Conflicts in Construction
I was asked if I could write an article as to why there are so many disputes on construction projects. A book I asked? “Fifteen hundred words tops” I was told.
“Never” thought I, “in the field of human conflict, could so little be written about so much” (with apologies to Winston Churchill).
Why Disputes Occur
The reason why there are so many disputes in the construction industry is simple; money and competing goals. The remainder of the reasons are variations on a theme.
Clients want to achieve surety of time, budget and quality. Contractors need profit. That’s not to say that contractors don’t want to complete on time or to produce quality work, but above all else they need to make profit. Deny that to them and disputes are almost inevitable. The nature of modern day construction is such that contractors sub contract the bulk if not all the work to subcontractors. Same problem; subcontractors need to make profit, and they are the ones that arguably have the most influence on the success or otherwise of a project.
Construction procurement is substantially money driven. Not necessarily the ultimate price to be paid, but the primary contract and subcontract prices. Contractors’ margins are squeezed. They in turn squeeze their subcontractors and suppliers.
An American astronaut when asked what was going through his mind before lift-off responded that he was trying not to remind himself that the rocket had been constructed by the lowest bidders.
Ask yourself this question. Would you want to fly on an aeroplane where the primary focus of the builder, its suppliers and subcontractors was on its build costs? No? Neither would I.
It is not surprising that contractors’ focus on money. There is not enough of it and the risks they face are out of all proportion to potential benefits.
I was a mediator on a project where a subcontractor’s winning bid was £13m. Expected profit was 2% or say £250k; outturn cost, £34m; direct loss, £21m.
That subcontractor would have to win and construct profitably around eighty projects of a similar size and margin, total value over £1bn. simply to offset its losses on that one project. Fortunately, the parties settled.
On another project, a contractor constructing a power station signed a contract where six weeks liquidated damages would wipe out five to six years average profits for the whole group.
For many contractors and subcontractors, they are always only one or two disastrous projects away from insolvency.
When things go wrong, disputes occur as the contractors try to recover lost profit or minimise loss.
Farmers and Banks may get bailed out by Governments when disaster strikes, but not the construction industry. Indeed, several years ago when the German Government intervened when Philipp Holzmann ran into trouble, the issue was raised in Brussels.
Time
One of the key problems faced by contractors is time. Many projects run late.
Late running projects constitute a real problem for contractors. Their site overhead costs increase; subcontractors’ will be late and their site overheads will increase. Contractors and subcontractors will want to be paid prolongation costs. Moreover contractors’ are always under the threat of liquidated damages.
Late running projects also create real problems for clients. A delay to a commercial venture will involve an owner in substantial finance costs and loss of the profits that were the entire basis of the project in the first place. That is why some owners, particularly in the capital plant industries place more emphasis on time than money.
Causes of late running projects? How much time have you got?
In an ideal world, programmes would be agreed at the outset of the project; monitored regularly and carefully; extent and cause of delays identified, analysed and agreed on a regular and progressive manner; and extensions of time granted promptly. The project would be rescheduled; contractors and subcontractors compensated for prolongation costs and everyone could put the past behind them. Sounds simple and it is, except that it does not happen on far too many projects.
Why? Many reasons! Inability or unwillingness of contractors to do the necessary analytical work and put a convincing case together is one reason. That may be caused by inexperience or lack of skilled and experienced staff or external consultants. Sometimes however contractors are well aware that the responsibility for delay is at least partly their fault. If they leave it until later things will be less transparent.
The other side of the coin is the reluctance of client’s consultants to concede time, as money demands will follow. One of the common complaints of contractors is late or inadequate information. It is not unusual for the same consultant whose information was problematic to sit in judgment on the contractor’s applications for time and money. It is hardly surprising that they can be reluctant to agree that they were the cause of delay. Some clients can be surprisingly unforgiving of consultants who hold up their project.
On several projects with which I have been involved, design problems were very severe. The sensible thing would have been to stop the project; suspend site operations and subcontractors and solve the problem. That would have cost money (and ructions), but not as much as the disasters that followed.
Extensions of Time
Denial or delay in recognising a legitimate entitlement to an extended completion date is commonplace and often has dire results.
Adjusting the completion date after the project is finished as some contracts permit and as frequently happens is about as much use to effective management of a construction project as udders on a bull.
In any contract the contractor needs certainty. If the contract requires certainty at the outset, it is even more important half way through when room for manoeuvre is much reduced.
Contracts that experience delay need good programmes that reflect reality. In cases of severe delay, effective management requires that the programme completion dates be examined and if necessary adjusted. That allows contractors to instruct subcontractors to comply with an amended and realistic programme, even, in extreme cases standing down subcontractors, or deferring the start of others.
Contracts with uncertain completion dates can and do descend into hopeless muddles and chaos. Programmes are not adjusted; contractors and subcontractors are hassled to mitigate delays (never accelerate – that costs money!) Progress is measured against unrealistic programmes and contractors try somehow to manage this unmanageable process.
Design Responsibility
In years gone by, Architects and Engineers designed; quantity surveyors counted and measured things; and contractors built projects with large in-house direct labour forces aided by specialist subcontractors.
In today’s projects, Architects and Engineers often undertake partial designs, leaving substantial design work to be undertaken by the contractor. The contractor will subcontract its design responsibility to subcontractors who will attempt to make the design and construction costs cheaper. Proposals to amend the design are often resisted by the client’s consultants and delay is caused whilst the parties wrangle. The ultimate cost including delay costs can exceed any potential savings.
Similarly, attempts by clients to reduce construction costs by redesigning work on live projects often results in delays and increased costs that can negate any savings made.
Contract Administration
In order to function properly, all managements need timely, realistic and competent information.
Poor advice and guidance by the contractor’s or the client’s staff often results in wrong even biased advice being given to management.
Serious disputes often arise caused by advice given by people not competent to assess proper entitlement and often exacerbated by exaggeration, belligerent attitudes and use of intemperate and insulting language in correspondence.
Such attitudes drive the parties apart and they set about “reserving their rights” instead of seeking solutions.
What should happen?
Firstly the parties need effective project monitoring and communication systems in order that problems are identified as early as possible and communicated by the contractor/subcontractor to the client team. The key to that of course is accurate and realistic recording, reporting and trend forecasting.
Good, effective contract administration can not stop production losses occurring or correct low tenders. It can however make ascertainment of contractor entitlement to more time or money that much easier and stop catastrophic decisions being made that will make matters worse.
As soon as a project runs into genuine problems of time and/or money, all parties should seek solutions. That requires realistic and positive attitudes on all sides.
Perhaps clients and contractors should learn from politicians that the best and most pragmatic solution is not adversity but compromise - (think Zimbabwe, South Africa and Northern Ireland). That may mean, not “reserving rights” or wreaking revenge, but sorting problems as they occur.
Sometimes, realism and compromise involving the paying of more money or accepting less can result in at least two project goals achieved - time and quality. In the long term it may also be the cheapest option.
Oh, and higher and more realistic profit margins for contractors’ and more realistic attitudes to risk would also help.
About the Author
Iain Wishart is Chairman of and a shareholder in Gardiner & Theobald Fairway Limited which he formed in 1990 with Gardiner & Theobald, one of the United Kingdom’s largest firms of project and cost managers. Iain has over thirty-five years management experience of construction projects on four continents including some of the largest building and engineering projects in the World. He is an internationally recognised expert in construction matters and a qualified arbitrator, adjudicator and mediator. He has given expert evidence in litigation and arbitrations in Amsterdam, Bahrain, Geneva, Istanbul, Paris, Rome and Washington DC as well as the United Kingdom.
