Construction – an industry plagued by disputes
A plethora of definitions exist as to what constitutes a dispute. West’s Encyclopedia of American Law defines a dispute as follows: [1]
“A conflict or controversy; a conflict of claims or rights; an assertion of a right, claim, or demand on one side, met by contrary claims or allegations on the other.”
While disagreements and conflicts are inevitable on any construction project, it is only those conflicts that cannot be resolved that escalate into disputes. Unfortunately, the construction industry is plagued with disputes resulting in increased cost, lost time and ruined commercial relationships.
Disputes ultimately increase overall construction cost, regardless of which party receives the more favourable outcome. According to a study by the Cooperative Research Centre, construction disputes cost the Australian economy around $7 billion a year and added, on average, around 6% to the overall cost of each project [2]. Regardless of the exact dollar value, there could be no doubt that disputes are detrimental to the construction industry and add unnecessary wasted cost to projects and the industry.
CRUX, HKA’s integrated research programme which provides valuable insight into claims and dispute causation from projects around the world, concludes that: [3]
“Lone issues rarely lead to a dispute between parties, yet when a host of them coalesce and eventually manifest, the combined effect can have a significant impact.”
The CRUX findings further identifies that on average, there are 13 interrelated and underlying causes per dispute, dispelling the notion that focussing on individual causes would assist those seeking dispute avoidance.
Due to the complex nature of construction, risk is invariably imbedded in all construction projects, with only the degree of risk varying from one project to another. However, the degree of risk exposure can be minimised by understanding how risks can be properly managed.
Risk Management
Risk management can be broken down into the following key components:
- Identification – The first step is to identify any potential risks including the probability of the risk eventuating and the possible impacts. By identifying potential risks early, steps can be taken to avoid certain risks, to an extent.
- Allocation – The next step is to allocate risk to the party best equipped to deal with it. This includes consideration of which risks should be retained, transferred or shared.
- Management – The final step involves managing risk to ensure the best possible outcome for all contractual parties.
Successful project delivery starts with accurate identification and a fair allocation of risk. Risk is usually allocated by way of conditions of contract, which stipulate the duties and responsibilities of each party, including the consequences flowing from any breach or unforeseen events. However, before risks can be appropriately allocated, any potential risks and the extent of risk exposure should be identified. It is therefore important that ample opportunity is allowed for investigations to allow informed decisions and accurate pricing of the risks involved.
In theory, risk should be assigned to the party best able to manage it. However, in practice, this is not always the case. Typically the client will have control over how risks are allocated under the contract and may be tempted to allocate all risks to the contractor. However, risks should never be automatically allocated to one party. Rather, parties must seek an equitable sharing of risk and allocate risks in the most appropriate manner, considering the specific circumstances of each project and in doing so, reducing potential disputes.
Some contracts go beyond the simple allocation of risk to the point where separate parties seek to work jointly to deliver an outcome and ensure project success. An excellent example is the NEC contract, which, through a collaborative approach, encourages parties to work in an integrated manner to find mutually acceptable solutions to problems. The benefits of collaborative working are further supported by research conducted by the Institute for Collaborative Working [4], which found that collaboration improved risk management and also reduced disputes.
Another effective way to manage risk is to ensure that the conditions of contract are meticulously followed, should any unforeseen events be encountered. This includes issuing notices in accordance with the contract, on time and containing the necessary information. These notices should be followed up with details of the claim which should include:
- details of the event giving rise to any entitlement to time and / or cost;
- the relevant clause(s); and
- detailed records to support any additional time and / or costs claimed.
It should be noted that proper contract administration does not necessarily create an adversarial relationship, but rather allows parties to discuss and find solutions to problems, once they have been identified.
Risk Management Strategies, or the lack thereof
As risks are constantly evolving, risk management should be a continuous process throughout the duration of a project. A risk management strategy should therefore be in place to swiftly and efficiently deal with risks as they arise. However, despite the consensus around the importance of risk management, many projects lack a formal risk management process detailing how risks will be dealt with. The lack of formal risk analysis and management is often driven by overly optimistic views as to the positive outcome of projects and the belief that crude risk allowances in the budget (e.g. overall contingency allowances) and programme (e.g. float) will be enough to cover any risk events. This is simply not the case as many otherwise manageable risks often evolve into major disputes.
According to a survey conducted by LogiKal (2019, cited by HKA, LogiKal and Aspire Europe [5]), 82% of respondents believe that system integration (cost, schedule, risk and people management) has a positive impact on project success, yet less than 10% have fully integrated systems. The research further suggested that system integration, which includes risk management, increases project success rates by 4 times.
Perhaps obvious but often overlooked, is the fact that having a risk management strategy in place is not sufficient if it is not used, or not used properly. According to CRUX, it is easy for those focussed on delivery to simply assume that the existence of controls directly translates into being in control. This illusion of control has wide ranging implications, as it obscures the interconnection between issues, allowing time for these to develop unnoticed into problems.
Concluding remarks
While risks and conflicts are unavoidable, effective risk management can provide a framework for dealing with these risk events to resolve issues before they escalate into formal disputes.
It should be noted that risk management should go hand-in-hand with opportunity management to not only have controls in place to constrain, but also to identify opportunities to yield better project outcomes.
As discussed in this article, effective risk (and opportunity) management can not only reduce potential disputes but can also contribute to increased overall project success.
