As explored in Systech’s previous article regarding rise and fall clauses and the management of cost escalation in Australia, costs are increasing in all departments of a construction project. However, there is an additional, unfortunately, common increase that is sometimes only considered when it is too late: relationship breakdown.

Statistics show that, globally, contested costs average 35% of a project’s Capex, whether that is disputing a payment claim, resolving a variation, going to adjudication or taking the matter to court. A study in Western Australia estimated that a range of between 0.5% to 5% of project value is commonly spent in resolving disputes, on top of the original budget, while costs could be as high as 35% of contract value when factoring indirect costs.

Given that the Australian government is planning to spend $255 billion from 2022 to 2026, disputes alone could cost between $1.3 billion to $12.8 billion, based on a 0.5% to 5% range estimate. With the continued inflation increase affecting the market, inflation marked at 5.3% annually, having risen 1.2% in September 2023, the costs of disputes could rise to between $1.4 billion to $13.5 billion. Even if inflation decreases to 3.2% the following year, the range could be between $1.3 billion to $13.2 billion.

The first and primary step to avoiding disputes is recognising their common causes and proactively managing those risks. Early detection of potential disputes is akin to preventive medicine; disputes often have gradual beginnings, offering telltale red flags if we remain vigilant. These signs include neglecting program updates, infrequent progress meetings hindering effective communication, and the failure to provide essential notices like change orders, delays, claims, or defect notices, all pivotal elements. Prompt recognition and proactive measures are the keys to maintaining project harmony and averting conflicts in construction.

This article will delve into the realm of construction dispute avoidance, ensuring an understanding of the multitude of ways that a dispute can be avoided.

Common Causes of Disputes

Procurement
A common source of construction disputes is procurement failure, which represents a critical point in the project's lifecycle where mistakes can have significant repercussions. Procurement failure arises when the acquisition of materials, equipment, or services are mishandled, setting the stage for problems later in the project lifecycle. For example, when materials are not sourced efficiently or are of substandard quality, it can lead to delays in construction, as well as unexpected cost overruns as the project struggles to adapt to these deficiencies. In essence, procurement isn't merely about acquiring what's necessary; it's about acquiring the right items, in the right quantities, at the right time, and with the required quality standards to ensure the smooth progression of the project.

Ambiguous Contract
Disputes can be as much a product of what is not said, as what is explicitly written in a contract. Contract errors, omissions, and discrepancies, which are all too often the result of poorly drafted contracts, unclear terms, or an incorrect assessment of risks, can serve as fertile ground for disagreements to take root. When the terms and conditions of a contract lack the clarity and specificity required for a complex construction project, parties may inadvertently adopt different interpretations of their obligations. This ambiguity can lead to misunderstandings, finger-pointing, and ultimately disputes that can grind the project to a halt or delay completion milestones. To mitigate these issues, it's imperative for all parties involved to invest in the drafting and review of contracts, with meticulous attention to detail and careful risk assessment. By striving for clarity and precision in the contract language, the potential for disputes stemming from contractual issues can be significantly reduced, fostering smoother project execution and healthier working relationships.

Administrative Errors
Administrative errors, often underestimated, can lead to construction disputes by breaching contractual obligations or through improper contract administration. These lapses may include inadequate project oversight, missed timelines, and failure to address deviations from the contract. Unresolved administrative errors result in missed deadlines, costly delays, frustration, increased expenses, and strained relations, potentially fostering mistrust among parties. In essence, diligent administrative management is the backbone of dispute avoidance, as it ensures that all parties remain in sync with their contractual obligations, timelines, and project objectives, ultimately fostering an environment of collaboration rather than confrontation.

Variations
Variations in the scope of work can be a double-edged sword in construction projects. While they often arise as a natural response to evolving project needs or unforeseen challenges, properly managing and documenting these changes is crucial to prevent conflicts. For example, when collaboration between the Project Principal, Superintendent, and Main Contractor breaks down, resulting in the rejection of variations, it can escalate into formal disputes and costly legal battles. Managing variations transparently and documenting changes meticulously is essential for preserving the project's integrity and stakeholder relationships.

Actions to Take to Avoid Disputes

To minimize the risk of disputes, it is crucial to focus on what actions can be taken during the lifetime of the project.

Contract Delivery
Effective project delivery is key to dispute prevention. A crucial element in achieving this is the establishment of robust and clear cost and schedule baselines, forming the foundation from which changes will be assessed. Timely compliance with obligations, including providing notices, ensures on-time and budget-conscious project completion, thereby significantly reducing dispute likelihood. Proactive measures such as preventing procurement failures and minimizing variations contributes to punctual and cost-effective delivery. Scrutinizing project scope, specifications, and drawings, especially in design and build projects, addressing ambiguities to prevent misunderstandings. Consistently updating project management tools like programs, cost, change, and risk management ensures transparency throughout the project lifecycle. Intelligent procurement practices and securing a high-quality supply chain, aligning obligations between main contracts and subcontracts, and vigilantly addressing scope gaps at package interfaces are vital for project success and dispute avoidance.

Adherence to Contract Provisions
Avoiding disputes through careful compliance with contractual provisions is a critical aspect of effective contract administration. Issuing Contract Notices, especially those related to time extensions or compensation, is a key practice in dispute prevention. Promptly issuing these notices is vital to protect your claims entitlements, avoiding potential disputes stemming from missed deadlines. These notices should specify the relevant contract clause and provide all required information, aligning with the contractual framework. Additionally, issuing Early Warning Notices is crucial, as neglecting them can reduce entitlements, or potentially preclude entitlements due to contractual time-bar. Timely issuance of these warnings assists in proactively managing risks and preventing disputes, serving as an essential element in effective contract administration.

Effective Communication
Effective communication is a cornerstone of dispute avoidance in construction projects. Key principles help stakeholders navigate potential pitfalls and maintain harmony. Recording important conversations, events, and instructions in writing promotes clarity but also allows for the consideration and implementation of mitigation measures, reducing the likelihood of disputes arising from misunderstandings. Confirming verbal instructions in writing and using precise language eliminates ambiguity, further contributing to a proactive dispute avoidance strategy. Timely client communication aids issue resolution. Fostering good relationships among parties enhances resolution potential, as positive atmospheres yield solutions. Early issue escalation enables amicable resolutions, leverages relationships and bargaining power for efficient dispute resolution. Prompt responses to subcontractor correspondence reduce misunderstandings. Seeking expert advice and considering correspondence's waiver implications contribute to effective dispute avoidance, facilitating smoother project execution and positive long-term relationships.

Conclusion

In summary, avoiding construction disputes hinges on several key steps. These include understanding each party's obligations and risks, maintaining clear contract documentation, embracing effective project management, fostering open communication and respect, practising rigorous cost and schedule control, managing risks, and ensuring fair dealings between subcontractors and employers. By adopting these measures, construction project stakeholders can significantly reduce the likelihood of disputes, resulting in smoother projects, cost savings, completion on time and stronger working relationships. Construction disputes may be challenging, but with proactive measures and communication, they can often be prevented, leading to more successful project outcomes.