Construction disputes at US$ 82 million in 2015: Arcadis
With uncertainty reigning in markets around the world and construction projects more complicated than ever before, construction disputes are a major risk and can have far reaching consequences.
The average length of global construction disputes increased to a record of 15.5 months in 2015, according to the sixth annual Arcadis Global Construction Disputes Report 2016: Don’t Get Left Behind. This is the sixth consecutive year that the length of disputes have increased. The report suggests this is likely due to a mix of factors, including an increase in the size of disputes and in the number of large and complex Engineering, Procurement and Construction (EPC) contract disputes.
Meanwhile, the value of disputes relating to major global construction projects marginally reduced to, on average, $46million. However, the Middle East still saw an increase in value, overtaking Asia as the region with the highest valued disputes in 2015, with an average of $82million.
Mike Allen, Global Leader of Contract Solutions at Arcadis, comments: “In 2015 the construction industry faced head winds in particular with commodity and currency volatility. This resulted in many projects and programs being faced with a very different economic business case than had been planned, which contributed to some of the issues and disputes that have materialized.”
The Middle East saw its dispute value increase to nearly 7%, once more, to their highest value since 2011 and remains the only region with increasing dispute values compared to last year, according to the report.
This year’s report is Arcadis’ sixth annual study into the duration, value, common causes, and methods of resolution of construction disputes across the globe. The report found that construction disputes were the highest in the Middle East at $82 million, followed by Asia at $67 million. However, in North America, the United Kingdom and Continental Europe, dispute values dipped to an average of $25 million.
Craig Beeson, Head of Contract Solutions, Middle East at Arcadis, says: “In an economic environment impacted by the oil price, the market continued to see a restriction in decision-making within the industry. This drove a lack of appropriate delegation to project management consultants and client representatives, thereby prolonging critical commercial decisions and generating cash flow issues related to instructed variations.”
Failure to properly administer the contract holds on to its top position regionally from last year as the main cause of construction disputes, followed by poorly drafted or incomplete and unsubstantiated claims.
The top three causes in 2015 were:
- 1. Failure to properly administer the contract
- 2. Poorly drafted or incomplete and unsubstantiated claims
- 3. Incomplete design information or employer requirements (for D&B/D&C)
In the Middle East, where a JV is in place, the proportion of disputes caused by a JV-related issued dropped in 2015, moving down almost ten per cent to 32.3%.
Some clients are looking to spread cash obligations by prolonging commercial payments and negotiations. Additionally, the tendency to utilize a traditional contracting strategy is ill-suited to the continuing size and complexity of the programs. This is exacerbated by the propensity of clients to transfer the majority of project risk to contractors.
However, there is a desire from all parties to better streamline formal dispute processes, reduce administrative burdens and create a fairer contracting model. There is a noticeable shift in the use of Mediation and Adjudication in lieu of the traditionally contracted Litigation/Arbitration methods. All parties embrace the added value that an impartial professional judgement/recommendation brings over the settlement of disputes, which is not only cheaper and more expeditious, but also transfers decision-making to external agents, thereby assisting with state audit compliance.
The market is further increasingly utilizing design and build contracting models and has even experimented with the New Engineering Contract (NEC) suite. Public-private partnerships are also growing in popularity as inward investment is coveted to mitigate budget deficits generated by low oil prices. This shift in strategic procurement can only be beneficial to the continued growth of construction in the Middle East and maintain its attractiveness to international contractors and consultants.
While the region is experiencing a challenging period, the opportunities and potential rewards for contractors and consultants remain. As better compliance and cost optimization initiatives are introduced by private operators and governmental entities, the market will improve as an environment within which both domestic and international organizations can thrive.