Ten Steps to Dispute Avoidance

Most would agree that the earlier a construction dispute, or potential dispute, is addressed, the better the chances of a fair and prompt solution. Undisputed facts may be available at the time of occurrence, facts that often become muddied with time and emotions.

But acting promptly is not enough in itself. All potential disputes must be accurately and fully documented as they occur - not reconstructed with hindsight based solely on project cost overruns. By observing the following simple guidelines, it is possible to keep most construction difficulties from escalating into expensive, drawn-out claims.

1. Planning: An effective project manager should ideally spend more time anticipating potential trouble areas to be avoided, rather than rectifying problems that have already occurred.

2. Recognition: Recognizing a potential dispute situation as it unfolds is the key to avoiding claims or minimizing their impact. Knowledge of the different types of claims enables a contractor or owner to take action to avoid a claim, or even worse, litigation.

3. Communication: Develop open communications between empowered people on both sides. Let the decision makers talk to each other; otherwise, precious time is wasted, and an accumulation of seemingly insignificant issues may begin to restrict progress. Owners should be aware that their representatives may be reluctant to acknowledge a problem in an attempt to "protect" the owner from any additional costs. Similarly, contractors should be aware that their managers may seek to escape the consequences of their own faults by blaming others, particularly the owner. Both situations lead to confrontation, especially when an owner receives an unexpected claim near the end of the project.

4. Definition: Do not ignore a problem, or its potential consequences, in the hope of a more favorable settlement after the work is complete. Once a problem is established, it should be defined and the parties should reach a consensus, if possible, in terms of impact, extent, cost, and plausible solutions. By establishing these parameters and rationally assigning responsibility, it is more likely that the parties will reach a mutually acceptable solution.

5. Notification: When a problem arises, the contractor must promptly inform the owner or the owner's representative in accordance with the requirements of the contract, and the owner must promptly respond. Failure to do so, by either party, could result in a claim and/or litigation. Each party should provide factual evidence to substantiate its position.

An untimely or poorly prepared submission places both parties in difficult positions, severely limiting options and resolution mechanisms. After-the-fact submissions for schedule impact and/or additional compensation are generally, and understandably, viewed with suspicion.

6. Documentation: Accurate, up-to-date project records are critical throughout a project, especially during the negotiation and litigation processes. Since contemporaneous project documents usually provide the most reliable account of a project's history, it is imperative that a well-documented, logical cause-and-effect relationship exist between any unanticipated events and their consequences. Without this information it may not be possible to demonstrate the full effects of the events that occurred.

7. Contract Documents: The contract documents should be fair to both parties and as specific as possible, as warranted by the nature of the project. One-sided contracts promote disputes that often end in litigation. With the increasing complexity of facilities, it has become correspondingly important to prepare accurate contract drawings and specifications that the contractor can readily interpret at the bid stage of a project.

8. Cost and Schedule Impact: In addition to the obvious direct cost associated with any change, the contractor should establish detailed schedule implications (direct and indirect) of the delay/disruption to the project completion date and intermediate milestones. Contractors must be confident they have the resources to undertake additional work and consider any potentially damaging effects on the regular scope of work. This exercise will enable the owner to make a well-informed decision and possibly provide an incentive to work towards a more timely solution once the schedule's critical activities are analyzed.

The fact that the contractor loses money on an element of work is not, of itself, entitlement for a claim, nor should the contractor build in excessive profits on extra work dictated by the owner or circumstance. Such action may undermine the contractor/owner relationship and destroy credibility. The owner must recognize the contractor's right to compensation and fair profit on any additional work the contractor is required to perform.

9. Administration: Parties should administer change orders as they would new contracts, promptly and in accordance with contract requirements. Change orders should clearly define the scope of the additional work and clearly delineate between direct and indirect costs when applicable.

10. Solution: One party is often in the best position to recognize the most cost-effective method to deal with a particular problem. This knowledge should be used to establish acceptable alternatives that will reduce the other party's exposure. However, neither party should assume total responsibility under the proposed alternative. Thus, mutual contribution or consensus remains an integral part of the process. Deviations from the original contract will create new areas of exposure and responsibility. Definition and reasonable allocation of this additional risk and responsibility can reduce the typical finger-pointing that can begin as soon as problems arise.

The Next Step

Inevitably, some disputes will remain unresolved. This does not mean that the parties should "revise" their positions, pull in unrelated incidents to discredit other parties, or inflate claims in anticipation of a compromised settlement, as all of these actions jeopardize the fair and efficient resolution of a legitimate claim. If efforts to avoid a claim situation at the project level prove unsuccessful, effective documentation will remain useful as favorable testimony and form a solid basis for future dispute resolution.

Disclaimer: This article is intended to be a source of general information on a specific construction-related topic. Its content should not be considered legal advice. If you are seeking legal advice, please consult with professional legal counsel. For assistance in assessing a specific construction-related issue, please contact Interface Consulting directly.