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Avoiding contract disputes in construction

disputes

In August last year Russell McVeagh released a revealing report on disputes between parties in the construction industry based on an in-depth survey. This was followed up by a paper focused on solutions for the construction sector’s perennial problems.

Russel McVeagh’s comprehensive report on construction disputes called ‘Getting it right from the ground up’ is based on the results of a survey of construction industry participants last year, including principals, contractors, project managers, engineers, and consultants.

Among the key findings of this survey was the fact that NZS 3910 is still the most popular standard form contract, with over 80 percent of respondents basing their contracts on it.

The number one factor identified as contributing to disputes is a lack of understanding of ‘contract obligations’ within the industry, with bespoke contract amendments reportedly not always being read and understood by all parties.

Both principals and contractors identified ‘principal variation’ as the leading cause of delays. However, they did not agree on what the other leading causes were.

Principals blamed the slow pace of construction and the consent process, while contractors blamed the quality of design.

Over 70 percent of respondents expect disputes to rise over the next two years, while contractors are more pessimistic – with 91 percent expecting disputes to rise in the next two years.

This publication follows on from Russell McVeagh’s survey results to focus on solutions for the sector’s recurring issues. It draws on further engagement with construction sector stakeholders and international reports to better understand mechanisms for proactively avoiding the causes of construction disputes in this country.

“Discussions with industry stakeholders have deepened our understanding of mechanisms that could be adopted or strengthened to help avoid disputes.

“Stakeholders are calling for better quality design, more collaborative procurement, improved project management and proactive contract administration to help avoid disputes in the construction sector.

“When these fail, there is scope for resolution processes to be utilised more effectively.”

Russell McVeagh’s litigation partner Polly Pope says the firm’s research shows the same issues have continued to arise throughout the past 25 years – the key factors causing disputes are consistent internationally and remain much the same in 2019, as they were in 1994.

“Discussions with industry stakeholders have deepened our understanding of mechanisms that could be adopted or strengthened to help avoid disputes, with four key areas consistently standing out for the industry to be proactively considering, debating and implementing to help solve some of these recurring issues.”

Design

Russell McVeagh Property and Construction partner Ed Crook says; “Procurement methods need to evolve. Where possible, finalisation of the contract should be collaborative and the preferred Contractor should be involved in the negotiation of the contract, rather than simply given concluded terms to price.

“High quality, well developed designs and specifications should be included in the contract documents. Incomplete and/or poor quality design frequently results in the Contractor incurring delays and additional costs.”

Project management

Building an effective team, including strong collaborative relationships with preferred consultants and contractors, is also recommended, especially where the Principal has a significant pipeline of work.

“Providing some assurance that a Contractor will be engaged to perform a pipeline of work allows for greater investment in recruitment and training and encourages long-term co-operation,” says Ed Crook.

High quality training of engineers is needed too, which may assist in improving standards of engineers to the contract.

“From our discussions, adopting an accreditation process is suggested as a potential fix, albeit a medium-to-long term solution that would require large-scale buy-in.”

Dispute Resolution

In instances where the above mechanisms fail, there is scope for resolution processes to be used more efficiently, either through adjudication or Dispute Review Boards, says Polly Pope.

“Adjudication is intended to provide a mechanism for a fast and inexpensive resolution to disputes as they arise under a construction contract.

“There is scope for it to be used more efficiently, by referring issues for a decision as they happen. In the right case, this can allow parties to get an answer and get on with the project.

“Dispute Review Boards are also worth considering, particularly on larger projects. This involves having a standing panel appointed at the start of the contract, which is made up of usually one or three people.

“They stay informed of the progress with the project and provide a means by which issues can be quickly resolved.”

Contract forms

Despite widespread use of NZS 3910 as a base contract – the increased use of long and complex special conditions appears to be resulting in contracts that are not understood by the parties to them, or the people responsible for administering the contracts.

“The industry would benefit from using a different standard form which all parties were happy to use without significant special conditions,” says Ed Crook.

“This could either be by way of adopting a standard form currently in use overseas, or by a (prompt) update of NZS 3910.”

You can find the full report on the Russell McVeagh website.

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