6 Methods For Alternate Dispute Resolution On Construction Projects
Construction disputes are fairly common and vary in nature, size and complexity. When not resolved in a timely manner, financial, labor, time and opportunity costs add up.
Construction claims can be defined as a request by either party, usually the contractor, for compensation of damages caused by the failure of the other party to fulfill their obligations as specified in the contract.
Over the past two decades, the construction industry has made progress in developing more efficient methods of dispute prevention and resolution. A few common methods include negotiation, dispute review boards, mediation and arbitration.
"A more effective approach would be a dispute resolution system that emphasizes prevention in addition to resolution," Baker Tilly Firm Director Tony Ollmann said. "It also includes the flexibility to determine the most appropriate alternate dispute resolution method, or combination of methods, for each dispute in an effort to find the least invasive procedure that has a strong likelihood of success."
Ollmann identified six bullet points to consider when creating a dispute resolution system.
1. Dispute Prevention
This is the first layer of defense against unresolved disputes and should be an integral part of every construction project. Achieving this step involves risk assessment and allocation, setting common project goals and drafting contract clauses incorporating these goals into the contract.
2. Read The Contract
The contract should outline the steps and procedures to follow in order to protect rights during a dispute. Not following the contract terms could seriously jeopardize the ability to recover damages associated with the claim.
3. Entitlement And Damage
To be on the positive side of a claim, project owners must prove contractual entitlement and incur actual damages.
"Without proving you have incurred both of these items, you might have a claim, but not incur any damage," Ollmann said. "It is essential that both of these items have been fully documented in order to have a successful recovery on a claim."
4. Document Actual Damages
It is the claimant’s responsibility to gather and generate proof of the actual damage incurred. Evidence can be gathered through photos, videos and segregation of the claim cost. Claims need to be completely transparent from all other transactions incurred during the normal course of business on the project.
5. Document For Litigation, But Attempt Settlement
"We do not advocate litigation, but every claim needs to be documented, generated and presented as if it was being presented to court," Ollmann said.
Negotiation of a settlement also should be done with an open and realistic expectation of the final recovery of the claim. Claimants do not have to cut a claim in half, but they do need to understand its weaknesses. This helps legal teams identify and resolve disputes in a timely and amicable manner.
6. Insurance Claims
Unexpected rain, fires, hurricanes and other disasters impact construction schedules and create an environment where unexpected costs impact the project. In these cases, owners and contractors need to work together to file a claim that accurately documents the damage.
Since the builder’s all-risk policy is held by either party, an environment of open dialogue and communication is essential to document and gauge the cost impact of an event like this, and assist the project to full recovery. Under an insurance policy, property owners have a duty to mitigate the effect of the insurable event.
These six points are not intended to be a solution to every problem, but rather create the starting point for any construction project involved in a dispute.
"We promote contract dispute prevention and resolution," Ollmann said. "In order for that system to work, it must be a flexible process tailored to both parties and based on the best practices of dispute resolution prevention and resolution techniques."
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