The Prediction And Resolution Of Project Disputes
Sources
of Dispute in Construction Projects
Planning for how risks and/or disputes are to be dealt with is quite possibly the most important issue in any contract, and yet it is often overlooked.
Project planning must include for both predictable and unpredictable events. Risk and conflict are an everyday usual and necessary part of life, and there will always be mistakes, misunderstandings, and unforeseen events.
Risk Management is a proactive process dealing with the potential for uncertainties. Dispute Management minimises both the potential for those uncertainties to become disputes, and the impact of those disputes.
This will set out the project objectives, the resources, and means by which they are to be met. It will make clear the respective roles of those involved, the tasks to be undertaken, and the processes - including feedback and review - anticipated.
At the inception of a project, a project quality plan will:
demonstrate that project requirements are understood
indicate the pathways to satisfy those requirements
set up a process for implementation.
During documentation, a project quality plan provides a framework to establish:
verification procedures for ensuring that client’s specified requirements can be met
feedback procedures to verify that the documentation meets those requirements
control mechanisms to ensure conformance with the agreed outcomes.
At the procurement stage the project quality plan will set out the means of verification of conformance to contract cost, time and quality requirements
At the post-completion stage the plan will provide for evaluation and feedback to learn from the experience ready for next time.
A project quality plan is a dynamic document subject to ongoing reviews to demonstrate it's effect, provide evidence of implementation, and allow both verification and modification.
Dispute Management is a necessary part of the project quality plan: it must be formulated to address potential disputes before they escalate, and to deal with them if they do.
Securing profit requires managing risk.
Risk management in the insurance field is defined as:
"the management of pure or non-speculative risks to which the assets, personnel and income of a business are exposed"
and
"managing the hazards inherent in forecasting the cost of work to be carried out at a future date which results in exposure to loss"
Managing hazards involves
risk identification (what is the problem?)
risk analysis (what is its effect?)
risk management (what can be done about it?)
This involves an overview of the project to ferret out what could go wrong, and the consequences, which could be financial (either costs or benefits), and/or measured in terms of time or quality.
what are the sources of risk?
what is the likelihood of the risk presenting itself?
what is the frequency of that likelihood?
what are the factors which will affect that frequency?
to what extent can those factors be controlled?
what controls are in place to address those factors?
what are the consequences of that risk presenting itself?
can the severity of those consequences be established?
do those consequences alter the impact of other risks?
to what extent can those consequences be controlled?
who could or should implement and execute that control?
what steps can be taken to minimise those consequences?
what interdependencies exist between each of these parameters?
what conditions or variables affect these assessments?
what reliance can be placed on the assessments of this information?
Sources of Dispute in Construction Projects:
The categories of risks expected include physical, environmental, design, logistical, financial, legal, political, implementation and operational risks.
A second way of classifying types of risks is by their source. What people, organisations or activities are the sources of risks that arise? These may include owners, regulatory agencies, funding bodies, project managers, designers, constructors, suppliers, the labour force, or the general public.
Frequently, risks are created at interfaces:
Physical Interfaces: tolerances; pipes versus structure; junctions of building elements
Contractual Interfaces: main contract terms versus supply contracts; specific conditions versus standards; notice requirements
Participant Interfaces: financing requirements versus timing; lessee requirements versus overall project objectives; design consultants versus construction personnel; conflicts within contracting organisations.
Craft Interfaces: "Builders work"; items of work requiring attendance by more than one trade.
Communication Interfaces: ambiguity, conflict or omission when the various consultants drawings, specifications, schedules and contract documents are taken collectively; failure of instructions at the main contractor level to be accurately passed down the line; client requirements not explicitly expressed to the design team.
The common causes of disputes in construction contracts are:
Technical
or Performance Failure:
inadequate or ambiguous site information
inadequate or ambiguous design information
inadequate or ambiguous specifications and/or quantity schedules
inadequate or ambiguous contract provisions
workmanship defects
material failure
supply failure
failure to meet performance requirements (time, quality, technical)
inadequate checking, supervision, or follow-up procedures
estimating errors and cost over-runs
Procedural
Causes:
changes made during progress of the works
inadequate or ambiguous design requirements
inaccurate, poor, or misunderstood communications
non-compliance with Acts or regulations
insolvency, slow payment or with-held payments
exaggerated claims
Miscellaneous Causes:
litigious or difficult contract parties
change in client circumstances
macro-economic or political changes
unusual environmental changes or site conditions
the doctrine of "joint and several liability"
allegiances to organisation in conflict with project allegiance.
Each identified risk needs to be to be weighted in terms of time, cost, quality - and people since they are the key to the outcome, and have a vested interest in it.
As a first step, break the project (from inception to beyond completion) into as many definable elements as you consider useful - by stage, and by task within stages. List these down one side of the page or spreadsheet.
In the next column, from the "what if" analysis, identify the potential risks.
In the next column, the elements (people, events, conditions etc) which contribute to the severity, probability, and frequency of the risk.
In the next column, the consequences of the risk, by description.
In the next column, rate the consequences from 1 = minor hassle to 5 = catastrophe. The consequences should be related to the circumstances of the project, and not necessarily to dollar figures.
In the next column, rate the probability of the risk arising, from 1 = most unlikely, to 5 almost certainly. If you can't put figures against these two items, then you need more information - or you could guess!
In the next column, add the two last columns, and add 2 if there is the potential for reoccurence of the risk. This is your risk profile: the higher the number, the higher the risk.
In the next column, make a note about what you are going to do to reduce each risk profile, and in the last column, what was done and when.
If all this looks like overkill, then at least categorise the potential problems into "hiccup/hassle/horror"!! On the other hand, if you were clever enough to do all this on a computer spreadsheet, then there may be the potential to use the "by stage" or "by task" totals to assist in setting cost and resourcing levels, and to identify the areas where you need more information.
There are four strategies:
Avoidance: the factors which give rise to the risk are removed
Reduction: the potential for the risk cannot be removed but analysis has enabled the identification of ways to reduce the incidence and/or the consequences
Transference: the risk is passed on to someone else - or is perhaps financed by an insurer
Absorption: the potential risk is accepted in the hope or expectation that the incidence and consequences can be coped with if necessary.
The allocation of risk between the parties to a contract is itself a part of the risk management, dispute management and project management processes.
In the context of a construction contract, the design by the designer, or contractual methods used by the contractor can be tailored to minimise the risks - but only if they have been identified and analysed!
The type of contract agreement will fundamentally affect the allocation of risks between the principal and the contractor:
The traditional form of tendering for a Lump Sum Contract tends to spread the risks fairly evenly between the principal and the contractor. In the Construction Management model, where the principal effectively enters into a separate contract with a multitude of trades and suppliers, the majority of the risk is borne by the principal. In the Guaranteed Maximum Price model the risk is predominantly borne by the contractor, and in a Design Build project the contractor takes almost all the risk. However, in each case, the contractor's risk is able to be spread across a range of subcontractors, and they will in turn spread it to suppliers where they can.
Allowance for the principal's risk is usually provided for by including a Contingency Sum in the contract documents. The amount is assessed according to the potential incidence and consequences of risk, there is an agreed procedure for the expenditure of the sum, and the unexpended amount is returned to the principal on completion. It would only be realistic for the contractor's price to allow in addition for the possibility of unrecoverable expenditure.
The probability of a risk giving rise to a dispute will depend on the extent to which any resulting conflicts produce an "unfair bargain", or may have consequences beyond the immediate issues. The process of dealing with those conflicts will itself affect the impact of that risk.
What is an “unfair bargain” depends on context, perception, environment and extent, and conflict resolution may involve any or all of avoidance, reduction, transference or absorption.
Resolution is the solution of a conflict so that the cause or needs giving rise to the conflict are met, and the conflict dissipated. Settlement is an arrangement which brings an end to the conflict, but does not necessarily address the underlying causes.
Dispute resolution processes are described in more detail elsewhere on this site.
As an arbitrator, mediator and advisor, I have participated in or observed several hundred disputes in the last few years. Some of those disputes arose because the documentation, including provisions for the resolution of disputes, was woefully inadequate
I am aware that contractors and consultants on major projects attempt to assess the risks beforehand, but suspect that the usual "solution" is to redesign or add to the contingency sum! The ideal would be for contractors and consultants to do that risk analysis together.
Proactive Dispute Management would involve a disputes advisor as part of the project team to assess the risks, monitor their manifestation, and guide the parties through any conflicts. The alternative is crisis management, with inevitable stress on relationships, cost control, and reputations.
These notes are provided by Orchiston Architects Ltd, Architecture & Dispute Resolution, P.O. Box 9136
Wellington, ph 04 5627 438, based on information as at 20/08/06. They
remain the copyright of Orchiston Architects Ltd, and may be copied and
redistributed if and only if reproduced in full without any change in content
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intended as a general guide only, and not specific advice: the author
accepts no responsibility for persons acting or not acting upon the information
herein, and specific advice should be sought from the author or other suitable
professional in respect of particular issues as and when required.