Top 5 issues exacerbating construction disputes

March 9, 2018

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By Steven T. F. Karst
The 2017 Arcadis Construction Disputes Report states 30 per cent of construction projects in North America end up in dispute. In Canada, the construction industry is adept at solving technical problems and developing innovative and new methods and materials. Simply put, the industry has always been about getting the job done—who can complain about that? In every major city, small town, or remote wilderness site, one sees innovative projects on the go or recently completed. Yet, along with this innovative technical construction ability comes the seemingly inevitable dispute.

Considering this, there are efforts afoot to help avoid disagreements and provide early dispute resolution. That said, no matter how technically innovative the project design, the management of physical work and project information is less so. It is this heavy reliance on human capital that exacerbates construction disputes. After reading the Arcadis Report, I looked back through my experience working on projects and producing construction claims reports with its top five causations for dispute in mind. I agree with Arcadis’ findings, and wanted to share my experience and thoughts on these matters. The following is my discussion of the top five categories exacerbating construction disputes.

1. Poor contract administration
Documentation, documentation, documentation! This may sound as if I am suggesting mountains of project records, but this is only true in part. Good contract administration relies on documenting the important information and filtering out the white noise. There is such a thing as capturing too much information to the point where all the data becomes useless.

Tracking accurate records is important, but so is communicating or demonstrating the documentation processes to the project team. I have frequently witnessed project kickoff meetings dealing only with onsite construction logistics, without ever really addressing the commercial processes required to make the project run smoothly. In fact, for the most part, the commercial aspects never receive consideration. This would include commercial deliverables such as schedule submissions, how meetings will be held, and minutes distributed and edited.

Further, the change approval process needs to be adequately communicated to the project team and all subcontractors. This would also apply for drawing changes, requests for information (RFIs), and site instructions. From my experience, it seems too many people are learning document processes on the fly, with no standardization.

Why is this? To most, getting the job done is at the forefront, and if this goes well, then many assume all other aspects of the project simply fall into place. However, when a project goes south or becomes delayed, commercial documentation becomes even more important to mitigate the risk of dispute. If this has not been adequately addressed, set up, and communicated at the beginning of a project, it opens the door to the possibility of endless disputes.

The management of information can be an extreme bottleneck on a project, and has been the reason for many disputes. Information should be the first line of defense, but due to poorly managed contract administration, it becomes the number-one source of disputes. In the end, the one with the highest quality of documentation wins!

2. Inadequate claims
Unsupported claims are all too common; some of the attempts I have seen are laughable. In one example, I was retained to analyze a delay claim of a contractor submitted against my client. This claim stated my client, the owner, delayed the contractor and therefore they were entitled to $1.5 million. This claim was submitted on one page, without establishing entitlement, demonstration of causation, or breakdown of the quantum of damages. After careful analysis, the data demonstrated the contractor was the cause for most of the delay—not the other way around as claimed.

Some contractors submit claims for damages without adequate support; many of the claims landing on my desk were drafted on a single page. I have noticed a trend among some subcontractors to just submit a claim for damages and hope for the best. Basically, the train of thought seems to be claim high and then hope for a favourable outcome
in negotiations.

When general contractors or owners receive claims from subcontractors like this, they immediately deny the claim. Yet, this has undoubtedly created a tendency to deny all requests for additional money or time, no matter how legitimate. This becomes costly in a couple of ways.

First, if the additional costs or time requested were truly entitled but denied, the contractor must cash-flow this issue until a resolution is found. Such resolutions typically happen well after project competition. Secondly, if no resolution can be realized, the dispute can require the retention of lawyers and experts at significant cost to each party. Relying on a well-written contract helps save everyone money in the long run.

From poor construction documentation to inadequate contract administration, certain recurring themes seem to plague building projects.

3. Ambiguous contract documents
Depending on the author, I have found contracts can be well-written and fair, or vague and biased toward one party or another. In the single-family residential market, contracts are non-existent or ambiguous at best. Homeowners have asked me if they should ask for a contract, and I always respond with a yes. Unfortunately, they typically rely on the contractor to provide them with an agreement. This, in turn, gives unscrupulous contractors the opportunity to leverage a contract in their favour.

On the other hand, I have seen contracts written unfairly and with confusing or ominous language. These construction managers or general contractors know that if, for example, subcontractors want the work, they will sign. In other instances, contractors proceed with only a Letter of Award, awaiting a signed contract agreement.

Writing vague clauses into contracts or leaving out important clauses altogether leaves the door open to interpretation and then to dispute. In Canada, groups offer templated contracts (e.g. those from the Canadian Construction Documents Committee [CCDC]) to provide fair and appropriate risk and balances. Accuracy in the contract documents is valuable to mitigate disputes.

4. Failure to comply with commercial contractual deliverables
Many owners and contractors read their contracts once—or from my experience, I read the contract for them, outline their deliverables, and they get on with their work. What many fail to do, however, is reference the contract for agreed-upon processes, procedures, and entitlement. This happens frequently on a project. To ‘get the job done,’ agreements or deals are made that end up operating under an assumed or virtual contract. This could possibly waive any contractual entitlement originally agreed upon.

One of the most abused contractual entitlements is that of notices, such as Notice of Delay. Some contractors think they can take care of the problem ‘in house’ and make up time lost in the schedule with this approach, but do not inform the other party until it is too late. By then, the required notification period could have been exceeded, waiving any entitlement to extension of time or costs. The contractor will submit the claim anyway and hope to garner some compensation through future negotiations. The general contractor or owner will most likely deny the claim—though typically for the amount of cost, rather than for exceeding the notice period.

Another issue many contractors engage in is one of politics. They might absorb problems on a project in good faith to avoid upsetting the owner or general contractor. The aim is to prevent damaging relations or losing a future contract. This is dangerous and can end up once again waiving entitlement for time extension or delay and disruption costs. I have never understood why parties to a contract would choose to operate this way, as the contract is written to protect everyone involved. How can you tarnish relations by following a contract to which you both agreed?

In the end, too many do not read their contracts until a dispute happens and they need it to prove and give credibility to their claims. Only then will they realize their entitlement or lack thereof. From what I have seen, both parties are often guilty of not reading and adhering to the contract.

5. Design deficiencies
Any RFI to clarify a design deficiency can be mismanaged. This issue goes hand-in-hand with the top reason for dispute—poor contract administration—as initiation for an RFI begins with the project. Not only can problems manifest themselves at the source of an RFI (e.g. frivolous contractor requests), but this management of information responsibility also lies with the designer whose drawings were deficient.

What I have found unusual is some project delay is contributable to inadequate design drawings, and the delay experienced was a result of waiting for clarification or revised drawings. Many parties to this type of disruption or delay do not think compensation is warranted, but entitlements might be possible, and assignment of responsibility needs to be directed toward the designer. What is interesting is claims for damages are seldom submitted against the designer and end up being absorbed by the owner. By holding designers accountable, this can help distribute financial responsibility for project delay.

The thoughts in this article are observations from my experience, not legal advice or a critique of the industry as a whole. It is my opinion most disputes can be avoided, but only if appropriate efforts are made before or at the beginning of a project.

I am aware of a couple multinational construction companies that have internal auditors looking for these risks, but many others across Canada do not. They rely on the construction professionals they employ to identify the commercial risks and administer them, but experience shows on many occasions these efforts fall short. Following the example of the larger construction corporations, having a third party review the commercial processes and documentation methods can be an asset in the long run at a fraction of the cost to resolve a dispute in the end.

From poor construction documentation to inadequate contract administration, certain recurring themes seem to plague building projects.

Steven T. F. Karst is a construction claims consultant from Toronto with more than 25 years of industry experience within residential, commercial, and industrial environments. Karst has handled contract management as well as cost control on multimillion-dollar programs, provided expert opinions for construction claims for world-class projects, and worked as an entrepreneur in the construction trades. He can be reached at[3].

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