Construction Disputes Skyrocketed in 2022, Here’s How to Strengthen Your Contracts in 2023
According to Arcadis’ 13th annual Construction Disputes Report, contract errors led the list of reasons for construction disputes in 2022. Since the total value of disputes rose nearly $12.7M in 2022, this also implies contract errors are bigger than ever before. Due to pandemic delays and material shortages, owners are rushing timelines, and general contractors lack the runway to thoroughly vet project plans before construction begins. Will this trend continue in the years to come? How can general contractors slow the increase in disputes? We believe it begins and ends with their contracts.
Why Are GCs Rushing Through Contracts?
Normally, the speed of the contract process inversely follows demand in the industry. If building is slow and jobs are competitive, GCs speed and compromise through the contract process to secure the job. If work is plentiful and GCs can afford to say “No” to a few projects, they’ll spend more time on contract due diligence.
Since the pandemic, we’ve seen demand plummet and we’ve seen it peak. Unfortunately, supply chains haven’t followed suit and are still trying to catch up. As supply chains struggle, material prices and availability are volatile. Add in unforeseen weather conditions (a la Hurricane Hilary), labor shortages and design disagreements to lengthen delays. As projects get delayed, budgets hit their limit, payments slow down, and subcontractors default. With each day a project is off schedule, profits diminish and what started as a supply chain problem swells to legal action to protect margins.
It’s not that contractors should know or predict better; it’s impossible to forecast material prices. But contractors can plan and negotiate better. Contracts can protect builders from most scenarios, even the unpredictable ones. Nowadays, the wisest contractor is the one who has weathered and survived the biggest dispute, but that doesn’t have to be the case.
We can build the collective wisdom of the industry to understand and profile risk appropriately, then write it into construction contracts.
Disputes start with a misalignment at the project level, then get a few degrees further off course with each stakeholder that gets involved. Everyone may have a claim, but at the end of the day no parties will make any money. Informal disputes can be resolved by executives fairly quickly but extreme cases can take a decade to resolve. An average dispute lasts a year and costs millions. That’s just the cost of the dispute, not the payout. In one legal case our Founder worked on, a project team didn’t give the Owner notice according to the contract so the Owner sued for $7M in damages. The GC responded by suing for $3M in delays. It was a $10M lawsuit that benefitted no one.
What a Bulletproof Contract Includes
How do we build more risk awareness and contract intelligence in the construction industry? It starts with all project stakeholders, not just executives and their lawyers, understanding and contributing to contract terms. The primary and optimal use of a contract is not as a weapon in a dispute, but rather a proactive, preventative tool in project planning.
In 2023, all construction contracts need four critical items:
Protection from material price escalation
A solid force majeure clause
A detailed delay framework (what’s permissible, when notice should happen, what costs are covered, etc.)
A project team that reviewed the contract and fully understands the terms they have to uphold.
General contractors have to approach every contract thoughtfully. They can’t be afraid to ask, “Can we talk about how these contract terms affect the price and schedule if the unexpected happens?” By having conversations early, GCs build both a solid contract and solid rapport with Owners for when problems arise. The more alignment and discussion GCs and Owners can have on contract terms, the more respect they’ve built to navigate future challenges.
Beyond the Contract, How Does the Industry Improve?
Why is the construction industry so “prone to litigation?” With a founding team of lawyers, we’ve seen this adversarial culture for decades. As the resources hired and paid to read contracts, we can confirm that contractors want to focus on what they love: building. They’re in a storied industry, where longevity and relationships are valued. They’re eager to get started and don’t appropriately assess, price, and write risk into their contracts. When issues arise and they can’t be worked out human-to-human, emotions kick in. When profit and reputation become involved, it leads to legal action.
Disputes arise from misunderstandings and confusion in regard to project scopes and responsibilities. Contracts can’t prevent all construction disputes, but they can strengthen relationships, improve understanding, and protect profits, all of which can reduce the likelihood of disputes in the first place.
Contracts should create clarity among stakeholders, arming them with knowledge and a realistic grasp on their rights and obligations.
Ready to get clarity on your contract terms, for everyone involved on the project? Demo Document Crunch today.