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More common, more costly: Is COVID-19 causing conflict in the construction sector?

25th February 2021

Published first the RICS World Built Environment Forum Website

An industry already hamstrung by delays and disputes is becoming more fractious still as the pandemic wears on.

An RICS survey of the global construction sector has found over 40% of professionals reporting an increase in disputes since the onset of the COVID-19 crisis. By contrast, fewer than 3% of respondents noted a fall in disputes over the same time, suggesting that the pandemic is exerting further pressure on an already stressed industry.

Upon release in October 2020, the latest instalment of HKA CRUX Insights laid bare the astounding drain on global productivity of construction conflicts and delays. Covering 1,185 projects across 88 countries, the report valued the overall cost of disputes at US$50bn, with extensions of time stalling projects for a total of 593 years. Then, experts cautioned that HKA’s research had yet to account for what might be called the COVID-19 effect. The consensus at the time held that the picture was likely to get worse before getting better. These RICS survey results seemingly prove those fears to be well founded.

RICS Economist Tarrant Parsons notes, “While disputes may not be uncommon across the construction industry, the sharp rise in such cases during the COVID-19 pandemic is a cause for concern. The impact of these disputes can be wide-ranging, leading to overrunning costs, falling productivity, delays in the delivery of projects and, potentially, a loss of business viability.”

Correlation, of course, is not causation. It is, therefore, highly relevant that, of those reporting an uptick in conflicts, over half cite force majeure as the primary cause of complications. As a term, force majeure can capture a broad array of unforeseen circumstances. Nonetheless, it seems fair to assume that the pandemic, which caught so many governments, industries and businesses completely off-guard, is at the very least an aggravating factor.

During November’s WBEF webinar The $50 billion question: Why are construction disputes so common and so costly?, it was noted that few markets are immune to the COVID-19 effect. Even those parts of the world where infection rates are relatively low have experienced severe disruption to supply chains. This has been especially true where the sector is reliant on labour influxes, and materials and equipment imports. The middle east is one such region.

Husam Gawish, a Partner at HKA in Qatar, picks up the thread: “Government implemented lockdowns in various cities have directly impacted the movement of labour and materials. This has caused delay and disruption to the implementation, progress and completion of construction projects. The pandemic has also had a general, albeit indirect, effect on cash flow, resulting in a lack of regular progress payments to the supply chain, causing further delays. When an event such as COVID-19 occurs, for which neither party can be held responsible or could have foreseen, then the issue of presenting and processing claims becomes difficult.”

With projects worth an estimated US$1.5tn planned for 2020 in the GCC states alone, the COVID-19 crisis was a particularly unwelcome impediment to growth. And the middle east is far from alone in this respect.

“The construction sector has a vital role to play in driving the broader global economic recovery over the next few years,” says Tarrant Parsons. “Many governments have committed to substantial infrastructure spending as part of their fiscal stimulus packages. It is therefore essential to form an understanding on how best to mitigate and resolve disputes and delays as they arise.”

Indeed, it is by analysis of preferred routes to resolution that industry watchers are likely to find the most compelling causes for encouragement. Asked to name “the most effective means of resolving claims and disputes”, 95% of RICS respondents chose collegiate, co-operative approaches such as negotiation and mediation. By contrast, only 0.2% picked litigation – often the most timely, adversarial and costly option available. There are, though, worrying signs that this trend could reverse in 2021.

Says Martin Burns, Head of Dispute Resolution Services with RICS, “Negotiation may be the cheapest and most effective way to resolve disputes but, in reality, parties often fail to engage in meaningful dialogue without encouragement. And positive initiatives to address the impact of COVID-19 on the performance of the sector could be masking increasing levels of disagreement between employers and contractors. The UK government, for example, has noted that a tidal wave of costly, resource-sapping disputes could hit the industry and wider economy hard in 2021.”

The UK government has noted that a tidal wave of costly, resource-sapping disputes could hit the industry and wider economy hard in 2021.

Ultimately, any widespread breakdown in trust or reversion to siloed working can only hurt an industry eager to get back to building. A healthy, happy construction sector can be the centrepiece of the global economic recovery, delivering urgently needed, resilient infrastructure, while boosting jobs growth in the process.

When an event such as COVID-19 occurs, for which neither party could be held responsible or could have foreseen, then the issue of presenting and processing claims becomes difficult.”
Husam Gawish, Partner, HKA
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