Research identifies the main causes of disputes

After the initial hiatus of the pandemic, the UK construction industry appears to be rebounding strongly. Chronic housing undersupply, regional economic rebalancing and infrastructure upgrades will be powerful drivers as we exploit new technologies, build climate resilience and advance towards carbon net zero.

However, the rise in construction output comes amid heightened uncertainty. Skills shortages, supply bottlenecks, cost inflation and covid-19 multiply the risks facing major capital projects. Claims and disputes are already exacting a heavy toll, as HKA’s Crux Insight 2021 analysis shows.

The underlying causes are clear. We must mitigate these risks to avoid even more costly blow-outs and worsening delays.

Comparison with other countries

UK projects are haemorrhaging cash more heavily than those in other countries, according to our analysis of 1,400 contracts worldwide. UK claims amounted to more than half of planned project costs – 55.2%, on average, compared with 46.3% globally.

Owners and employers all too often enter into contracts before the scope is fully defined for their desired outcomes

Delays faced by the 317 UK projects analysed – which had a combined capital expenditure of $125bn – were no less significant. On average, contractors claimed an extra 13 months in time extensions, prolonging programmes by 68.4% – which is 4% worse than the European average.

Buildings formed the largest category in our dataset for Europe, where “incorrect design” is now the top cause of claims and disputes – overtaking change of scope, the number-one factor in Crux global rankings. Poor workmanship and skills shortages were also more prevalent, confirming trends increasingly evident to our consultants working across the continent.

Key underlying factors in disputes

Labour shortages: Shortages of people with the right qualifications, skills and experience are causing difficulties from design and planning, through the construction phase and across multiple sectors, from buildings to renewables.

The design skills shortage is partly due to a drop in trainees as far back as the 2008 crash. Brexit has exacerbated the gap, which will continue to widen as workload rises unless new recruits join the workforce in greater numbers.

Design complexities: Many design-related claims are even deeper rooted. Projects are set up as if design is a product to be taken off the shelf, finished and guaranteed, ready for use.

Failure to acknowledge the complexity of design and how it is developed, particularly on larger projects, sets the scene for inevitable design clashes, changes and variations.

The supply chain crisis: As well as holding up progress, ongoing supply chain disruption is also fuelling design-centric claims and disputes over poor specialist workmanship.

This challenge can be compounded when materials are substituted – with or without agreement – forcing changes in working practices.

Rectifying the resultant problems after installation tends to be costly with long delays, which grow with lengthening supply lead times.

The UK’s high-risk, low-margin model: Many of the most persistent causes of claims and disputes – including design shortcomings – are embedded in the structural fault lines of the UK industry’s high-risk, low-margin operating model.

Owners and employers all too often enter into contracts before the scope is fully defined for their desired outcomes. This may be due to planning or funding pressures, or to changing circumstances and priorities giving rise to legitimate changes that require management.

Onerous contract terms provide a perverse incentive to take a harder view on change orders, triggering disputes over scope

Contractors may bid over-aggressively and take an overly optimistic view of outcomes. Onerous contract terms also provide a perverse incentive to take a harder view on change orders, triggering disputes over scope. 

This adversarial culture, still favoured by many employers, breeds more claims and more contentious disputes.

Protecting against risk

Short of a strategic reset in the industry’s contracting culture, practical measures can mitigate claims and disputes – and make the difference between success and failure on projects in an industry operating on fine margins.

Gaps in scope usually result in a blame game within the design team or between consultants and contractors. Time is then wasted discussing a potential claim without a rigorous assessment of the technical grounds.

Project promoters need to provider greater time and resources to develop scope, mature designs, evaluate procurement options and involve contractors earlier.

Investment in design at earlier stages and maintaining continuity of design teams might add cost but can save the effects of errors and omissions further down the line

Project outcomes would also be enhanced if, during pre-construction, a more interactive design process involved all stakeholders to ensure its fitness for purpose. A sound BIM model managed by competent operators – and used by all of the project team – allows scope changes to be incorporated and assessed more easily.

Similarly, investment in design at earlier stages and maintaining continuity of design teams might add cost but can save the effects of errors and omissions further down the line.

Following covid, the harsh contractual consequences for some contractors underscore the need to reassess force majeure provisions. Resilience to logistical disruption and extreme weather events warrants similar attention.

Over the next 12 months a rising workload must be delivered in a more volatile market where many companies – from small specialist suppliers to major contractors – are weaker post covid. Financial stress and the danger of insolvency tend to drive more aggressive behaviour.

Only by recognising the risks, and taking practical steps to mitigate them, can we begin to curb the colossal losses of money and time on major building projects.

Toby Hunt is a partner at disputes and risk consultant HKA and a sponsor of CRUX Insight 2021; Helen Collie is a forensic technical expert