Caryn Fuller and Daniel Kwon | HKA
This article is an extract from Lexology In-Depth: Construction Disputes – Edition 5. Click here for the full guide.
Claims and disputes in the engineering and construction sectors are often not incidental disruptions – they can create significant obstacles that threaten to derail even the most meticulously planned projects. These disruptions can amplify costs, jeopardise profitability and challenge organisational stability. To explain the impact of project-related claims and disputes, HKA publishes its annual CRUX Insight report. Now in its seventh year, the 2024 CRUX Insight report demonstrates HKA’s commitment to sharing lessons with clients around the world so our industry can proactively manage risk on complex projects. Drawing on years of real-world experience and detailed analysis of project outcomes, the report shares valuable lessons on what drives on-time, on-budget delivery – and the key causation factors behind delays and cost overruns.
Changing the narrative: the 2024 CRUX Insight report
The 2024 CRUX Insight report contains data that helps address the following key questions:
- What causes claims and disputes on infrastructure and capital projects?
- How do the claims and disputes impact those projects?
- How can the answers to the first two questions help the industry mitigate risk?
This year’s report differs from previous years in two ways. First, it focuses more on preventive measures, including practical and effective recommendations for reducing the frequency and intensity of disputes and resolving those that occur. Second, the report uses an econometric analysis to examine the relationships between macroeconomic conditions and some of the causes of project challenges.
The 2024 CRUX Insight report draws on the expert analysis of 2,002 projects that HKA has been involved with across 107 countries, with a combined capital expenditure (CapEx) of US$2.25 trillion, including a substantial number of megaprojects with an average CapEx of US$1.28 billion. Given global economic conditions, the impacts of disputes on those projects were expectedly substantial.
The total value of the disputed sums across all 2,002 projects rose to US$84.40 billion in 2024, while the total combined length of extensions requested by contractors reached almost a millennium (ie, 994 years). On average, additional costs incurred because of claims or disputes amounted to 33.2 per cent of project budgeted CapEx, while planned schedules were exceeded by an average of 16 months (or 66.5 per cent).
In the Americas, the report draws on the analysis of 662 projects with an average CapEx of US$638 million across 20 countries. Almost half of those projects were buildings, while transportation infrastructure and power and utility projects each accounted for less than one-fifth of those analysed. The average cost and time overruns were slightly lower than the global average. Additional costs incurred because of claims or disputes in the Americas amounted to 31.7 per cent of budgeted CapEx versus 34.2 per cent for the rest of the world. Contractors’ claims to extend construction time were only 57.1 per cent of planned schedules in the Americas compared to 71.2 per cent for the rest of the world. Of the Americas projects, 490 were based in the United States, with an average CapEx of US$583 million. Just over half (52.7 per cent) of those were buildings, 16.5 per cent were transportation infrastructure projects and 15.9 per cent were power and utilities projects.
Each project included in the 2024 CRUX Insight report’s dataset – globally and in the Americas – is one in which HKA was involved and in which at least one claim or dispute arose. The report’s data (aside from the econometric data) is based on information submitted by HKA’s worldwide team of consultants via digital questionnaires. The dataset, originating in 2016, continues to grow with informational updates and renewed analysis. Before being summarised into an annual report, current data is shared with HKA’s CRUX Experts global staff for further evaluation and contextual analysis through regional panel discussions. Finally, the data is compiled and peer-reviewed before publication in the report.
Primary causes for claims and disputes
The 2024 CRUX Insight report identifies five primary causes for claims and disputes in engineering and construction projects. The most prevalent is change in scope, followed by three design-related failings – incorrect design, late design information and incomplete design – and then failure in contract management or administration.
HKA’s analysis also found that these same problems tend to recur across years, sectors and international borders and that clusters of interrelated causes are associated with many of the challenges facing infrastructure and capital projects:
- contract-related conflicts;
- speed to build; and
- human capital.
These impact between 43 per cent and 50 per cent of global projects – and even more in some regions. In the rest of this chapter, we explore each challenge further.
Contract-related conflicts
Overview
Contract disputes – usually related to contract formation or terms – affect between 36 per cent and 68 per cent of capital projects across different sectors and regions, and over 43 per cent of projects worldwide. They impact 48.3 per cent of megaprojects globally and 39.2 per cent of non-megaprojects.
These conflicts generally include interrelated issues such as contract management or administration, cash flow and payment, contract interpretation, bid and tender errors, inaccurate estimates, breaches of contract, ambiguous drafting, force majeure, and termination. In the United States, contract management or administrative failures affect 14.1 per cent of projects, while cash flow and payment issues, contract interpretation issues, and spurious claims each affect over 11 per cent of projects.
While these disputes originated over contractual matters, they are often driven by underlying economic factors. The financial repercussions of global events, for example, may reverberate across construction projects, triggering difficulties for stakeholders and contractual disagreements. Geopolitical risks and supply chain disruptions may compel parties to stretch contractual provisions to mitigate risk, reduce potential legal exposure, and meet their own cost and time requirements as opposed to those of the project. For example, contracts may also impose risks on parties that can be challenging to mitigate or control with risk management measures, but that do manifest during project deliveries. Those parties may then offer questionable interpretations (or, at the very least, interpretations unanticipated by stakeholders) of contracts to recover time and costs.
Even when unexpected issues are not to blame, contractual disputes may arise. Poor contract management or administration can contribute to increased dispute risk in many ways, including failure to advise senior internal stakeholders. Complications such as pursuing flawed dispute strategies, heightened emotions and management lapses can accumulate, leading to potential distrust among the parties and delays. This can result in a situation in which an owner’s revenue, lost due to late completion, may surpass the damages stemming from responding to or working with the contractor to resolve its complaints.
Effective solutions to contract-related conflicts
Contractual disputes can happen despite how proactive parties are when negotiating their contracts. Parties can, however, try to pre-empt or limit disputes by collaboratively managing their contracts in good faith and with an eye toward pragmatic solutions.
Risk management
Risk is a fact of life in engineering and construction contracts. Foreseeable and unforeseeable risks exist throughout a project, from contract drafting to successful completion. Megaprojects, which often span 10–15 years from start to finish (when including their funding and design phases), offer an extended time frame during which potential risks may emerge.
Improved risk management typically begins with thoughtful contract negotiation and drafting. To achieve the best possible outcomes and limit future disputes or delays, consultants and project teams should consider informing contract drafters of existing conditions and related circumstances.
Contract drafters might also consider thinking beyond routine challenges and vulnerabilities to include unpredictable events in their analyses. These unpredictable occurrences may have major effects, especially given the increasingly interconnected global risk landscape in which construction is planned, completed and disputed. While tackling all the unknowns in contract formation is impossible, drafters may want to address at least some uncertainties.
Misallocation of risk can often plague contractual disputes. Owners sometimes transfer disproportionate risks to contractors, including challenges beyond contractors’ control. Such risk allocation can inflate contingency pricing, stifle competition and, even sometimes, lead contractors to prioritise claims and disputes over advancing project progress.
Owners can be resistant to adopting shared contingency pricing mechanisms, but their inclusion could reduce the risk of future cost claims. Even when risks are not shared and instead rest solely on contractors, owners who cut contingency price increases during contract negotiations may face more cost claims as projects progress.
Proactive employers
As mentioned previously, economic concerns and worldwide political tensions can generate substantial repercussions in balancing risk. The 2024 CRUX Insight report suggests owners attempt to neutralise risk with negotiations as part of the tendering process. For example, project-neutral treatment can offset inflation risks. That is, in certain situations, inflation may be managed by treating it as an owner or project risk and including methods for measuring and managing risk in the contract. By removing cost increases as a source of disputes, this strategy may limit the uncertain financial pressures contractors often face, including removing cost escalation as a trigger for disputes.
Project governance
Decision-making that spans multiple layers of management can often be inefficient or misunderstood, and the engineering and construction contexts are no different. When project managers are required to report to a board of directors (or parent company in another country) for approval, or when owners’ representatives do not have the authority to issue variation instructions, disputes may arise. In such instances, contractors may decide, or be contractually required, to proceed with work before receiving the necessary approvals, or they risk delays, leading to future claims or disputes. Effective project governance processes and procedures can go a long way toward preventing disputes created by parties having to consult with multiple layers of management before acting.
Dispute resolution
Dispute resolution procedures can be effective when they are implemented from the start, with forethought given to proactively eliminating areas of dispute within the process itself. For example, by identifying the adjudicator or arbitrator in their contract, the parties may avoid a dispute regarding that issue down the road.
Where appropriate, establishing a dispute resolution board can be another productive dispute resolution tool. So, too, can pre-contract ‘war gaming’ – a form of role play that simulates project conflicts and can proactively identify pitfalls that may reduce costs in the long run. Parties may also turn to early neutral evaluations at the first signs of conflict. While the results are typically nonbinding, the process can inform the parties of likely results if they were to pursue a formal dispute, once again potentially saving time and money.
Collaboration
The scale and complexity of modern megaprojects often require greater collaboration among the parties. In some parts of the world, alliance contracting has been effective in encouraging cooperation and incentivising parties to work together toward a shared goal. It often comes in two forms: (1) under true alliancing, both reward and risk are shared by all parties under a single contract; and (2) in a two-party arrangement, an alliance overlay, including incentives and methods for cooperation, is added to a contract.
While alliance contracting is uncommon in the United States, other strategies have seen some success. Collaboration clauses are increasingly included in contracts, often leading to greater team integration, more teamwork and joint problem resolution. Project owners in certain situations may be able to avoid surprises later in construction that could give rise to contractual disputes by engaging contractors earlier to validate designs, collaborate on ‘de-risking’ and pursue development of detailed cost estimates. Further, by engaging contractors before the main contracts are drafted and promoting detailed cost estimates along with improved collaboration, owners may be able to adjust project scopes to meet budgetary and scheduling requirements.
Speed to build
Overview
While the urge to build quickly – minimising upfront costs and potential claims – may appear beneficial, it can also lead to design-related failures. Decision-making based on urgency can result in design complications, increased costs and project disruptions.
Design is typically a time-consuming, decision-driven and iterative process. Control of that time is frequently at the centre of speed-to-build/design failure disputes. Properly allocating that control can help avoid and address conflict.
Almost half of the global projects (47.6 per cent) and 42.7 per cent of those in the Americas studied as part of the 2024 CRUX Insight report were affected by design challenges or speed-to-build concerns. Design-affected projects globally faced average time extensions of 63.5 per cent. In the United States, 17.8 per cent of projects faced incomplete designs, 17.3 per cent faced incorrect designs and 16.7 per cent faced late-issued design information.
Design failures are often linked to changes in scope, the most prevalent cause of disputes or claims globally (36.9 per cent of projects). In the United States, changes in scope were responsible for claims and/or disputes in 25.5 per cent of projects.
Incentives and motivations
Frequently, the incentive fuelling a speed-to-build mentality is a simple yet sound one: revenue. When the value of the potential revenue stream is significant, cost overruns can be viewed as a lesser priority. The goal in many instances – obtaining the revenue stream as quickly as possible – can adversely affect project timelines and costs.
For example, with oil and gas projects, as well as with industrial process plants (among other projects), the motivation may be to begin production as soon as possible after a construction contract is signed. It should come as no surprise, then, that, according to the 2024 CRUX Insight report, costs claimed on resources and energy projects typically approached a third of budgeted CapEx (31.7 per cent) and more than half (51.9 per cent) for industrial and manufacturing plants. Ironically, despite time frequently being of the essence in these projects, overruns pushed schedules in those industries well past their original end dates by 64 per cent and 69 per cent, respectively.
Building and transportation infrastructure projects can be similarly shaped by the drive to recoup project costs through revenue from rental properties, sales, tolls or passenger fares. Responsible owners, both private and public, are often driven to provide services for the greater good to quickly address larger societal issues.
Notably, as the artificial intelligence-driven demand for computing power drives the construction of private data centres, speed-to-build concerns may plague their design and construction. The US Census Bureau began publishing monthly private data centre construction spending in July 2024 and reported a 60 per cent increase in investment through the first eight months of 2024 above 2023 levels. As private data centres generally face significant speed-to-build pressures, anticipated concerns and their accompanying solutions may be applicable in other contexts.
Unintended consequences
Parties often attempt to enable earlier commencement of work by shortening the duration of design phases, or they may opt to expedite completion by limiting site investigations when design development runs concurrently with procurement and construction. The potential race to begin and forge ahead despite the potential repercussions could alter underlying risks and responsibilities in projects of all sizes and types. Sometimes, contractors introduce additional complications by short-cutting project commissioning, start-up and verification processes. In addition, a contractor may allow time for its own self-performed work by deducting time for follow-on subcontractors.
Issues can arise from an immature front-end engineering design (FEED) and the potential resulting detailed design changes. The key takeaway is that projects may not always allow sufficient time for preliminary design development and decision-making by the owner. The more design-related decisions made post-contract, the greater the potential for conflict and disruption, which may ultimately force contractors to face unexpected obstacles, leading to further costs and delays.
A question of (contractual) form
Design-related failures are generally not avoided or resolved by contract forms. Like other contributors to disputes and claims, they usually stem from the allocation of risk, and managing that risk through a contract is unlikely to be an effective solution.
Design disputes often arise when owners delegate design responsibilities to the contractor or other party without clearly defining or allocating these responsibilities. Such failures can also occur when the contractor or other party moves through the design phase too quickly without following through on quality control.
Replicating a design element to save time – rather than creating an original – can result in delays and disputes that negate any time savings. Larger projects, in particular, may require precise, tailored designs for optimal safety. Both safety failures and the increased costs of replication, as opposed to site-specific design, can trigger disputes.
Effective solutions to speed-to-build conflicts
Owners and contractors alike can take steps internally and externally to speed project completion. Parties may attempt various strategies in the pursuit of time savings, including those discussed in this list. These strategies all generally begin with keeping speed to completion as a primary objective for all project participants and focusing the efforts of the entire project team on this goal.
A smarter pace
‘Go slow to go fast’ can be an effective strategy for preventing speed-to-build conflicts. Projects are more likely to finish on schedule and within budget when designs are finalised early in the process. Investing time and money in FEED development may also lead to fewer design changes, assuming the parties are willing to go slow out of the gate. At the same time, the parties would be wise to be realistic and upfront about contractors’ abilities to stay on schedule and address risks.
Early contractor involvement
Early contractor involvement can be an efficient way to stress-test designs and avoid conflicts. By integrating contractor expertise in the initial stages, cost estimation may improve, and the early identification of challenges could lead to more effective risk management. It is also important that parties be aware that different contracts allocate roles and responsibilities differently. While traditional design-bid-build contracts tend to preserve ownership control, certain design-build contracts may delegate design responsibilities to contractors, prompting owners’ contract drafting representatives to consider including an incentive structure for contractors.
Standardisation
Common elements may exist across many large projects. While projects may be unique in myriad ways, they can also include certain repeatable elements. Off-the-shelf components may save both time and expense in the design and procurement phases, but only in the case of having a mature design. Exploring the effectiveness of standard components unaccounted for or untested at the beginning of projects may actually increase rather than reduce disputes.
Management
Regardless of location or industry, large projects normally benefit from experienced management. Speed-to-build and design failures suggest the need for managers with multidisciplinary skills who can establish strategic priorities and coordinate efforts among stakeholders, so targets are more likely to be met efficiently and effectively.
Supply chains
Speed to build typically relies on supply chains and their capacity. Sometimes, geopolitical factors can interfere with supply chains, leading to project delays and causing suppliers, owners and contractors to experience difficulty securing the supplies required for projects to stay on schedule and within budget. Although they may struggle to build completely bulletproof supply chains, suppliers may have an opportunity to incrementally harden their supply chains by enhancing their own capabilities. They could, for example, invest in improving their processes and the skills of their workforce.
The business case for these internal investments seems straightforward – the more ‘hardened’ the supply chain, the higher the likelihood of future contracts from parties who benefited previously from that supply chain. Collective efforts among suppliers, encouraged by owners and project managers, may reduce delivery time and costs. By working together, suppliers can develop new scheduling methods, delivery strategies and more, doing their share to avoid speed-to-build–based disputes and claims.
Human capital
Overview
Both the quality and quantity of workers can contribute to claims and disputes. While the US construction industry saw its employment rise to 8.3 million in July 2024, it must still navigate widespread talent shortages. A seemingly ongoing shortage of skilled and non-skilled workers, as well as a mismatch between skills available versus skills in demand, can challenge timely and on-budget project completions. Other considerations include subcontractor mismanagement, inadequate supervision and operational deficiencies.
Across all regions and sectors, these human capital complications affected over 40 per cent of projects, while 51.5 per cent of projects in the Americas were affected. In the United States, specifically, workmanship deficiencies caused disputes or claims on 20.8 per cent of projects, affecting 102 projects with a total CapEx of US$896.66 million. Poor management of subcontractors, suppliers or their interfaces affected 18.2 per cent of projects, while operational performance affected 14.7 per cent of projects. Skill level and labour shortages were less of an issue, as skill level or experience affected 9.8 per cent of projects, while a shortage of skilled and non-skilled labour affected 7.1 per cent of projects.
US construction firms appear to struggle to fill both salaried and hourly craft positions. In a 2023 survey by the Associated General Contractors of America, while 70 per cent of respondents expected adding to their company headcounts in 2024, only 7 per cent of open-shop respondents and 9 per cent of union respondents reported no difficulty in filling salaried and hourly craft positions.
The 2024 CRUX Insight report highlighted example projects that reflected a lack of skill in both design offices and onsite at infrastructure and capital projects. For example, on a US airport project, the decision to save costs rather than investigate the possible presence of a utility trunk line (which was on a historical, hand-drawn plan) ultimately led to expensive additional work, including redesigning foundations.
Hollowed out workforces
The engineering and construction industries are struggling with aging workforces and the possibility that it may be difficult to replace the pool of manual and professional workers within them. In the United States, for instance, 41 per cent of the pre-2020 construction workforce is expected to retire by 2031, according to the National Center for Construction Education and Research.
Additionally, the pandemic and, even more so, the financial crisis of 2008 caused shortages of professional workers. The cancellation of construction contracts led to a mass exodus of engineers. Not only was their absence felt as construction rebounded, but the next generation of talent might have missed the opportunity to learn from experienced mentors. Moreover, workforce turnover is a common problem, especially in areas with soaring demand for experienced workers and in sectors with large long-term projects.
In the United States, contractors can sometimes issue requests for information for small tasks or minor obstacles, in part because the number of ‘master builders’ has declined and the clients employing these contractors are frequently inexperienced. Such requests might not have been necessary if today’s workforce had the same experience and expertise as the workforce of 20 years ago. Given these challenges, it would be wise for experienced engineers to review even minor changes to avoid later cost increases and delays.
Dysfunctional model
The construction industry’s low-margin, competitively driven operating structure can lead to poor workforce management. Low margins typically mean contractors are unable and unwilling to invest in the development of their workers. As a result, construction workers’ wages have generally failed to keep pace with those in other industries. In addition, the lack of training options for workers taking on specialised functions can add to the difficulties in maintaining a knowledgeable and capable workforce.
Technology often has a complicated role in construction projects, serving as both a missed opportunity and a potential danger, depending on how it is used or misused. Certain technologies can be remarkably useful, while others may cause more problems than they solve. For example, real-time monitoring tools, such as drones, can discover problems early. Promptly identified design flaws may be fixable before significant expenditures result from late redesigns, while workmanship claims may be pre-empted if flaws are quickly identified and remediated.
Conventional wisdom says technology should be implemented carefully. Building information modelling (BIM), which is growing in popularity, can accelerate processes, reduce design problems and expedite conflict resolution, but challenges can accompany those benefits. For example, overreliance on BIM could lead parties to forgo crucial design reviews, potentially leading to claims whose costs could outweigh the savings produced by any efficiency gains.
Human factors are worthy of consideration when assessing a technology’s functionality and benefits. Generational differences regarding comfort with technology and evasiveness when using it are not unusual in most disciplines, including engineering and construction. Worksite experience tends to lie primarily with more experienced but less technologically focused workers. Quality control may be compromised when junior personnel lack the traditional training and experience focusing on detailed drawings. Similar quality control issues may result if artificial intelligence is used haphazardly to offset skills shortages. It is important that a solution to those shortages be found, but quality control may suffer in the face of new and opaque technologies.
Additionally, where contractor education is lacking, conflict may not be far behind. In the United States, a lawsuit arose when a contractor, an engineer and an architect shared a BIM model, but the contractor could not use the program properly to export the correct dimensions.
Effective solutions to human capital challenges
Education
Development of human capital in the engineering and construction arenas likely requires concerted efforts by governments, employers and industries. One potential avenue for addressing human capital challenges is education.
To close the skills gap, professional governing bodies and trade unions could raise and enforce training standards with innovative educational policies and provisions. These private entities, along with federal, state or local governments, could take extra steps to subsidise training and conduct additional early outreach to attract more people to the industries.
Employer initiatives
Employers could promote progress by reviving the role of the resident engineer and by overlapping, or at least reconciling, scopes. If, for example, the role of the engineer overlaps with that of the contractor, and two of their representatives are reviewing the same aspects of a project, especially in the design context, the chances of missing potential problems could be minimised. Stakeholders may want to consider the fact that although such a review could increase costs in the short term, it could save costs in the long term by avoiding conflict.
Employers may also want to consider the ramifications of passing significant amounts of risk to contractors. The resulting low-margin business model may be incapable of providing adequate training, may suppress pay levels, and may discourage investment in innovation. These high risks and low returns, alongside high expenses, may discourage external investors from injecting needed outside capital and operational improvements.
Filling the workforce
The workforce could potentially be built from already accessible talent pools. Putting aside the fact that all pools could be tapped to replace a shrinking workforce, including everyone, of all backgrounds and ways of life, has been shown across industries to promote innovation and financial performance. The engineering and construction industries could also benefit from such an initiative. By fostering a widely sourced workforce, employers could attract the new workers they need to stay competitive.
While employers in the industry would be wise to implement technology with significant checks and limitations, they do seem poised to invest in technology such as drones, artificial intelligence and off-site production to help them become more efficient in the hope of improving their low margins. According to a study from the Associated General Contractors of America, 40 per cent of construction firms report plans to increase investment in drones, 30 per cent plan to increase investment in artificial intelligence and nearly 30 per cent anticipate increased use of offsite production.
Looking forward
The engineering and construction industries face complex challenges as they manage the evolving landscape of stakeholder relationships, external geopolitical and macroeconomic conditions, and technological developments. At the same time, many industry players grapple with stakeholders’ internal concerns, regulatory hurdles and workforce demands.
Despite the struggles, these industries continue to build, and this resilience compels optimism. Through proactive cooperation by the private and public sectors on preventive measures, management tools, design, workforce expansion and more, stakeholders can collaborate to potentially overcome these hurdles, perhaps leading to a more efficient and sustainable future.
When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.