EC HARRIS | GLOBAL CONSTRUCTION DISPUTES 2012: MOVING IN THE RIGHT DIRECTION …€¦ · ·...

GLOBAL CONSTRUCTION DISPUTES: MOVING IN THE RIGHT DIRECTION

EC HARRIS | GLOBAL CONSTRUCTION DISPUTES 2012: MOVING IN THE RIGHT DIRECTION

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Over the past twelve months the demand for construction work across the globe has continued to defy on-going turbulence within the marketplace. For struggling economies in the Eurozone or North America construction is widely seen as a conduit through which to help kick-start a sluggish economy. In developing markets across Asia and the Middle East, investment in major infrastructure and property development programmes has been identified as key in order to both sustain growth and deal with wider social issues such as urbanisation and the growing demands of a burgeoning middle-class demographic.

With construction so intrinsically tied to the overall health of the world’s economy, it is fundamentally important that the capital invested in these schemes helps to deliver value and outputs that support growth. There are many case-studies across the globe that demonstrate the return that construction projects can help to deliver, however on too many occasions these schemes become embroiled in disputes that ultimately costs the industry millions of dollars each year.

These disputes are also extremely disruptive from a business operation perspective as resolving these differences often ties up key personnel for significant periods of time. Furthermore, trying to make a provision against potential claims can result in inaccurate or incomplete management information (MI) and lead to issues around contingent liability, as well as creating a headache in the boardroom related to informed decision making.

In our second annual ‘Global Construction Disputes’ report we set out to analyse how things have changed since our first report twelve months ago.

There were a number of key questions we wanted to try and answer in the course of the study. Had progress been made in helping to tackle some of the issues we identified in 2011? Were there certain solutions that were increasingly making a difference in helping to resolve disputes? Which regions were taking the lead in proactively trying to deal with issues before they reached the formal dispute stage?

In the pages that follow we provide an overview of the key findings from this year’s report, share our views on what this means for clients within each region and offer some expert insight on how the industry should look to deal with future disputes to help ensure they are resolved in the most efficient and appropriate manner possible.

Mike AllenGroup Head of Contract Solutions, EC Harris

Methodology

This research was conducted by the EC Harris Contract Solutions and ARCADIS Construction Claims Consulting teams and is based on construction disputes handled by the teams during 2011.

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Region Dispute value (US$ millions) Length of dispute (months)

2011 2010 2011 2010

UK 10.2 7.5 8.7 6.75

Europe 35.1 33.3 11.7 10

Middle East 112.5 56.25 9 8.25

Asia 53.1 64.5 12.4 11.4

US 10.5 64.5 14.4 11.4

Global average 32.2 35.1 10.6 9.1

Executive Summary

The results from this year’s study indicate that progress has been made in the past twelve months, with the average value of the construction disputes reviewed in our survey decreasing by 8% from US$35.1 million in 2010 to US$32.2 million in 2011. However, whilst this figure may be decreasing, the findings also revealed that the time required to resolve these disputes was rising, with the global average increasing by 16% from 9.1 months in 2010 to 10.6 months in 2011.

Whilst the global averages offer a useful gauge against which to measure the overall direction of travel within the sector, a more specific picture emerges if we examine this year’s results on a regional basis. Whilst dispute values fell in both Asia and the US, in the Middle East, Europe and the UK the average cost of disputes all went up, showing an increase over the past twelve months.

The US market saw the biggest drop with the average value falling from $US64.5 million in 2010 to just US$10.5 million in 2011, whilst the Middle East saw the most dramatic increase with a number of high-profile disputes causing the average to more than double from US$56.25 million in 2010 to US$115 million in 2011. Unsurprisingly, the highest value dispute that EC Harris handled during 2011 was for a project in the Middle East that was worth $350 million.

From a time perspective disputes in the US took the longest to resolve at 14.4 months whilst the UK was the speediest market with disputes lasting just 8.7 months on average. These disparities between each region comes as no real surprise as the length and value of disputes is dependent on the size, complexity and volume of construction projects undertaken as well as the preference and available methods of dispute resolution, all of which inevitably varies in each region.

In terms of what was causing these disputes, the issues most typically identified were a failure to properly administer the contract, ambiguities in the contract documents, a failure to make interim awards on extensions of time and to give associated compensation, incomplete design information or employer requirements and conflicting party interests.

When it came to dispute resolution, this year’s study found that arbitration had actually become less popular as a means of settlement with party-to-party negotiation the most common method of resolution in 2011, closely followed by mediation. Arbitration was the third most popular, with adjudication and litigation completing the top five most common methods deployed.

Overall it is promising to see the average value of disputes decrease whilst the shift to settle issues without the need for formal dispute resolution is certainly a positive one. However, disputes are still costing the industry unnecessary time and money and greater focus is still required to help avoid the dispute from the very outset through better contract document design, production and administration, as well as improvements in the level and standard of relevant design information.

Standing of Global Construction Disputes Data 2011

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The top five causes of disputes in Middle East construction projects during 2011 were:

1. A failure to properly administer the contract

2. Incomplete design information or employer requirements

3. Employer imposed change

4. Failure to make interim awards on extensions of time and to give associated compensation

5. Unrealistic risk transfer from employers to contractors.


In contrast to the global trend the average value of

disputes in the Middle East construction industry

increased significantly in 2011 rising by 104% to

$112.5 million compared to $56.25 million twelve

months ago. Whilst this is a huge rise, it reflects the

flood of high-profile disputes that took place within

the Middle East construction market in the past year.

Furthermore, the reluctance of many contractors

and clients across the Gulf region to negotiate means

that disputes are often resolved in a more formal

environment which typically leads to higher overall

costs for all parties involved.

There are several reasons why the number of disputes across the region is on the rise however, timing is a major factor. Many large construction programmes are now nearing completion which is when most claims typically formalise as parties tend to crystallise their respective positions towards the end of the project, and also cannot proceed to arbitration until Substantial Completion has been achieved. The greater level of liquidity within the market, with some key developers declaring profit, has also contributed to this rise, as claimants appear to be more confident that employers have sufficient funds to discharge any awards that may be found in their favour.

Finally, as the dispute boards and arbitration centres establish themselves across the region, a greater level of maturity and reliability cascades into the various panels, appointing bodies and associated judiciary. This results in having a greater level of confidence in referring and enforcing awards in the region. Therefore it appears that a combination of these factors has contributed to the volume increase discussed above.

Once these disputes have reached the formal disputes stage a stronger desire to do business begins to manifest itself and there is a real focus on trying to resolve things as quickly as possible. This year’s study showed that construction disputes in the Middle East lasted on average

nine months which is a slight increase on the 2010 figures (8.25months) but shorter than all other markets except the UK and markedly below the global average of 10.6 months.

The report found that a failure to properly administer the contract was the most common cause of dispute in the Middle East whilst arbitration was the most common method employed to try and resolve disputes, closely followed by party to party negotiation and adjudication.

This preference for adjudication is understandable as the number of parties involved in construction projects across the Gulf, means that a strong and independent voice is required at the centre to ensure that all views are taken into account. When all parties, from client to sub-contractor, get an opportunity to share their views in a structured environment it often negates the need to proceed to a more formal environment to resolve these differences.

In recent years Dubai has emerged as a hub for international arbitration, due in no small part to government endorsement and its adoption of the New York Convention. With a vibrant international construction market across the Gulf region and multi-cultural contracting relationships, the option of using arbitration as a method of dispute resolution will always hold appeal as it allows parties from different jurisdictions to opt for a neutral country to host and resolve their dispute.

Middle East

During 2011 the average value of disputes in Asia’s

construction industry fell by 18% to $53.1 million

compared with $64.5 million in 2010. Given the volume

of construction that is taking place across the region

this is a positive development and bodes well for all of

the future work that is planned in both established and

developing markets across Asia.

There is no single reason to explain this drop however there are strong indications that across Asia, parties are beginning to take a more proactive approach when it comes to resolving their disputes. This move to tackle differences at a much earlier stage through structured negotiation and mediation helps to lower the overall cost of a dispute as it significantly reduces the amount of resource that needs to be allocated in helping to deal with these issues.

Whilst the value of construction disputes in Asia may be decreasing, the length of time required to deal with them has risen over the past twelve months. In 2010 the average length of each dispute was 11.4 months however in 2011 this figure increased by 9% to 12.4 months. This was longer than most regions took to resolve disputes with only the US taking more time (14.4months). This may be partly attributed to the fact that it takes time for large and complex disputes to be heard in arbitration with issues of availability of the leading Arbitrators and Counsel, as well as the time that it can take to assemble the evidence for complex cases.

Fortunately, a consensus is now beginning to emerge on the need to address these issues more quickly. In Singapore the Security of Payment Act has already delivered measurable improvements whilst the Arbitration Ordinance that was introduced in Hong Kong last year is also beginning to lead to faster methods of resolution, in addition to the implementation of the DRA scheme and a wider use of mediation. Also, collaborative relationship contracting is gathering momentum in the region, with many employers looking to procure in this way. Malaysia is another market that is soon to adopt adjudication as a method of dispute resolution and if we take all of this positive momentum into

consideration, it seems fair to assume that in next year’s report the length of time taken to resolve disputes in 2012 should be lower than in previous years.

In 2011 the most common cause of a construction dispute in Asia was a failure to make interim awards on extensions of time and to give associated compensation followed by an unrealistic level of risk transfer from employers to contractors. When it came to resolving these disputes, mediation was the most common method employed although interestingly, the approach taken varied on a location basis. This year’s figures indicated an increase in the use of the Security of Payment Act in Singapore, a rise in the use of mediation in Hong Kong, and a general increase in the use of arbitration in mainland China and South Korea. There has also been an increase in cross-border arbitration between Hong Kong and China however in mainland China dispute resolution is largely locally and regionally driven and is likely to remain so on a short to medium term basis.

The top five causes of disputes in Asian construction projects during 2011 were:


2. Unrealistic risk transfer from employers to contractors

3. Conflicting party interests

4. An unrealistic contract completion date being defined at tender stage

5. Incomplete design information or employer requirements.

Asia

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The average value of disputes in the British construction

industry rose to £6.5million during 2011, up from

£4.6million in 2010. This represents a significant rise

although in this instance this may be due to the size of

the disputes EC Harris’ Contract Solutions team worked

on over the past twelve months rather than reflect the

evolution of the UK industry as a whole.

This year’s study also found that construction disputes in the UK were proving more time-consuming than before with the average length of each dispute increasing from 6.75 months in 2010 to 8.7 months in 2011. However, despite this increase, disputes in the UK were still resolved more quickly than any other region in the world. This increase could be due to a growing reluctance from parties’ to refer their disputes to the adjudication process largely because of inconsistent results that have been obtained from these proceedings over the past twelve months. Furthermore, when matters are referred to adjudication it regularly exceeds the statutory period of 28 days for a decision.

The results from this year’s study showed that in the UK a failure to properly administer the contract was the most common cause of a construction dispute. The failure to administer contracts stems from clients being less willing to spend money during the procurement phase such that the choice of contract is often unfamiliar to those chosen to administer the contract selected. Another unfortunate, but all too frequent, occurrence is the shaping of a project around the contract, rather than the contract being developed around the project characteristics. This failure also stems from clients being advised to adopt contracts such as NEC3 without fully appreciating the level of administration and involvement required to effectively gain the benefits of using such a contract form.

The performance of the project manager or engineer was also a recurring issue with differences arising because they had insufficient understanding of the procedural aspects of the contract or were deemed too partial to the employer’s interests. This type of scenario was particularly common when local authorities were one of the parties to the

contract, and in many occasions it was because the authority was unwilling or unable to spend more public money than had been allocated within the initial budget.

When it came to dispute resolution, party-to-party negotiation was the most common method employed followed by adjudication and then mediation. This supportsthe view that parties are increasingly trying to begin negotiating directly with the other party before resorting to third party resolution. Whilst adjudication also features prominently when it comes to resolving disputes, there is a perception that over the past twelve months, parties have become increasingly frustrated by the process although it does help to speed up decisions and confidentiality is maintained throughout.

Although it didn’t specifically feature within the survey this is also an emerging trend within the UK construction market of parties pursuing resolution of disputes by litigation. It is also likely that the recent changes to the Construction Act, allowing disputes based on oral contracts to be referred, will see a rise in the number of disputes being referred in 2012, albeit the likelihood is that parties will exercise a degree of caution before referring where doubt surrounds the contract terms.


The top five causes of disputes in UK construction projects during 2011 were:



3. Unrealistic risk transfer from employers to contractors

4. Employer imposed change

5. Ambiguities in the contract document.

UK

In 2011 the average value of disputes in the

European construction industry rose by 5% increasing

from $33.3 million in 2010 to $35.5 million in 2011.

The report also found that the length of time required to tackle construction disputes in Europe had increased over the past twelve months with the average figure rising to 11.7 months in 2011 compared to 10 months in 2010.

The research found that a failure to properly administer the contract was the most common cause of a construction dispute in Europe. When it came to dispute resolution, party-to-party negotiation was the most common method used in Europe, followed by litigation and then adjudication.

The top five causes of disputes in European construction projects during 2011 were:



3. Ambiguities in the contract document

4. Failure to make interim rewards on extensions of time and to give associated compensation

5. Employer imposed change.

Mainland Europe

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The average value of disputes in the US construction

industry decreased significantly over the past twelve

months falling from $64.5 million in 2010 to $10.5

million in 2011. This dramatic fall is largely due to a

more generally depressed market over the last twelve

months whereby the volume of construction taking

place has not been at a comparable level to previous

years. There has also been an increasing emphasis

from both public and private sector owners to avoid

and mitigate disputes through both risk management

and early, field level, resolution of disputes.

Interestingly, despite the fact that the volume and value of disputes dropped compared with the 2010 figures, the length of time required to solve disputes increased, rising from 11.4 months in 2010 to 14.4 months on average in 2011. This was longer than anywhere else across the globe and significantly higher than the global average of 10.6 months. However, in some respects this statistic is slightly misleading and disguises the progress that has been made in the North America market in avoiding and resolving construction disputes.

Today, most capital programmes have their own risk and dispute management teams in place who have been very successful at resolving differences at the project level before they escalated. Therefore, the apparent challenge to a quicker resolution of disputes in the US market may be explained by the fact that the results of the survey are probably referring to the more complex disputes that needed to go through formal proceedings and which, by their very nature, inevitably required additional time to resolve.

When it came to the most common causes of construction disputes in the US, this year’s results indicated that ambiguities in the contract document were the most typical problem although there were also issues around incomplete design information or employer requirements. Interestingly, party to party negotiation was the most common method used to resolve disputes in the US, followed by mediation and arbitration.

This preference for party to party negotiation isunderstandable as the drive within the US construction industry for early resolution saw a marked shift in emphasis towards direct negotiation as a means of tackling issues before they escalate into something more serious. All parties in the project are now focused on the primary objective of early dispute resolution and claims avoidance.


The top five causes of disputes in US construction projects during 2011 were:





5. A failure to properly administer the contract.

North America

Commentary on most typical causes of dispute

In 2010 the most common cause of a dispute within the construction industry was a failure to properly administer the contract and in 2011 this once again emerged as the biggest issue. Indeed the top three reasons identified in 2010 remained unchanged in 2011 with ambiguities in the contract document and a failure to make interim awards on extensions of time and to give associated compensation, occupying second and third place respectively.

However, this year saw two new issues come to the fore, with the study revealing that incomplete design information or employer requirements and conflicting party interests were increasingly causing disputes within the industry compared with the previous twelve months.

These findings indicate that whilst the market may be evolving, many of the same old problems continue to create tension and ultimately prevent projects from moving forward. Unsurprisingly, contract issues are once again responsible for many of these disputes with incorrect selection and failure to administer these contracts the two most common issues.

When it comes to multi-million dollar projects having the right procurement and contract strategies in place from the outset is absolutely fundamental to the project’s future success. In the best examples the contract is developed based on the particular constraints and characteristics of that project rather than trying to make the project fit around a standard contract template. The allocation of risk between each party, the way that constraints are incorporated and also the pricing mechanism, all need to be adapted on an individual project basis yet too often there is a trend within the industry to try and impose a standard approach on many projects.

Overall the top five causes of disputes in construction projects during 2011 were:



3. A failure to make interim awards on extensions of time and to give associated compensation


5. Conflicting party interests.

The findings from this year’s report also suggest that there is a second key issue at play – the documents may contain inter-related time management and notification provisions, however in too many cases these respective provisions are not enforced. If all clauses within a contract are not adhered to, this can affect the timely capture of relevant data, but can also severely influence and affect the project cash flow, sub-contractors and also the morale and relationships between the parties and the engineer or project manager.

Directly related to this is a failure to provide interim extensions of time and to give associated compensation. Often this issue is influenced by the quality and standard of substantiation provided to support the application and the level, experience and impartiality of the engineer or project manager who is administering the contract. The report also indicated that in many instances the engineer or project manager lacks a sufficient level of authority to address an issue as and when it arises on a project.

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Meeting the Future Challenge

With the global economy likely to remain subdued over the coming years, construction companies will be operating in an increasingly challenging marketplace. In such an environment, construction disputes are not just an unwanted hassle but also something that could potentially endanger a business’ existence or at the very least, have a lasting impact on future business relationships.

At the same time, the scale and complexity of some of the infrastructure and building construction programmes that are planned over the coming years means that large and complex disputes will inevitably remain a feature of our industry despite the best intentions of all parties involved to try and avoid them. With such limited room for error in a financially constrained climate, resolving these before they reach the formal dispute stage is always the most welcome outcome.

Typically we find the approaches outlined below are particularly relevant when it comes to reducing the risks associated with the construction and engineering delivery process and enabling clients to realise their project objectives.

Avoid Disputes:■ The first line of defence against construction disputes is to prevent them happening in the first place. To help our clients avoid disputes, we identify the potential risks on their projects and then recommend the procurement routes and contract structures that are most likely to enable a project to run smoothly. The scale of many of today’s construction projects and programmes means that the level of experience and technical expertise required has never been greater. Our ability to bring to bear the combined knowledge of quantity surveyors, building surveyors, project managers, architects, engineers and delay analysts is crucial in helping our clients to avoid problems and to deal with them before they spiral into more formal disputes.


Mitigate Disputes:■ Unfortunately, even on the most appropriately procured and managed projects, disputes can arise. In such a scenario, how clients and contractors react will ultimately determine whether the dispute ends up being a minor inconvenience or a more serious threat to the project’s success and the long-term business relationship. A rapid response is required to help mitigate the effects of the dispute, avoid delays and deal with issues in a timely fashion so that the dispute doesn’t turn into a long-running conflict that prevents parties from their delivery commitments. With speed of the essence here, having the right people available with knowledge of the region and access to best-in-class technology are all key as rapid deployment can help to isolate and manage issues quickly.

Resolve Disputes:■ If, despite everyone’s best intentions, a dispute does escalate to the extent that more formal proceedings are required to try and resolve the issue, then an expert witness is often required to help provide independent advice and opinion evidence. In this case, experts are needed that can offer innovative approaches, relevant expertise and evidence, professional integrity and commercial acumen to both clients and law firms to enable them to deliver the best possible outcome. This environment requires not only specialist training in legal procedure, a full understanding of the role and duties of an expert, but also skilled writing and an ability to clearly identify and address issues and provide clear, persuasive and credible evidence. Ultimately this evidence will be based on opinion and relevant data so access to robust data management systems is also crucial, as it enables the witness to present well considered, early findings that provides clients with an early indication of issues and likely opinions.

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About us

About EC Harris:

EC Harris is a leading global built asset consultancy. As an ARCADIS company, we have access to approximately 21,000 professionals worldwide operating in over 70 countries, 300 offices and generating in excess of €2.4 billion in revenue. Working across a wide range of market sectors, we help our clients make the most from the money they spend on their built assets.

For more information visit www.echarris.com

About Contract Solutions:

EC Harris’s specialist Contract Solutions team helps clients avoid, mitigate and resolve disputes. The team is based around the globe and encompasses one of the industry’s largest pool of procurement, contract, risk management and also quantum, delay, project management, engineering defects and building surveying experts. The Contract Solutions team provides procurement, contract and dispute avoidance and management strategies, management expertise as well as dispute resolution and expert witness services. This is delivered through a blend of technical expertise, commercialism, sector insight and the use of live project data, combined with a multi disciplined and professional focus.

Please visit: www.echarris.com/contractsolutions

About ARCADIS:

ARCADIS is an international company providing consultancy, design, engineering and management services in infrastructure, water, environment and buildings. We enhance mobility, sustainability and quality of life by creating balance in the built and natural environment. ARCADIS develops, designs, implements, maintains and operates projects for companies and governments. With 21,000 people and €2.4 billion in revenues, the company has an extensive international network supported by strong local market positions. ARCADIS supports UN-HABITAT with knowledge and expertise to improve the quality of life in rapidly growing cities around the world.

Please visit: www.arcadis.com

Mediation:■ Mediation is a private, confidential, voluntary and non-binding dispute resolution process in which a neutral third party facilitates all stakeholders to help arrive at a negotiated compromise without recourse to the courts. The process leads to a negotiated settlement which is recorded in a binding and enforceable written agreement between the parties. This approach allows parties to remain in control of the process and its outcomes and can be an effective way to protect or repair commercial relationships. Mediation is an innovative approach as it is the only method of dispute resolution that can include forward-looking obligations or commitments whereby the aim is to not only resolve immediate differences but also protect the long-term relationship of all parties involved. Internationally, mediation has a success rate of 70-75%.

There are a number of solutions that parties should consider as they strive to manage disputes in the most efficient and appropriate manner possible, however in most cases applying the right skills at the right time and focusing on delivering what is in accordance with the contract, goes a long way to reducing the nature and extent of any dispute. An early involvement by independent specialist consultants, who are wholly focused on business outcomes, can also significantly help in achieving the desired outcome.

For more information, please contact:

Mike AllenGroup Head of Contract SolutionsEC Harris

t +852 2263 7301e [email protected]

David DaleHead of Contract Solutions EC Harris - Middle East

t +971 4 423 3921e [email protected]

Gary KittHead of Contract Solutions EC Harris - UK and Europe

t +44 (0)20 7812 2310e [email protected]

Joe SeiboldExecutive Vice PresidentARCADIS US

t +1 213 486 9884e [email protected]

www.echarris.com/contract_solutions

AN ARCADIS company


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