How to avoid construction disputes

Frequently construction projects end in lengthy and acrimonious disputes between the owner and the contractor, or between the general contractor and their subcontractors.

Construction projects will inevitably have changes, delays and variations. Where these are as a result of the client or owner’s actions, or due to some other actions which the contractor had no control of and couldn’t avoid, then the contractor, depending on the terms of the contract document, will have reason to claim for an extension of time caused by the delay and for the additional costs they incurred as a result of the variation. Unfortunately often these variation claims are refuted due to them not being legitimate, or because they weren’t submitted in terms of the contract or because they are incomplete and don’t have the necessary supporting documentation. However, sometimes the claims are rejected for the wrong reason. This might include the party that rejects the claim not understanding the claim, possibly not understanding the contract, or, in some cases purely because they believe they can bully the contractor into withdrawing their claim. Where the parties cannot agree the legitimacy or the quantum of the claim then the aggrieved party may declare a dispute.

Why disputes are bad

Where possible disputes should be avoided because they:

1.                  Are time consuming – contractors shouldn’t underestimate the time that disputes take to resolve, time that could be better utilised elsewhere on the construction project, or on other projects.

2.                  Can damage the construction company’s reputation – clients/customers and subcontractors often avoid contractors that have a reputation for project disputes.

3.                  Damage the relationship between the parties – the relationship seldom returns to normal after a dispute.

4.                  They are costly especially when they become legal and involve lawyers.

5.                  They may end poorly for the contractor who doesn’t receive the full value of their claim.

6.                  They can disrupt the construction project and sometimes cause further problems.

How to avoid disputes

Generally most disputes can be avoided if appropriate actions are taken, such as ensuring:

1.                  There’s a legally enforceable contract in place which protects both parties’ interests.

2.                  The contract is well written and doesn’t have conflicting clauses or contractual loopholes.

3.                  The contractor understands the contract and complies with its provisions. Often the contractor’s Project Manager doesn’t read the contract until a dispute arises – it’s normally too late then!

4.                  The contractor communicates with the client and their own subcontractors, timeously notifying them when problems, delays and variations arise.

5.                  The contractor submits and resolves variations as soon as practical.

6.                  Clients act in a fair and reasonable manner.

7.                  Accurate records are maintained.

8.                  There’s willingness by the parties to talk and negotiate.

9.                  Personalities and emotions are kept out of the negotiations.

10.              The contractor admits when they’re wrong and doesn’t lodge extravagant claims.

11.              The consequences of escalating the dispute are weighed up carefully, since the costs of legal action may be more than the outcome is worth.

12.              The construction contract is administered in a spirit of honesty and cooperation by all parties.

13.              Senior management are made aware of potential disputes and problems on a project, thus enabling them to take the necessary action and intervene if required to avoid the problem escalating.

14.              Expert advice is sought when necessary.

15.              The contractor deals with their subcontractors and suppliers fairly and resolves claims when they arise.

Negotiating a variation claim successfully

Being able to negotiate is a skill that’s essential to successfully agreeing variation claims. There are many useful courses about negotiations. Negotiating is often a slow process and the success depends on:

1.                  Understanding the strengths and the weaknesses of the claim.

2.                  Being able to support the strengths of the claim with relevant documentation.

3.                  Being able to defend the weak points of the claim, but always ensuring that supporting a weakness isn’t done at the expense of credibility.

4.                  Understanding the other party’s arguments and having the facts to explain why they are incorrect. Take time to go through every argument even if you consider the points irrelevant or trivial.

5.                  Keeping emotions out of arguments. Even if the other party becomes personal or abusive it’s important to stay calm and stick to the facts.

6.                  Presenting arguments in a logical fashion.

7.                  Being prepared to grant the other party small wins.

8.                  Understanding the other party’s fears or concerns which will enable these fears to be addressed, pointing out why these fears are unnecessary, or presenting arguments that will allay the fears.

9.                  Learning to admit when you are wrong. Defending a claim, or part of a claim, with flimsy arguments wastes time, impacts integrity and frustrates the other party, even undermining any partial wins already negotiated.

10.              Knowing what the ‘walk-away’ point is – what is the absolute minimum that can be accepted. When this point is reached, and in the face of stiff opposition, depending on other factors and claims it may be advisable to accept the settlement.

11.              Understanding the other party’s emotions. Some people will launch into blustery and abusive attacks while others may try and appeal to the contractor’s sympathy. Often these are made to disarm the contractor. Understand when they are bluffing and when there is serious intent.

12.              Knowing the other party’s bottom line or budget is helpful as often it is pointless arguing for a figure higher than this because it just might not be achievable.

13.              Not making threats or promises that can’t be kept.

14.              Learning when to take a break with the negotiations when your side needs to regroup or develop a new strategy, or when it’s obvious the employer is engrossed with other events, or is just in a ‘bad mood’. On the other hand when things are going well it may be worth extending the negotiations so that a deal can be struck while everyone is in agreement.

15.              When there is a deadlock, knowing it’s pointless arguing the same point over and over again. Repeating the argument isn’t going to change minds – nor is raising one’s voice. Think of another tack or angle. It may be necessary to leave an issue unresolved and move onto another part of the claim or discuss other claims. Settlement of other issues may allow both parties to later approach the deadlocked issue with more open-minds.

16.              When a deadlock persists, sum-up the issue, including what points the parties agree on, what the disagreements are, and why the parties differ. Often this summary awakens both parties to how close they are to agreement.

Conclusion

Contractors who have a legitimate claim for a delay or additional costs shouldn’t hesitate to claim for these. However they must ensure that they formulate and submit their variation claim in terms of the conditions of the contract document. This claim should be properly presented and well thought out and should include all the necessary information and documentation to support the claim.

Only once the contractor has gone through all the options of negotiating a successful resolution of a variation claim (but also baring in mind time limits contained in the contract document) should they proceed down the dispute resolution process. It’s important to follow the process outlined in the contract document. Contractors should note that they cannot simply stop work on a project because they have an unresolved dispute with their client. The contractor should also understand other options available to them to resolve the claim which can vary depending on the country and state.

I’ve been involved with over 120 projects and all have had variation claims – some for millions of dollars, almost doubling the project value. Yet, more than 99% of my variation claims were settled amicably without declaring a dispute, and most of what we claimed was approved. More importantly we completed further projects with these same employers.

Have you had a variation claim that’s ended in a dispute? How was the dispute resolved, and was it worth the time and effort?

This article is adapted from information contained in the author’s book 'Construction Claims: A Short Guide for Contractors'  available from Amazon and other on-line stores.

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Paul Netscher is also the author of the popular books 'Successful Construction Project Management: The Practical Guide' and 'Building a Successful Construction Company: The Practical Guide'. 

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Paul's other books include 'Construction Claims: A Short Guide for Contractors' a?nd 'Construction Project Management: Tips and Insights'.

Paul' new book 'Construction Management: From Project Concept to completion' has recently been published.

These books are available on Amazon and other online book stores.

Paul publishes articles regularly on LinkedIn and his website. Visit www.pn-projectmanagement.com to read other similar helpful articles.

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