According to Arcadis, the average value of disputes relating to major global construction projects increased significantly in 2014, reaching £32 million.
This is the second year in a row that values have risen, with the average now standing at £32 million, up £12 million from 2013. Significantly, the number of projects that will go to arbitration is expected to rise in 2015, with low margins agreed upon during the economic downturn and labour shortages in some markets likely to be a catalyst for arbitration.
This year’s report, Global Construction Disputes: The Higher the Stakes, the Greater the Risk, is Arcadis’ fifth annual investigation into the duration, value, common causes, and methods of resolution of construction disputes worldwide. According to the report, the highest construction dispute values were found in Asia at £54.5 million, where values more than doubled, followed by the Middle East at £48.8 million. However, in North America and the United Kingdom, dispute values fell to £18.8 million and £17.2 million, respectively.
Meanwhile, the average time to resolve a dispute has increased to 13.2 months[2, up from just under a year in 2013.] With the exception of Asia, where the average dispute length was two months less, all regions of the world saw the resolution process take longer.
While the UK construction market recovered last year, the number of British disputes fell slightly from £17.8 million in 2013 to £17.2 million in 2014. The most common causes of construction disputes in the UK last year were failure to properly administer contracts or comply with their obligations, as well as poorly drafted or unsubstantiated claims, with many now taking on average two months longer to resolve.
“It’s encouraging to see a slight drop 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,” said Gary Kitt, head of UK Contract Solutions at Arcadis.
“However, the figure is unusually high when compared to the start of the decade, when construction disputes in the UK were valued at £4.5 million.” Caution is still required, particularly for those operating in fixed-price contracts secured during the recession. The recovery of costs and increase in margins will undoubtedly increase the possibility of disputes, particularly where clients continue to operate on extremely tight budgets.”
“Right across the world, governments and developers are commissioning large-scale construction programmes with levels of investment reaching the tens of billions,” said Mike Allen, global leader of Contract Solutions at Arcadis. These programmes are frequently highly complex, and with a combination of tender pricing made during the recession and limited resource availability, disputes are not only more likely but also potentially more costly. While many of these situations are resolved behind closed doors, the time and expense involved can cause major issues for all parties involved.”
In 2014, the following were the most common causes of construction disputes worldwide:
- Failure to administer the contract properly
- Claims that are poorly written, incomplete, or unsubstantiated
- Contract document errors and/or omissions
In 2014, the transportation sector saw the most disputes, followed by social infrastructure and real estate.
The report also examined the likelihood of a joint venture (JV) ending in a dispute. Arcadis discovered that where a JV was in place, nearly a third of the disputes (31%) were caused by a joint venture-related difference. This represents a slight decrease from 2013, when JV disputes were slightly more common.