause of disputes, with a slight difference in the second and third causes, but still indicated that, regardless of geographical region, contractual requirements and obligations were the primary global generator of disputes in the construction industry for 2020.

How Project Participants Are Resolving Disputes

When asked how construction disputes are most effectively resolved, North American respondents answered (in order): party-to-party negotiation; mediation; and, finally, arbitration.

The top two responses indicate people continue to value dispute resolution techniques which avoid formal, adversarial proceedings. Moreover, what we have seen is participants are more frequently utilizing the services of qualified claims and risk professionals as part of their project teams to avoid, mitigate, and resolve disputes more efficiently. Intelligent owners are proactively asking for upfront assistance to strategize how to assess their risk and circumvent problems on their projects. With this expertise in place, they can take advantage of a well-thought-out strategy for managing and resolving disputes throughout the lifecycle of their programs, rather than the more typical and less successful method of an ad-hoc reaction to issues after they arise.

Not surprisingly, litigation was not listed as a top effective method of resolving disputes in North America or other surveyed regions of the world. In the United States, Arcadis has observed a slight increase in disputes where one or more project participants remain unreasonably steadfast in their position, resulting in litigation being the only viable way to conclude the disagreement. Sadly, the parties sometimes expend substantial time, resources, and funds, yet still end up unhappy with the outcome.

What Speeds Up Resolution of Disputes

Statistically, we found the average time taken to resolve construction disputes in North America decreased from 17.6 months in 2019 to 14.2 months in 2020. While that sounds significant, the average time has hovered between 14 and 18 months since the 2016 survey, so it seems that the closeout duration has generally remained consistent over the last five years.

In order to speed up dispute resolution, respondents discussed the importance of timely documentation of field changes, project delays, and potential claim issues. They also stressed the importance of having thorough design documents that are well coordinated and completed expeditiously. Finally, the parties’ ability to adhere to contractual notice requirements as well as the dispute resolution administrative process in the contract were both reiterated as being vital for project success.

Major industry players understand that issues on construction projects are seemingly unavoidable and it is, therefore, essential that their teams are prepared to navigate (and resolve) disputes as they arise. To effectively prepare their teams in the future, organizations should emphasize and require their employees to be trained on topics such as schedule management, work documentation, tracking of costs, and intimately knowing the contract terms and obligations, to name a few. Effective training should not be limited to technical topics but should also address soft skills such as verbal and written communication, organization, leadership, and empathy. Regardless of the issues facing a construction project, the relationships between project participants and willingness to compromise continues to be factors in whether a dispute may be resolved or will advance to litigation.

How COVID Will Affect Disputes

It’s an understatement to say that 2020 was unlike any other year. Many construction projects were temporarily or permanently shut down, and those that were deemed ‘essential’ or started later in the year were required to implement new safety protocols and often change the means and methods of how the work was performed. As we reach the halfway point of 2021, the construction industry faces an optimistic but uncertain economy as a result of the financial impacts of the COVID pandemic. Further complicating the ability to predict the future, these effects will be felt unevenly across different sectors and across different geographical parts of the United States.

For example, the transportation sector has used the pandemic-induced decrease in traffic and ridership to accelerate many ongoing road, bridge, and rail projects. With up to 90% fewer cars on the road and fewer people on trains and subways last year, this once in a generation opportunity has been a boon to the schedule of those projects where the traveling public must be accommodated. But with the decrease in income from tolls and fares and a unclear prospect of future federal stimulus, large public transportation agencies are being required to decrease their short and mid-term budgets, so fewer new transportation projects are being let in some areas of the country. Absent a federal injection of money, this could have a negative effect on how much of this type of construction occurs over the next few years.

Additionally, many projects that rely upon the severely curtailed hospitality and travel industries have been paused or cancelled. Some owners are using this time to reevaluate the realistic needs for these projects in a post-COVID world. When will people restart utilizing air travel and cruise ships, or visiting hotels and casinos? The answers will likely foretell when construction programs associated with those industries will return and at what levels.

Another area that is uncertain is what the traditional office will look like when employees are no longer required to work from home? We have already seen an uptick in organizations with large workspaces trying to re-engineer those physical environments in a more permanent way to address the ‘new normal’ when it soon arrives. Also, many companies are decreasing their commercial footprint, while others are moving out of urban areas in search of the suburbs or rural locales. Depending on the magnitude of these types of changes, there will likely be construction winners and losers as a result of this fundamental shift in where employees work.

Regardless of the sector, owners and contractors will need to be nimble and ready to deal with unique hurdles as this year progresses. Many economists are predicting a dismal construction market through the second or third quarter of 2021. But the majority of financial prognosticators also forecast better times for the following quarters and into 2022. As such, we appear to currently be in a pivotal year.

Success at individual companies and organizations will largely depend on the level of forethought and the continually shifting regulatory landscape.  As a larger percentage of the population receives the COVID vaccine, things can return to something like normal. Those businesses that are able to get out ahead of the coming challenges and who implement plans to manage the disputes that will undoubtedly arise in the future, will be poised to grow as the economy improves. Although it may seem difficult, now is the time to prepare for the difficulties to come. 

As noted, no one can predict the full impact the pandemic will have on the construction industry. Still, it would be prudent to remember what has worked best for decades – training, risk management, clear contract language, processes to implement better design drawings, managing the project schedule, and proper documentation – will be crucial to effective dispute avoidance and resolution in the post-COVID world.