Construction disputes and the economic crisis

David Dale

The Past
Only 12 months ago, if contractors and subcontractors experienced difficulties with their projects, they adopted a complacent approach to contractual disputes.

During such times, poor record keeping and non-compliance with contractual administrative requirements were common. At the end of a project, ‘amicable negotiations’ would take place and some contractors would be prepared to ‘take a financial loss’ and simply move on to the next project and fund any losses by future advance payments; a vicious and dangerous circle of events.

There appeared to be no priority in preparing detailed and qualified tenders or carrying out risk assessments. Tender sums would be reduced, sometimes under pressure from employers, accepting that lowest price usually wins.

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One of the ways contractors reduced prices was by decreasing the amount of key project administrative and middle management staff. Acceptance of late payments against certified amounts, under valued variation costs, unsubstantiated employer back charges and non compensable extensions of time, appeared to be an accepted way of life for many.

Some employers did not seem to help this circle of events, by attempting to pass on contractual risk onto the contractors and accepting the lowest possible price irrespective of a contractor’s ability to deliver.

In addition, there appeared to be an inclination to appoint an engineer or project manager who, in my experience, had little capability or resource to deal with, sometimes complex, contractual issues and disputes.

The Present
Nothing much has changed in terms of contractors’ or subcontractors’ willingness to reduce tender prices or to adopt better tendering and/or contractual administrative procedures.

What seems to be changing is a resolve to pursue claims and make a firmer stand for what they consider to be their rightful entitlement. The number of disputes being referred to arbitration centres is on the increase.

However, there is still an apparent reluctance to formally crystallise a dispute and to use the contractual mechanism for resolution, always assuming that one exists in the first place.

Many forms of informal alternative dispute resolution techniques seem to be used ahead of, for example, requesting a formal engineer’s decision and giving notice of intent to arbitrate, without preparing a reasonably substantiated, particularised and credible claim.

Should such negotiations fail, contractors are left with no alternative but attempt to initiate legal or arbitration proceedings. Unfortunately, once such a decision has been made, contractors often find themselves with problems in advancing any proceedings.

Legal fees will start to accrue with no guarantees of a successful award or even enforcement of such an award. There is therefore a point where the cost of preparing and prosecuting a claim becomes disproportionate to the amounts in dispute.

The Future
Contractors and subcontractors should learn valuable lessons from these experiences. Better qualified and priced tenders for new work combined with the requisite implementation of effective procedures run by suitably qualified staff is needed.

Employers on their part should endeavour to take a more balanced view of the commercial risk for their projects; passing the risk to contractors does not necessarily mean deliverance of a project on time and to budget.

Of course the above issues do not affect all employers, contractors or subcontractors.But the majority should consider a change in strategy as compliance with contractual procedures by all parties does not have to be adversarial and indeed should be positively encouraged.

David Dale is partner and regional leader for contract solutions at international built asset consultancy, EC Harris, based in Dubai. Having trained as a planning/industrial engineer, Dale has over 25 years’ practical experience in project/commercial management in commercial real estate and in scheduling of major, multi-discipline projects world wide.