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Trending Construction Disputes: Best Practices for Mitigation

Trending Construction Disputes: Best Practices for Mitigation

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In all phases of the construction lifecycle, from negotiation to post-project dispute, construction executives, project management teams and lawyers experience the constant yet somewhat unpredictable and often inconsistent market fluctuations in leverage between owners, developers, contractors, design professionals, subcontractors and other project participants. Market fluctuations the past ten to fifteen years, exacerbated or dramatized by COVID-19 (and related circumstances), exemplify and intensify the need to appreciate and fully comprehend developing trends. In this regard, Norton Rose Fulbright’s Litigation Trends Survey reveals that those responding to the survey expect an increase in Construction and Real Estate disputes. Norton Rose Fulbright’s 2024 Annual Litigation Trends Survey | United States | Global law firm | Norton Rose Fulbright

Causes of Construction Disputes

Historically, the vast majority of construction disputes arise from three primary causes: 1) completion delays; 2) cost overruns (including scope change, extra work, disruption and other cost increase claims); and 3) quality and/or defect disputes. For each of these categories, conditions and market forces have developed in recent years causing an increase in likelihood of disputes arising from each of these primary causes. How to manage capital projects more efficiently | McKinsey.

Delays in Completion

Conditions exist for increased likelihood of delay claims by owners against contractors and vice versa and recent statistical trends reveal a reason for concern. [LINK] The construction industry experienced significant turmoil in the last major economic downturn of The Great Recession (2007-2009), with many aspects of construction demand not returning until 2012 or 2013. However, once the market recovered, many construction industry participants, including contractors, subcontractors, and other project participants required to staff and manage steadily increasing project inventories, yet the labor left the industry due to economic forces encouraging a move to another industry and Baby Boomers retiring. This caused a major labor (specifically skilled labor) shortage in the industry which continues today. 2023_Outlook_National_V3.pdf (agc.org). New Report Shows Construction Workforce Shortage Will Top Half a Million in 2023 – Condustrial

When the construction industry rebounded with a vengeance, especially from 2014/2015 and beyond Total Construction Spending: Total Construction in the United States (TTLCONS) | FRED | St. Louis Fed (stlouisfed.org)], the demand for construction services combined with fewer participants in the industry (contractors and individuals), created a higher likelihood of delays resulting from contractor, professional management and skilled labor shortages. The exponential construction demand growth, powered by conversion to sustainable energy facilities (solar, wind, etc.), housing shortages, changes in health care and medical treatment causing a demand for renovation and repurposing of aging assets, growth in educational infrastructure needs, and Baby Boomer aging leading to senior living, memory care and other related needs, led to further compression of available construction resources, which combined with unrelenting time constraints from the owners, developers and other project, increased the likelihood and actuality of project delay claims.

COVID-19 further exacerbated these existing conditions already ripe for delay claims. AGC Survey: Chaotic Supply Chain, Worker Shortages Still Plague Contractors a Year Into Pandemic | 2021-03-11 | Engineering News-Record (enr.com). Although most government authorities quickly classified construction as an essential service and allowed construction projects to continue, labor disruptions caused by the illness, as well as worldwide supply chain issues, caused significant delays to many construction projects which could not properly re-sequence or otherwise manage the challenges. To further complicate schedule delays, owner demand persisted and contractors continued to negotiate and accept new jobs with aggressive timelines despite unprecedented inflation and material price fluctuation which further increased the likelihood of delays, unless all project participants contributed to aggressively maintain the project schedule.

Cost Overruns

With respect to cost disputes, which persist throughout the industry (Construction Cost Overruns: An Industry in Crisis – SmartPM (smartpmtech.com)), the genesis of the dispute typically varies based on the project delivery (design/bid build v. design/build) and pricing methodology (lump sum v. guaranteed maximum price), however, all cost claims tend to arise or devolve from a disagreement regarding whether the contractor knew or should have known that the original scope of work included the costs incurred by the contractor or whether the contractor incurred the costs because of a change in the original scope and/or an inaccurate or insufficient description of the scope of work whereby the contractor should have reasonably anticipated the costs.

In this regard, the above referenced skilled labor shortages (causing increased cost of available labor), global supply chain issues (causing increased cost of obtaining materials on time) and inflation/fluctuating material costs, increased the likelihood of clashes between project participants regarding cost provisions in contracts. In recent years, especially since parties completed projects post COVID-19 and endeavored to negotiate new contracts with provisions attempting to confront the pricing instability, the concerns regarding continued effects of the new economic market and/or the failure of these negotiated cost mitigation provisions, continue to cause all project participants to fear cost disputes which could derail the success of all sized construction projects.

Defect/Quality Issues

Many of these same market conditions or variances on the same conditions have caused the increased concern regarding defect/quality issues. Of course, with respect to a skilled labor shortage, defect/quality issues stem from inexperienced and/or less qualified skilled workers in the field. As referenced above, experienced skilled craftsmen Baby Boomers left the industry during the Great Depression and naturally through retirement, however, in addition, recent trends show a decrease in trade union participation (BLS: Union Construction Workforce Share Dips To Lowest in Years | Engineering News-Record (enr.com)) as well as a cultural emphasis on four year college education as opposed entering a vocational practice or trade. Moreover, defect/quality issues occur when the contractor or subcontractor fails to construct or install the work in the manner and/or with detail or quality required by the plans or specifications. In this regard, in addition to skilled labor shortages causing these issues, the scarcity of experienced project management professionals to accurately, effectively and consistently identify defect/quality issues as a result of a lack of experience, also increases the likelihood of these disputes.

As further implication that these overwhelming causes of construction disputes (delay, cost overruns, and defect/quality issues) interrelate and exacerbate each other, schedule delays and compression often lead to less attention to detail and/or strict compliance with specifications and cost concerns and fluctuations often cause parties to attempt savings through less quality control or assurance. For all of these reasons, all project participants continue to see a trend of increased defect/quality claims on projects.

Best Practices for Mitigating Project Failure

Having identified the many problems and causes leading project participants to continue to concern themselves with increased likelihood of construction disputes, these projects participants should continuously conduct introspective reviews of construction contracting and/or project management best practices for project controls, protocols and procedures to mitigate disputes, or at least mitigate the damaging effects of disputes. Keep the train on the tracks and avoid the growing dispute which causes a project to become a disaster and bad memory for all involved.

No one solution fits all projects and all causes of disputes. However, through negotiation of more reasonable and thoughtful contracts with clear and understandable project protocols and expectations, increased attention to project documentation, and heightened and multilevel involvement in early intervention, construction project participants experiencing increasing dispute trends, may increase the likelihood of a successfully mitigated dispute.

Reasonable and Thoughtful Contracts

All construction disputes start and often end with the contract and an evaluation by the arbitrator, judge, or jury regarding the parties’ intent at project commencement. Construction project professionals and their lawyers should all desire for clear and understandable contracts, even if all parties zealously advocate for a better market “deal” for their client. However, often times the contract negotiators blind themselves with obtaining the most favorable language regarding indemnity, standard of care, consequential damages, termination, notice requirements, etc. and blind themselves to the creation of clear and understandable scopes of work and/or clear and understandable expectations with respect to project schedules, excused delays, weather/force majeure, and other issues.

Projects without clear scopes of work describing what the contractor or design professional or other consultant must perform to comply with the terms of the contract, increase the likelihood of a problem project from the start. All negotiators, whether legal or non-legal, should work together internally and with counter-parties to clearly describe, articulate and enumerate the baseline scope for the project. This will include the lawyers reviewing the scope documents to identify overuse of colloquialism or technical language, vague requirements, ambiguous expectations and potential conflicts between the scope documents and the other contract documents. In addition, removing these issues and compiling the most clear and understandable contracts with clear and understandable scopes of work will include the non-lawyers working together across counter-party lines with their counterparts to review the language drafted and included by the counter-party as well as the language drafted by the lawyers to ensure that expectations are clear and understandable, including with the lack of effusive redundant lawyerly language the non-lawyers will ignore.

Contemporaneous Project Documentation

In any construction dispute, the lawyers litigating the claims look for evidence of contemporaneous documentation of the issues and claims. Witness testimony can tell a story of how a dispute arose and how the parties grew apart on the issues, however, the jaded and biased testimony of the party witnesses creates credibility issues for the arbitrator, judge or jury. That said, contemporaneous project documentation, whether through statements in a change order, request for information, claim letter, email, text message, direct message, etc. can unwind the prejudice of the witness testimony. As such, all project participants, hopefully without causing an unhelpful letter writing campaign, should endeavor to document their communications, agreements and disagreements through some form of written documentation shared contemporaneously with all relevant parties. Circulate meeting minutes promptly, including persons and parties in attendance. Respond to meeting minutes with corrections or clarifications when the party keeping minutes fails to accurately, completely, or effectively record the issues addressed. Respond to claim letters, notices or other project communications, even if to simply point out that although the response communication is not intended to fully address all issues, but rather to document a disagreement with the facts or conclusions in the writing. Regardless, at all times, endeavor to create an accurate and contemporaneous written record of the agreements and disagreements between the parties.

Early Intervention

Lastly, all project participants, including lawyers and non-lawyers should endeavor to instill early intervention risk mitigation protocols. The contracts should set forth the inter-party requirements for claims and dispute resolution procedures which call for early intervention by elevating project level disputes and claims to legal departments and senior management.

Similarly, intra-party protocols should create clear standards and requirements for project level dispute resolution authority, required timing of notice of claims from project level management to legal department oversight and regular interval reporting to senior management responsible for the project. Too often, project level management teams avoid reporting potential claims and disputes to internal legal departments and/or senior management for a variety of reasons, sometimes out of genuine belief that the parties will resolve the claim quickly and amicably at the project level and sometimes because the project level management teams believe the involvement of legal departments or senior management will complicate the resolution or somehow indicate a failure by the project management team.

In this regard, projects that succeed and remain on track throughout (or quickly course correct following a claim), almost always include three hundred and sixty degree reviews on regular intervals with project level management routinely reporting to legal and senior management as well as legal and/or senior management conducting audits of project communications, change order requests, requests for information, claims notices, payment applications, lien waivers, and other project documentation, in manner consistent with supporting the project level management team as opposed to creating a culture of patronizing oversight. This culture requires clear expectations from the outset and supportive buy-in from all levels to truly succeed and the best projects result from well drafted project handbooks with the protocols, procedures and documentation requirements which management will expect internally.

Conclusion

Norton Rose Fulbright’s surveyed clients expect increases in disputes in the construction and real estate sectors. These increases will likely arise through delays in project completion, cost overruns, and defect/quality issues. Evolving market forces over the past ten to fifteen years have set the stage for these likely increases in construction disputes, however, adherence to the above recommended best practices in construction management and risk mitigation should help limit the propensity of projects to unravel into unsuccessful or less than worthy experiences and/or contractual relationships.

Tim Walsh is Head of Construction at Norton Rose Fulbright US LLP. He represents owners, developers, contractors, and design professionals in construction projects, including, energy and power plant facilities, commercial and industrial manufacturing plants, infrastructure support, warehouses, and storage facilities, hotel, condominium and multifamily residential housing developments, health care facilities, entertainment complexes, and shopping centers.

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