Failure to understand contractual obligations is losing the industry millions

Gary Kitt
28 June 2015

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Last week’s Global Construction Disputes report by ARCADIS found that disputes relating to major global construction projects increased significantly in value to £32M on average in 2014. Gary Kitt, Head of UK Contract Solutions at ARCADIS, gives his recommendations on how the industry can work to avoid disputes and ultimately evade paying a high price.

Each year, a growing number of disputes in the industry are occurring due to parties failing to properly understand and administer their contractual obligations.

"Common root causes of construction disputes include not providing details of project specific contractual risk at handover to commercial teams"

Not only are the costs associated with these disputes on the rise globally, but findings from the 2014 Global Construction Disputes ARCADIS Report also found that they are taking a significant amount of time to resolve, averaging at around 10 months in the UK alone.

Sizeable delays to disputes that could easily have been avoided are both putting projects on hold for an indefinite amount of time and potentially costing millions for parties involved.

Although each case is different, often there is a common thread that can be found. Our recommendation to those wishing to avoid such a situation is based on the following four key foundations:

1. From the outset of any project, ensure that contractual obligations are clearly defined and that a range of procurement options and a clear contractual strategy are in place
2. Undertake a thorough contract review during the negotiation of contracts, including the need for acute awareness when amending standard forms
3. Appoint an independent party to provide contract risk analysis and one who can offer an outside perspective
4. Develop contractual procedures and contract-specific training to mitigate against the possibility of common administrative errors

Getting the basics right is absolutely pivotal to any project and proper administration of contracts demands significant management resource, particularly true with NEC3.

"By taking a long term view and considering the consequences of commercial decisions, the industry can enter into contracts expecting the best whilst having planned for the worst."

Early and continued recognition of this is essential to reducing disputes that arise from poor administration of contracts.

For example, common root causes of construction disputes include not providing details of project specific contractual risk at handover to commercial teams, and the instinct for managers to ‘fill the blanks’ often with incorrect assumptions based on previous and differing contracts.. Both often expose employers to significant additional yet avoidable risk.

If followed, the following five recommendations should help to ensure that basic errors are avoided:

1. Take a tactical viewpoint in analysing project risk and fairly apportioning it between parties
2. Invest in contract administration training and ring fencing management time to ensure managers remain focused on their central role in dispute avoidance
3. Consider the significance of project records should a dispute arise and diligently record progress and monitor performance
4. Undertake contract schedule risk analysis
5. Do not wait until it is too late before calling in specialist planning or project controls expertise. Project audits provide reassurance and identify light touch intervention that is both a quick and cost effective means to achieve project recovery. In our experience, the shock of such intervention can refocus the supply chain.

In general, the industry has failed to respond to Sir Michael Latham’s call for dispute avoidance in his 1994 report, “Constructing the Team”. By taking a long term view and considering the consequences of commercial decisions, the industry can enter into contracts expecting the best whilst having planned for the worst.