OPTIMIZING THE RESOLUTION OF DISPUTES ON CONSTRUCTON PROJECTS
OPTIMIZING THE RESOLUTION OF DISPUTESON CONSTRUCTON PROJECTSLynn Larsen CFCCwww.larsenanalytics.com801-541-91551
Table of Contentspage #1.0 Organization and Scope1.1 The Default Option2.0 Alternative Methods to Resolve Disputes3332.2 Negotiations - Direct Discussions32.3 Mediation42.4 Arbitration52.5 Dispute Resolution Board (DRB)72.6 Alternative Dispute Resolution (ADR) Methods: A Summary83.0 Typical Claims83.1 Failure to Cooperate83.2 Productivity Issues93.3 Differing Site Conditions103.4 Defective Plans113.5 Delay133.6 Scope Change or Mere Clarification133.7 Damages144.0 Recommended Practice144.1 The Alternatives144.2 The Recommended Practice14Appendix 1: Avoidance and Prevention15Appendix 2: Expanded Dispute Resolution Board (EDRB)182
1.0INTRODUCTIONThis paper summarizes the methods for resolving issues on construction projects. The best method is,of course, avoidance. See Appendix 1. If avoidance were always successful, however, this paper wouldbe moot. This paper discusses the various methods to resolve the disputes that typically arise onprojects with a recommendation on the "best" process.Disputes typically involve determining the facts, applying the controlling standards whether dictated bycontract, statute, regulation, industry custom, or code, and then calculating any damages, monetary ortime. All must be determined to resolve the dispute.1.1 The Default OptionUnless the parties otherwise agree, the default process for dispute resolution is litigation in court. Thatprocess can take years and become very costly with the outcome often determined by a judge or jurywith limited construction experience. After the trial, the losing party has the right to appeal to a highertribunal for a review of factual sufficiency and a determination that controlling legal precedent wasfollowed. The appeal process does not redo what the trial court did, but determines whether the trialcourt followed the correct process and properly applied the law. The appeal process, whiledetermining the correctness of the trial court decision, increases the cost and can extend theresolution process for several years.In an effort to reduce the time and cost of resolving disputes, the construction industry hasadopted other, alternative means to resolve disputes. These methods are less time consuming,less costly, and can include knowledgeable experts as the decision makers. These processesare known as Alternative Dispute Resolution (ADR) processes.2.0ALTERNATIVE METHODS TO RESOLVE DISPUTESAlternative Dispute Resolution (ADR) methods include:1.2.3.4.Negotiations - Direct discussions.MediationArbitrationDispute Resolution BoardThe controlling contract forms may dictate particular the process(es) to be used.2.1. Negotiations - Direct discussions.The first level of dispute resolution is direct discussions between the parties. This may bebetween site personnel, project management, or company executives. Parties are mostsatisfied if they control the resolution of a dispute. Therefore, resolution by direct discussionsbetween the parties is a most acceptable process for dispute resolution. The key to success,however, is that the person negotiating must have authority to resolve the dispute or, at least,has ready access to the person with authority.3
Generally, the lower in the management chain that a issue can be resolved the better. Thelower level personnel frequently are most knowledgeable about the facts of the dispute, butthe higher management personnel have more binding authority.2.2 MediationA third party might foster better communication and assist the disputing parties: an independentunemotional person who manages the dispute resolution process. That third party might be skilled inthe technical aspects of the dispute or merely skilled in fostering communications. This process istypically called mediation. The mediator has no power to compel or bind the parties, without theagreement of the parties. See 2.2.3.The mediator does not disclose confidences of one party to the other unless there is expressauthorization to do so.Mediation can be a great benefit if the disputing parties are having difficulty even communicating witheach other. The skilled Mediator facilitates communications and can overcome misconceptions of theother party or the other party's position. Mediation is a waste if one or both parties do not want toresolve the dispute.2.2.1 Pure MediationPure mediation involves the use of an individual skilled in promoting communications andunderstanding the motivations and goals of each party but typically without constructionexpertise. The mediator acts as the communicator of the needs, interests, goals, flexibility ofeach party to the other. In this process, he makes no assessment of the merits of the positions,but merely facilitates the communication of the positions and seeks to have the partiescompromise their positions and reach an agreement.2.2.2 Evaluative MediationThis process involves the use of a person knowledgeable or skilled in area of dispute. That personevaluates and counsels each party on the merits of their respective positions and the likelihood ofprevailing in litigation or arbitration. This requires the mediator to be knowledgeable in the field of thedispute.2.2.3 Mediation: BindingAfter discussions and after gaining an understanding of the dispute, if the parties fail to come to anagreement through the normal mediation process, the parties might agree to be bound by adetermination of the mediator. This requires an express written agreement of the parties.4
2.3 Arbitration.Arbitration is a process where a single person or panel of three persons listen to the evidence andpresentation of each party and then issues an Arbitration Award. It is typically binding on the partieswith little chance of appeal. The actual arbitration hearing is less formal than court litigation and canbe adapted to the desires of the parties. It is private, much faster, simpler, and in most cases muchless expensive than court litigation.The parties are generally involved in the selection of the arbitrators. That process allows the selectionof an arbitrator knowledgeable in the topic of the arbitration, a distinct difference from court litigationwhere the judge is not necessarily educated in the subject of the dispute.An Arbitration Award is more final than a court decision. That can be a blessing or curse. If one doesnot like the decision of an arbitrator, one can only appeal that decision on very limited groundschallenging arbitrator misconduct. In court litigation, if one does not like the decision of a judge, onecan appeal that decision for review by other judges or even a panel of judges, but in almost all cases,none of the judges will be experienced in construction matters.In some instances American Arbitration Association (AAA)1 arbitration has become akin to courtlitigation with expensive discovery, legal procedural motions and protracted scheduling. AAA isproviding guidance to its arbitrators and instituting procedures to be more efficient in resolving theissues in a cost effective and timely manner.Another provider, Construction Dispute Resolution Services (CDRS)2, provides services similar to AAA.CDRS has skilled people available in all 50 states and many foreign countries who are available to assistin the resolution of disputes on an almost immediate basis.An independent survey by the Harris poll people found that most feel arbitration is faster, simpler, andcheaper than traditional litigation.12See AAA website, www.adr.org.See CDRS website, www.constructiondisputes-cdrs.com.5
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2.4 Dispute Resolution Board (DRB) 3 4The Dispute Resolution Board (DRB) process provides an independent non-bindingrecommended resolution of a disagreement from skilled construction savvy individuals in "realtime." Those individuals are preselected by the parties to the contract and are available toadvise the resolution of a dispute at the time it arises. The DRB process avoids the expensivelengthy discovery process that is customary in litigation and in arbitration. Attorneys are notnecessary.A DRB is traditionally comprised of three construction-knowledgeable individuals who have beenmutually selected by the project owner and the general contractor. A DRB usually meets on a regularbasis; every month, two months, quarterly, as the parties determine and specified in the DRBAgreement. The DRB will review the progress of the project and will try to anticipate any possiblefuture disputes or will handle any disputes that have developed.The DRB members might be selected after a dispute arises. This allows selection of people withparticular knowledge in the topic in dispute. This might be financial, subsurface, tunneling, retrofitting,or whatever.Typically, DRBs issue “Recommendations” specifying how the DRB feels the issue should be resolved.Each party to the dispute has an opportunity to present their case to the DRB for their consideration. Ifthe parties, thereafter, do not come to an agreement, the dispute will need to be referred toarbitration or to litigation.On the “Big Dig” multi-billion dollar artery project in Boston5, there were 46 different DRBs each withits own specialty. These DRBs each met on a regular basis to review the progress of the project and torender recommendations or advisory opinions as necessary to prevent or settle a dispute specificallyrelated to the DRB’s area of expertise. The use of the 46 DRBs had fixed costs with some of the DRBsmeeting as scheduled without having any important issues to handle. The overall savings to the projectfar exceeded the fixed costs of the DRB(s).The World Bank typically requires DRBs on all projects that it funds.2.5 Alternative Dispute Resolution (ADR) Methods: A SummaryParties are free to choose one or more of the above methods of ADR or create their own. If nomethod is determined, then court litigation is the default method of resolving disputes. Thedescribed ADR methods seek to overcome the expense and duration of litigation. ADR methodsallow the parties to a dispute to seek a better process to resolve their dispute.ADR allows the decision maker to be one skilled in the field of the dispute, allows the dispute tobe resolved privately, and, hopefully, more accurately, at a lesser cost, in a much shorter time.3See Dispute Resolution Board Foundation website, www.drb.org.A Project Solomon, A Concept Whose Time Has Come, Lynn B. Larsen, Contract Management, December 1993.5Kurt Dettman oversaw the DRBs on the Boston project. www.c-adr.com.47
ADR methods typically allows each party to "tell" its story, even if it is based on second handinformation. The arbitrator, mediator, or DRB panel then determines the reliability of thatinformation.Users of ADR, however, give up the right to appeal the decision or recommendation to a higherauthority such as an Appeals Court. Use of ADR might weaken a party's right to "legal"defenses or to the enforcement of the rules of evidence utilized by courts, but does strengthenenforcement of industry custom and practice.3.0 TYPICAL CLAIMSClaims have two components: entitlement and quantum. Is there liability and what is thedamage.3.1 Failure to Cooperate.Every contract includes the implied covenant of Good Faith and Fair Dealings, a duty tocooperate. The courts have put it this way:Under covenant of good faith and fair dealings, each party impliedly promises that he will notintentionally or purposely do anything which will destroy or injure other party's right to receivefruits of the contract.If the dispute is over the lack of cooperation by one party and involves industry custom and practice, aknowledgeable construction person is better equipped to address that issue than a judge or lay jury.That knowledgeable construction person could also be an expert witness in a courtroom litigation, orthe arbitrator himself/herself, or a DRB member. The arbitration or DRB process would be more timelyand more cost efficient process.3.2 Productivity IssuesSeveral publications discuss lost productivity associated with disruptions. Donald F. McDonald, Jr. andJames G. Zack, Jr., AACE's RP No. 25R-03 Estimating Lost Labor Productivity In Construction Claims;Reginald M. Jones and Thomas J. Driscoll, Cumulative Impact Claims, Federal Publications, Inc., FallsChurch, VA, 2002. Reginald M. Jones, Claims for the Cumulative Impact of Multiple Change Orders, 31Pub. Contr. L.J. 1, 2001. Schwartzkopf, William, Calculating Lost Labor Productivity in ConstructionClaims, John Wiley & Sons, Inc., New York, 1995, and annual updates. AACE's RP No. 25R-03Estimating Lost Labor Productivity In Construction Claims categorizes the disruptive events as follows:1.2.3.4.5.6.7.Absenteeism and the missing man syndromeAcceleration (directed or constructive)Adverse or unusually severe weatherAvailability of skilled laborChanges, ripple impact, cumulative impact of multiple changes and reworkCompetition for Craft LaborCraft turnover8
8. Crowding of labor or stacking of trades9. Defective engineering, engineering recycle and/or rework10. Dilution of supervision11. Excessive overtime12. Failure to coordinate trade contractors, subcontractors and/or vendors13. Fatigue14. Labor relations and labor management factors15. Learning Curve16. Material, tools and equipment shortages17. Over-manning18. Poor morale of craft labor19. Project management factors20. Out of sequence work21. Rework and errors22. Schedule Compression Impacts on Productivity23. Site or work area access restrictions24. Site conditions25. Untimely approvals or responsesWhat forum of resolution is best to determine responsibility and associated damages? A series ofexperts could assist the courtroom judge or jury.Alternatively, an arbitrator or DRB panel would be similarly equipped with considerably less time andmoney consumed. A DRB panel could evaluate the issue is "real time" and not after the fact, avoidingthe lengthy and expensive discovery process.3.3 Differing Site ConditionsOne of the major risks of a construction project is the subsurface conditions which will beencountered. Consider the following actual dispute that occurred in early June 2010 on a heavyengineering project. The contractor's productivity approached zero.9
In this case, a provision in the specifications prompted the on-site engineer to issue stop orders untiladditional dewatering was accomplished. The specification required the contractor to dewater so thatthe ground water was kept 3 feet below the level of the excavation. That was no problem for the firstmonths of excavation. Then in June 2010, the contractor experienced great difficulty in maintaining alow level of ground water. After three months of abortive efforts, the geotechnical design engineercame to the site and determined that his specification was defective. The dewatering specification wasrelaxed and the work was promptly completed. In the meantime, however, the contractor had spent 1M attempting performance. The project was pushed into bad weather winter months and a majordispute had developed. More money was lost because the project now involved 2 constructionseasons. The overrun was now 2M.As a result, the contractor dismissed its project manager for his abortive efforts and "waste" of 1Mtrying to perform. The contractor retained a claims expert to gather the evidence and develop theclaim to be presented to the owner. Each party and the consulting engineer each retained attorneysand prepared to resolve the dispute through litigation.Before trial, the parties participated in a mediation. That prompted a settlement. The owner, a ruralwater cooperative paid the contractor all the money it could gather from its members, a little morethan 1M.In the end, although the parties agreed the contractor "prevailed," it lost 1M plus the cost ofattorneys, claim consultants, and experts. The owner and its engineer paid out 1M plus the cost oftheir attorneys and experts. All lost.10
How could this dispute been more promptly resolved? How could the expenses of performance, ofclaim preparation, and of dispute resolution been minimized? Who can best determine the causes ofthe lost critical production, the merits of the case, and resolve it in an efficient and expeditiousmanner?Had the project utilized a DRB panel, the problem would probably have been resolved within a fewweeks of arising, each party would have saved a 1M, and the project manager might have retained hisjob.3.4 Defective PlansThe below drawing reflects a lack of coordination between the structural drawings, the mechanicalpiping, and the sheet metal drawings. This overlay reflects the work that the contractor was requiredto do, if the drawings, as issued for construction were followed. If followed, the ceilings would havebeen 4 feet 6 inches high. The lack of coordination created hundreds of conflicts.The existence of such a dispute could impair production for months and significantly delay completionof a project.11
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In this case, the contractor gave notice to the owner and the architect of the conflicts. The architectdenied any responsibility to resolve the issues. The owner told the contractor that it had theresponsibility to resolve any supposed conflicts. The sheet metal subcontractor was the one sufferingthe most significant impact.The superintendent of the sheet metal contractor developed hundreds of drawing revisions andcompleted the work. After the work was completed, the contractor and the sheet metal subcontractorpresented a claim to the owner. The owner denied the claim.Finally a couple of years later, the matter was presented to a panel of arbitrators, consisting of aretired judge, a retired architect, and a retired contractor. After an arbitration lasting 6 months, 2weeks of hearing each month, the panel awarded the contractor full compensation for the engineeringand additional work. The arbitrators also ordered the owner to reimburse the contractor for cost of thearbitrators. Shortly thereafter the subcontractor went out of business.The resolution of this dispute required the determination of the existence of each conflict, adetermination of who had the duty to resolve the conflict, the resolution of the drawing conflict, thedetermination of the cost of the changed work including the engineering cost, and a determination ofwho would bear that cost. Who could best do that and do it timely?Wisdom would suggest that the parties select a method of dispute resolution that allowed for quickdetermination of such disputes. Had the project utilized a DRB panel, the problem would probablyhave been resolved within a few weeks of arising, and each party would have saved millions and thesubcontractor would have stayed in business.3.5 DelayAny action by the other party to the contract, which causes delay, is actionable. Generally, contractshave express remedies for delay.Who can best determine entitlement to a time extension or an adjustment to the contract price? Ajudge? A jury? Most likely, a person with construction knowledge and experience would be preferable.3.6 Scope Change or Mere ClarificationExtra work and extra cost arises when the Owner directs a change. This may be intentional orunintentional. The design professional might assert that his new directive was a minor change, notaffecting price or time; that is, a mere clarification. The contractor would possibly have a differentview.Who is best to evaluate the issues?13
3.7 DamagesDamages are always at issue in a construction contract dispute. The intent of the law and anyclaims disputes process is to put the damaged party in the same position as it would have beenabsent the impacting event, the disruption. Who is best to determine damages?4.0 RECOMMENDED PRACTICE4.1 The AlternativesA Judge or jury without the knowledge in construction will make a decision, OR, a savvy person withconstruction knowledge serving as an arbitrator or a DRB member can mak
2.4 Dispute Resolution Board (DRB) 3 4 The Dispute Resolution Board (DRB) process provides an independent non-binding recommended resolution of a disagreement from skilled construction savvy individuals in "real time." Those individuals are preselected by the parties to the contract and are available to advise the resolution of a dispute at the .
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