Arcadis’ experience indicates that in 2015, commodity and currency volatility around the world created noticeable headwinds for the global construction industry. This resulted in many projects and programs facing a very different economic business case than had been planned, contributing to issues and disputes that materialized throughout the year. Globally, the natural resources markets and some of the major projects utilizing alternative delivery methods ran into substantial disputes, with billions of U.S. dollars in contention. There was also a rise in the number of insolvent companies and terminated contracts, which are no doubt linked to the current economic environment.
Yet despite this, in North America, the value and length of construction disputes dropped in 2015 from 2014. This was the only region of the world to experience both of these trends together. Have we found a magic formula for avoiding construction disputes, or did we just get lucky? In a way, it’s a little of both. To learn from construction dispute trends, good or ill, it’s important to look at how the construction industry in North America behaved differently from our counterparts in other regions and understand what we can do to continue making progress.
The record on construction disputes for 2015
The Arcadis Global Construction Disputes Report analyzed five key metrics related to construction disputes in each region of the world: the length of disputes, average value, common causes, most popular methods, and region-specific nuances.
This is the third straight year that dispute values dropped in North America (Table 1). Further, the report predicts that the decline in duration and value of construction disputes in North America will continue into 2016. If this continues, these trends represent a positive signal for the U.S., reducing the financial drag on construction overall.
There’s more good news: Fewer and fewer disputes are progressing through the stages of initial assessment from evaluation to negotiation and then all the way through litigation in North America. The reasons are often complex, but for one, more participants are including provisions in construction contracts specifying a procedure to address disputed issues. The result is a growing number of disputes being dealt with early while fewer are growing into full-blown disputes involving consultants and counsel.
In addition, both owners and contractors in North America have come to appreciate how expensive and time consuming the formal dispute resolution process can be. Legal fees, consultant fees, and business distraction have prompted the construction industry to consider quicker and less costly ways of addressing disputed issues.
While the U.S. can feel good about this performance, avoiding disputes takes both vigilance and expert management from design and contract language all the way to project management and even defining claims. Effective dispute avoidance mechanisms need to be actively deployed as early as possible within a project, and involving the right expertise and support at the right time is critical.
The downside of this is that even though more disputes are being settled early, the ones that remain grow into complicated, emotional affairs, with large damages at stake. These also take longer to resolve, since U.S. courts dislike trying construction cases, due to the large volume of documents and greater complexity.
Why disputes happen
Project complexity, pressures on scheduling and budgets, and human expectations and emotions can push plans and contracts to the limit. It’s not a matter of if these factors exist; it’s how they’re handled that makes the difference.
Heading off disputes starts with understanding where the pitfalls lie. The Arcadis Global Construction Disputes Report examines causes from region to region and from year to year. For example, for the second year running, the most common cause for disputes in North America during 2015 was errors and/or omissions in the contract documentation. Differing site conditions dropped down a place to third and failure to properly administer the contract — the top cause globally — came in second position in North America (Table 2).
It’s interesting that in its first year being measured in the construction disputes report, Failure to properly administer the contract made the top three reasons in the U.S. And globally, this was the No. 1 reason for disputes. This reason speaks directly to the human and emotional factors of construction. At one extreme, key contract provisions are ignored at critical stages of a project, in effect leaving the participants to make up the rules as they go. At the other extreme and equally as dangerous is when one party or the other, or both, use the contract as a giant hammer, delivering blow after blow to inflict pain and suffering.
The global picture
We consider that these themes provide a helpful reference point to typical trends both regionally and globally. It is evident that the natural resources market is now operating against a very different economic backdrop. The business case assumptions that were likely used to endorse projects and programs have therefore changed, presenting a huge challenge to the project and entity risk profiles. The disputes in this sector have been a material feature in the last 12 months and will continue to be evident in the coming year.
- We have established that globally the following key dispute themes have prevailed:
- average value has marginally reduced to U.S. $46 million;
- average length has increased to 15.5 months; and
- most common cause is still the failure to properly administer the contract.
A continuing trend over the last six years globally is that, on average, disputes have increased in value and duration, with the notable increase this year in the length of time taken to resolve disputes. Therefore, our report this year is focused around making sure that in recognizing what causes disputes, avoidance mechanisms can be actively deployed to resolve issues as they materialize. Furthermore, if a claim does progress into a formalized dispute, then actively deploying key support and expertise, effective strategies, and the active use of Alternative Dispute Resolution (ADR) will assist in reducing the time it takes to resolve the dispute.
Considering why the length of disputes has increased is likely to be a mix of the following factors:
- an increase in the size of disputes that Arcadis has been instructed to act;
- an increase in the number of large and complex disputes on projects where alternative project delivery methods were used;
- disputes that are formalized are including multiple or whole contract issues, rather than referring discrete claims; and
- adjudication or some forms of ADR in some regions is not providing a solution that is acceptable to the parties.
Some interesting features of the regional overviews have highlighted the following trends in some or all of the markets:
- effect of the global commodity and currency volatility;
- earlier deployment of dispute avoidance mechanisms;
- increasing use of mediation, and refinement of other forms of ADR; and
- reliance from public or quasi-public bodies to require third-party decisions to assist in retaining complete “arm’s length” decision making.
- This year, consistent with last year, we have noted the following additional features:
- mega disputes, with the largest dispute we have been engaged in this year exceeding U.S. $2.5 billion; and
- a notable increase in the volume of arbitrations.
In the end, it all comes down to how disputes are resolved. Resolving disputes early before they go to court is as desired in the U.S. as it is all over the world. Mediation and ADR are more commonly used, but party-to-party negotiation is still the most common form of resolving disputes.
As professional practices continue to improve in the U.S., we can expect the picture to remain positive compared with other regions. However, economic clouds appear to be thickening, which could put additional stresses on the whole system, setting back progress. As we’ve seen, the key is knowing the significant risks of a project and addressing each one early.
Roy Cooper is vice president, head of Contract Solutions for Arcadis North America.