Disputes within the construction industry are an inevitable part of doing business. Well, that is the frequent punditry. While parties enter into contracts with the intention of successfully completing their projects without a dispute, often there can be an almost subconscious acceptance that a dispute over time and/or money will occur at some point during the works. It should not be the case that we simply accept this as inevitable and the industry must challenge such thinking and endeavour to improve the number of projects that are delivered claims-free.
Over the years, industry has been invited to take steps to address its adversarial nature, to collaborate and to avoid disputes. From evangelists such as Latham, Egan, McNulty or Wolstenholm, to the more recent collaborative working principles defined through BS 11000 and the new international standard, ISO 44001, “signposts” and techniques to assist projects in avoiding disputes do exist.
In spite of this, the construction industry is still predominantly seen as adversarial and divisive with claims becoming more complex, protracted and costly. There is clearly room for improvement and, rather than focus on remedies and contractual defences, clients should consider what contribution they can make to a more collaborative process from the outset, with the potential to avoid disputes from arising in the first place.
This post looks at one such client that has set out on a journey of collaboration and is challenging the inevitability of disputes across its portfolio.
A journey of collaboration
As the UK’s largest infrastructure client, Network Rail has a demanding capital works programme to deliver over £25 billion of enhancement and renewal works in a five-year period from 2014 to 2019. In the first three years of that period, it has successfully delivered over £15 billion of works to the operational infrastructure. Much of this is via frameworks and collaborative forms of contract. In 2012, it became the first UK infrastructure client to secure BS 11000 certification and, in March 2017, was one of the first six organisations from across the globe to secure accreditation to ISO 44001.
These collaborative credentials may be a demonstration of its strategic principles, but they require bolstering through continued engagement with the industry. This comes in the form of the Commercial Directors’ Forum (CDF), which was established in 2011. The forum comprises the commercial directors of key suppliers and other senior industry stakeholders, and has established itself as the crucible for engagement and an effective programme to drive industry change. Currently, it meets twice a year and has some 70 delegates from across the rail supply chain.
The CDF is the arena for strategic engagement on commercial policy and enables working groups to be established to tackle industry issues in a collaborative way. These working groups collectively identify, develop and test opportunities for improvements in the delivery of projects that also have a lasting impact on the relationships and reputation of the rail sector.
Over the past 5 years, the CDF has endorsed and deployed tangible, industry changing improvements including:
- A fair payment charter (reducing payment terms from 56 to 21 days and removing retentions).
- A rail sustainability charter (5% tender rating for sustainability).
- Creating a network of practitioners called “Tomorrows’ Talent Today” (Triple Ts).
- Several industry best practice guidance notes on pertinent commercial issues.
One of the primary areas for “tactical reinforcement” and the focus of a CDF working group was of course, claims, and the acknowledgement of industry research that perhaps as many as one in four frameworks, JV’s or partnerships will end in some form of dispute. Given the significant value of work to be delivered by Network Rail through frameworks, alliances and collaborative forms of contract, the impact of such a volume of disputes could have considerable financial and relationship consequences. Consequently, in 2015, the CDF established two working groups to tackle:
- Better defining allowable costs and fee, which was a constant source of “argument”.
- Exploring ways of avoiding (common) disputes altogether.
Watching for embers in the dry grass
Developed during the course of 2016, in simple terms, the concept of the Dispute Avoidance Panel (DAP) is one of avoidance rather than early intervention, which is where many techniques are already available to industry. At its heart, the DAP is about establishing a team to be on “fire watch”, looking for the smouldering embers of a dispute in the dry grass and inviting leadership teams to take action to prevent a fire.
The concept and process was developed by a working group of industry leaders drawn from within the CDF, which we chaired. The working group developed the concept and established the key principles of the process through a number of roundtable discussions with industry experts in dispute resolution (including leading counsel, mediators and programme and quantum experts). These experts have a keen understanding of the genesis of disputes and developed a process to bring that knowledge to bear in a practical way for the benefit of live programmes.
In summary, the process is as follows:
- The parties establish and engage the DAP, an “expert” panel of three or four people (legal, technical and behavioural), to visit and review key programmes/projects and to provide “observations” on matters that have a potential to become a claim. (The DAP will not provide intervention or opinions on current issues.)
- The DAP’s cost will be split equally between the parties to the contract.
- DAP members will visit the project on pre-determined dates and will undertake confidential, open discussions with as many project representatives as possible – from project leaders to practitioners.
- A pre-read pack of standard project documents will be issued to the DAP members in advance of a visit.
- Following the visit, the DAP will produce a report briefly setting out its findings and categorising its observations as either critical, essential or general (the observations report).
- On receipt of the observations report, the project leadership team will decide on the response and any necessary action planning.
In December 2015, the working group took this process back to the CDF to seek its support to run a pilot aimed at testing this unique concept. A resounding 93% of the delegates agreed that a pilot programme should be run.
The pilot programme
In order to provide a suitable challenge to this new initiative, it was decided to run the pilot over six months and to select a mixture of different contracting strategies, from a multi-party collaborative alliance to a standard two-party contract.
A number of projects were nominated by the CDF, and we set about making the necessary arrangements to ensure that we vigorously tested the approach. It was essential that the project team were fully committed and that as many people as possible were able to participate on the day of the site visits.
Next time, we will explain some of the challenges we encountered, some of the broad themes that emerged from the process and the feedback we received from the pilot’s participants.
No one can deny that this must be a very good idea and for the mutual benefit of all but the most unscrupulous parties. But against all that how many recent contracts have lists and lists of documents all deemed to be part of the Contract and which typically the Contractor is deemed to have read and understood and where he becomes responsible (in varying degrees) for any error or inconsistency, when the truth is he had no real chance to read them in their latest versions, let alone understand them pre Contract? Sometimes the parties get away with it because the documents in question do not cause an issue – but more by luck than design. That is where typically a Contractor starts to lose money on the job and feels forced to take a very strict line elsewhere to stem his loss. I cannot see a DAP solving that situation.
Richard
What you say is very true, and it generally surrounds parties attempting to pass as much risk as possible to others without allowing a risk/contingency pot. In other words passing all risks for little or no rewards.
I review schedules of amendments to standard forms on a regular basis, which sometimes go to 50+ pages (the main aim of the amendments being to pass risk to the other party). Quite ridiculous really when you think about it. Disputes will (and do) regularly arise in such circumstances.
As a lawyer (and thus someone who tends to see what goes wrong rather than what goes right) I may have a somewhat jaded view. In my experience, claims are pretty much inevitable if the contractor looks like making a loss on a contract.
You can do things that reduce the risk of the contractor making a loss e.g. foster best practice (as per NEC approach), de-risk the contract (which in turn passes the risk to the employer – albeit this is not necessarily a zero-sum game if it avoids perverse behaviours), or challenge tenders during the bid process to avoid contractors from buying the contractor (i.e. set a higher contract price) but these either cost more or result in marginal improvements at best.
In my personal experience, the best way to minimise claims is to aggregate projects. If a project is part of a portfolio, the contractor is generally far more willing to take a loss on an individual project, provided that he expects to come out ahead over the portfolio as a whole.
The other big thing is to look at bidder culture as part of the tender process. A contractor that focuses on audit rights but ignores the definition of actual costs should be a worry. Likewise a contractor that seeks through negotiation to create rather than reduce ambiguity in the contract is likely to end up creating more work for the lawyers before the project is finished.
How to avoid a dispute get practical
• To employ a panel to identify a potential dispute it’s probably too late
• Recognise that there is no such thing as a claim only entitlement
• Provide contract documents, in plain English to prevent ambiguity, clarify entitlement, clear administration and a sensible balance of risk and opportunity.
• Don’t mess around with standard drafting – we all know what it means
• Engage a procurement strategy which is commensurate for the size and complexity of the project.
• Ensure the tender period is sensible.
• Select competent contractors with the core skills (staff) and track record (scope and contract) to deliver the works.
• Provide a pipeline of work such that it creates a disincentive for ALL stakeholders NOT to fall out.
• A good pipe will encourage innovation, promote training and development of all stakeholders (staff). It will, amongst other things ensure that those administering the contract know what they have to do and by when.
• Ensure that there is an escalation procedure (clause) encouraging those at the sharp end to sort and differences before the need for further escalation and formal dispute is a last resort
• Do what you say and do it by the time you said you would do it
• Adopt a philosophy of “it only hurts when I laugh”
• There are many more