The construction risk and change management process and the pathology of the arising disputes (Chapter 2)
Introduction
Construction is a process whereby a contractor typically undertakes to carry out a specified scope of work for an amount of money that is fixed or for a variable amount of money determined using fixed rates. However when one considers how the scope of work is typically required to be changed in its implementation in construction one can begin to understand the dilemma the construction industry faces in managing the resultant risks and change. A major part of the construction process involves the management of this risk and dealing with change with the owner on the one hand demanding value for money and the contractor on the other hand aiming to achieve maximum profit.
Along the time line of the project there is typically a big focus on risk management at the pre-contract stage when the procurement method is defined and the contract is negotiated. A risk register is normally drawn up at this stage itemizing the probable risk but how are the risks that are defined at pre-contract stage then monitored and managed in the post contract stage?
The industry has come up with new methods of procurement to deal with the problems that arise in the construction process with the latest being partnering which has introduced a collaborative working environment between all the parties. However to what extent has partnering been successful in reducing the problems that arise in the construction process?
An important point to consider, as pointed out in Phillip Cappers article , is no matter what method of procurement or contract is used there are a number of characteristics which are common to, and largely distinctive of, almost all construction projects. It is generally in these characteristics that the seeds of eventual disputes lie. When change occurs parties will be faced with a process of agreeing on the liability and quantum. During this process it is inevitable that differences will develop from time to time. Parties will naturally have their own self interests to pursue which will almost certainly be conflicting. The clients self interest will be essentially be to pay as little as possible and the contractor will want to be paid as much as possible.
Commenting on the where the clues as to the causes of disputed matters Phillip Capper identified the problem that the construct industry faces with the diversity and sheer volume of evidentiary material.
Masses of record material are produced even on relatively small construction projects, many of them crucial as they are informal: such as eg the penciled scribblings of a gang member on daywork sheets, or mud stained card recording a piling set. Project records may be a diverse as site investigation reports, feasibility studies, specifications, drawings, tender submissions, estimating and pricing details, diaries, minutes of meetings, formal instruction, test data, payment applications and certificates, weather reports, job sheets, inspection reports, programming data and reports and so on. To all of that is added great chains of correspondence between the participants, managing report in each of the entities and the usual periphery of any business activity: from management accounting to press publicity. It is haphazardly in these various forms of contemporary records that are found the clues as to the causes of disputed matters.
If the causes of disputes can be identified by analyzing theses contemporary records then what steps are being taken to arrange these records on construction projects and their data in a manor whereby they can be used to identify problems in real time and enable managers to make systematic decision based on the facts?
Risk management in construction
This section takes a look at the current practice of risk management distinguishing between the pre contract stage and post contract stage. At each stage there are different dynamics at play. We try to understand the origin of differences with the ultimate objective of identifying how and when risks occur, what is needed to identify them quickly and what is the current process for resolving disputes.
Pre Contract Stage
At this stage there is a focus on risk identification and allocation. Once the risks have been defined they are allocated to a party. Depending on the circumstances the employer will choose a method of procurement that he anticipates will best suite the nature of the particular project. This process will largely depend on the circumstances of the owner and the influence of his advisors. The owner will generally employ consultants to investigate the risks and ultimately decide what method of procurement best suites the owner. For example an owner that is procuring a new telecommunication system which involves new technology may decide that operation and maintenance of such a system is best controlled with an expert party who has the necessary skills. This may be one of the reasons for an owner deciding that a Build Operate/Maintain and Transfer (BOT) procurement method is best suited. In another instance the owner might be highly skilled and sufficiently resourced in this area and therefore may decide on a traditional construct or possibly design and construct method and take responsibility himself for the operations and maintenance of the asset. It is not in the scope of this paper to delve deeply into this area however for each set of risks and circumstances there will be a method of procurement that is best suited or more appropriate. It is essentially dependant on the unique set of circumstances but it must be stressed that it is very important that the most appropriate method is chosen. If an unfavorable method is chosen this could exacerbate the management of the issues later on in the project.
Under traditional procurement the contractor is seldom involved at the pre contract stage and therefore does not have the opportunity to add to the upfront definition of risks, choice of procurement and allocation of risks. These are to a large degree imposed on the contractor. This has been one of the criticisms of the traditional adversarial approach. However under partnering the parties are encouraged to engage early in the project cycle to encourage early participation of the contractor.
Post Contract Stage
At this stage the emphasis is on monitoring the risks and managing them when they occur. The risks and change events on a construction project are vast and there is no standard for categorizing them and the way they are dealt with. This is probably because the dynamics of these events vary from project to project and are influenced by the environment, the procurement method, the contract that is being used as well as allocation that has been agreed, to mention but a few factors. In most cases risk and change are managed intuitively as apposed to systematically. The reason for this is thought to be largely because the construction process is prototypical it varies from project to project as apposed to the processes typical in the financial industry, for example, which are mainly repetitive.
For the purpose of illustrating this point we have provided on example of a typical way the risk of providing sufficient resource to complete a construction project on time is managed followed by an example of how change to a contractors access arrangements is managed. Both these events if not managed adequately could result in a delay to the programme which could result in a party either incurring liquidated damages or an entitlement to extension of time with costs.
Example A – Managing the risk of providing adequate resource levels
There will normally always be a minimum, optimum and maximum level of labour resource required to complete a defined scope of work within a fixed period of time. If the contractor provides a level that is below the minimum level he will not complete on time and consequently he will have to pay liquidated damages for being late. If the contractor provides a level of resource above the maximum level then he will start working inefficiently and therefore not realize maximum profit. Therefore he will aim for an optimum level where he completes on time and realizes the maximum profit. How is this risk managed? This risk is normally managed at site management level based on the opinion of an experienced manager. If the work is not completed on time how will it be decided if there was adequate labour resource to complete the scope of work within the defined timescale? Essentially if it is can not be agreed between the parties there will ultimately be a retrospective delay analysis prepared based on the contemporaneous records and a comparison will be made with the contract programme.
The above is a simplified version of a scenario that in practice is normally much more complicated. The purpose of the example is to point out the disparity between the way decisions are made on managing risk and the way liability if determined in the event that the risk matures.
The above examples of risk and change are simplistic but even these simple issues on a big scale can become extremely difficult to manage on a big complex projects without adequate systems being in place that collect and analyse the contemporaneous records.
Strategies that construction companies adopt for managing risk
It is evident that some large construction companies actively pursue an overall high risk / high return strategy on the basis that there will be some loss and some profit. Smaller companies tend to spread their risk, in order to reduce it’s overall effect, at a lower rate of return. They cannot afford to pursue a high risk strategy because of the effect of failure.
This practice in the construction industry results in contractors being generally complacent in the area of real time risk management and have adopted a high level approach to risk management.
The decision making process in the construction industry
The decision making process in construction is to a large degree based on the intuition of decision makers rather than a systematic approach. Intuitive decision making involves making decisions with no immediate factual rationale and is to a large degree based on the experience of the decision maker. Where culture and experience exist in a stable environment intuitive management can perform reasonably well according to some studies. However the complexity of contractual relationships and increasing size of the mega projects that are undertaken and a host of other reason means that the intuition method of decision making is only reliable to a degree and very dependant on key personal.
Gary France in his article on controlling time in construction emphases the importance of analysis and management in the controlling of risk in construction projects. However he said that the use of computer systems like Monte Carlo which carry out simulation tests based on random probabilities are totally meaningless. He goes on to say that mathematical or quantitative risk management is the most reliable.
What other choices does the construction industry have in this respect. Would it be possible for a construction company convert to a systematic approach to decision making considering the nature of construction projects being one-offs and unique the amount of investment required to develop a system to fulfill this function for a one-off project may be perceived to outweigh the benefits.
Pathology of the arising disputes in construction
Contracts are designed to identify problems at an early stage. This is normally through a notification process advising the party a problem that could or will result in a claim. This is no coincidence as the earlier problems are identified the more chance parties have in sorting the problem out by taking corrective actions. If the parties fail to resolve their differences it will more than likely develop into a dispute. For a frustrated claimant it is necessary for a dispute to have arisen before it can be referred to adjudication . We therefore look at the process of how disputes manifest themselves and then how they are resolved.
The manifestation of disputes
A common tactic in construction disputes is to argue that no dispute exists, therefore it is important to distinguish between a dispute and a difference. The fundamental distinction between a difference and a dispute is a situation where a claim has been rejected, in part or in whole, or has simply been ignored by the other party. Where no dispute has in fact occurred will depend on the facts of the case. In Fastrack Contractors v Morrison Construction (2000) Judge Thornton QC stated
A dispute can only arise once the subject matter of the claim, issue or other matter has been brought to the attention of the opposing party and that party has had an opportunity of considering and admitting, modifying or rejecting the claim.
A dispute is different to a disagreement in that a claim may have been submitted however it has not yet been agreed or rejected. It is possibly in the stage where the contract administrator has acknowledged the submission but has requested further substantiation or details before he can make his decision. This can be a lengthy process. Even for a relatively minor difference between parties can take months or years with further information being requested and this process recycling a few times until either adequate information is provided or alternatively a deal is made that both parties can live with. Where the parties have not been empowered to make decisions, for example this sometimes occurs when large amounts of public money is being used to fund projects, the issue is normally protracted and then finally when it becomes apparent to the claimant that there is a dispute that is not going to be settled through a non-coercive process it is referred to a coercive dispute resolution process.
Felstiner, Abel and Sarat put it this way; that all disputes go though specific transformations. The process of naming, blaming, claiming and dispute. The naming stage recognizes an experience as injurious and labels it as a problem. The blaming stage attributes the cause of the problem to another person. The claiming stage is when the grievance is voiced to the person believed to be at fault. The dispute stage occurs when the other person rejects the claim, in whole or part or ignores the claim.
How disputes are settled
The importance of contemporaneous records in the dispute process was considered in the case of Attorney General for the Falklands Islands v. Gordon Forbes Construction (Falklands) Limited (2003). A contract was let using the FIDIC 4th Edition conditions which like most standards forms provide a procedure for submitting claims. The first principle being to provide notice of intention to claim within 28 days after the event occurring and the second obligating the contractor to keep contemporaneous records necessary to support the claim. The contract went a step further requiring a detailed account of the claim to be issued within 28 days from the first notice. In the event of the contractor failing to provide a detailed account of the claim the contract provided for a fall back position stating that the contractors entitlement will not exceed that amount the engineer or arbitrator could consider verified by contemporaneous records. The events that unfolded on site were typical to the industry with the contractor failing to provide a detailed account of a claim within the required timescale. A dispute then developed because the contractor did not have sufficient records to satisfy the requirements of the fall back position. The judge considered that the requirements of the contract were clear and ordered a way with dealing with the claim. Claims have to be notified at the time they arise, contemporaneous records have to be kept and regular accounts redendered. The judge explained that the whole contractual system is aimed at the early resolution of any queries at the time the claim arises. He ordered that where there are no contemporaneous records the claim would fail.
Non coercive dispute resolution process
It has been established by survey that negotiation is by far the most favored method of resolving disputes in the construction industry. Negotiation is a non-coercive process of communication which ultimately leads to a joint decision. Goldberg described negotiation as “communication for the purpose of persuasion; the pre-eminent of dispute resolution”. Negotiation in its broad sense is more that just the process of dispute resolution it may be considered as the process by which individuals communicate in order to arrange their business affairs and private lives by establishing agreement and reconciling areas of disagreement.
Negotiation is the principle method of dispute resolution in the construction industry. Gulliver maintains that negotiation is essentially a development process with eight distinct but often overlapping phases:
Phase 1 – the search for the arena
Phase 2 – agenda and definition
Phase 3 – exploring the field
Phase 4 – narrowing the differences
Phase 5 – preliminaries to final bargain
Phase 6 – final bargain
Phase 7 – ritualizing the outcome
Phase 8 – execution of outcome
Gulliver asserts that negotiation is developmental because the early stages involve predominance of antagonism while the later stages involve a predomination of co-ordination. Roberts on the other hand asserts that negotiation is about communication and information exchange which leads to a joint decision. As the parties begin to explore their differences, the information exchange which occurs leads to a greater understanding of the situation. This can either lead to a convergence of opinion or abandonment of the negotiations. If real time data was available could this process be radically accelerated?
The process of negotiation on a construction project clearly is dependable on information availability and / or the ability the parties have to assimilate large amounts of information which involves data collection and analysis as well as the understanding of principles that establish liability and measurement of quantum.
To what extent is the reason for differences evolving into disputes on major construction projects down to the large amounts of documents that need rationalising? If the information was readily available and if managers had the skills or advice to define the principles to establish liability and measure the quantum would the majority of problems / differences develop into disputes or would they be resolved?
Coercive dispute resolution
Adjudication, arbitration and litigation are coercive processes but adjudication is not final and can be challenged if the losing party is not satisfied. Arbitration is final and binding and litigation is final and binding with scope for appeal.
In 1998 the Housing Grants Construction and Regeneration Act 1996 (the Construction Act) came into force. Prior to the Act neither litigation nor arbitration provided the speedy resolution of disputes which are often required in the construction industry. Typically prior to the Construction Act standard contracts could provide that litigation or arbitration could not be commenced until practical completion therefore disputes could be left unresolved for the duration of the contract. The Construction Act now makes adjudication available for parties to resolve any dispute arising under the contract at any time with a decision being given within 28 days of appointment. While this legislation has been a positive move for the construction industry it has created difficulties for parties when unmanageable quantities of relevant information have to be dealt with .
Essentially the rationale behind the concept adjudication in the construction industry is the provision of quick, cheap summary procedure. Adjudication jurisprudentially is similar to certification by an architect or engineer and is a second tier of evaluation that is made if the parties dispute a contract administrators determination. An important point is it aims to resolve disputes speedily because cash flow was described as the life blood of the industry by Sir Michael Latham.
The same trends and pursuit for speeding up proceedings can be seen in the sphere of litigation. In June 1996 Lord Woolf published a review of the civil justice system saying that it was too slow, too costly and too complex. The objectives of the pre-action protocol encourages the exchange of early and full information about prospective legal claims to enable parties to avoid litigation by agreeing a statement of the claim before commencing of proceedings.
In arbitration the trend of speed is further continued. The Arbitration Act 1996 where the parties have the choice to decide on the degree of formality they desire, how much time will be allocated to various aspects of the process and how documentation, discovery and the taking of evidence will be handled.
Essentially an objective of the 1996 Arbitration Act being to ensure that the process is fair, cost effective and rapid; to promote party autonomy; to ensure that the courts supportive powers are available when required etc.
Conclusion
It is clear that there is a long drawn out period from when the a claim is initially raised to when the parties are in a position to resolve the matter. This is indicative that the parties do not know much about the dispute when a claim is first made. Probably the only thing that is known at this stage is that the target profit margins are not being met. This is then followed by a long and drawn out process of retrospective analysis to define what went wrong, who is to blame and how much is due.
The management of risk and change in the construction industry is currently based mainly on intuition as apposed to systematically. This exposes the parties to the risk of the wrong decisions being made that are not reconcilable with the retrospective analysis carried out by the lawyers after the event. This leaves the construction industry in the dilemma where the real answers are only arrived at much to late to deal with the problem and prevent disputes but in time to resolve the dispute but hence at a cost.
In terms of the dispute resolution it seems that an adequate framework is in place to speed up the process through adjudication to a large degree as well as arbitration and litigation with the latest reforms in the law. However it seems as the industry is lagging behind and not capable of taking full advantage of the new changes.
Construction is a process whereby a contractor typically undertakes to carry out a specified scope of work for an amount of money that is fixed or for a variable amount of money determined using fixed rates. However when one considers how the scope of work is typically required to be changed in its implementation in construction one can begin to understand the dilemma the construction industry faces in managing the resultant risks and change. A major part of the construction process involves the management of this risk and dealing with change with the owner on the one hand demanding value for money and the contractor on the other hand aiming to achieve maximum profit.
Along the time line of the project there is typically a big focus on risk management at the pre-contract stage when the procurement method is defined and the contract is negotiated. A risk register is normally drawn up at this stage itemizing the probable risk but how are the risks that are defined at pre-contract stage then monitored and managed in the post contract stage?
The industry has come up with new methods of procurement to deal with the problems that arise in the construction process with the latest being partnering which has introduced a collaborative working environment between all the parties. However to what extent has partnering been successful in reducing the problems that arise in the construction process?
An important point to consider, as pointed out in Phillip Cappers article , is no matter what method of procurement or contract is used there are a number of characteristics which are common to, and largely distinctive of, almost all construction projects. It is generally in these characteristics that the seeds of eventual disputes lie. When change occurs parties will be faced with a process of agreeing on the liability and quantum. During this process it is inevitable that differences will develop from time to time. Parties will naturally have their own self interests to pursue which will almost certainly be conflicting. The clients self interest will be essentially be to pay as little as possible and the contractor will want to be paid as much as possible.
Commenting on the where the clues as to the causes of disputed matters Phillip Capper identified the problem that the construct industry faces with the diversity and sheer volume of evidentiary material.
Masses of record material are produced even on relatively small construction projects, many of them crucial as they are informal: such as eg the penciled scribblings of a gang member on daywork sheets, or mud stained card recording a piling set. Project records may be a diverse as site investigation reports, feasibility studies, specifications, drawings, tender submissions, estimating and pricing details, diaries, minutes of meetings, formal instruction, test data, payment applications and certificates, weather reports, job sheets, inspection reports, programming data and reports and so on. To all of that is added great chains of correspondence between the participants, managing report in each of the entities and the usual periphery of any business activity: from management accounting to press publicity. It is haphazardly in these various forms of contemporary records that are found the clues as to the causes of disputed matters.
If the causes of disputes can be identified by analyzing theses contemporary records then what steps are being taken to arrange these records on construction projects and their data in a manor whereby they can be used to identify problems in real time and enable managers to make systematic decision based on the facts?
Risk management in construction
This section takes a look at the current practice of risk management distinguishing between the pre contract stage and post contract stage. At each stage there are different dynamics at play. We try to understand the origin of differences with the ultimate objective of identifying how and when risks occur, what is needed to identify them quickly and what is the current process for resolving disputes.
Pre Contract Stage
At this stage there is a focus on risk identification and allocation. Once the risks have been defined they are allocated to a party. Depending on the circumstances the employer will choose a method of procurement that he anticipates will best suite the nature of the particular project. This process will largely depend on the circumstances of the owner and the influence of his advisors. The owner will generally employ consultants to investigate the risks and ultimately decide what method of procurement best suites the owner. For example an owner that is procuring a new telecommunication system which involves new technology may decide that operation and maintenance of such a system is best controlled with an expert party who has the necessary skills. This may be one of the reasons for an owner deciding that a Build Operate/Maintain and Transfer (BOT) procurement method is best suited. In another instance the owner might be highly skilled and sufficiently resourced in this area and therefore may decide on a traditional construct or possibly design and construct method and take responsibility himself for the operations and maintenance of the asset. It is not in the scope of this paper to delve deeply into this area however for each set of risks and circumstances there will be a method of procurement that is best suited or more appropriate. It is essentially dependant on the unique set of circumstances but it must be stressed that it is very important that the most appropriate method is chosen. If an unfavorable method is chosen this could exacerbate the management of the issues later on in the project.
Under traditional procurement the contractor is seldom involved at the pre contract stage and therefore does not have the opportunity to add to the upfront definition of risks, choice of procurement and allocation of risks. These are to a large degree imposed on the contractor. This has been one of the criticisms of the traditional adversarial approach. However under partnering the parties are encouraged to engage early in the project cycle to encourage early participation of the contractor.
Post Contract Stage
At this stage the emphasis is on monitoring the risks and managing them when they occur. The risks and change events on a construction project are vast and there is no standard for categorizing them and the way they are dealt with. This is probably because the dynamics of these events vary from project to project and are influenced by the environment, the procurement method, the contract that is being used as well as allocation that has been agreed, to mention but a few factors. In most cases risk and change are managed intuitively as apposed to systematically. The reason for this is thought to be largely because the construction process is prototypical it varies from project to project as apposed to the processes typical in the financial industry, for example, which are mainly repetitive.
For the purpose of illustrating this point we have provided on example of a typical way the risk of providing sufficient resource to complete a construction project on time is managed followed by an example of how change to a contractors access arrangements is managed. Both these events if not managed adequately could result in a delay to the programme which could result in a party either incurring liquidated damages or an entitlement to extension of time with costs.
Example A – Managing the risk of providing adequate resource levels
There will normally always be a minimum, optimum and maximum level of labour resource required to complete a defined scope of work within a fixed period of time. If the contractor provides a level that is below the minimum level he will not complete on time and consequently he will have to pay liquidated damages for being late. If the contractor provides a level of resource above the maximum level then he will start working inefficiently and therefore not realize maximum profit. Therefore he will aim for an optimum level where he completes on time and realizes the maximum profit. How is this risk managed? This risk is normally managed at site management level based on the opinion of an experienced manager. If the work is not completed on time how will it be decided if there was adequate labour resource to complete the scope of work within the defined timescale? Essentially if it is can not be agreed between the parties there will ultimately be a retrospective delay analysis prepared based on the contemporaneous records and a comparison will be made with the contract programme.
The above is a simplified version of a scenario that in practice is normally much more complicated. The purpose of the example is to point out the disparity between the way decisions are made on managing risk and the way liability if determined in the event that the risk matures.
The above examples of risk and change are simplistic but even these simple issues on a big scale can become extremely difficult to manage on a big complex projects without adequate systems being in place that collect and analyse the contemporaneous records.
Strategies that construction companies adopt for managing risk
It is evident that some large construction companies actively pursue an overall high risk / high return strategy on the basis that there will be some loss and some profit. Smaller companies tend to spread their risk, in order to reduce it’s overall effect, at a lower rate of return. They cannot afford to pursue a high risk strategy because of the effect of failure.
This practice in the construction industry results in contractors being generally complacent in the area of real time risk management and have adopted a high level approach to risk management.
The decision making process in the construction industry
The decision making process in construction is to a large degree based on the intuition of decision makers rather than a systematic approach. Intuitive decision making involves making decisions with no immediate factual rationale and is to a large degree based on the experience of the decision maker. Where culture and experience exist in a stable environment intuitive management can perform reasonably well according to some studies. However the complexity of contractual relationships and increasing size of the mega projects that are undertaken and a host of other reason means that the intuition method of decision making is only reliable to a degree and very dependant on key personal.
Gary France in his article on controlling time in construction emphases the importance of analysis and management in the controlling of risk in construction projects. However he said that the use of computer systems like Monte Carlo which carry out simulation tests based on random probabilities are totally meaningless. He goes on to say that mathematical or quantitative risk management is the most reliable.
What other choices does the construction industry have in this respect. Would it be possible for a construction company convert to a systematic approach to decision making considering the nature of construction projects being one-offs and unique the amount of investment required to develop a system to fulfill this function for a one-off project may be perceived to outweigh the benefits.
Pathology of the arising disputes in construction
Contracts are designed to identify problems at an early stage. This is normally through a notification process advising the party a problem that could or will result in a claim. This is no coincidence as the earlier problems are identified the more chance parties have in sorting the problem out by taking corrective actions. If the parties fail to resolve their differences it will more than likely develop into a dispute. For a frustrated claimant it is necessary for a dispute to have arisen before it can be referred to adjudication . We therefore look at the process of how disputes manifest themselves and then how they are resolved.
The manifestation of disputes
A common tactic in construction disputes is to argue that no dispute exists, therefore it is important to distinguish between a dispute and a difference. The fundamental distinction between a difference and a dispute is a situation where a claim has been rejected, in part or in whole, or has simply been ignored by the other party. Where no dispute has in fact occurred will depend on the facts of the case. In Fastrack Contractors v Morrison Construction (2000) Judge Thornton QC stated
A dispute can only arise once the subject matter of the claim, issue or other matter has been brought to the attention of the opposing party and that party has had an opportunity of considering and admitting, modifying or rejecting the claim.
A dispute is different to a disagreement in that a claim may have been submitted however it has not yet been agreed or rejected. It is possibly in the stage where the contract administrator has acknowledged the submission but has requested further substantiation or details before he can make his decision. This can be a lengthy process. Even for a relatively minor difference between parties can take months or years with further information being requested and this process recycling a few times until either adequate information is provided or alternatively a deal is made that both parties can live with. Where the parties have not been empowered to make decisions, for example this sometimes occurs when large amounts of public money is being used to fund projects, the issue is normally protracted and then finally when it becomes apparent to the claimant that there is a dispute that is not going to be settled through a non-coercive process it is referred to a coercive dispute resolution process.
Felstiner, Abel and Sarat put it this way; that all disputes go though specific transformations. The process of naming, blaming, claiming and dispute. The naming stage recognizes an experience as injurious and labels it as a problem. The blaming stage attributes the cause of the problem to another person. The claiming stage is when the grievance is voiced to the person believed to be at fault. The dispute stage occurs when the other person rejects the claim, in whole or part or ignores the claim.
How disputes are settled
The importance of contemporaneous records in the dispute process was considered in the case of Attorney General for the Falklands Islands v. Gordon Forbes Construction (Falklands) Limited (2003). A contract was let using the FIDIC 4th Edition conditions which like most standards forms provide a procedure for submitting claims. The first principle being to provide notice of intention to claim within 28 days after the event occurring and the second obligating the contractor to keep contemporaneous records necessary to support the claim. The contract went a step further requiring a detailed account of the claim to be issued within 28 days from the first notice. In the event of the contractor failing to provide a detailed account of the claim the contract provided for a fall back position stating that the contractors entitlement will not exceed that amount the engineer or arbitrator could consider verified by contemporaneous records. The events that unfolded on site were typical to the industry with the contractor failing to provide a detailed account of a claim within the required timescale. A dispute then developed because the contractor did not have sufficient records to satisfy the requirements of the fall back position. The judge considered that the requirements of the contract were clear and ordered a way with dealing with the claim. Claims have to be notified at the time they arise, contemporaneous records have to be kept and regular accounts redendered. The judge explained that the whole contractual system is aimed at the early resolution of any queries at the time the claim arises. He ordered that where there are no contemporaneous records the claim would fail.
Non coercive dispute resolution process
It has been established by survey that negotiation is by far the most favored method of resolving disputes in the construction industry. Negotiation is a non-coercive process of communication which ultimately leads to a joint decision. Goldberg described negotiation as “communication for the purpose of persuasion; the pre-eminent of dispute resolution”. Negotiation in its broad sense is more that just the process of dispute resolution it may be considered as the process by which individuals communicate in order to arrange their business affairs and private lives by establishing agreement and reconciling areas of disagreement.
Negotiation is the principle method of dispute resolution in the construction industry. Gulliver maintains that negotiation is essentially a development process with eight distinct but often overlapping phases:
Phase 1 – the search for the arena
Phase 2 – agenda and definition
Phase 3 – exploring the field
Phase 4 – narrowing the differences
Phase 5 – preliminaries to final bargain
Phase 6 – final bargain
Phase 7 – ritualizing the outcome
Phase 8 – execution of outcome
Gulliver asserts that negotiation is developmental because the early stages involve predominance of antagonism while the later stages involve a predomination of co-ordination. Roberts on the other hand asserts that negotiation is about communication and information exchange which leads to a joint decision. As the parties begin to explore their differences, the information exchange which occurs leads to a greater understanding of the situation. This can either lead to a convergence of opinion or abandonment of the negotiations. If real time data was available could this process be radically accelerated?
The process of negotiation on a construction project clearly is dependable on information availability and / or the ability the parties have to assimilate large amounts of information which involves data collection and analysis as well as the understanding of principles that establish liability and measurement of quantum.
To what extent is the reason for differences evolving into disputes on major construction projects down to the large amounts of documents that need rationalising? If the information was readily available and if managers had the skills or advice to define the principles to establish liability and measure the quantum would the majority of problems / differences develop into disputes or would they be resolved?
Coercive dispute resolution
Adjudication, arbitration and litigation are coercive processes but adjudication is not final and can be challenged if the losing party is not satisfied. Arbitration is final and binding and litigation is final and binding with scope for appeal.
In 1998 the Housing Grants Construction and Regeneration Act 1996 (the Construction Act) came into force. Prior to the Act neither litigation nor arbitration provided the speedy resolution of disputes which are often required in the construction industry. Typically prior to the Construction Act standard contracts could provide that litigation or arbitration could not be commenced until practical completion therefore disputes could be left unresolved for the duration of the contract. The Construction Act now makes adjudication available for parties to resolve any dispute arising under the contract at any time with a decision being given within 28 days of appointment. While this legislation has been a positive move for the construction industry it has created difficulties for parties when unmanageable quantities of relevant information have to be dealt with .
Essentially the rationale behind the concept adjudication in the construction industry is the provision of quick, cheap summary procedure. Adjudication jurisprudentially is similar to certification by an architect or engineer and is a second tier of evaluation that is made if the parties dispute a contract administrators determination. An important point is it aims to resolve disputes speedily because cash flow was described as the life blood of the industry by Sir Michael Latham.
The same trends and pursuit for speeding up proceedings can be seen in the sphere of litigation. In June 1996 Lord Woolf published a review of the civil justice system saying that it was too slow, too costly and too complex. The objectives of the pre-action protocol encourages the exchange of early and full information about prospective legal claims to enable parties to avoid litigation by agreeing a statement of the claim before commencing of proceedings.
In arbitration the trend of speed is further continued. The Arbitration Act 1996 where the parties have the choice to decide on the degree of formality they desire, how much time will be allocated to various aspects of the process and how documentation, discovery and the taking of evidence will be handled.
Essentially an objective of the 1996 Arbitration Act being to ensure that the process is fair, cost effective and rapid; to promote party autonomy; to ensure that the courts supportive powers are available when required etc.
Conclusion
It is clear that there is a long drawn out period from when the a claim is initially raised to when the parties are in a position to resolve the matter. This is indicative that the parties do not know much about the dispute when a claim is first made. Probably the only thing that is known at this stage is that the target profit margins are not being met. This is then followed by a long and drawn out process of retrospective analysis to define what went wrong, who is to blame and how much is due.
The management of risk and change in the construction industry is currently based mainly on intuition as apposed to systematically. This exposes the parties to the risk of the wrong decisions being made that are not reconcilable with the retrospective analysis carried out by the lawyers after the event. This leaves the construction industry in the dilemma where the real answers are only arrived at much to late to deal with the problem and prevent disputes but in time to resolve the dispute but hence at a cost.
In terms of the dispute resolution it seems that an adequate framework is in place to speed up the process through adjudication to a large degree as well as arbitration and litigation with the latest reforms in the law. However it seems as the industry is lagging behind and not capable of taking full advantage of the new changes.
posted by Will at 11.10.06
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