Brief Review of Typical Dispute Prevention and Resolution Best Practices
Summary of a Presentation by James P. Groton
Past President, American College of Construction Lawyers, and Robert A. Rubin
Past President, American College of Construction Lawyers
Good project managers know how to control costs, schedules, quality, and safety. But often, they do not know how to control disputes. A first step in controlling disputes is for owners and project stakeholders to better understand the nature of the dispute cycle: Disputes start with a problem and develop into a difference of opinion, which can escalate to disagreements, disputes, and conflicts that require attorneys and some form of legal action. Managers must realize they have to break this cycle and resolve problems early.
Our goal in this presentation is to describe a range of best practices, problem solving tools, dispute control tools and “real time” dispute resolution techniques that can be used to break this cycle and help avoid and manage disputes on construction projects.
BEST PRACTICES FOR DISPUTE PREVENTION
Front-end Planning. The Construction Industry Institute (CII) operates on the principle that prevention is the best form of conflict resolution and supports several “best practices” that help reduce problems in projects. CII is a consortium of leading owners, contractors, suppliers, and academics interested in improving the constructed project and the capital investment process. Its mission is to improve the business effectiveness of the capital facilities lifecycle, including safety, quality, schedule, cost, security, reliability and operability. CII offers some of the best pre-project planning and prevention best practices and tools for setting up a project to minimize problems down the line. These include:
Project Definition Rating Index (PDRI),
Planning for startup,
Quality management, and
Additional information about these tools is available at www.construction-institute.org.
Project Delivery Method Selection. One of the most important early steps to prevent disputes is the selection of the most appropriate project delivery and management method. The construction industry has developed many different methods for delivering a project, including traditional design-bid-build, cost-plus, cost-plus subject to a guaranteed maximum price, construction manager at-risk, construction
manager as agent, design/build, bridging with design/build, and so forth. The project delivery method must be chosen with care, depending on the nature of the project. An informed owner will choose the appropriate delivery method at the very beginning of the planning process, perhaps before selecting the project team.
Realistic Risk Allocation. Another best practice for dispute prevention is to assign each project risk to the party who is best able to manage, control, and, if necessary, insure against the risk. Realistic risk allocation is crucial. Saddling project members with risks they cannot handle can build resentment, subjecting the project to adversarial relationships and countless potential disputes.
Financial Incentives to Encourage Cooperation. Project participants must have incentives to form alliances and cooperate. There are a number of cost-effective methods that can help save money and encourage people to work as a team. One example is a “bonus pool,” which is divided among all subcontractors (based on their contract amounts), provided they meet defined goals of teamwork and cooperation. The bonus is payable either to everyone or to no one, thus encouraging the participants to support and assist each other by focusing on legitimate project goals and subordinating self-interest to the ultimate benefit of all project participants.
Predicting the Likelihood of Disputes. At the beginning of a project, participants must recognize that disputes and problems can arise even in the best of circumstances and should plan accordingly. CII has developed a tool called the “Disputes Potential Index.” If administered at the beginning of the project, project leaders can take corrective actions in vulnerable areas to minimize the risk of disputes.
Partnering. This is a team-building effort in which the parties establish cooperative working relationships to achieve project goals and resolve potential problems. It can be used for long-term relationships or on a project-specific basis.
PROBLEM SOLVING TOOLS
Negotiation. Negotiation is the time-honored method of discussing problems and resolving them consensually by focusing on the legitimate interests of both parties. The focus is first on getting the problem solved so that the project can move ahead. The focus should be on “First, let’s fix the problem,” rather than “First, let’s fix the blame.”
Step Negotiations. In recent years, construction documents have incorporated step negotiation, a progressive process for dealing with problems. Step negotiation aims to resolve problems at the jobsite level. But, if the jobsite representatives are unable to resolve the issue, it is passed to their immediate superiors, who are not as closely involved with the problem. If they fail, the problem will be passed up to the senior management of both parties. Because of an intermediate manager’s detachment and interest in demonstrating to higher management the intermediate manager’s ability to solve problems, there is a built-in incentive to resolve disputes before they go to the higher level. Step negotiation has proven particularly effective in resolving disputes early and preventing them from escalating.
DISPUTE CONTROL TOOLS
There are a number of techniques for creating a level playing field and an environment that tends to reduce the likelihood of disputes:
Encourage Communication and Open Sharing of Information. If all parties are communicating and sharing the same information about the project, in effect being “all on the same page,” they have the same tools to work with and less chance of misunderstanding each other. Such an approach tends to create trusting relationships.
Geotechnical Baseline Summary Report. Contract and bidding documents typically include the results of a geotechnical investigation. The investigation includes logs with descriptions of the material, the elevation at which water is found, the elevation at which rock is found, and notations about the types of soil and rock encountered. However these reports rarely include interpretive notations to help contractors develop their bids. Where a project may encounter unanticipated geotechnical conditions, it is useful to establish, at the time of contracting, a geotechnical “baseline” of expected underground conditions, from which any changed conditions can be measured, with price adjustments at pre-agreed unit rates.
Engineers who preside over geotechnical investigations use the report to state the conditions that contractors can expect: Obstructions to the pile driver, the number of boulders, the likely elevation at which the piles will rest, the projected inflow of water that will have to be addressed in dewatering the site during construction, and other such information.
This type of geotechnical report, coupled with the site conditions clause, aims to reduce the risk factors in the contractor’s evaluation of the project for bidding. It also results in more uniform bid prices, less exposure to claims involving interpretation of subsurface data, and a transparent non-controversial changes procedure which should foster a climate of openness and candor.
To date, the Geotechnical Baseline Summary Report has not been widely used because geotechnical engineers worry about liability for professional negligence. It is finally gaining greater acceptance because the frequency of claims against engineers who use this device has been considerably less than expected.
Escrowed Bid Documents. In spite of its benefits and successes, the Geotechnical Baseline Summary Report still gives rise to concerns that contractors are making a windfall on projects. Escrowed bid documents were designed to alleviate such mistrust. Because of the likelihood of changes to any construction project and the need to obtain the most reliable pricing for changes, it is often helpful to place the successful bidder’s estimating calculations in escrow. The calculations can then be consulted whenever a dispute arises that requires reference to the original quantity and price calculations. This method also fosters a climate of openness and candor in a project and has proven successful in reducing the likelihood that a claim for compensation will be disputed.
REAL TIME DISPUTE RESOLUTION AT THE JOB SITE
Dispute Review Boards. For real-time dispute resolution at the project site, the traditional approach has been to call on the project’s designer to make rulings on questions of compliance with the contract requirements and workmanship. These decisions, while not binding on the parties, can often help resolve problems in the field promptly. However, a more modern and much more successful alternative is the Dispute Review Board (DRB). Dispute Review Boards emerged in the mid-1970s and have been used in approximately 1,100 projects worldwide (about $79 billion worth of construction).
At the outset of a project, the contractor and owner mutually choose one or three neutral construction experts, who are asked to become generally familiar with the project and its progress, and be available to render advisory decisions promptly on any problems that the parties are unable to resolve themselves. These experts serve for the duration of the project and hold regular meetings at the project site to receive progress updates. If disputes occur, the DRB can convene quickly to hold a hearing and give a non-binding written recommendation. This system works because it is non-threatening and allows parties to retain control of the process. The existence and ready availability of trusted expert neutrals who have been chosen by and have the confidence of the parties, and the knowledge that, if asked, they
will render objective decisions which will administer “a dose of reality” to the parties, has many advantages in encouraging the parties to resolve disputes promptly. This process has enjoyed great success in both preventing disputes and achieving early consensus on virtually every project in which it has been used.
In the 1,100 projects that have used DRBs, participants adopted 98 percent of the boards’ recommendations and ended disputes without mediation, arbitration, or litigation. The cost of a DRB is typically 0.15 percent of the total cost of construction—far less than the cost of resolving any dispute through arbitration or litigation. The existence of a pre-selected neutral agent chosen by and respected by the parties, who is already familiar with the project and its progress, avoids many of the initial problems and delays that are involved in selecting and appointing neutral agents after a controversy has arisen. The ready availability of the neutral agent, the speed with which he or she can render decisions, and particularly the fact that this neutral will hear every dispute which occurs during the life of the relationship, all provide powerful incentives for the parties to deal with each other and the neutral in a timely and frank manner, by discouraging game-playing, dilatory tactics, and the taking of extreme and insupportable positions. In practice, the nature of this process is such that the mere existence of the neutral agent always results in minimizing—and often totally eliminating—the number of disputes that have to be presented. In effect the use of a standing neutral serves not only as a standby dispute resolution technique, but also as a remarkably successful dispute prevention device. Even though some expense is involved in selecting, appointing, orienting, and periodically keeping the neutral informed about the relationship, the costs are relatively minimal, even in those rare cases where the neutral has to be called on to resolve disputes—especially when compared to the potential costs of resolving a dispute in arbitration or litigation.
Two variations of the DRB are the standing arbitrator panel and the standing mediator, where a mediator or one or more arbitrators is designated at the beginning of the project to either mediate or render binding decisions promptly on problems that the parties are unable to resolve themselves.
Designating a standing mediator when the project begins is a rarely-used technique. This is probably because what the parties need during construction is not a facilitator to encourage them to compromise every dispute, but rather an objective expert such as a DRB who can administer a “dose of reality,” a process that is more likely to give the parties a principled basis for resolving disputes. A standing arbitrator is much less successful than a DRB because the binding nature of the arbitration process takes away the ability of the parties to mutually resolve the dispute and almost invariably causes the parties to involve lawyers, thus adding expense, polarizing positions, and escalating adversarial attitudes.
Employing a Project Neutral. On some large, complex, many-phase construction projects involving many different parties over a long period of time, it has been useful to employ a full-time neutral expert in both construction and dispute resolution. His or her role is to continuously monitor the project to make sure that all of its dispute prevention, control, and resolution mechanisms are operating well. If they are not, the project neutral can recommend other techniques that will make it certain that all disputes are successfully resolved.
Designating a Project Counsel. On large projects that may involve complex legal relationships and questions, the project can be well served if all of the parties collectively select and employ an expert construction lawyer who would be the legal advisor for, and represent, the “project” as a whole, not any individual party. The tasks of project counsel would be the following:
Help the parties to select the most appropriate project delivery system,
Assure that all contracts and insurance arrangements on the project are consistent with each other and integrated,
Participate in team building processes,
Work with the parties to design project-wide systems for dispute prevention, control, and resolution, and
Guide the project through the complex legal relationships between the parties.
Project Alliancing. The project is structured to align the commercial interests of all the parties, so that they share risks and rewards equitably. Alliancing provides incentives to the parties to work cooperatively and openly, to perform well—even exceptionally, and to align attitudinal objectives to create mutual commitment, trust, openness, flexibility, and teamwork.
There are many techniques and approaches to preventing, controlling, and resolving disputes. Because problems and potential disputes can occur in many different ways and at different times during a construction relationship, no one size of dispute resolution mechanism fits all problems and disputes. Therefore, at the beginning of a construction relationship, the most successful approach is to acknowledge that problems and disputes will occur, anticipate the kinds of problems and disputes that are most likely to occur, and design a system of techniques, controls, filters, and devices that will ensure the prompt, realistic resolution of disputes before they fester and grow into serious problems. A typical “stepped” approach would be for the parties to design a system that will (1) establish a cooperative project environment, (2) set up controls that will minimize the frequency and severity of problems, and (3) establish real time or jobsite techniques designed to get disputes resolved during construction. In the unlikely event that these techniques do not resolve all problems, provide for a “backstop” combination of mediation and, as the final resort, arbitration before expert construction industry arbitrators.