What to do when construction projects go wrong?

Businesses embark on construction projects for a number of reasons, including fitting out a new unit and undertaking renovations to commercial premises. Building projects can be expensive, complicated and time critical. They may also be impacted by factors outside the control of the business or the building contractor. It is therefore common for disputes to arise on construction projects.

Common disputes include delay, defective work, and disputes about payment (including disputes about the value of the work completed). This article addresses several of the key issues to consider when such a dispute arises, and provides some guidance on how to navigate the process.

Assess the importance of the dispute

It is important to assess the importance of any dispute and to understand your leverage. This will allow you to make decisions that fit with your objectives and that align with the commercial and practical reality.

An obvious starting place is the financial impact the dispute will potentially have. The fact that a dispute has arisen often means that either the employer or the contractor will suffer some financial loss. This may mean that the contractor needs to undertake additional work that it will not be paid for. Alternatively, it could mean that the employer needs to incur additional costs that it did not budget for.

The impact on the parties’ cash-flows is often a key consideration in any construction dispute. Many contractors operate on thin margins, and if they are pushed too hard to undertake additional work without payment, this can lead to their insolvency, or their abandonment of the project. Similarly, a business undertaking a construction project may be relying on incoming revenue to finance the works on an ongoing basis, and an unexpected rise in costs in the short term can disrupt its overall business activities.

Another important consideration is resourcing. Disputes require time and effort to resolve. This inevitably diverts the parties’ attention and resources away from their other responsibilities and activities.

You should consider how much management time is likely to be absorbed in dealing with a dispute. In addition, you should consider the extent to which you will require third party input/expertise, whether from a construction professional (such as a surveyor) or a lawyer.

Finally, you should consider the impact that the dispute could have on the future of the project. If it is likely that the dispute will result in you needing to hire a replacement contractor, how easy is that likely to be, and what will the additional cost be?

Understand your position

Construction disputes often leave parties with a series of less-than-ideal options in respect of which they have to choose the least worst. You therefore need to have sufficient information available to inform your decision-making, and to identify and understand the different options available to you.

At the outset of disputes, parties will generally need more information about the events that have led to the dispute in order to decide how to respond, and to understand what evidence might be available if the dispute escalates. Gathering the key documents and other evidence will usually involve a review of your own records, in addition to requesting documents from third parties, including any construction professional engaged on your behalf.

If the dispute relates to defective work, make sure that the issues are well-documented (by taking photographs, site-notes, etc.), and consider engaging an independent expert to prepare a report, which you can later refer to and rely on. If the dispute relates to the valuation of the works, you should seek input from the project quantity surveyor, or consider hiring one to review the account.

Deal with the dispute

Often the most cost-effective way of dealing with construction disputes is through commercial negotiation. However, if this cannot be achieved then parties have a number of options available to them, including litigation through the courts, and other formal dispute resolution processes, such as mediation. Parties to construction projects will often also have the right to refer disputes to adjudication, which is an expedited dispute resolution process, and which can often produce a decision which allows the parties to get on with the project, whilst not finally determining matters.

This article was featured in this month's Business Connexions issue.