How to save money in Disputes & Arbitration
It was Voltaire who said:
“I was never ruined but twice: once when I lost a lawsuit, and once when I won one”.
Anyone who has been involved in construction arbitrations will know that they can be expensive; with uncertain results based on flawed or even a lack of understanding of the construction processes. The other common feature of them, is that they are not quick.
Arbitrations can and do take years, sometimes longer than the actual construction time.
Could the dispute process be accelerated and made more efficient; or even avoided?
The answer is yes.
What I advise is simply good contract administration practice. It should be standard practice on all contracts.
Use standard contracts that are fair to both parties; keep changes to a minimum.
Standard contracts are normally modified to make them more onerous. Sometimes with changes so subtle that the effect might be missed by tendering contractors. If changes are required, clarity would be achieved by identified clauses deleted and clauses added.
Assume that a dispute could occur and implement effective contract administration systems.
Contractors and consultants should take all necessary steps to avoid a dispute by keep themselves and the Employer informed; ensuring necessary records are kept and reaching agreements promptly.
Contractors require to issue early warning notices to consultants including confirmation of verbal instructions; assessed costs of changes, productivity losses, delays, final contract price and completion date(s). “Catch up programmes” where contractors are accelerating need to be monitored and reported regularly.
Most importantly, they also need to be substantiated with checkable facts and support, including, assessments of loss and/or delay and the financial and time effects of changes, loss of productivity and other issues.
If contractors consider that they are entitled to more money and/or time, then, do not leave it as a surprise to be revealed at the end of the project. Inform consultants immediately; back it up with evidence of the financial effect of changes; analyses of forecast delays, and the forecast cost of delays.
If these procedures are not part of your standard processes, then be warned, it may take only one bad project to regret it. In a previous article that I wrote, I described the fate of Davy McKee the World’s Largest International Contractor in 1988; insolvent in 1991 following one disastrous contract.
Frequent reporting to the Employer through the consultants of the likely outturn cost and completion dates of the project requires frequent and effective internal communication systems between site operatives and the commercial and programming teams. It requires effective cost monitoring against budgets; identifying losses, identifying, and costing productivity losses; linking additional costs to probable causes. It also requires frequent programme updates; identifying causes, forecasted effects and costs of delay on an ongoing basis.
Contractors should not be surprised that they may have a problem if they leave it towards the end of the project to inform the Employer/consultant of the predicted contract price and/or completion dates.
Contractors should maintain like systems with subcontractors and suppliers and ensure that they comply. Have regular commercial and programming discussions/meetings with subcontractors and suppliers. Make it clear that failure to notify additional cost and/or delays promptly, may well result in denial of entitlement, ultimately by the Employer to the contractor and the contractor to the subcontractor/supplier.
Minimum monthly updating reminders to subcontractors and suppliers ought to be standard practice.
Electronic data and remote access make things much easier. Standard systems and formats assist staff to get used to its systems.
I have witnessed contractors lose control of contract entitlement, progress and cost, including:
- A site reported it was on programme and forecast a profit. Both were wrong. The project was running months late. As construction continued well beyond the predicted date, it incurred a loss.
- A complex city centre project involved partial demolition work, but a structural survey had not been commissioned. The Construction Manager (CM) thought it could manage the situation. The project was a disaster. The CM immediately on appointment ought to have issued an immediately warning; stopped the project and postponed the work. It didn’t and a court awarded substantial damages to the Employer.
Failures by consultants to award time extensions may well result in the contractor implementing acceleration measures. Before commencing acceleration, contractors should:
a) Warn the consultants that it is entitled to a time extension.
b) Provide preliminary forecasts of delay and estimated costs.
c) Invite the consultants to check and agree the contractor’s preliminary assessment of:
(i) delay; and
(ii) costs.
d) Details of actual delay and costs should be provided not less than every month with forecast future delay and costs.
e) Contractor to keep and provide records and updated assessments to the consultant for checking and agreement, including details and costs of any acceleration measures and the assessed costs of the productivity losses.
The above advice is really not difficult. Apart from all else, implementing sensible options makes it easier for consultants and employers to maintain control of their projects. How do I know?
I lived and worked in the Middle East for close to 11 years for (at that time) one of the World’s largest international contractors. Initially based on very large high value sites; promoted to subcontract manager and ultimately contract manager all site Quantity Surveyors reporting to me. In turn, I reported to regional and main board directors. The projects under my responsibility totalled at one time close to the equivalent of US$ 12 billion (inflated to 2020 rates). We implemented all these systems described above and for a very large part they worked.
By way of example, on one US$ 5 billion (inflated to 2020 rates) contract, the Employer wanted to add at a late stage some very expensive facilities. Because of our financial and programming systems, we knew the value of the contract was already very close to the contract sum. The Employer was told that the changes would increase the contract sum and time by more than the permitted allowances. It was not achievable without recourse to the central Ministry for more funds. The proposal was abandoned.
You might ask if it is not difficult, why do so many disputes end in arbitration. That’s easy, one party (the contractor) wants, sometimes needs more money, the other (the Employer) will not or cannot pay as it exceeds its budget. It may be the consultant and the Employer were not warned of financial and time problems until too late.
What I have described above is simply good practice. Apart from avoiding potential disputes, it may also permit the Employer to ensure that it has the funds to meet the increased contract price.
Let me assume that the above advice has not worked or was not implemented, and a dispute is heading for arbitration. Can money still be saved?
Yes, employ good lawyers and follow their advice. Employ good independent experts. A truly independent expert will always tell you the truth. Always remember that advice might not be what you want to hear. But it may save you a lot of money and time in the long run.
Always remember poor old Voltaire!
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