Why do construction disputes happen?

Construction projects are undoubtedly a fertile ground for disputes to arise, when compared with other business ventures.  In the first article in this series, I look at some of the reasons why, and what those who operate outside the sector encountering construction projects only occasionally, or on a one off basis, may want to consider.

As well as ensuring that construction contracts and appointments are properly set up in the first place, it is important to have an understanding of the wide range of highly effective and flexible modern dispute resolution methods available for construction disputes, which I discuss in later articles in this series.

Triggers for disputes

Understanding where disputes typically arise on construction projects, and what points those disputes will turn on, is often key to working out the best strategy and means of resolving them.

Disputes typically fall into one or more of these broad categories.

1. A problem with the construction contract itself – For example a provision that fails to deal with a particular situation, or deals with it in a way that is not clear or simply cannot operate in reality.
2. Parties ignoring processes set out in the contract – A key root cause of disputes is that the actions of one or both of the parties have not followed processes in the contract, or they have not become fully familiar with the Schedule of Amendments to one of the standard forms.
3. Issues get “kicked down the road” – It remains commonplace, and understandable, for the parties to kick the can down the road and not fully deal with issues as and when they arise, because they do not wish to sour the relationship whilst the works are ongoing. This can though be dangerous, as increasingly contracts contain “use it or lose it” entitlements, with the right to time and/or money being lost if they are not exercised promptly upon an event occurring.
4. External Factors – Other disputes occur because of external factors, rather than issues with the contract or way in which it has been operated. Insolvency is unfortunately increasingly prevalent at this time, and financial pressures hitting a party in relation to an entirely unrelated project can often quickly cause matters to unravel, particularly as the knock on effects of Brexit and Covid continue to be felt. Changes in key personnel can also be highly disruptive, particularly if there has been no orderly handover and/or there is a lack of good record keeping, meaning that large amounts of knowledge about the project disappear when a key person moves on.

Very often there will simply be an element of bad luck, if a “perfect storm” of different factors causes a previously constructive working relationship to break down, as commercial realities bite, necessitating a move to a “contractual” approach which should provide a framework to deal with the issues as the works progress.

The contract should be clear on financial consequences of an issue, and risk allocation between the parties. A key role in many forms of construction contract will be that of the Contract Administrator, who the contract empowers to assess and certify the entitlements that arise. Whilst in practice the Contract Administrator may often be the employer’s architect, they must act fairly and impartially between the parties.

Common areas for disputes to arise include the following:

Interim payment cycles

It is important to be aware that there are non-excludable minimum requirements that apply by reason of the Construction Act 1996 which cannot be contracted out of. Disputes often arise where a contract has failed to set out compliant payment terms, so a party will be relying on their entitlements under the Act.

Variations

A key part of the contract will be to set out the mechanisms which enable change to be managed, and disputes will often arise in relation to whether or not something is a variation or was always part of the original scheme, and what the financial and time consequences of the variation are by reference to the valuation rules.

Delay Claims

Many disputes arise in the context of delay claims, particularly after the unprecedented disruptions of recent years to supply chains. Contracts will set out the circumstances in which a contractor is entitled to be awarded an extension of time, the employers entitlement to deduct liquidated and ascertained damages at a pre-agreed rate for the period of delay, and the contractors entitlement to claim for the loss and expense arising from keeping the site operational for the period.

Defects

The limitation period for claims concerning alleged defects need to be carefully considered. It is worth noting that whereas traditionally most claims had to be brought within either 6 or 12 years of practical completion, provisions of the Building Safety Act introduced following the Grenfell Tower tragedy have increased the limitation period to 30 years for defects which are serious enough to cause a building to be defective within the meaning of the Defective Premises Act, being those that render the building unfit for habitation.

Design Failings

Claims are often brought against the professional design team for alleged failings and whilst most construction contracts will include mechanisms to deal with the effect of discrepancies and divergences within the design information against which the contractor has priced for the work, more substantive disputes can arise where there are complaints that design information is incomplete or inaccurate. Allegations of professional negligence will require the involvement of the professional’s insurer (if covered) from a very early stage, and to a large extent the insurer will be calling the shots in how they wish to engage which can present particular challenges in the context of ongoing construction projects.

How can disputes be resolved?

The nature of construction projects and their inherent complexity means that it is not surprising that construction disputes do occur. The good news is that the tools available to resolve these disputes are very well developed and enable appropriate strategies to be devised in light of the bigger picture of the project, and the commercial imperatives of getting it to a successful conclusion whilst also protecting your position in relation to the claim at hand. The tools available are discussed later in my related articles on adjudication and alternative dispute resolution, along with my final article in this series on re-setting construction contracts and conditional settlement.

If you have any questions about the topics raised in this article, please get in touch.