This feature is a part of “The Dotted Line” series, which takes an in-depth look at the complex legal landscape of the construction industry. To view the entire series, click here.
The construction industry scores the dubious distinction of having among the most and costliest lawsuits. Scope changes are consistently a top cause of these disputes, according to London-based HKA Global, a consultancy that specializes in construction risk mitigation and dispute resolution.
These conflicts sap contractors’ time and money. Disputed sums on projects in the Americas reached more than a third of their value, averaging $100 million or 33.6% of capital expenditure, HKA’s newly released Crux insight report found. Nevertheless, this situation is not inevitable — there are many steps contractors can take to avoid claims.
Construction pros can mitigate this risk by understanding and planning for the common causes of project disputes. Change orders are a key pain point to address before shovels hit dirt, legal experts say.
In order to take these proactive measures, however, builders must first get over the psychological hump of accepting that unexpected circumstances will almost certainly occur over the course of a job, said Dan Feinblum, partner at HKA Global. Builders may hesitate to communicate problems as they arise for fear of souring their relationship with the owner, but that often leads to distrust and conflict down the road.
“One of the most important things about change management, and change controls, is acknowledging that change happens on every project,” said Feinblum. “I don’t think I know any project that hasn't had some kind of change … if you aren’t willing to acknowledge change, you aren’t going to take any of these measures to protect yourself.”
Be prepared
When starting a new project, it’s instructive to review past ones with a similar contract structure or procurement route, said HKA Global Partner and civil engineer Caryn Fuller. Make note of failures and successes and use them to make a plan to avoid similar pitfalls. Creating a “lessons learned” package at the end of a project can help builders go into future negotiations better informed.
The next step is to really know your contract. Everyone managing and executing the job should know what the project scope, milestones and provisions are — and clearly define the change and notice provisions, said Fuller. To that end, it’s vital to facilitate clear communication within the team and between teams from the jump.
“Sometimes there’s a miscommunication between the people negotiating the contract and the people who are going to be executing the project,” Fuller said, and that can lead to unrealistic expectations being put into the agreement and frustration later on. “Having better communication and coordination between that contract execution phase with the actual execution team could prove very valuable.”
Next, create a robust change management plan that clearly defines how to process a change or address unforeseen conditions. Project or process manuals are one tool for this: They can include key contract clauses regarding changes and workflows that break down exactly what to do when a change arises, i.e. who to email and how to document.
Put a project controls program in place — make sure progress, productivity and costs are being updated properly and reported accurately and regularly, said Fuller. Builders and clients can review those reports to make sure the project is progressing as expected, and address any problems promptly.
Still, even with the best laid plans, sometimes conflict will still arise. Contractors should be prepared by adequately documenting changes as they go along, and keeping relevant paperwork organized in one place and up to date. Without proper documentation, builders may not be able to prove their case. Thankfully there are now a plethora of tech tools available to help contractors track, document and organize changes, Feinblum said.
Design conflicts
Amid the rise of design-build projects, in recent years Feinblum said he’s noticed increased conflict between design and builder teams.
High-profile examples of this include the $2.3 billion Boston MBTA Green Line Extension. Its builders filed suit in August against engineering firm STV, claiming its allegedly faulty designs caused more than $35 million in cost overruns. On the Corpus Christi, Texas, Harbor Bridge project, Texas DOT shut down work and issued a notice of default due to design flaws.
With a fixed-price, lump-sum contract, designers are accustomed to being consultants and asking for more money when needed from clients; on a design-build project, they’re effectively subcontractors and the price has been set, and contractors may not want to foot the bill for changes designers want, Feinblum said. Plus, as designs are fleshed out, owners may ask for changes that are costly and difficult.
One approach to mitigate this is by sharing risk when possible. In a progressive design-build contract, for example, the contractor and owner collaborate to develop the project's design and budget. “Pain-share gain-share” agreements, in particular between designers and builders, can also be a useful tool, according to Feinblum. Schedule incentive bonuses can help motivate the whole team to meet timeline goals.
Another way to reduce this friction is through a design integration manager, who keeps the project meshed with design expectations through each step of the building process and proactively mitigates conflict. Usually builder-supplied, they liaise with the design lead, construction manager and owner, addressing issues as they arise by breaking down communication silos.
Contracts are getting more complicated, Feinblum said, but the best-written agreement is no substitute for communication.
“Attorneys are trying to write the smartest contract they can, and in doing so they just put more and more restrictions on, as opposed to the two parties just getting together and talking it out, and figuring out how to resolve a change,” said Feinblum.
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