Introduction to Construction Dispute Resolution The Construction Industry

Introduction to Construction Dispute Resolution The Construction Industry Feniosky Peña-Mora Gilbert W. Winslow Career Development Associate Professor of Information Technology and Project Management MIT Room 1 -253, Phone (617)253 -7142, Fax (617)253 -6324 Email: feniosky@mit. edu Intelligent Engineering Systems Laboratory Center for Construction and Research Education Department of Civil and Environmental Engineering Massachusetts Institute of Technology

Definitions n WHAT • One-time Unique Construction Projects • Over Three Trillion US Dollars of Investment n WHO • Owners, Engineers, Contractors, Suppliers • Different Roles and Objectives n WHY • Large, Complex and Unique Projects Susceptible to Conflicts n HOW • Understanding Organizational Issues and Uncertainties 2 • Defining Roles, Contractual Relationships and Delivery System Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002

LNGT Project Organization BRITISH ENERGY CONGLOMERATE (CLIENT) Construction Management contract for Refinery Complex GERMAN DESIGN CONSTRUCTION HOLDING COMPANY CALIFORNIAN CONSTRUCTION MANAGER (CM) BRITISH DESIGN BUILD (fast-track) CONTRACTOR FOR LNG TANKS (DESIGNER) Formal Sub-contract agreement BID negotiations and TECHNICAL communications during construction Corporate bid and performance bonds for 100% of the work ITALIAN CONTRACTOR FOUNDATIONS AND CIVIL WORKS LNG TANKS (GC-civil) Formal communications and payment request to British firm Letter of intent to form joint venture, assuming 100% responsibility over cost and schedule for portion of work through corporate and personal guarantees VENEZUELAN SUB-CONTRACTOR ABOVE GRADE WORK PACKAGE CIVIL WORKS (SUB-civil) 3 Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002

Project Communication Lines British DESIGNER California CM New York Arbitration Italian GC Job Formal lines of communication Informal lines of communications 4 Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002

Case Study: Important Issues n Are the contractual and communicational relationships favorable to limit conflicts? n Is there anything about the project structure that would give an indication on how this project will handle conflicts? n Does this project have mechanisms to handle uncertainty in this project? n Is there a process by which conflicts on this project will be handled? 5 Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002

Outline Ø Sources of Conflict and Dispute n Organizational Issues • Participants Issues • Project Structure • Process Problems n Project Uncertainty • External Uncertainties • Internal Uncertainties 6 Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002

Sources of Conflict and Dispute n One-time Experience Projects n Correlated Variables: Difference between a Manufacturing Process and a Construction Project n Different Reasons for a Particular Dispute n Need to Identify the Roots of Controversy to Avoid Unnecessary Litigation 7 Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002

Sources of Conflicts Research Author Sources of Conflicts and Disputes in Construction Bristow, 1998 Six Areas: unrealistic expectations; contract documents; communications; lack of team spirit; and changes. Conlin et al. , 1996 Five Areas: payment; performance; delay; negligence; quality; and administration. Heath et al. , 1994 Seven Areas: contract terms; payment; variations; time; nomination; renomination; and information. Hewit, 1991 Six Areas: change of scope; change conditions; delay; disruption; acceleration; and termination. Rhys Jones, 1994 Ten Areas: management; culture; communications; design economics; tendering pressures; law; unrealistic expectations; contracts; and workmanship. Semple et al. , 1996 Four Areas: acceleration; access; weather; and changes Sykes, 1996 Two Areas: misunderstandings; and unpredictability 8 Fenn et al. , 1997 Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002

Hierarchical Sources of Conflicts Peña-Mora, et. al, 2002 9 Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002

Owner-Contractor Objective Alignment n Disagreements Resulting from Incompatible Objectives Contractors’ and owners’ objectives Owners Objectives 10 Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002

Contractors' Objectives n Achieve Profit and other Financial Gains n Satisfy Client and Generate Repeat Business n Manage Cash Flow n Limit Long-term Liability n Develop Employees and Create Satisfaction n Optimize Employment Level 11 Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002

Owners' Objectives n Meet Return on Investment Goal n Minimize Operating and Maintenance Costs n Minimize Project Downtime and Outrages n Achieve High Product Quality n Provide Design Flexibility for Future Demands n Minimize Disruptions to Existing Operations n Avoid Negative Impact on Environment and Community n Reduce Design and Construction Time for a Timely Usage of the Facility 12 n Exceed Customer’s Expectations Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002

Contractors’ and owners’ Objectives n Complete the Project within Budget n Complete the Project within Schedule n Maintain a High Level of Quality n Execute the Project Safely, without Wasted Time or Accidents n Minimize Claims and Litigation 13 Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002

Outline ü Sources of Conflict and Dispute ü Organizational Issues Ø Participants Issues • Project Structure • Process Problems n Project Uncertainty • External Uncertainties • Internal Uncertainties 14 Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002

Major Participants n Owner : Public and Private Owner n Architect/Engineer n General Contractor n Construction Manager 15 Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002

Outline ü Sources of Conflict and Dispute ü Organizational Issues ü Participants Issues Ø Project Structure • Process Problems n Project Uncertainty • External Uncertainties • Internal Uncertainties 16 Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002

Project Structure n Seven major project delivery systems • Traditional Design-Bid-Build (DBB) • Pure or Agency Construction Management (PCM) • Construction Management at Risk (CMR) • Design-Build (D/B) • Turn-Key (TKY) • Design-Build-Operate (DBO) • Build-Operate-Transfer (BOT) 17 Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002

Four Main Delivery Systems: Relationships Between Participants Owner A/E General Contractor C/M Subcontractor Traditional Design-Bid-Build Trade contractor Construction Management at Risk 18 Trade contractor Owner A/E Trade contractor Pure or Agency Construction Management Owner C/M A/E Contractual Relationship Communicational Relationship Introduction to Construction Dispute Resolution Construction Function Sub contractor D/B Entity Design Function Sub contractor Design-Build Internal Relationship Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002

Type of Relationships Among Participants 19 Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002

Traditional Design-Bid-Build Owner A/E General Contractor Subcontractor Contractual Relationship Communicational Relationship 20 Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002

Traditional Design-Bid-Build n Sequential Construction Process n Lump Bids Commonly Adopted, Resulting in Adversarial Relationship between the Owner and the Contractor n Collaborative Relationship between A/E(Chosen on Qualification Basis) and Owner n Different Participants’ Interests: • Owner: Quality and Value Product, Delivery Schedule, Site Safety • Contractor: Profit, Construction Time, Relationships, Reputation 21 • A/E: Profit, Aesthetics, Relationships, Quality, Recognition Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002

Pure Construction Management Owner C/M Trade contractor A/E Trade contractor Contractual Relationship Communicational Relationship 22 Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002

Pure Construction Management n Great Flexibility in the Schedule and for Changes n Market Competition for the Work n Fiduciary Relationship with the Contractor n Small Financial Risks of PCM and High Risk of Loss of Reputation n PCM Generally Paid a Fixed Fee n PCM as Facilitator/Mediator in Conflicts 23 Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002

Construction Management at Risk Owner C/M Trade contractor A/E Trade contractor Contractual Relationship Communicational Relationship 24 Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002

Construction Management at Risk n CM Guaranteeing Maximum Price: GMP n Reduced Owner’s Risk n Half-way between the DBB and the PCM System n Contractual Relationships between CM and Trade Contractors 25 Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002

Design-Build Owner Construction Function Sub contractor D/B Entity Sub contractor Design Function Sub contractor Contractual Relationship Communicational Relationship Internal Relationship 26 Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002

Design-Build n One Contractual Team Responsible for Design and Construction Function n Owners with more Emphasis on Schedule Despite Less Control and More Uncertainty of Cost n Loss of Control Over Design and Flexibility in Changes n Owner with Enough Knowledge about Design and Construction to Establish the Initial Parameters, Review Proposals and Monitor the Process 27 Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002

Outline ü Sources of Conflict and Dispute ü Organizational Issues ü Participants Issues ü Project Structure Ø Process Problems n Project Uncertainty • External Uncertainties • Internal Uncertainties 28 Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002

Process Problems n Process Problems Inherited from the Choice of Project Structure and Contract Type n Distinction between Contract Type and Delivery Process 29 Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002

Contract Types n Lump Sum or Fixed Price Contract • Most Common and Most Adversarial n Cost plus Contract • Risk Shifted to the Owner • Risk of Cost Inflation by the Contractor to Increase Profit n Guaranteed Maximum Price • Cost Reimbursement plus Profit, with a Fixed Ceiling 30 Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002

Outline ü Sources of Conflict and Dispute ü Organizational Issues ü Participants Issues ü Project Structure ü Process Problems ü Project Uncertainty Ø External Uncertainties • Internal Uncertainties 31 Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002

External Uncertainties n Result of External Forces on the Project: Inclement Weather, Political Risk, Acts of God n Some Issues Addressed with Insurance Policies, Contract Clauses or Other Forms of Mitigation n Identify the Type of Uncertainties ahead of Time and Account for Them to Avoid Conflict 32 Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002

Outline ü Sources of Conflict and Dispute ü Organizational Issues ü Participants Issues ü Project Structure ü Process Problems ü Project Uncertainty ü External Uncertainties Ø Internal Uncertainties 33 Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002

Internal Uncertainties n Errors in Design, Unforeseen Site Conditions, Incomplete Definition of Scope n Need for a Proper Monitoring and Control to Reduce the Impact of Internal Uncertainties 34 Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002

Outline ü Sources of Conflict and Dispute ü Organizational Issues ü Participants Issues ü Project Structure ü Process Problems ü Project Uncertainty ü External Uncertainties ü Internal Uncertainties 35 Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002

Conflicts in LNGT Project n Omission of Civil Works Contract between DESIGNER and GC n Misplacement of the Contract between GC and SUB n Cash Flow Problems and Cost Overruns : The SUB invoicing 55% of the Contract to the GC while only 30% is in Place 36 Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002

Remedies and Consequences n DESIGNER’s Takeover of GC’s and SUB’s Work n GC and SUB’s Responsibility For All Costs Going Forward Concerning the Civil Works Package n DESIGNER with Total Control of the Project and GC and SUB Assuming the Cost Risk n Consequences • One Year Delay • Increase in Overhead Cost • Claims for Changed Site Conditions and Design Changes Issued by GC and SUB against DESIGNER • Counterclaims 37 • Arbitration in New York with High Expenses Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002

Summary n Conflict in the Construction Industry Is Inherent of the Characteristics of the Industry. n Project Uncertainties and Sub-optimal Contractual Relationships Are a Major Source of Conflict. n Legal Costs of Dispute Resolution Constitute a Burden for the Industry. n Dispute Avoidance and Resolution Techniques Should Be Implemented to Resolve Conflicts With Time and Cost Savings. 38 Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002

References 39 n [Conlin et al. , 1996] : Conlin, J. , Langford, D. A. , and Kennedy, P. , 1996. The Relationship Between Construction Procurement Strategies and Construction Contract Disputes Proceedings of CIB W 92, North Meets South, pp. 66 -82. Durban, (January). n [Fenn et al. , 1997] : Fenn, Peter, Lowe, David, and Speck Christopher, (1997). Conflict and Dispute in Construction Management and Economics (1997) 15, p. 513 n [Gordon, 1991] : Gordon, Chris. (1991). “Compatibility of Construction Contracting Methods with Projects and Owners” MS Thesis, MIT, Cambridge. n [Howell et al. , 1998] : n [Peña-Mora et al, 2002] : Peña-Mora, F. , Sosa, C. , and Mc. Cone, S. Introduction to Construction Dispute Resolution. Prentice Hall, New Jersey, 2002. n [Porter, 1985] : Porter, M. (1985). Competitive Advantage, Free Press, New York. n [Scott, 1995] : Scott, Donahey M. , (1995). Seeking Harmony. Technique Dispute Resolution Journal. pp. 74 -78. April-June n [Stipanowich, 1996] : Stipanowich, Thomas J. , (1996). Arbitration: Innovation and Evolution in the United States Construction Industry. Wake Forest Law Review Vol. 31 (1) pp. 65 -182. Spring n [Sykes, 1996] : Sykes, John. Claims and Disputes in Construction: Suggestions for their Timely Resolution. Construction Law Journal. Sweet & Maxwell. Vol. 12 (1) pp. 3 -13 Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002