Why construction contracts generate disputes
Construction contracts are complex by nature, because their drafting involves technical and legal aspects that establish the rights and obligations of the parties. Even with detailed stipulations trying to cover all possible hypotheses that could arise during execution, controversies still arise between the parties from:
- Increased or decreased costs and/or time
- Partial or total suspension of the work
- Partial or total cancellation of the work by the owner
- Termination due to unexpected or force majeure acts
- Termination of the contract for breach by either party
- Defects in the work and/or hidden faults
The phases where disputes originate
All construction contracts, public, private, and public-private (PPP), have the following phases: planning, tender, contracting, execution, and closing.
One of the major causes of construction disputes originates during the planning phase: failure of the design or executive project. When the design generated in the planning phase is executed, several problems can arise, errors, deficiencies, incompleteness or modifications, whose magnitude has negative effects on the programmed cost and deadline.
Other common causes include: lack of financial resources, non-payment of executed work, inexperience in the contractor or project management, insufficient information from the tender, unrealistic scheduling deadlines, environmental problems, inadequate management of permits and licenses, failure to obtain the working space permit, social problems, and unqualified personnel.
International examples
Three important construction projects worldwide illustrate these problems:
Dubai Metro (United Arab Emirates, 2005): A $3.39 billion contract for the red line and $1.11 billion for the green line. The project suffered a 5-year delay and an 85% cost increase.
Boston Big Dig (USA): A tunnel and central artery project in Boston with an original cost of $2.8 billion. The final project cost reached between $14.6 billion and $22 billion, with planned completion in 1998 and actual completion in 2007.
Line 12 CDMX Metro (Mexico): Construction of a new subway line in Mexico City with an initial cost of $1.3 billion USD and a 70% cost increase. Planned for completion in 2009, it was actually delivered in 2013.
How disputes escalate
One of the contracting parties must assume responsibility when these problems create a negative impact on the cost of the work. Disagreements arise when neither party wishes to assume the additional cost. When the parties fail to reconcile despite multiple solution attempts, controversies escalate, from a discrepancy or conciliation to arbitration or court trial, all in detriment of the work.
Documentation and professional quantification of costs has great significance during this process, because the decision to continue with the controversy or not may depend on this analysis.
Dispute resolution mechanisms
To prevent disputes from becoming arbitration or legal litigation, the construction industry has implemented various binding and non-binding dispute resolution mechanisms: mini trial, third party mediation, expertise, neutral expert, independent expertise, dispute boards, intermediate dispute resolution, and the authorized representative.
Likewise, the construction sector has implemented methodological, technological and legal solutions: BIM, LEAN, blockchain contracts, standardized FIDIC contracts, NEC, and others.
Key conclusions
- It is during the execution of the work that disagreements arise, and not all disagreements result in formal disputes.
- The party asserting a disagreement must determine the root cause, quantify the costs, and prove its assertions. Only then will it be able to move forward to a dispute in good standing.
- Risk is one of the most important costs in infrastructure projects, so its proper management is of utmost importance to reduce disputes.
- As there is no perfect design or work execution, it is reasonable to assume that all constructions will have unforeseen events. Contracts should contain flexible solutions for a proper resolution of these problems.
- Work completion and operation initiation must be the priority for the parties. Completing the works is the most important thing and builders should never forget it.