A very costly break-up

Just like any relationship, parties working together on a construction contract don’t always see eye-to-eye.

Just like any relationship, parties working together on a construction contract don’t always see eye-to-eye. The problem is, unlike most relationships, when things turn sour in the construction world, the problems can be far reaching and prove extraordinarily costly.

There is an old saying in the construction industry; “when times are good the market for disputes is big; when times are bad it’s even bigger”. This couldn’t ring any truer as many economies either begin to recover from the global downturn or continue on their path to prosperity. As shown in our latest Construction Disputes Report, last year we saw a lot of high value claims initiated for work that was undertaken five or six years previously. The reason? Only now are many firms beginning to see a return to significant liquidity, meaning they have the funds to pursue a claim. Also, many contracts may have needed to wait until completion before commencing formal dispute resolution. Evidently, this rush to market to claw back damages is both time-consuming and can potentially harm the relationship between contractor and client in the longer term.

Clearly, we are entering a very busy and litigious time for the industry but the volume of claims and disputes is one thing; the value of them is quite another. The sheer scale and complexity of some of the world’s new transport hubs and commercial developments is staggering, thus making the task of unpicking what went wrong and who is to blame all the more tricky. Highly complex supply chains, intricate funding mechanisms and joint venture arrangements murky the waters, and – perhaps more importantly – we are now operating in a market where projects are being aggregated into major programs. The problem with this is that programs themselves contain huge contractual and delivery risks, meaning the risk profile jumps significantly. Our insights suggest that where a program experiences difficulties, the disputes that arise very often escalate into multi-billion dollar ‘mega’ disputes which prove extremely costly for all involved, and unfortunately it is not uncommon to find the sum in dispute to be more than the value of the original contract sum.

These complexities are big contributors to the sharp rise in dispute values that we saw throughout 2014. With this in mind, understanding the causes, scale and extent of disputes is vital when we look towards positive avoidance mechanisms, and to ascertain how to mitigate or resolve issues as they arise. This is crucial and will become more important as more investment enters the construction market and programs and projects get ever more complex.

My advice to all parties entering into a contract would be – make sure you take expert advice at the tender stage and throughout the contract itself. As we have seen, the ramifications could be huge if appropriate advice is not sought at the right time to remove or mitigate a risk rather than after the horse has bolted.

Gary Kitt

Head of Contract Solutions +44 (0)207 812 2310 Ask me a question