Steps to avoid the common areas of dispute under a construction contract.

Construction disputes are costly and are often accompanied by lengthy resolution processes which can be stressful and result in additional costs. The main issues experienced by parties to a construction contract which result in disputes and how they can be avoided, are set out hereunder:

1. The Project Scope: The scope of works refers to a description of what the works on the project entails. In the absence of the scope of works, extrinsic evidence is often relied upon to determine what the parties intended the works to include. Furthermore, a project without a properly defined scope of works results in disputes in respect of what constitutes a variation, and what was included in the original scope of works. Where the parties have a Bill of Quantities, reliance is often placed on this to establish what the parties have intended to include in the scope and what was excluded.  Misunderstandings and ambiguity regarding the scope may lead to differing interpretations which lead to delays, cost overruns and strained relationships between the parties.

   The scope of works serves as a comprehensive document that outlines the specific tasks, responsibilities and deliverables required from each party involved, together with the required standards and specifications. A clear and detailed definition of the scope helps to minimise misunderstandings and ambiguities, providing a solid foundation for the execution of the project.
   

   It is recommended that a scope of work document is included in the contract document which properly records the requirements of each party.

2. Basis of costing and terms of payment: The basis of costing refers to how a project is priced, i.e. whether it is re-measurable against a bill of quantities, whether it is lump sum etc. Where both parties have a clear understanding and agreement on the basis of the costing of a project, the methods of measurements in this regard and what are the inclusions and exclusions in the price, the likelihood of a dispute is greatly reduced.                                                                                                                                                                                          The terms of payment refer to the process for a contractor to receive payment. This includes the claim for payment from the Contractor, the time for the Employer or his Agent to review the claim, the submission of invoices and the time period to process payment.

3. Standard form contracts capture the terms of payment clearly, based on industry best practice and the collective experience of multiple experts. It is imperative to understand and properly apply these terms. Often these terms are modified, for example a “pay when paid” clause. Where these changes are made, it is critical to clarify and properly understand the extent of these changes and their precise meaning, to avoid any disputes.

4. Project Schedule: The project time for completion is often disputed. It is important to constantly formulate a project schedule at the commencement of a project and to regularly update progress on the schedule for dissemination to the project stakeholders. The project critical path must be clearly identified and any changes to the critical path through contract claims or variations must be regularly updated and submitted, following the process laid out in the contract.

   If the project schedule is properly formulated, submitted for approval when contract claims are submitted and the process in the contract for extensions of time are properly followed, then disputes in this regard are mitigated. This will also lead to disputes concerning penalties and disputes in the final account relating to preliminary and general costs being avoided.

   The parties will therefore be well advised to pay attention to the clauses in the contract pertaining to the schedule, extension of time and the approval thereof as well as the clauses governing the preliminary costs when claiming extension of time and ensure that they understand these clauses and apply them as intended.

5. Builder’s Lien: In its simplest form, a builder’s lien is the right a contractor acquires over a building or structure which they have constructed and have not received payment for the works. This is a specialised area that is often overlooked but is crucial. Parties should understand what a lien entails and when a builder is entitled to exercise it. Similarly, builders should understand when to invoke a builder’s lien, under what circumstances they apply and when they may be required by certain contracts to waive them.

6. Arrangements for Dispute Resolution: This matter is well documented in standard form contracts.  They become complicated when the parties fail to properly record their intentions or selections on certain dispute resolution aspects in the contract data. Parties should ensure that every option that requires a selection or information in the contract data is properly and correctly captured. In bespoke contracts, the parties should capture a clear and unambiguous dispute resolution process to avoid any ambiguity in the process involved.

In conclusion, it should be added that navigating the complexities of a construction contract requires a thorough understanding of the common areas of dispute and a proactive approach to mitigating potential conflicts. By highlighting the typical sources of contention, such as unclear scope of works, changes in project specifications and payment disputes, parties can take deliberate steps to avoid these pitfalls. Clear and detailed contracts, open communication channels, and a commitment to resolving issues collaboratively, are key elements in preventing disputes. Additionally, regular project updates, well-documented changes and the establishment of a dispute resolution mechanism can significantly contribute to a smoother construction process. It is essential for all parties involved to prioritise transparency, cooperation and adherence to contractual obligations.

Through these measures, stakeholders can foster a positive working environment, enhance project outcomes, and ultimately ensure the success of construction endeavours, while minimising the likelihood of disputes.

Bilaal Dawood

Head: Membership Services