If you are expecting an article that points at Covid for the troubles in the construction market, this is not it. Even before Covid emerged, contractors had little wiggle room to absorb even moderate levels of risk with some international contractors engaged in a dangerous contest to deliver more projects at often razor-thin margins.
But it is fair to say that Covid could not have been less timely. As lockdown measures have relaxed around the globe, supply chain disruptions continue to materialise, placing contractors in a testing position.
The adversarial nature of many construction contracts and the current lack of cash flow is a perilous recipe that is triggering a new wave of disputes between owners, main contractors and subcontractors.
Contractors are becoming impatient and notices of claim are issued, degrading many already tense relationships between contracted parties. As distrust mounts, parties are equipping themselves with lawyers and experts in anticipation of disputes.
Yet it does not stop at claims. More severe consequences are materialising, including owners calling bonds, contracts being terminated and joint venture partners being abandoned and left with unexpected financial burdens.
On live contracts, cash flow is currently a prime concern for contractors and this can be eased by negotiating more timely payment terms, releasing retentions, reducing performance bonds. For project owners, there are a number of collaborative solutions to reduce costs such as targeted de-scoping, value engineering or more forward looking profit sharing mechanisms on an open book basis.
In this gloomy context, many are in for a long ride. All parties must be aware of the sheer cost and time consequences of triggering formal disputes: years of costly proceedings and uncertain liabilities on everyone’s balance sheets.
Rationalising dispute resolution
Changing the inclination of owners and contractors to go into battle in a formal dispute is certainly no mean feat. It stems from claims processes.
The paradigm with construction claims is that contracts do not clearly indicate how delay and quantum claims should be presented or substantiated. Contractors seek to maximise their claims, expecting them to be partly rejected. Although the contractor may have indeed suffered delay or cost overruns, the claims put forward are not auditable and make it easy for clients to reject them. The reality is that, in our experience, poorly substantiated claims are the norm and this is still the case on claims arising from Covid.
We are working with project owners and contractors globally to foster a streamlined approach to the burdensome dispute process. It is about implementing pragmatic contract processes that are effective in avoiding unnecessary noise. More than ever, now is the time to treat construction contracts as living and breathing documents that focus on the successful delivery of projects whilst maintaining the financial equilibrium between parties.
The successes we have seen are down to getting contractors and owners to speak the same language when it comes to understanding the causes of project overruns. Project owners need to look at the big picture, focus on project delivery and understand the repercussions of these disputes on their organisation’s goals. In practice, that requires parties to stand back from already entrenched positions on existing contracts, and thinking differently about future contracts.
Juan SAEZ – Director at Accuracy
Juan Sáez is a director at Accuracy. Juan provides expert advice on large capital projects worldwide. He has accompanied owners, contractors, subcontractors and funders on over 25 international megaprojects. Juan has been appointed and testified as an independent delay expert in international arbitration proceedings. He has provided written and oral testimony (including witness conferencing) before some of the most experienced construction arbitrators. Juan has provided expert advice on a number of airport, bridge, high-rise, power plant, oil & gas, renewable and other infrastructure projects. Juan provides advice to his clients seamlessly in English, Spanish, and French.