Disputes relating to major global construction projects increased significantly in value to, on average, £32million in 2014 according to Arcadis.
This represents the second consecutive year in which values have increased with the average now reaching £32million, up £12million on 2013. Significantly, the number of projects going into dispute is also expected to rise during 2015, with low margins agreed during the economic downturn and labor shortages in some markets likely to prove a catalyst for disputes.
This year’s report, Global Construction Disputes: The Higher the Stakes, the Bigger the Risk, is Arcadis’ fifth annual study into the duration, value, common causes and methods of resolution of construction disputes across the globe. The report found that construction dispute values were the highest in Asia at £54.5 milllion where values more than doubled, closely followed by the Middle East at £48.8million. However, in the North America and the UK, dispute values dipped to £18.8million and £17.2million respectively.
Meanwhile, the average time taken to resolve disputes rose to 13.2 months, up from just under a year in 2013. Significantly, all areas of the world saw the resolution process take longer with the exception of Asia where the average dispute length took two months less.
While the UK construction market returned to growth last year, the number of British disputes fell marginally from £17.8m in 2013 to £17.2m in 2014. Failure to properly administer contracts or comply with their obligations, as well as poorly drafted or unsubstantiated claims were the most common causes of construction disputes in the UK last year, with many now taking on average two months longer to resolve.
Gary Kitt, head of UK Contract Solutions at Arcadis, said:“It’s encouraging to see a slight dip in the value of UK construction disputes, which is largely due to a greater willingness by parties to compromise before the onset of formal proceedings and UK courts that are actively seeking to control costs.
“However, the figure is exceptionally high when compared to the beginning of the decade when construction disputes in the UK were valued at £4.5m. In particular, for those operating in fixed-price contracts that were secured during the recession, caution is still needed. The recovery of costs and rise in margins will undoubtedly increase the possibility for disputes, especially where clients continue to operate on highly constrained budgets.”
Mike Allen, global leader of Contract Solutions at Arcadis, said:“Right across the world, governments and developers are commissioning large-scale construction programs with levels of investment reaching the tens of billions. These programs are often highly complex and with a combination of tender pricing made during the recession and low availability of resources, disputes are not only much more likely but also potentially more costly. While many of these situations are resolved behind closed doors, the time taken to do so and the expense involved can create huge problems for all parties involved.”
Globally, the most common causes of construction disputes in 2014 were:
1. Failure to properly administer the contract
2. Poorly drafted or incomplete and unsubstantiated claims
3. Errors and/or omissions in the contract document
The transportation sector saw the most disputes arise in 2014, followed by social infrastructure and real estate.
The likelihood of a joint venture (JV) ending in dispute was also reviewed in the report. Arcadis found that, where a JV was in place, almost a third of disputes (31%) were driven by a joint venture related difference. This represents a slight dip from 2013 where instances of a JV dispute were marginally more commonplace.