How the construction industry can handle disputes and avoid costly delays

Construction disputes are an inherent aspect of the industry, arising from the complex interplay of contracts, timelines, budgets and stakeholder expectations. As projects become more intricate and involve multiple parties, the potential for disagreements escalates, leading to disputes that can impact project delivery, financial outcomes and professional relationships – and when they fail to be resolved – the costs can be staggering, writes John Ridgeway.

Construction disputes come with significant financial and reputational costs. The average value of disputes globally, according to reports in 2019, was $30.7 million, with the Middle East experiencing the highest values at $56.7 million. The Americas reported an average dispute value of $18.8 million, while Asia saw an average of $30.5 million.

Time delays due to disputes are also a major concern, with the global average length to resolve disputes standing at 15 months. These delays affect cash flow and lead to cost overruns and strained relationships between stakeholders. In addition, prolonged disputes can tarnish reputations, making it difficult for contractors and developers to secure future projects. Delays and cost escalations can also lead to legal battles with investors and clients, further complicating business operations.

Failure to effectively resolve disputes can result in severe consequences for construction firms. Prolonged disputes can lead to contract termination, affecting project completion and financial stability. Unresolved disputes can also escalate into litigation, leading to costly legal battles and potential bankruptcy for smaller firms. In some cases, failure to resolve disputes related to safety or environmental compliance can attract heavy fines and sanctions.

However, as the industry evolves, new approaches to dispute resolution are emerging. The use of AI and blockchain technology is streamlining dispute resolution by providing automated contract analysis, risk assessment and evidence management. Smart contracts, in particular, are helping reduce disputes by ensuring compliance through self-executing agreements.

Construction firms are also moving towards mediation and collaborative dispute resolution models to preserve relationships and avoid costly legal proceedings. This is particularly important as governments worldwide are introducing stricter regulations and frameworks to reduce disputes and improve payment security for contractors. The UK’s Construction Act, for instance, mandates fair payment and dispute resolution processes, reducing litigation cases.

As sustainability becomes a priority, disputes related to environmental compliance and green building standards are also expected to rise. Companies investing in sustainable construction practices will likely face fewer regulatory and contractual disputes.

Global statistics on construction disputes

The frequency and nature of construction disputes vary across different regions, influenced by local industry practices, legal frameworks and economic conditions. A notable trend is the increasing preference for arbitration as the primary method for resolving international disputes. Research by Queen Mary University London (QMUL) and law firm White & Case indicates that 90% of companies now opt for arbitration in cross-border construction disputes, a significant rise from 73% in 2006. London and Paris remain the preferred venues for arbitration, chosen by 45% and 37% of respondents, respectively. However, Asian hubs like Hong Kong and Singapore are gaining prominence, reflecting the region's growing infrastructure investments. ​

In the United Kingdom, the construction industry has seen a reduction in both the duration and value of disputes. According to Arcadis' Global Construction Disputes Report 2020, the average time to resolve disputes in the UK decreased to 9.8 months in 2019, down from 12.8 months in 2018, marking the fastest resolution time globally.

As already mentioned, construction disputes can affect various stakeholders, including project owners, contractors, subcontractors, suppliers and consultants. The impact on each party depends on their role, contractual obligations and the nature of the dispute.​

Project owners may face delays, increased costs and compromised project quality. Disputes can strain relationships with contractors and affect the overall success of the project. Contractors and subcontractors often bear the brunt of disputes, facing financial losses, reputational damage and operational disruptions. Payment disputes, scope changes and delays can severely impact their cash flow and profitability.​

Disagreements over material quality, delivery schedules, or payment terms can also lead to disputes, affecting suppliers' financial stability and relationships within the supply chain.​ It is also not unusual to see architects, engineers and other consultants becoming embroiled in disputes related to design errors, project management issues, or professional negligence claims.​

Common causes of construction disputes

Understanding the root causes of construction disputes is crucial for developing strategies to prevent and manage them effectively. For example, ambiguities, inconsistencies, or misunderstandings in contract terms are leading causes of disputes. Proper contract administration is vital to mitigate these issues.

Delays can result from various factors, including unforeseen site conditions, design changes, or supply chain disruptions. Disputes often arise over responsibility for such delays and associated costs.​ Disagreements over payment terms, valuations, or non-payment for completed work are also common, particularly affecting contractors and subcontractors.

Variations or changes in project scope without proper documentation and agreement can further lead to disputes over additional costs and time extensions.​ Allegations of substandard workmanship or materials are other common causes of disputes, especially if there are differing interpretations of quality standards.​

Fortunately, the construction industry employs various dispute resolution methods, each with its advantages and limitations.​ As previously discussed, arbitration is the preferred method for resolving international construction disputes due to its enforceability, flexibility, and the ability to select arbitrators with relevant expertise. ​

In the UK, adjudication has become the most common resolution method, replacing party-to-party negotiation. This process offers a quicker resolution, typically within 28 days, making it attractive for resolving disputes without lengthy delays. Mediation, where an informal process involving a neutral third party facilitating negotiations between disputing parties to reach a mutually acceptable agreement is also increasing an option of choice. Mediation is cost-effective and preserves business relationships but relies on the willingness of parties to compromise.​

This is preferable to traditional court proceedings, which provide a formal avenue for dispute resolution. These are often time-consuming, costly and can damage professional relationships. Consequently, litigation is less favoured in the construction industry.​

Challenges in resolving construction disputes

Despite the availability of various resolution methods, challenges persist in effectively resolving construction disputes.​ Modern construction projects involve intricate designs, advanced technologies and numerous stakeholders, increasing the potential for disputes and complicating their resolution.​

In international projects, differing legal systems, business practices, and cultural norms can hinder dispute resolution efforts.​ The high costs associated with dispute resolution processes, particularly arbitration and litigation, can also be prohibitive, especially for smaller firms.​ This is because even after a resolution is reached, enforcing the decision can be challenging, especially in jurisdictions with weak legal frameworks or where parties are unwilling to comply.​

So, what is the answer? Proactive measures can significantly reduce the occurrence of disputes and facilitate more efficient resolution when they do arise.​ Drafting precise and comprehensive contracts that clearly outline roles, responsibilities and procedures for handling changes can further prevent misunderstandings.

Effective planning, scheduling, and communication among all stakeholders can minimise delays and disputes. Regular project reviews and transparent reporting help identify and address potential issues early. Implementing mechanisms such as early dispute resolution boards (DRBs) can provide a proactive approach to addressing disagreements before they escalate into formal disputes. DRBs, composed of independent experts, offer recommendations that can prevent costly litigation or arbitration.

Furthermore, establishing clear and enforceable payment structures can mitigate disputes related to non-payment or undervaluation of work completed. Prompt payment laws in jurisdictions like the UK and Australia have significantly reduced payment disputes. Investing in training programmes to enhance contractual awareness, negotiation skills and alternative dispute resolution (ADR) methods can also help construction professionals navigate disputes more effectively.

To summarise, construction disputes are an unavoidable part of the industry, but their impact can be minimised through effective risk management, clear contracts and robust dispute resolution strategies. As the industry embraces technology-driven solutions, alternative dispute resolution methods and regulatory improvements, construction firms can expect a more efficient and cost-effective approach to handling disputes. Let’s hop