By: Jim Zack, Senior Consultant, Navigant Construction Forum
Despite all the best efforts, claims and disputes are likely to arise on your projects. This article provides keys to help you avoid claims during the dispute phase which starts during and overlaps with the construction phase.
Prompt, effective negotiation helps resolve changes and avoid disputes. Owners and contractors should establish their own hand-picked negotiation team – a permanent team on both sides. The team members should be skilled in analysis, negotiation and problem solving. They should know the project and be able to craft creative solutions. It is very helpful for team members to get to know, understand, respect and trust one another. Building a working relationship increases effectiveness of negotiation teams and continual use of the same teams should increase effectiveness and benefit both the negotiation process and project.
A decision ladder is a parallel organization chart that shows both the owner’s and contractor’s staff with specified authority levels. The decision ladder chart should be provided in writing to all parties and establish a reasonable time that problems can stay at any level on the decision ladder. For example, issues not resolved within 30 days will automatically be elevated to the next step on the ladder. The concept is simple – identify problems, assign a specific set of people by name to resolve these problems, and set a timeframe for problem resolution. Continued failure to resolve issues at a particular level may cause management to change personnel, which helps people focus on the issues to get them resolved quickly.
Dispute Resolution Boards
Some problems are going to arise that cannot be resolved through negotiations. Owners and contractors need to look at their disputes clause for the next step. Typical dispute clauses specify: claim filing with A/E, CM or owner’s representative; failing that an appeal to owner’s senior management or governing board; and failing to reach resolution, appeal to arbitration or litigation.
The problem with this process is that both the owner and contractor lose control of the resolution with this dispute staircase. Control is given to others who may have little or no knowledge of engineering, construction or the project. The final decision authority may rest with a judge or jury who have even less knowledge. Typically, neither owner nor contractor wins, regardless of the outcome.
A great deal of time, money and resources are expended, which add no value to the construction project.
Dispute resolution boards, created in the 1970s, are generally a three-person panel. One member is selected by the owner subject to veto by the contractor; one by the contractor subject to veto by the owner and a third by the first two selected members subject to veto by both owner and contractor. The third person typically sits as chair of the board.
A three-party agreement is executed that includes governing policies, procedures, payments and conflict of interest issues. Typically a board will hear a dispute and render an opinion usually within 30 days. Either side may request an appellate review and the recommendation may be rejected by either side.
The DRB Foundation published a study in 2007 that reported that 2,000+ projects globally, worth U.S. $100 billion have used dispute resolution boards. In the U.S., 58% of the projects reported to be “dispute free” (that is, never held a dispute hearing) and 98.7% of the projects were completed without arbitration or litigation. So, if done properly, dispute resolution boards can save both owners and contractors in time and money.