How to dodge a dispute
Theresa Mohammed, Partner, and Emma Thompson, Associate, Watson Farley & Williams
CONSTRUCTION disputes have notoriously emerged from delays to a project or disagreements over time extensions. One cause of those delays and extensions is supply chains being unable to produce and deliver building materials on time.
The situation will only get worse as global inflation, armed conflict and rising oil prices have all contributed to the instability which now exists in the UK construction industry with sourcing materials. This predicament has and continues to have a detrimental impact on pricing and project delivery timelines. Steel, building blocks, timber and paints are just some of the many building materials subject to rising costs and unreliable supply.
Contract mechanics
The truth is, disputes can often be avoided, but it is helpful to know where to start. There are several steps a construction professional can take to minimise and prevent disputes from arising, beginning with the contract itself and reliable, clear contract drafting. Early warning mechanisms (EWMs) are a useful tool under contracts which mandate parties to identify issues from the time they arise, thus enabling parties to work collaboratively to problem-solve and resolve issues amicably.
EWMs, if used correctly, can prevent a workable issue from snowballing into a contentious dispute. A material escalation clause is another useful mechanism which can be employed to adjust the price of material to react to a changing and volatile market.
Contracts should also be clear as to risk sharing between parties, to ensure that liabilities are appropriately apportioned and that the success of the project is prioritised as the end goal for all involved. This is particularly important in the relationship between contractor and subcontractor where grey areas often exist.
The situation will only get worse as global inflation, armed conflict and rising oil prices have all contributed to the instability which now exists in the UK construction industry with sourcing materials.
The contract should set out workable procedures to deal with fluctuations of material pricing and availability which may result from disruptions to material supply chains.
Such procedures should allocate the risks between the parties, addressing the cost and time implications, as well as any compensation as a result of such events impacting other areas of the project. These types of mechanisms prevent uncertainties over costs and delay from escalating into full-blown disputes.
Variation clauses are another useful contractual tool for negotiating in circumstances which may otherwise result in a deadlock. Varying a contract to allow for alternative materials to be substituted in the specification may avoid disputes in instances where the original agreed products become unavailable.
As with all contracts, special attention should be paid to clauses relating to liquidated damages, warranty periods and timings for practical completion to ensure that they assist parties in the event of a delayed delivery of material. It may also be useful to amend force majeure (FM) clauses to specifically include FM events which result in delays to material deliveries. In this way, parties will have an agreed understanding from contract inception as to how these eventualities will be dealt with, should they arise. Clear and unambiguous drafting makes for easier interpretation, which is key to avoiding the conflict that often arises when contractual wording is unclear.
Putting it into practice
The next steps for dispute avoidance will take place once the project is under way. Project managers on site should play an active role by de-escalating issues before they crystallise into formal disputes. Communicating at the first sign of an issue should be an ongoing practice throughout the lifecycle of a project. Keeping good records will also put parties in good stead not only to ensure transparency is maintained so that everyone is on the same page but will also put the parties in a good position to support their claim should a dispute be unavoidable.
Keeping good records will put parties in good stead not only to ensure transparency is maintained so that everyone is on the same page but will also put the parties in a good position to support their claim should a dispute be unavoidable.Having an accurate bill of materials from the outset will also facilitate better contract management as contractors will be able to estimate and procure the right quantities at the outset. This will avoid later delays and discrepancies and any resulting production downtime, as well as ensure that targets are met within the project cycle.
Where possible, parties can make advanced orders for materials to ensure that both the price and quantities are locked in and secured from early on.
Adopting building information modelling allows parties to see what alternative materials used on the project would look like even before construction begins in the event that the planned materials become unavailable. Taking a proactive approach to dispute avoidance requires forward planning so that a ‘plan B’ will be on the table should the need arise to use it.
We highlighted above a number of useful contract terms. It is equally important that the parties use those carefully drafted provisions. It is very common in the stressful and pressured environment of a project that is running late or over budget for the parties to focus on getting the work done come what may. Following procedures to agree the cost and time implications of a variation is often the last thing on their minds. Ignoring the contract provisions may delay the dispute arising but it can also lead to escalation of the problem.
Collaborative relationships
There is no denying that the difficulties the construction sector is facing are immense and will require it to revisit its current procurement practices as well as certain supplier relationships.
The truth is, disputes can often be avoided, but it is helpful to know where to start.Maintaining reasonable lead times whilst ensuring that the quality and quantities of material sourced are not compromised will be the uppermost considerations to bear in mind. Good-performing suppliers are likely be the ones to stand the test of time, as now, more than ever, the industry requires reliability and consistency to meet an increased demand in what are otherwise turbulent, uncertain times.
In the past, some contractors have gotten away with sourcing the cheapest, quickest materials or procuring them at the last minute, however it is likely that with the current economic climate there will no longer be room for these types of practices. Similarly, going forward, employers will have to shoulder more of the responsibility and share in the overall project risks.
The current practice for contractors to assume all the risk could result in unwanted insolvency. Parties will have to be realistic about pricing all the way up the supply chain to ensure that risks are appropriately spread and there is a degree of flexibility to react to the volatility of the market. With a collaborative and positive approach in hand, parties will be able to work together to weather the storm and hopefully create a better outlook for the near future.
Conclusion
The fact that project delivery is becoming increasingly expensive is a harsh reality that the sector is already coming to terms with. By increasing risk sharing, having open and ongoing communication and utilising contract mechanisms, building professionals will not only be able to better navigate the challenges which exist within the current market but better prepare for those which lie ahead.
Theresa Mohammed, Partner, and Emma Thompson, Associate, Watson Farley & Williams