Pinnell/Busch: Project Management Consultants for the Design & Construction Industry

American Society of Civil Engineers
Civil Engineering Magazine, June 1999
By Steven Pinnell, P.E.

Exhausted by the adversarial approach that is all too common in settling disputes? There is a better way.

Disputes are an inescapable part of the construction process. Inevitably, parties will disagree over the contract terms, what constitutes extra work, and how much additional work should cost. The vast majority of these disputes are settled amicably, but those that are not become claims and end up in arbitration or litigation. Given the quantity of construction performed in the United States and abroad, it's not surprising that there are quite a number of disputes and lawsuits.

Most civil engineers and almost certainly every civil engineering or construction organization will encounter claims, some of which will lead to arbitration or litigation. Being unprepared can result in devastating losses that could have been avoided with better dispute management.

Dispute management is like an insurance policy against catastrophic loss. Contractors and public works agencies must be knowledgeable about disputes and claims. Unpaid extra work and delays can send contractors into bankruptcy, and unexpected change orders or claims can decimate the budgets of public works agencies, facility managers, and developers. Even engineers who design or construct projects for private owners on negotiated construction contracts need to know about claims. Firms as well as individual engineers can suffer damaged reputations, loss of future work, and, in some cases, monetary damages from allegedly defective plans and specifications. Everyone needs to know about disputes, change orders, and claims and how to avoid and resolve them by means of an effective dispute management program (DMP).

One example of what can happen without a DMP occurred several years ago on a $600,000 sewer contract in Arizona. Pinnell/Busch, was awarded $300,000 in an arbitration agreement that cost the two parties more than $200,000 in legal fees, $7,000 in arbitration administration costs, and $50,000 for a three-person arbitration panel meeting for two weeks of hearings. Litigation would have been even more expensive. In another, more complex case, the attorneys' fees alone exceeded $5 million.

How can this lengthy, costly process be avoided? Several approaches have evolved over the years for reducing disputes and litigation. The oldest is arbitration, which is a faster, less expensive alternative to litigation. Another type, mediation, can resolve most claims that would otherwise go to litigation or arbitration.

Partnering, however, offers even greater savings, because it helps avoid claims by shifting attitudes, improving communication, and providing a mechanism for the fair and timely resolution of conflicts. Partnering should be the cornerstone of any DMP.

Partnering is a team-building method employed by the parties involved in a construction project: the owner, the designer, the contractor, the subcontractors, and other stakeholders. The managers of the various parties agree to work together and bring the members of the team together in a preconstruction workshop. Team members prepare a common mission statement, learn and implement procedures for better communication and conflict resolution, and then work together to successfully complete the project.

The first step in developing an effective DMP is to adopt the partnering concept as the keystone of the operation. The parties must get a commitment from top management. Contractors must believe that partnering is the most effective way to ensure prompt, fair payment while preserving business relationships. Project owners must believe partnering will help avoid claims and will lead to a safe, high-quality, economical, and timely project. Finally, the parties must find a capable facilitator, someone who can help them form a unified team with shared goals for successful project completion.

The second step is to create a program that will facilitate partnering and protect everyone from those who don't follow a partnering approach. This requires more effort but less change than adopting partnering – and offers even greater benefits.

Most construction problems, disputes, and claims are a result of poor project management. Project owners may fail to plan adequately, define the project scope, or provide an adequate budget. Designers may fail to negotiate an adequate fee, plan their work, or control their costs and schedules. This can result in design errors, poor drawing coordination, or insufficient time and money for completing the contract documents. Contractors may fail to manage the bid process, prepare adequate schedules, or properly staff the work.

The solution? Train the managers in project management, provide better procedures and systems, and then use the system to set objectives, monitor performance, take corrective action when necessary, and reward success.

The people skills of the project team members are vital as well. Emotions and the perception of facts are sometimes more important in resolving disputes than rational analysis and the facts themselves. Contractors, designers, and owners' representatives need to understand the importance of words and to be reasonably skilled at clear written and oral communication. They should also understand behavioral styles, the origin and resolution of conflict, and negotiation techniques. People skills can be learned through reading, attending workshops, and simple observations.

In addition to the now conventional partnering workshop that takes place at the beginning of a project, intervention partnering provides an opportunity to refocus a project that has gone adrift. A skilled facilitator – someone who understands construction and has the requisite experience and people skills – can do this.

Teamwork is also important in identifying and avoiding potential disputes and in working together to solve problems affecting either the entire project or one or more of the team members. Although a particular problem may directly affect one of the parties (say the mechanical subcontractor), it may be best resolved by a brainstorming session with everyone participating.

Negotiating with the intention of having all parties win involves establishing the criteria for a fair settlement and a rational process for the negotiation itself. The parties examine one another's underlying interests and how the benefits of an agreement can be increased so that all parties come out ahead. Such “win-win negotiating” lets the parties move away from positional bargaining and gamesmanship.

Documenting procedures for record keeping and identifying, tracking, estimating, and negotiating changes will pay immense dividends to both owners and contractors. On troubled projects, good record keeping can avert financial disaster. It will keep a project on track and will eliminate the problems and expense that accompany the preparation of a claim with inefficient records.

To implement effective change order requests and claims, the following are of particular importance:

• Use timescale arrow diagrams to clarify the job logic, trace the critical path, and identify concurrent activities, weather impacts, or space conflicts;
  

• Keep detailed as-built drawings that make it possible to reconstruct what happened and why, from a myriad job records;
  

• Analyze efficiency using a variety of methods, including historical cost data, industry studies, learning curves, and time-and-motion studies to reconstruct the record;
  

• Use a simple but rigorous methodology to ensure that important information is not omitted and to prevent wasting time on superfluous details.

Often, the parties involved require help in the dispute process. "Project standing neutrals" are experienced construction experts who are retained jointly by the contractor and the project owner to assist in avoiding and resolving disputes. A dispute review board (DRB) meets regularly during construction, monitors progress, hears disputes, and recommends settlements. The parties are not forced to accept the board's findings, but they usually do. The DRB's recommendations are admissible in arbitration and litigation, and few arbitration panels or courts are likely to disagree with the recommendations of mutually selected industry experts who were involved in the project and are knowledgeable about the dispute.

Neutral experts function in the same way as a DRB, but they play a more proactive role. Neutral experts use technical expertise both to determine the facts and to craft a solution. A neutral expert may be hired in lieu of a DRB when employing a single individual makes sense on smaller projects. Neutral experts may also be hired by a DRB or intervention partnering facilitator to examine the facts in a dispute and compute a fair settlement.

A mediator is a neutral third party who helps resolve disputes. Mediators are jointly selected and retained and may or may not recommend a solution. Their role is to help the parties develop a settlement, although some mediators are more directive than others. Though not required to settle, the parties usually do so if the mediator is skilled. Neither the information exchanged nor offers of settlement are admissible in subsequent arbitration or litigation. The New York City-based American Arbitration Association, and most experienced construction attorneys, can recommend qualified mediators.

Arbitration has numerous advantages over litigation – speed, economy, and privacy being foremost. Avoiding the possibility of an appeal is an advantage to some, and a disadvantage to others. Recent changes in arbitration procedures and reduced fees have made arbitration even more attractive than litigation. The key to a fair award, of course, is selecting the right arbiter. The American Arbitration Association is the best source of information on arbitration.

Partnering can help avoid most disputes, but it is not always well implemented and sometimes it fails to prevent conflict. Also, some contractors are reluctant to pursue change orders for fear of damaging the partnering process or long-term business relationships. Furthermore, overreliance on partnering while failing to preserve contract rights, or to maintain good records of changes may preclude payment for extra work or, in the case of project owners, lead to payments for unwarranted or inflated claims.

Consequently, a combination of partnering and a comprehensive approach to disputes is essential to a successful project. This comprehensive approach will prevent most contract problems, limit the conflicts that do occur, and resolve disputes that develop. Utilizing an alternative dispute management program will help partnering succeed and ensure the amicable, fair settlement of most disputes. At the very least it will help prepare an effective claim (or defend against an unwarranted claim) and, if necessary, help win in arbitration or litigation.