Part one: Disputes and avoiding the same pitfalls by Roy Cooper
Disputes have long been one of the most frustrating obstacles for the real estate, building and construction industry. As such, the industry has changed its behavior over the years and recognizes the importance of early intervention. In fact, many North American-based contracts include some kind of formal administrative process that brings these parties together to try and resolve disputes. These administrative processes are also designed to kick in early in a dispute life cycle, which is usually at the beginning of the construction phase of the project. Yet despite these proactive measures, a recent report by Arcadis Contract Solutions finds the value and duration of disputes have remained essentially unchanged over the last few years. In other words, the industry is experiencing the same pitfalls year after year. But why?
The construction industry is good at solving technical problems and developing innovative methods. Look around at the cutting-edge projects that are completed each year in every market sector. Technical issues always get solved. After all, there are not very many half-built buildings, highways, airports or power facilities around the world. Employing formal, early intervention forums and robust contract provisions are the industry’s “technical” answer to avoiding disputes. However, as the Arcadis survey reveals, there are non-technical factors at the core of every dispute. Some of the factors are represented on a global scale, and some are specific to the North American market.
For clarity, Arcadis defines a “dispute” as a situation in which two parties typically differ in the assertion of a contractual right. The value of a dispute is the additional entitlement to what is included in the contract for the additional work or event which is being claimed. The length of a dispute is the period between when it becomes formalized under the contract and the time of settlement or the conclusion of the hearing.
The global perspective
The report shows that both the global value and duration of disputes have slightly decreased over the past year. The global average value of disputes was $42.8 million (all figures USD) and the global average length of disputes dropped to 14 months (compared to $46 million and 15.5 months respectively, recorded in last year’s report results). The decreased dispute value and dispute duration will have multiple effects for both parties and are likely to have a positive impact on the construction industry.
With that said, this year’s report continues to find that globally, poor contract administration is the number one cause of construction disputes year over year. Specifically, a failure to properly administer the contract remained the most common cause of construction disputes worldwide. Moving up this year in the rankings was the issue of the employer, contractor or subcontractor failing to understand or comply with the contractual obligations—a sign that experienced industry advisors are not being sought at the outset.
The social infrastructure and public sector saw the most disputes, moving up one spot from last year. This was closely followed by the property, real estate, and oil and gas sectors.
The view from North America
Much like the global averages, the value of disputes in North America dropped slightly in 2016. This is the third consecutive year that the value of disputes dropped since a peak in 2013 for this region. However, the average time taken to resolve these disputes in the region increased by over two months in 2016 and is over a month longer than the global average.
For the third year running, the most common cause for disputes in North America during 2016 was errors and omissions in the contract documentation. Poorly drafted, incomplete or unsubstantiated claims, a newly added cause, ranked in the second position. Failure to properly administer the contract—the top cause globally—moved from second to third position. In North America, where a joint venture (JV) was in place, the proportion of disputes caused by a JV-related issue increased from 2015 to nearly a third of all cases (30.36 per cent).
With the new U.S. administration, and the forecasted increase in infrastructure spending, the North American construction market will be changing. Many of these new projects will be delivered using non-traditional delivery methods such as design-build, public-private-partnership, and construction manager as general contractor. All of these factors are sure to affect dispute values and durations in 2017 and beyond, and it will be interesting to see how the market adapts.
Understanding an emerging theme of 2017
The global pattern is that human factors are driving disputes and the same is true in North America. The pattern from previous years’ reports shows a similar trend, indicating that while the industry has developed better contracts, done a better job of risk allocation and has more educated participants, it has not figured out how to control human emotion. Human emotion and the need for being “right” often drives a dispute from infancy to the courtroom.
Resolution of claims continues to present significant challenges for public owners. While the causes of those disputes vary, an important path to resolution is early intervention in the claims process. Whether it is through an administrative process or through mediation, proactive resolution minimizes the costs and delays for all of the parties and keeps the project on schedule. Public projects involve a lot of negotiations and therefore are often influenced by human emotion. Early intervention in the claims process helps avoid emotional entanglements that can emerge when disputes drag on.
Part two: Cost uncertainty in an uncertain world by David Hudd
Despite improvement in market sentiment and a positive global economic outlook, risks remain in the forecast and some turbulence is expected in markets which could affect the volume and complexity of construction disputes. Commodity prices have seen some improvement as a result of stronger activity and expectations of more robust global demand, coupled with agreed restrictions on oil supply. In fact, industrial commodity prices experienced a slight resurgence, increasing by around 15 per cent between October 2016 and February 2017.
Overall, the 2017 global growth outlook is positive. Stabilizing oil prices, Brexit, and increased activity from policy stimulus in the U.S. and China are turning out to be larger than the current forecasts and would all result in a stronger pickup of activity.
However, there are factors that could counteract the positive trends that began last year and have created the current global growth momentum. A potential widening of global imbalances coupled with sharp currency exchange rate movements, should those occur in response to major policy shifts, could further intensify protectionist pressures.
The ability of investors and developers to flex their approaches to project procurement, finance and delivery will continue to be extremely valuable as politics and markets continue to be buffeted by both unexpected events and shifts in growth and economic conditions that will impact the global construction industry’s business. Fluctuating currency, commodity prices and politics can directly affect project capital expenditures and supply chain performance.
A consideration of other cost variables
Capital costs associated with constructing the infrastructure and buildings of tomorrow vary widely by location and remain hard to predict. Fluctuating currencies and commodity prices, and unexpected political developments have added to a complex and dynamic mix over the last year. These factors add further dimensions of risk to investment decision making, increasing the challenges associated with securing certainty of outcome.
The 2017 International Construction Costs report by Arcadis details the relative cost of construction in 44 of the world’s major cities. Like the construction disputes report, this cost report found that risk can result in increased costs. Given construction’s poor record in improving productivity, there is a possibility that growing uncertainty might become a barrier to the successful delivery of project investment. And with the significant shift in the political landscape seen in 2016 in mind, the challenge for businesses and government has increased in many markets. Meeting investment decision criteria and achieving the predictable project outcomes may be more challenging in many markets, but will remain essential if vital infrastructure investment is to be delivered.
Addressing cost variables
Agility is a valuable capability in uncertain markets. However, in seeking to be agile, developers and investors may have to relinquish some level of control over the detail of project delivery. This has consequences for overall construction costs and can impact the probability of a dispute. Ultimately the challenge for construction professionals remains how to make smart investments in an increasingly uncertain world. Having access to high quality data and current, relevant market insight is one tool that will help the industry successfully navigate these challenges.
No matter the city or country around the world, a fundamental truth is that the cost of constructing critical infrastructure and new buildings over the course of a long build phase is notoriously difficult to predict, making the challenge of providing cost and commercial certainty a vital one. However difficult the process of construction, when completed, built assets generate a formidable economic contribution to the communities and cities within which they are built. For example, in 2016 the built environment generated a huge $36 trillion of gross domestic product globally. This is evidence that throughout history constructing built assets, from roads and railways to residential high-rises, is critical to national wealth.
Across the globe, governments are planning, constructing and redefining their built environments in order to create thriving communities that improve the quality of life for their citizens and generate better returns for the economy. World cities, including London and New York, continue to be some of the most expensive locations in the world to build. However, a slowdown in the rate of global growth, led by China and the resource economies, such as Brazil and Saudi Arabia, points to wider changes affecting the world’s construction markets.
To address costs in this complex global market, it is increasingly important to leverage available data analytics and digital construction methods to develop a higher degree of cost certainty and investment confidence. A digitally enabled cost and project delivery framework allows for a more agile response to these shifts in investment fundamentals during project delivery as well as driving long term asset life cycle performance.
With an increasingly volatile and uncertain geo-political and economic landscape, the importance of monitoring and controlling the cost life cycle has never been more evident. Fluctuating currency, commodity and politics can directly affect project capital expenditure and supply chain performance underpinning investment decisions; the events of 2016 show that these fundamentals can shift quickly and unexpectedly.
Roy Cooper is a senior vice president of Arcadis’ Contract Solutions group in North America. He is responsible for all claims related service offerings including providing expert testimony, claims analysis, schedule review services, constructability reviews, cost estimating and quantitative risk assessment.
David Hudd is a principal of the Arcadis Cost Consultancy group. He is provides comprehensive cost planning, management and analysis services across a broad range of sectors.