Managing Construction Projects: Resolving Disputes in Real Time

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September 28, 2018
Author: Curtis W. Martin
Organization: Ford Nassen & Baldwin P.C.

Resolving Disputes in Real Time
I. Why Disputes Do Not Get Better With Age
Construction can be a contentious industry. This occurs in part due to the industry’s fragmented organization. Each project is new. Unlike businesses that manufacture auto parts for General Motors or Ford, each new construction contract brings a unique design, different materials, new challenges, changing personnel, and new relationships. Disputes are bound to develop.

What exactly is a dispute? Disputes are essentially issues that generate different opinions. This all-encompassing definition includes differing perspectives on answers to requests for information, disagreements over proposed changes, and full-blown jury trials. We could define disputes more narrowly, but this message applies equally to disputes of all sizes and temperatures – disputes must be resolved quickly or they’ll enlarge and become unmanageable.

Unlike fine wines, disputes do not get better with age. Memories fade and witnesses become unavailable. (The author has seen witnesses become unavailable by moving to Saudi Arabia, Alaska, and Egypt; one witness became unfriendly when he was hired by the opposing party!) And positions polarize with age, making it harder for each party to appreciate the other side’s points. Individuals involved in the project tend to remember their own positions much better than they remember the (often valid) positions of the other party, which makes compromise and settlement of disputes more difficult. As disputes age, the parties often consult with counsel. Lawyers (or claims consultants or accountants) slow the process down. Lawyers are trained to explore every legal avenue and document every fact. Some attorneys file lawsuits in order to take advantage of “discovery” rules of court that may compel costly and tedious document production or testimony that would be unavailable in a non-litigated controversy. More investigation means more documentation. In turn, more documentation means more time in which positions continue to polarize and more transaction costs, which widen the gap between the parties. An attorney may also expand the dispute by adding causes of action or defenses. This can make settling the dispute slower and less likely to happen.

II. Putting Dispute Resolution on the Critical Path
Each new project is a “shotgun wedding,” creating teams of unfamiliar individuals. Those individuals bring to the marriage their own past experiences and institutional biases. For example, the general contractor is on the lookout for problems with the design, the architect is wary of requests for information and change proposals, and the subcontractors are concerned they will be treated unfairly. The parties begin the project with the prospect that their counterparts may not pull their weight. Additionally, economic factors make today’s projects even riskier. Tightening surety credit, smaller budgets, and shorter timetables add challenges that make projects more difficult. Conflicts are bound to arise in such an environment.

Resolving disputes is expensive. In the United States, approximately $2,000,000,000.00 is spent annually on construction lawyers, giving rise to the old adage that “everyone lost except the lawyers.” That figure does not include the costs of claims consultants, court reporters, and document production. (If Greenpeace ever found out the volume of documents we print, they would start disrupting construction sites rather than oil tankers.) However, the most costly aspect of disputes cannot be measured: the opportunities which are lost when management is occupied closing out yesterday’s projects instead of focusing on the projects of today and tomorrow.

Now for some good news: Many of these costs can be mitigated, and some can be avoided altogether. To paraphrase Waylon Jennings: “Managers, don’t let your disputes grow up to be lawsuits.” Disputes cannot be completely avoided. However, with careful planning and proactive action, issues may be resolved before they take on lives of their own. If this occurs, everyone wins (except the lawyers). Here are ten “commandments” that will help you keep disputes on the jobsite:

1. Develop teamwork.
“Always acknowledge a fault. This will throw those in authority off their guard and give you an opportunity to commit more.” – Mark Twain
2. Understand the risks.
Perform adequate site investigations. Use historical data to evaluate risks objectively. By understanding the risks, you will avoid the uncertainties that are the underlying causes of many disputes.
3. Allocate the risks fairly.
Include “differing site conditions” clauses in your contracts and subcontracts. Clearly establish the baseline. Consider a geotechnical baseline report. Try to incorporate risks into the contract price – but be fair.
4. Identify potential problems early.
Identify and address problems early through documentation, investigation, and analysis. Problems cannot be resolved and managed until they are identified and recognized.
5. Manage disputes appropriately.
Manage disputes like every other aspect of the project.
6. Assess your position objectively.
Often disputes do not settle early because one party overvalues its position. Avoid “Partisan Perceptions.” Even lawyers become partisan and non-objective.
7. Set timetables for resolution.
Schedule disputes as you schedule the work. Keep an open issue log. By setting goals and timetables for resolution, you are more likely to focus on the issues and achieve resolution.
8. Involve third-party neutrals to help resolve disputes.
Third-party neutrals can provide independent and objective counsel, focus parties on the dispute, focus parties on their real interests, allow confidential sharing of information, give parties their “day in court,” and remind parties of the transaction costs.
9. Learn from your mistakes.
Train your personnel. Use “post-mortems” to improve your processes. Don’t repeat your mistakes, and learn from the mistakes of others.
10. Create structures and processes to help you reach your goals.
Profile the risk for each new project. Obtain lien or payment releases to identify claims early. Dispute Review Boards can identify and resolve disputes early.

III. Contractual and Extra-Contractual Strategies and Tools for Prompt Dispute Resolution
Because of the highly complex and fluid nature of most construction projects, there is a particular need in the industry for dispute resolution techniques designed to anticipate and avoid disputes as early as possible. One court aptly compared large construction projects to a battlefield:

…except in the middle of a battlefield, nowhere must men coordinate the
movement of other men and all materials in the midst of such chaos and
with such limited certainty of present facts and future occurrences as in a
huge construction project … Even the most painstaking planning
frequently turns out to be mere conjecture, and accommodation to changes
must necessarily be of the rough, quick and ad hoc sort, analogous to everchanging
commands on the battlefield.1

Therefore, project participants should be aware of processes that may be implemented and completed early in the construction process, often resolving issues and disputes on-site. Such project level alternative dispute resolution (ADR) methods are perhaps more “procedural” than other methods, in that they are designed to resolve disputes quickly and without resort to formal adjudication. These processes may include simple cooperative measures between the parties, such as negotiation and partnering, or active involvement by an appointed, neutral third party.

The ADR Revolution
In the 1970’s, Professor Frank E. Sander of Harvard Law School began to write extensively about alternative dispute resolution. His point was that people were dissatisfied with the courts and needed “alternative” means to resolve their disputes. One of his key points was that there should be multiple opportunities or “pathways” for dispute resolution. His suggestion was that these multiple pathways might allow the parties to “fit the forum to the fuss.”

Since the author began practicing law, various methods of ADR have developed increasingly prominent roles as methods of resolving construction disputes. This is due in no small measure to the rising costs of traditional litigation. The construction industry has recognized the benefits of ADR and enthusiastically adopted it as a means for resolving claims.

The Cornell University Law School Legal Information Institute defines ADR as “any method of resolving disputes other than by litigation.” The Institute’s overview identifies arbitration and mediation as the two major forms of ADR, but explains that the term encompasses a number of other dispute resolution mechanisms—including early neutral evaluation and negotiation.2 A simple internet search for further definitions of the term yields similar results and reflects an unsurprising focus on arbitration and mediation  as the “major forms” of ADR.3 This common focus illustrates the extensive mainstream acceptance of mediation and arbitration that has evolved over the past few decades, and it raises the question of whether those two processes continue to be “alternative” in any way.

Standard industry form contracts offered by the American Institute of Architects (AIA) and the Associated General Contractors have incorporated arbitration clauses since the early 1900s. They are now widely used in both private and public construction contracts. Arbitration is generally the most formal method of ADR—and most costly. In arbitration, disputes are typically presented to a panel of either one or three members. One of the key advantages of arbitration is that the members comprising the panel are typically knowledgeable about the construction industry, so there is less need to spend time defining and explaining the basics of things like RFIs and change orders. Like litigation, arbitration involves the discovery process, but it is generally a more streamlined version. And like litigation, the decision reached by the panel is binding on the parties. There are very limited grounds for appealing an arbitration decision. Although arbitration does offer a number of advantages to traditional litigation, it can still be an incredibly complex, expensive, and slow moving way to resolve a dispute. It may involve extensive production and inspection of documents, the retention of expert witnesses, and a lengthy hearing before a panel. These are just a few of the reasons why it is always best to try to facilitate the early resolution of disputes.

Mediation is less formal, less expensive, and less time consuming than arbitration. Although attorneys are generally involved, mediation is most often conducted either before or soon after a lawsuit is filed. A mediation is conducted with the assistance of a neutral third party who is present to assist the parties in reaching a settlement rather than to hand down a ruling. The mediator is usually an attorney, often one who is knowledgeable about construction law. Each party typically presents its argument in a relatively brief opening statement, after which the parties separate and the mediator acts as a go-between. If the parties are able to reach a settlement agreement, they can save the time and money associated with conducting discovery and appearing before an arbitration panel or in a court.

Mediation provisions are common in construction contracts. The parties to a contract often agree to mediate disputes as a condition precedent to the filing of a lawsuit. If a construction contract requires mediation as a condition precedent to filing suit, the defendant can raise the failure to mediate as an affirmative defense to the lawsuit. Although mediation is generally non-binding, which means the agreement is not enforceable until it is memorialized in a formal settlement agreement, binding mediation is an option.

Mediation is an attractive alternative or precursor to arbitration or litigation. The process is shorter, sometimes as short a half-day for simple disputes. However, the parties must keep an open mind during mediation and be willing to acknowledge the strengths of the other side’s position. If either side is unwilling to compromise, the mediation will almost certainly be unsuccessful. It is important to keep the high costs of arbitration and litigation in mind when negotiating toward a settlement. Disputes in which a relatively small amount of money is in dispute are often simply not worth arbitrating or litigating. It is often said that at the conclusion of a successful mediation, both parties walk away a little unhappy. However, if they were to consider the money and time they saved by avoiding litigation, they would probably realize that they were both winners.

Perhaps the simplest and most straightforward dispute resolution technique, negotiation is an option frequently overlooked by parties in the midst of time pressures and flaring tempers. Nonetheless, it can be a valuable tool for resolving disputes without resorting to outside sources. The parties to any construction contract should consider drafting provisions that require some form of negotiation in the event of a disagreement. Negotiation requirements may be casual (e.g., conversations, emails, phone calls), or more formal (e.g., scheduled meetings or presentations), but the final resolution of disputes should always be reduced to writing.

One method for ensuring that negotiation will take place and be successful is to create a contractual dispute resolution “ladder,” in which the parties to the construction contract agree to conduct negotiation in various “steps.” For example, if on-site personnel are unable to negotiate and resolve a dispute at the jobsite level, the dispute is pushed up the hierarchy to more senior staff. Again, only the parties are involved in resolving the dispute, but moving a difficult dispute up the ladder results in it being resolved by the most capable individuals. On the jobsite level, the employees closest to the dispute can often reach a resolution (and are incentivized to resolve the problem before escalation), whereas senior staff may sometimes be necessary for a resolution due to their ability to see the “bigger picture” and to make ultimate decisions. Contractually mandated negotiation also creates a format and timetable for resolution of disputes before the project has even begun, and it removes individual personalities from the equation.

Partnering is another proactive method that construction participants may use to build dispute resolution protections into their relationships. Partnering has been described as “a project and risk management tool that seeks to change attitudes about the relationships between the owner and the contractor to promote mutual rather than bifurcated goals.”4 In some ways, partnering is a process designed to artificially create what used to exist naturally: trust, cooperation and collaborative management. The partnering process involves a “workshop” or retreat, scheduled sometime prior to project commencement, where the key players gather to engage in teambuilding exercises and develop relationships to avoid future conflicts. The underlying concept is that a good contract (which establishes legal rights, remedies and expectations) does not, by itself, create a good working relationship.5

Unlike negotiation, which involves only the parties, partnering is typically guided by a neutral facilitator, whose lack of a vested interest in the project allows for exploration of all contract concerns and partners’ needs in a non-threatening manner.6 Over the course of the retreat, parties identify common project goals to consolidate into a mission statement and plan for success. As the project gets underway and progresses to completion, partnering activities often continue in order to positively reinforce the relationship between the parties.

Dispute Review Boards
One of the most popular third-party neutral processes in the construction industry is the Dispute Review Board. It involves a three-person panel of neutrals and is favored in the industry because of the highly technical nature of construction disputes and the necessity for expert construction professionals in the resolution of disputes.7 The three member panel of neutral experts is typically chosen and approved jointly by the parties prior to the start of construction. This is often accomplished by having each party choose a single member of the board, followed by selection of a third member by that two member panel. After the panel is complete, all parties enter into a third-party agreement setting forth details such as project scope, panelist compensation, responsibilities and succession.8

Dispute review boards are distinguishable from other ADR methods in that they seek “to use a procedure contemporaneous with the development of the conflict itself while also being more responsive to the parties’ underlying problems.”9 One of the strengths of the dispute review board process is that the board will regularly visit the project site and keep track of progress and issues. This engenders familiarity with the ongoing construction, as well as any important developments or issues, and enables the board to make recommendations to resolve conflicts before they intensify into full-blown disputes.10 It also incentivizes the parties to resolve disputes prior to involving the board. One might refer to this as the “highway patrolman” syndrome: Like the motorists who regulate their speed due to the possibility of being stopped, construction project participants may work to resolve disputes between themselves early, rather than air their laundry before the dispute review board.

Standing Neutrals
A standing neutral, sometimes referred to as an “on-site” or “project” neutral, is simply a trusted third party expert selected by the parties at the beginning of their contractual relationship. The standing neutral is to be present during the course of the project (potentially even longer, if the parties have an ongoing business relationship) in order to hear and to resolve disputes. The standing neutral system is a middle ground between dispute review boards and construction settlement panels: A neutral’s presence is available at all times, but at a reduced expense because there is only a single member. Having a single, neutral party on site to resolve disputes and reduces the time and costs required to settle disagreements, usually while the facts are still fresh in the minds of the  parties. According to some, “it practically guarantees that any disputes that develop between contracting parties will be resolved promptly and economically.”11

Early Case Evaluation
Also known as “early neutral evaluation,” early case evaluation is similar to the other neutral third-party options outlined above. It is distinguishable in that it is a process initiated specifically to resolve existing disputes, unlike standing neutrals or dispute review boards (which are established at the start of the project and have a broader potential responsibility). It is more adversarial than the processes already discussed, but it still involves a process by which an independent, neutral third party examines the evidence and listens to the positions of the parties and then provides an honest evaluation. Like standing neutrals and dispute review boards, this evaluation is generally nonbinding, but parties who include early case evaluation provisions in their contracts are free to agree otherwise.

By carefully tailoring the dispute resolution language in their contracts, parties may limit the cost and time necessary to resolve disputes. The avoidance of litigation seems to be the main thrust behind such clauses found in many construction contracts today, but the focus should more appropriately be directed at finding a process that suits the unique needs of the individual parties. This may implicate proactive, “procedural” techniques such as partnering or the appointment of an on-site neutral, or it may only require a tightly-scripted arbitration clause. Alternatively, parties might find greatest satisfaction in one of the other forms of ADR outlined above.

Arbitration and mediation remain useful techniques, even if they are no longer truly “alternative” proceedings. In truth, alternative dispute resolution procedures are infinite. We hope that consideration of the options discussed above will be helpful to devise new and inventive procedures for the resolution of construction disputes in order to “fit the forum to the fuss.”

1 Blake v. Coakley, 431 A.2d 569, 575 (D.C. 1981).
3 Google, for example, defines ADR as “the use of methods such as mediation and arbitration to resolve a dispute instead of litigation.”
4 Kathleen M.J. Harmon, Resolution of Construction Disputes: A Review of Current Methodologies, Leadership and Management in Engineering (October 2003), available online at 10/Articles/Harmon%20-%20Construction%20Disputes.pdf.
5 Mark Appel, Partnering: New Dimensions in Dispute Prevention and Resolution, Arbitration Journal, 48(2), 47-51 (1993), available online at
6 Id.
7 American Arbitration Association, The Construction Industry’s Guide to Dispute Avoidance and Resolution, October 2009, available online at
8 Harmon (2003), supra note 2.
9 Id.; citing Chapman, P.H.J., Worldwide Application of the DRB Method of Dispute Resolution (2001).
10 Id.
11 James P. Groton, The Standing Neutral: A ‘Real Time’ Resolution Procedure that also Can Prevent Disputes, Alternatives to the High Cost of Litigation, published by the International Institute for Conflict Prevention & Resolution, Vol. 27 No.11 (December 2009), available online at /The%20Standing%20Neutral%20from%20Alternatives.pdf.

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