4 Ways to Mitigate Construction Disputes
Resolving construction disputes in litigation (court or arbitration) can be expensive and may drag on for years. Most disputes could have been avoided, or at least mitigated, had the parties (both owners and contractors) identified contract risks during negotiations and been more proactive in communicating the risks during execution of the work. This article highlights four practical risk management approaches that help all parties focus on their mutual interest in close coordination and clear communication at the beginning of the project as well as throughout performance:
- Identifying and allocating risks;
- Accurate scheduling;
- Clear project documentation and communication; and
- Real-time dispute resolution.
The intent of these techniques is not to shift legal obligations or risks. Rather, the intent is to keep project personnel and project management for all the participants focused on communicating and working together, including responsibly confronting real problems to avoid or mitigate their impact. Allocating risks, scheduling, project documentation and communication, and real-time dispute resolution are independently relevant on a bilateral basis between the owner, designer, and the various contractors. These approaches and their diligent execution by the parties during construction contribute far more to a successful project than anything lawyers and claims consultants can contribute in after-the-fact legal proceedings.
- Allocating Risks Between The Parties.
Negotiating to win the contract drafting, rather than identifying the potential risks and negotiating to appropriately assign the risks between the parties, can lead to more chaos and frustration when the delays, changes, or other risks occur on a project. The greater emphasis and focus the parties place on working together as a team to build a successful project, the greater likelihood the parties will identify risks to work together to avoid such risks or to blunt their impact.
For this to happen, risks have to be evaluated, and those stakeholders with a degree of control must be prepared to take on responsibility for dealing with problem situations as they occur. Identifying and setting up systems to manage potential problems as soon as possible helps parties achieve common objectives and enhances the chances for the success of the project. This is best accomplished on a partnership basis where all of those involved—owners, contractors, consultants, attorneys—help identify the likely points where conflicts may arise and agree to play an appropriate role in a system custom-designed to avoid or resolve them:
- Contractors (including subcontractors and key suppliers) should actively want to and try to participate in scheduling and coordination meetings with the owner/developer, if possible.
- The various contracts should mutually require parties to provide timely feedback on overlapping concerns such as scope gaps, responsibility matrices, and project scheduling.
- The parties should attempt to allocate risks between the parties best capable of preparing for, assuming, and mitigating those risks. For example, contractors should avoid assuming risks and being responsible for issues outside their control, including early project delays or supply chain disruptions.
- Consider appointing an independent advisor (or initial decision maker) to resolve contractor disputes as they arise as a means of trying to resolve issues and avoid expensive litigation. In the event a dispute cannot be resolved by the independent advisor, the formal disputes resolution procedures should be aligned among the contractors.
- Accurate Scheduling.
In construction, the schedule is a critical management tool to plan and coordinate work and avoid delays. It is likewise critically important to measure actual delays and to identify ways to mitigate or recoup delays incurred. A properly prepared schedule tells all project participants what others expect of them and what they can plan for and expect of other participants.
While many consider the use and manipulation of project schedules as a weapon for claims, a properly prepared baseline schedule that is regularly and accurately updated during the course of construction will reduce the opportunity for questionable claims and make legitimate disputes about delays easier to resolve.
It can be difficult to put together a comprehensive and accurate baseline schedule before all the project participants are under contract and formally onboard. Often, the prime contractors and subcontractors may have relatively limited scheduling information or performance dates and deadlines in their agreement at the time of execution. This is understandable, but the contracts and purchase orders should also anticipate the need for more vigorous schedules after contracting but well before performance.
The level of detail of involvement with the schedule will vary among the contracting parties, but the prime contractor will likely have the most detailed baseline schedule and heaviest schedule update responsibilities. Of course, the performance of the prime contractor will be heavily dependent on its subcontractors and the downstream suppliers on whom the prime contractor depends to execute the work. Those subcontractors and suppliers also must know when their deliveries or services are required.
A comprehensive baseline schedule should be prepared as soon as practical and before construction begins. The prime contractor will typically be responsible for creating the baseline schedule. Subcontractors and critical suppliers should be required to provide key dates for and restraints to their deliveries and activities and should review and identify any inaccuracies in the proposed baseline schedule related to their deliveries and activities.
The baseline schedule is only the beginning. Regular updates are required throughout construction to reflect real progress, problems, and delays. The responsibility for schedule updates typically falls on the prime contractor, but all project participants should be required to provide accurate updated information and identify inaccuracies related to their scope. If properly updated, the project schedule can be the most effective means of critical communication and documentation of what transpired during the course of the project, for purposes of looking back as well as for planning toward completion.
Without proper updating, an inaccurate schedule update loses its value as a management tool and can mislead and confuse the situation during construction. In the event of post-construction disputes, inaccurate updates make proper allocation of responsibility for delays more difficult. In addition, the parties maintaining or not objecting to inaccurate updates may face an uphill battle in legal proceedings if they want to distance themselves from the schedule update after the fact.
- Project Documentation and Communication.
On any construction project, there is a lot of written communications and documentation beyond schedule updates. The focus should not be on “scoring points” with nasty emails or creating a false or misleading record. Instead, all project participants must appreciate the importance for clear, accurate, and timely communication throughout the course of construction. This is necessary to maintain the real-time flow of critical information required by the contract and necessary for the smooth execution of construction and adjusting to changes or unanticipated circumstances.
In creating project communications or documentation, whether in the form of letters, emails, meetings, meeting minutes, change order requests or claims, daily reports, or otherwise, keep in mind these considerations to enhance communication during the project and to create inaccurate records in case of disputes later:
- Comply with the timing and content of notice requirements to communicate important developments and to avoid unwittingly losing contract rights.
- Avoid emotion and personal or professional attacks. Focus on the facts and the technical and timing issues at hand.
- Consider the terms of your agreement. Frame your communication consistent with your rights and obligations and use language consistent with your agreement.
- If other documentation is required to understand the communication, specifically reference it and, if practical, attach it.
- Accurately indicate a level of urgency for action or risk long lead issues preempting urgent ones.
- Recognize that bad news does not improve with age. Get problems on the table and seek ways to mitigate the situation rather than ignore them and hope for the best.
- Real Time Dispute Resolution.
In addition, to claim procedures and formal dispute resolution requirements (litigation or arbitration), all project participants share an interest in the opportunity for real-time, nonbinding dispute resolution procedures that provide the opportunity for the parties to quickly resolve on the project level. These real-time processes can be tiered “meet and confer” steps, mediation, dispute review boards, or one-person project neutrals that provide non-binding recommendations to assist parties in resolving issues early.
Highlighting a process above, the use of dispute resolution boards (DRB) is more typically seen on larger or more complex construction projects. A DRB is a board of impartial industry professionals formed typically at the beginning of the project to follow construction progress, encourage dispute avoidance, and assist in the resolution of disputes for the duration of the project. Dispute Resolution Boards, when used properly can:
- Provide an informal and non-adversarial process;
- Prevent many disputes that might otherwise develop;
- Preserve relationships;
- Enhance communication;
- Address problems in real-time, while construction continues;
- Avoid “end-of-job” claims;
- Reduce bids; and
- Provide useful support and credibility for claim resolution or settlement.
In terms of real-time dispute resolution, the owner and prime contractor should consider such dispute resolution processes to resolve coordination problems and disputes among the key participants as they arise to resolve such issues early and before they impact the project and generate disputes.
Implementing these risk management approaches on construction projects should lead to better communication and transparency among the parties during the project and help the parties avoid or at least mitigate disputes. These approaches reflect the importance of providing project personnel with the forum and the procedures to maintain their focus on their mutual interest in a successful project, rather than claims and disputes.
How project personnel execute their responsibilities and communicate during construction is far more valuable, far cheaper, and far more effective than anything the most skilled attorney or claim consultant can accomplish after the fact in formal legal proceedings. If formal legal proceedings are unavoidable, these techniques enhance the prospects of success.
“The Construction Industry Team at Jones Walker LLP is one of the most highly regarded and award-winning construction law practices in the nation. Our experienced construction attorneys understand the complex dynamics between — and the unique priorities of — project participants and can craft effective solutions that minimize disputes, manage risks, and help keep projects moving from conception to completion.”
The views expressed in this article are not necessarily those of ConsensusDocs. Readers should not take or refrain from taking any action based on any information without first seeking legal advice