- Design problems have overtaken change in project scope as the primary cause of claims and disputes in the construction industry in the U.S., according to global consulting firm HKA's CRUX Insight 2020 report.
- Projects have also become more prone to deficiencies in workmanship and unforeseen physical conditions, according to the report, which primarily examines pre-pandemic data. Other top drivers of conflict include poor management of third parties and inadequate contract management, which may be contributing to the design issues.
- According to the report, "design problems are more likely to occur as a result of increasingly tight timescales imposed upon third parties engaged in design," which result in late or incomplete designs and conflict between the parties. Report authors also blame "failings in the management of third parties across increasingly complex supply chains," for these top issues.
The toll of disputes on the industry is staggering. The value of claims on the 1,100-plus projects HKA studied worldwide from 2018-2020 worked out to $48.6 billion (excluding legal and related fees) and the extensions of time claimed would accumulate to 593 years, according to the report.
Here were the top causes of claims and disputes in the U.S. and the Americas more broadly from data on 410 projects collected in 2020:
- Design was incorrect.
- Workmanship deficiencies.
- Design was incomplete.
- Physical conditions were unforeseen.
- Change in scope.
- Poor management of sub-contractor/ supplier and/or their interfaces.
- Design information was issued late.
- Claims were spurious, over-inflated, opportunistic and/or unsubstantiated.
- Access to work site was restricted and/or late.
- Contract management and/or administration failure.
- Weather conditions were exceptionally adverse.
- Installation failure.
The U.S. building industry also continues to grapple with impacts from the pandemic and market uncertainty. Plus, trade tensions could have wide implications for the flows and costs of equipment and materials worldwide, the report said. Going forward, contractors will likely be challenged by restricted cash flow, shortages in the administrative skills required to manage and execute contracts and difficulties in design coordination.
The report looked at construction issues internationally, examining 1,185 projects worldwide with a combined value of $1.8 trillion. Worldwide, the top four conflict-causing issues were: Change in scope, incorrect design, incomplete design and poor management of subcontractor/supplier.
How contractors can cope with disputes
Given increased pandemic-related uncertainty, the report said investing more time in up-front planning, design and coordination can help nip conflict in the bud by ensuring that all parties are clear on their roles, responsibilities and risks at the outset. Report authors also encouraged contractors to be more intentional about taking lessons from successful and problematic projects alike.
Here are more strategies from the October 2020 report that contractors can use to mitigate disputes:
- Don't rush Requests for Proposals (RFPs). Wait until the design is as advanced as practicable, so that the associated schedule and cost can be relied upon.
- When structuring RFPs, weigh factors such as experience and expertise, quality and price in a more balanced way to gauge the true value bidders provide.
- Allocate adequate design resources and set realistic timelines for design deliverables.
- Ensure all relevant stakeholders are involved in a design review process that incorporates the appropriate level of quality assurance.
- Develop and implement a project execution plan with buy-in from the client, as well as the supply chain.
- Apportion risks and opportunities to the party best placed to own, manage and mitigate them, using an appropriately managed risk register.
- Promote transparency among all parties, and promptly address and communicate issues as they arise.
Data collection for the 2020 report ended in February 2020, before the impacts of COVID-19 began to take effect. After the pandemic hit, HKA identified a surge in spurious claims and claims related to restrictions and delays associated with site access. Construction firms would be wise to interrogate what may prove to be opportunistic contractor claims, according to the report.
The pandemic has also influenced how parties choose to resolve their disputes. There has been a greater increase in mediation over litigation compared to previous reports, with a 10% uptick in mediation in the Americas year over year. Going forward, HKA experts expect to see an increase in arbitration over litigation in the courts.
"The dynamic nature of this region's market, coupled with an uncertain economic outlook as the global pandemic shows no signs of abating, makes for an increasingly tough operating environment," the report said. "If successful project outcomes are to be achieved in the face of this adversity, more concerted engagement and action on these practical lessons are required of employers, contractors and the supply chain."
Clarification: This story has been updated to reflect the correct release date of the report.