A recent report from Arcadis[i] reveals that the cost of an average construction dispute doubled from 2019 to 2020.
In this article, we consider the figures on disputes and comment on the themes behind the numbers.
Key Performance Metrics
The four main metrics that this article will examine from the Arcadis report are:
- Overall Construction dispute value
- Average resolution length
- Common causes of the construction dispute, and
- Most important factors in the mitigation/early resolution of disputes.
The report shows combined data from across the world and on a region-by-region basis. This means we can consider both global trends as well as those specific to UK construction disputes.
Overall construction dispute value
The overall average value of construction disputes has almost doubled from 2019 to 2020, increasing from $30.7m to $54.26m. The figures for the UK follow a similar trend in doubling as they rise from $17.8m (2019) to $38.6m (2020).
Average resolution length
The average resolution length has decreased from 15 months in 2019 to 13.4 months in 2020.
In the UK the length has remained consistent over the previous 2 years at 9.8 months.
Common causes of the construction dispute
Both globally and within the UK the most common cause of dispute is “the owner/contractor has failed to understand and comply with contractual obligations“.
Globally, “owner-directed changes” and “force majeure” are the second and third most common causes of disputes respectively.
In the UK, “errors and/or omissions in the contract document“, followed by “failure to make interim awards on extensions of time and compensation” take the second and third spots.
Most important factors in the mitigation/early resolution of disputes
Globally, the most popular dispute resolution techniques are: (1) negotiation (2) mediation (3) adjudication.
In the UK the list reads: (1) adjudication (2) negotiation (3) arbitration.
Why are dispute values soaring?
The obvious point to address is the huge rise in dispute value over the 12-month period from 2019 to 2020. We consider factors influencing this below.
As the pandemic affected all businesses worldwide, it would be safe to assume that Covid-19 played a significant role in this jump in dispute value.
The internet is awash with articles regarding Covid-19 related construction disputes. The common theme among them is contractual confusion where a project has been impacted by the pandemic.
This is further emphasised by research from Turner & Townsend from February 2021[ii] , which suggested that 1 in 3 respondents believed their contracts were not fit to address the issues caused by Covid. Commenting on the research, Nick Jones, Associate Director at Turner & Townsend suggested:
“The COVID-19 pandemic hit live projects with delays, site closures and reductions in productivity. Almost a year on though and we still do not have enough clarity on the liability within construction contracts”
This reasoning is supported in the Arcadis Report, which found the most common cause of construction dispute over the previous 12 months was due to the owner/contractor failing to understand and comply with its contractual obligations.
In 2019 this was the third most common reason. It is safe to assume that as Covid-19 struck in early 2020, the confusion around the contractual rights regarding the pandemic saw this issue rise in importance.
The third most common global reason in 2020, “force majeure“, is also directly linked to Covid. Commentary on whether a Covid suspension amounted to a force majeure event was one of the most popular topics in the construction legal press in the early days of the pandemic.
The Arcadis Report further explains that :
“75% of [respondents] stated they had encountered disputes or claims specific to COVID-19 impacts, with the largest proportion of these being for delay and disruption”.
The good news is that whilst contractual confusion was rife throughout 2020, everyone experiencing these problems should now be almost 2 years wiser on how to act within the contract if the pandemic impacts their project. Contracts let since the pandemic started should now specifically address the implications of Covid restrictions and both contractors and employers are better equipped to deal with the issues faced.
A further potential reason for the rise of the average dispute value is that a natural result of economic uncertainty. When margins are tight and future projects are uncertain, every penny on a project becomes important. In a difficult economic climate people are simply more willing to fight for what they believe they are entitled to.
Innovative ADR?
Despite the pandemic, alternative dispute resolution techniques continue to grow in popularity. Although overall dispute values have increased, the global overall resolution duration has decreased from 15 months to 13.4 months. In the UK the duration has remained constant at 9.8 months.
The Arcadis report shows that globally negotiation is the most common ADR technique used, whilst within the UK adjudication is most common. .
The significantly shorter than average resolution period in the UK and the #1 status for adjudication is testament to the success of the Latham Report and the status of adjudication in the UK. Whilst the process is criticised by some for providing ‘rough justice’, adjudication provides parties with access to a quick and (relatively) cost effective dispute resolution process.
What next?
Whilst the pandemic has been an overriding factor in the increase in global disputes, it is important to consider UK based events such as the ongoing EU withdrawal negotiations and what they may also mean in terms of dispute figures.
For example, some of my previous articles have discussed how Brexit may lead to increased labour and material costs, and/or shortages in labour and materials.
Any of the above is enough to potentially derail a project, leading to a dispute between the parties.
Until the ongoing Brexit negotiations are finalised, and all concerned parties are comfortable within their new parameters, then disputes related to Brexit and supply issues will continue.
And whilst we continue to navigate through Brexit, the Arcadis report informs us that 60% of their survey participants anticipate the number of disputes in the UK increasing in 2021 as a result of the ongoing pandemic.
With this in mind, it is vitally important that parties remain open to innovative ADR techniques such as mediation and negotiation.
How we can help
ALA has acted in over 100 adjudications over the past 25 years. We also have extensive experience in negotiations and mediations.
Contact Us if you would be interested in discussing any issues you may be having on your project. We would be happy to provide a free initial consultation.
[i] https://www.arcadis.com/en-gb/knowledge-hub/perspectives/global/global-construction-disputes-report
[ii] https://www.turnerandtownsend.com/en/news/confusion-remains-over-contractual-liability-for-covid-delays-and-costs/