ech global construction disputes report 2012

7/27/2019 ECH Global Construction Disputes Report 2012

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GLOBAL CONSTRUCTIONDISPUTES: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 worlds

economy, it is fundamentally important

that the capital invested in these

schemes helps to deliver value and

outputs that support growth. Thereare 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 personnelfor 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 thatwere 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 years report, share our views

on what this means for clients within

each region and offer some expertinsight 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 Consultingteams 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 years 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 maybe 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

years 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 years study found

that arbitration had actually become less popular as a means

of settlement with party-to-party negotiation the mostcommon 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 employerrequirements

3. Employer imposed change

4. Failure to make interim awards on extensions oftime 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 withinthe 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 claimstypically 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 years 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 commonmethod 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


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During 2011 the average value of disputes in Asias

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 anddeveloping 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 maybe 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 disputeresolution and if we take all of this positive momentum into

consideration, it seems fair to assume that in next years

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 anunrealistic 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 years

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



2. Unrealistic risk transfer from employers to contractors

3. Conflicting party interests

4. An unrealistic contract completion date beingdefined at tender stage

5. Incomplete design information or employerrequirements.

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 theevolution of the UK industry as a whole.

This years study also found that construction disputesin 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 years 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 dif ferences arising because they

had insufficient understanding of the procedural aspects of

the contract or were deemed too partial to the employersinterests. 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 didnt specifically feature within the survey

this is also an emerging trend within the UK construction

market of parties pursuing resolution of disputes bylitigation. 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


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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 to11.7 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




3. Ambiguities in the contract document

4. Failure to make interim rewards on extensions oftime 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 takingplace 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 years 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 mediationand arbitration.

This preference for party to party negotiation is

understandable 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


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Commentary on most typical causes

of dispute

In 2010 the most common cause of a dispute within theconstruction industry was a failure to properly administer

the contract and in 2011 this once again emerged as thebiggest issue. Indeed the top three reasons identified in2010 remained unchanged in 2011 with ambiguities in thecontract document and a failure to make interim awards onextensions 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 informationor employer requirements and conflicting party interestswere increasingly causing disputes within the industrycompared 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 theright procurement and contract strategies in place from

the outset is absolutely fundamental to the projects 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




3. A failure to make interim awards on extensions of

time and to give associated compensation


5. Conflicting party interests.

The findings from this years 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 potentiallyendanger 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 disputesis to prevent them happening in the first place. To help

our clients avoid disputes, we identify the potential riskson 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

todays 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 procuredand 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 projects

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 doesnt 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 everyones 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 andduties 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.echarr is.com

About Contract Solutions:

EC Harriss specialist Contract Solutions team helps

clients avoid, mitigate and resolve disputes. The teamis based around the globe and encompasses one of

the industrys 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 andprofessional 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 andnon-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 isrecorded 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.


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For more information, please contact:

Mike Allen

Group Head of Contract Solutions

EC Harrist +852 2263 7301e [email protected]

David Dale

Head of Contract Solutions

EC Harris - Middle East

t +971 4 423 3921e [email protected]

Gary Kitt

Head of Contract Solutions

EC Harris - UK and Europe

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

Joe Seibold

Executive Vice President

ARCADIS US

t +1 213 486 9884e [email protected]

www.echarris.com/contract_solutions

AN ARCADIS company


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