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Report: Construction Disputes Lengthen

Thursday, May 23, 2013

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Construction disputes around the world are taking longer and longer to resolve, with increasing project complexity and multinational projects complicating resolutions, a new study reports.

The report, “Global Construction Disputes: A Longer Resolution,” is the third annual study into worldwide construction disputes by built asset consultancy EC Harris .

Overall, construction disputes underway in 2012 averaged more than a year, 20 percent longer than in 2011, the report said. The average value of the disputes in 2012 declined slightly to $31.7 million, from $32.2 million in 2011, the report said.

Research was conducted by the EC Harris Contract Solutions and ARCADIS Construction Claims Consulting experts and was based on constructions disputes the teams handled during 2012. Markets included in the report are the United States, the UK, Europe, the Middle East, and Asia.

ARCADIS
Photos: ARCADIS

A new report on global construction disputes found that they are taking longer to resolve, with the average length just under 13 months for 2012, compared to 10.6 months in 2011.

“Construction projects are increasing in complexity, so when a dispute materializes, its duration is not necessarily linked to its value, and so complex disputes can take equally as long to unravel,” said Mike Allen, global head of contract solutions at EC Harris.

Overall, disputes are taking longer to resolve, with the average length of a dispute taking 12.8 months in 2012, compared to 10.6 months in 2011. In 2010, disputes averaged 9.1 months to resolve.

Regional Differences

The trends varied significantly by region. For example, the average length of disputes rose across the Middle East, Asia and the UK.

“[T]he regional differences do indicate that with many billions of dollars being spent on construction, particularly in Asia and the Middle East, it is likely that high-value disputes will continue to be a feature in international markets,” said Allen.

construction dispute length
EC Harris

Increased project complexity and regional differences are adding to high-value disputes, according to the study.

Dispute resolution times in the Middle East were the longest in the world: 14.6 months, up from 9 months in 2011. Fueling the problem were the volume of disputes, a limited number of arbitrators and expert witnesses, lack of arbitration award enforcement, and the use of “frustration tactics” to delay awards, the study said.

Asia’s average resolution timeframe increased by almost two months from 2011 (12.4 months), averaging 14.3 months in 2012. In the UK, dispute resolutions increased to 12.9 months from 8.7 months in 2011—possibly, the study said, because the Technology & Construction Court encourages using pre-action protocol, which slows down the resolution.

On the other hand, the average length of disputes decreased in the United States and mainland Europe in 2012. In the U.S., dispute length fell from an average of 14.4 months in 2011 to 11.9 months in 2012. Mainland Europe showed the shortest dispute time out of all the markets studied, with an average of just six months.

Smaller Stakes

The good news: Although the disputes took longer to resolve, their overall cost remained fairly stable, the study found. The average value in 2012 was $31.7 million, down slightly from $32.2 million in 2011.

The highest-value disputes were in the Middle East, although total values for the region plummeted from $112.5 million in 2011 to $65 million in 2012.

"This is a significant drop, but values are still high enough for the Middle East to have the highest value disputes by region," the report said. "There is no particular reason for this drop, and still reflects the size and scale of construction programs being undertaken in the region."

The UK saw an increase in dispute value to $27 million (£17.7 million) in 2012, compared to $10.2 million (£6.5 million) in 2011.

The value of disputes in the U.S. was “not significantly different” from the $10.5 million average in 2011, the study said, but did decline to $9 million in 2012.

The consultants credited the experience of their clients and contractors and a culture of general claims avoidance for the decline. Managers are trained in preventing disputes, and many have dealt with them in the past, the study said.

However, it warned that the growing construction market could outstrip the number of experienced managers able to deal with claims.

EC Harris

Reasons for disputes in the U.S. were said to be "significantly different" than the other markets studied, showing less client/employer fault.

Values in Asia have steadily decreased: from $64.5 million in 2010, to $50 million in 2011, to $39.7 million in 2012. This decrease was attributed to collaborative contracting and related procurement strategies; supplemental agreements; settlement of large disputes in the region; and continued use of Dispute Resolution Advisors (DRAs) and Dispute Adjudication Boards (DABs).

In Europe, dispute value fell to $25 million (€19.6 million) in 2012, compared to $35.1 million (€27.5 million) in 2011.

Dispute Causes, Resolutions...

The top five causes of construction disputes identified in the study dealt with a mistake or failure, and all were related to contract administration. The most commonly preferred method of dispute resolution was based on better communication using negotiation and mediation over arbitration.

“This appears to support the general perception within the industry that parties who are dealing with a dispute wish to retain control and endeavor to settle the dispute themselves,” the study noted.

...In the U.S.

Causes of disputes in the U.S. were “significantly different” than those in other regions, which could reflect the “maturity” of the construction market, the report said. Instances where the client/employer was at fault were less common, but instances of incomplete or unsubstantiated claims, errors in the contract, and failure to comply with the contract show “serious deficiencies that could be rectified given even better dispute avoidance practices.”

The most common dispute resolution practices in the U.S. were party-to-party negotiation, mediation and arbitration.

... In the Middle East

In the Middle East, the most common reason for construction disputes was failure to properly administer the contract. One difference in the Middle East, compared to other markets, was the impact a client’s responsibility had on dispute causes by not making interim awards on extensions, changing the project, and differences between the contract and the actual project characteristics.

contract resolution

The top five causes of disputes involved mistakes or failures related to contract administration.

The study found that, in the Middle East, engineers and architects are “often unwilling to act impartially in assessing contract variations, with any member of the engineer’s/architect’s team that even suggests agreeing to a contractor’s contractual claims being removed from the project by the Employer.”

The most common methods for resolving a conflict in the Middle East were party-to-party negotiation, followed by arbitration and adjudication.

...In Asia

The cause of disputes in Asia differed from the previous year, with an inability to properly manage claims or the contract taking the blame in 2012, compared to employer/client causes in 2011. The study found that contractors and subcontractors often submitted incomplete and unsubstantiated claims, citing examples of heavily discounted claims, claims that lack foundation, substance, and substantive contractual or legal merit.

“[G]iven the typical relationship based culture that exists within the region, a continuing theme is the desire to undertake the minimum amount of work and then try to settle the claim without confrontation and maintain face,” the study said.

Asia’s top three methods of dispute resolution were party-to-party negotiation, mediation and arbitration. When disputes are referred to a third party, arbitration is found to be the most common method of resolution.

global construction outlook

“Construction projects are increasing in complexity, so when a dispute materialises its duration is not necessarily linked to its value, and so complex disputes can take equally as long to unravel," said Mike Allen, head of contract solutions for EC Harris.

...In the UK and Europe

Failure to properly administer the contract was the most common cause of disputes in the UK for the second year. Disputes in 2012 saw an increase in failure to understand contractual obligations. The study noted that on larger projects, this cause is a result of “clumsy, sometimes over legalistic, drafting of the generally bespoke contracts,” and recommended reducing this problem by adopting standard forms with less amendments.

The UK’s two most common means of resolution were adjudication and arbitration, followed by party-to-party negotiations.

In Europe, the most common cause of dispute was that the employer/contractor/subcontractor failed to understand or comply with contractual obligations. An “unrealistic transfer of risk” to contractors and conflicting party interests that led to a breakdown in relationships and understanding were also common causes.

Party-to-party negotiation was the most common method of resolution in Europe, followed by arbitration and mediation.

About the Companies

ARCADIS is an international company headquartered in Amsterdam, the Netherlands, that provides consultancy, design, engineering and management services in the infrastructure, water, environment and building industries. The company was originally founded in 1888 as an association for wasteland redevelopment and now has locations all over the world, employing over 21,600 people.

EC Harris is an ARCADIS company that operates in a wide range of sectors. Services offered include asset and facilities strategy to management information systems, such as quantity surveying, project and construction management, and software development.

   

Tagged categories: Annual report; Asia Pacific; Construction; Consultants; Contractors; Contracts; EMEA (Europe, Middle East and Africa); Europe; Laws and litigation; Market research; North America; Subcontractors

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