Everything to Know about Disputes

The meaning of disputes in construction, causes and how to mitigate or resolve disputes.

What are Disputes?

Disputes in construction refer to conflicts or disagreements that arise between any parties involved in a construction project, such as General Contractors, Subcontractors, Project Managers, Project Owner, Stakeholders or regulatory bodies. These disputes can be over contract terms, project management, payment, quality of work, or compliance with regulations.

What does Disputes mean?

'Disputes' mean disagreement, contention or conflict that disrupts a Capital Project. These disputes can delay project timelines, increase costs, and damage relationships between parties. Arcadis define a disputes in a bit more detail, as "A disagreement in which two parties, typically the Project Owner and the Contractors, differ in the assertion of a perceived contractual right, resulting in a determination issued by the owner in accordance with the process specified in the contract"

Disputes Example

A common example of a dispute in construction occurs over payment terms, where a Subcontractor might file a claim against the General Contractor for late or insufficient payments for services rendered. This can lead to legal actions and disrupt work on the project site. For these reasons, Construction Lawyers exist and specialise in construction law and construction contract administration.

The History of Disputes

The history of disputes in construction is as old as the industry itself, given the complexity of construction projects and the multiple parties involved. Arcadis have been reporting on disputes in the construction industry for many years and provide an annual disputes report. Over time, the industry has developed various dispute resolution mechanisms to handle these issues more efficiently, such as mediation, arbitration, and litigation. However, disputes remain at historically high levels compared the past and the

Causes of Disputes

Disputes can arise from a variety of sources:

Contractual misunderstandings: Ambiguities or contradictions in contract documents.
Delays: Disagreements over the cause, responsibility, and impact of project delays.
Work quality issues: Conflicts over non-compliance with technical specifications or standards.
Change orders: Disputes arising from changes in project scope or terms not agreed upon by all parties.
Payment issues: Disputes over invoicing, payment delays, or final account settlements.

According to Arcadi's annual disputes report, top causes of dispute are.

Errors and/or omissions in the contract document.
Owner/Contractor/Subcontractor failing to understandand/or comply with its contractual obligations.
Poorly drafted or incomplete and unsubstantiated claims.

Likelihood of Disputes

The likelihood of disputes in construction projects is relatively high due to the complex nature of the projects, the number of stakeholders involved, and the significant financial interests at stake. Recently, likelihood of disputes has been increasing due to supply chain impacts and price escalation. When the construction industry is “healthy” and everyone is busy with a robust backlog, the likelihood of increasing dispute activity is lower. Instead, the industry is focused on a continuing string of active projects. There is diminished incentive to chase disputes (as they are costly) as planning and execution of new projects is more urgent and holds a higher priority. Of course, the converse should also be true!

Consequence / Impact of Disputes

The consequences of disputes can be significant, including project delays, increased costs due to legal fees and dispute resolution processes, damaged professional relationships, and negative publicity. Persistent disputes can even lead to project failure or bankruptcy for smaller firms. In 2022, the highest value reported in a single dispute in North America was $2 billion.

Dispute Clauses in Construction Contracts

dispute clauses appear in Standard Form Contracts in Australian and North America, with contract authorities such as Standards Australia and AIA Contract Docs respectively. In your contracts, keep an eye out for clauses or terms that relate to:

Dispute Resolution Mechanism: Specifies the steps to be followed when a dispute arises, such as negotiation, mediation, arbitration, or litigation.
Notice Requirements: Outlines the requirements for notifying parties about a dispute, including time frames and formalities.
Escalation Procedures: Defines the steps for escalating a dispute if initial resolution efforts fail.
Roles and Responsibilities: Clarifies the roles and responsibilities of each party in the dispute resolution process.

Mitigations and Treatments for Disputes Risk

Effective mitigation and treatment strategies for disputes generally include:

Clear Contractual Agreements: Ensure all contract documents are clear, detailed, and understood by all parties.
Regular Communication: Maintain open and frequent communication among all stakeholders to address issues before they escalate.
Documentation: Keep thorough records of all project activities and communications to support positions during a dispute.
Dispute Resolution Training: Train project managers and staff on conflict resolution techniques and the specifics of the contract's dispute resolution process.

According to Arcadi's annual disputes report, the most effective avoidance techniques and mitigating factors are:

Good Risk management.
Contract and specification reviews.
Constructability reviews.
Owner/contractor willingness to compromise.
Accurate and timely schedules and reviews by project staff or third parties.
Contractor transparency of cost data in support of claimed damages.

Risk Management and Reporting of Disputes Risk

As we've seen above, there are alot of considerations when it comes to Risk Management of Disputes. Implementing Risk Management and Reporting controls will make managing disputes easy, and ensure success of your Capital Project.

Risk Management Plan: Download a free Risk Management Plan Template and put a Risk Management process in place.
Risk Register: Download a manual Risk Register Template or use an automated Risk Register solution to track all risks, causes, consquences and mitigations.
Reporting: Create automated Risk Reports, Project Status Reports or Dashboards for communicating with stakeholders. If you need a free Report Template, you can find some examples here.