Figure 1: Incorporating claims prevention early in projects can help minimize the risk of cost overruns later on.
There's nothing like survival instinct to focus priorities. Economic theory tells us that the pain of recessions may put stress on companies, but it also forces them to evolve and adapt. Companies willing to learn from adversity can emerge stronger and wiser. Those who failed to learn from economic hardship are among the significant percentage of medium and large construction firms that don't make it through the recession and likely have a different view of this "constructive destruction." However, the contractors and construction managers able to learn, change, and improve their engineering and management practices are enjoying an unexpected benefit – a reduced number of costly construction claims.
A recent ARCADIS study undertaken by its subsidiary and worldwide consultancy firm, EC Harris, shows that construction claims in the United States reaching litigation (arbitration included) fell from 2010 to 2011. The average value of reported disputes shrunk from $64.5 million to only $10.5 million. This drop is considerably larger than the contraction of the overall construction market, and it reflects the lessons learned by contractors, construction managers, and owners who have developed new strategies.
We can thank economic, market, and technical changes for this significant drop in claims and disputes. Less construction means fewer projects, and having fewer projects means there are simply fewer opportunities for claims to arise. Further, the paucity of projects means that there are more contractors seeking each of the available projects, resulting in lower bids. This might be expected to lead to more claims in the future as contractors under-bid work and then try to recover their under-bid. At least so far, this seems not to have occurred, and according to the EC Harris study, the opposite is true. The reasons appear to stem from greater emphasis on avoiding and resolving disputes before they reach litigation. This change is a direct result of improved methods in construction management and dispute resolution, combined with applying the lessons learned from the economic downturn. Forced to adopt new best practices, companies are now recognizing that "amicable" dispute resolution saves huge amounts of money and time.
Nine economic lessons
One: Build in more predictability. Rapidly emerging alternative project delivery methods such as design-build, fast-track construction, lean construction, integrated project delivery (IPD), guaranteed maximum price (GMP) delivery, and public-private partnership (P3) delivery systems offer considerable advantages compared with traditional design-bid-build contracting systems. Each of these delivery systems alters the traditional risk allocation between the parties, usually making eventual total cost and delivery time more predictable. While none of these new systems offers a guarantee against claims and disputes, they each implement contractual changes that reduce likely claims and disputes.
Two: Identify risks up front. More and more owners look to risk analysis in advance of construction commencement. Hiring experts or charging the project management team to review documents, procedures, and planned work methods not only pinpoints potential risk areas but specifies ways to eliminate or control them. Risk analysis identifies the party best prepared to assume that risk, and ways to mitigate the risk should it arise. Experts in the field armed with improved software analyze schedule and cost risks and produce a clearer picture of where dangers lie before work begins.
Forced to adopt new best practices, companies are now recognizing that "amicable" dispute resolution saves huge amounts of money and time.
Three: Leverage established green construction standards. Who would have guessed that the maturation of the green construction movement would also reduce disputes? The discipline of integrating green construction into design and construction procedures reduces unknowns when the construction is priced. Thanks to proven materials and greater familiarity with the system of integrating green technologies, the widespread fear that green construction standards would spawn lawsuits never materialized. As a result, the overall number of disputes related to green construction is down.
Four: Prevent conflict with constructability reviews. Retaining consultants, construction managers, or contractors prior to completion of design helps assure that the design can be built both economically and in conformance to the design intent. Careful review of the design documents at various stages of development prior to a "For Construction" issuance and conducting value engineering studies improve the cost effectiveness of the design. The comments from these studies become valuable insights for designers who then modify their designs. Further, the use of building information modeling (BIM) during design and construction has made vast improvements in finding and eliminating conflicts. Simply put, coordinating documents such as contracts, designs, plans, specifications, and schedules produces fewer opportunities for conflicts in the field, fewer guesses in the bids, fewer changes necessitated by conflicts, and fewer requests for more money.
Five: Build claim prevention into contracts. When a potential cost or time risk event occurs, engineers and construction managers reduce the impact of the event with prompt schedule and claims reviews, active change order processing, and active change negotiation (see Figure 1). Informal resolution of potential disputes or issues, based on a complete and careful analysis, assist in resolving issues before they become ful blown disputes.
Six: Decide, don't delay. Project management improvements eliminate inherent decision-making bottlenecks. The recent recession has strengthened the need for quick identification and resolution of potential issues, procedures long recognized as essential to cost control. Prompt decisions on owner issues and quick resolution of RFIs mean fewer unknowns for the contractor and quicker advancement of the work. Owners are now more aware of their responsibility to decide issues quickly – the days of waiting for the project to be completed to "sort it all out" have vanished.
Seven: Improve planning with critical path method (CPM) scheduling. Virtually all segments of the construction industry now use CPM scheduling. Increasingly, contractors plan their work with greater care as they develop the baseline schedule, monitor their performance to identify issues early, and take corrective steps as soon as possible to avoid delays or other impacts. Initial cost-loaded schedules indicate the contractor has considered the work plan and has the financial, material, and manpower resources to satisfy it. Regular schedule updates allow all parties to better understand the normal evolution of the project plan and to adapt to the inevitable events on the project that were not included on the schedule. Better planning and scheduling mean fewer delay claims and disputes.
Eight: Harness technology to reduce claims and disputes. Technology is assisting project management like never before. BIM provides the designer the opportunity to improve coordination of design, make details more readily available, and streamline the drawing revision process. Contractors are also embracing the use of BIM to improve planning and increase efficiency. Integrated project management software permits contractors and owners to automate many functions, track events, document occurrences, respond to changes, and most importantly, manage the tremendous responsibility associated with any construction project. New software, coupled with the Internet, speeds submissions and approval, RFI resolution, and change order review. The documentation of events on a construction project is always important and new hardware and software ensure it is collected more completely and quickly. Continuous video and photography capture events on the site for review and analysis. Onsite walk-around computer tablets eliminate double entry and speed information transmission. Email access makes for faster management communication, even as managers bemoan its incessant presence. Better, more complete, and timely information reduces the unknowns and hence the disputes and claims.
Nine: Drastically reduce cost with real-time dispute resolution. When potential disputes arise, prompt change order processing and consideration/approvals drive down costs. The advances in technology and more widespread knowledge of forensic scheduling allow quick and accurate analysis of potential disputes. Further, many owners and contractors are recognizing that compromising and settling for a few dollars during the job to resolve a potential dispute is cheaper than winning at litigation several years later. Dispute Review Boards and expert neutrals provide an impartial and potentially quick resolution to the disputes that cannot be resolved at the management level. Better documentation and regular schedule updates make it easier to analyze delay-related disputes quickly so they too can be amicably resolved.
Thanks to proven materials and greater familiarity with the system of integrating green technologies, the widespread fear that green construction standards would spawn lawsuits never materialized.
One thing owners, contractors, and construction management engineers know: While intentions are good, disputes happen. However, the economic crucible associated with the last five years has forced every member of the construction process to reassess its policies and procedures to assure that project funding goes to building the project, not arguing about it. Further, technology advances eliminated a lot of the guess work and communication barriers that traditionally plagued complex construction projects. Most importantly, the financial downturn has forced owners, construction managers, and contractors to use all available tools to lower project costs. In the end, adversity provided the incentive to implement needed changes – knowledge we can apply to avoid and mitigate costly disputes now and in the future.
John Livengood Esq., AIA,, associate vice president for ARCADIS, has more than 34 years of experience in architectural design, project management, design analysis, and document preparation. He also is an attorney experienced in construction litigation, government contracts, claims analysis, international contracts, and arbitration.