The cost of construction disputes increased dramatically in 2020!
A recently released report reveals a significant increase in the cost of construction disputes in 2020, while the time taken to resolve disputes decreased.
- In North America, construction dispute value rose from $18.8 million in 2019 to $37.9 million in 2020.
- The length of disputes shortened from 17.6 to 14.2 months.
The data is from Arcadis' 11th annual "Global Construction Disputes Report 2021: The road to early resolution.” While trends related to the value and length of disputes varied, all regions surveyed saw an increase in very large or MEGA disputes tied to large capital programs and private projects.
- 60% of survey respondents encountered project impacts due to COVID-19.
- Proper contract administration was identified as leading to successful and early resolution of disputes.
- Most disputes were settled through party-to-party negotiation.
Change orders create a lot of work for construction lawyers and the legal and project costs can be detrimental costs for parties involved. Owners and contractors can never seem to agree on whether something is a change (which costs more money) or part of the original contract scope (included in the original price).
Owners, contractors, or subcontractors failing to understand and/or comply with their contractual obligations became the leading cause of construction disputes in 2020, followed by owner-directed changes and third-party and force-majeure changes as the second and third-leading causes, respectively.
Change orders play a major role in disputes, whether being the actual cause or being used as leverage.
A “Change order” is just the industry term for an amendment to a construction contract that changes the contractor’s scope of work. Most change orders modify the work outlined by contract documents and typically will increase the contract price or adjust the amount of time the contractor has to complete the work, or both.
Since construction is a dynamic process, even the most carefully made plans may need changes once workers break ground on site. A change order is one of several important documents that record adjustments throughout a construction project. If all goes well, they keep contractors accountable to complete a particular scope of work and clients accountable to pay for that work. In theory, for there to be a valid change order, the owner and contractor must both agree on all terms.
Classic examples of change orders include:
- The project owner’s desire to move the location of a wall to accommodate some other design challenge
- Adding a window or some other architectural feature where there was none in the original plans
- Making a change on the finish of the floors material
These are known as additive change orders, but there are also change orders which delete portions of the work; known as deductive change orders. Either of these types of changes can lead to more costs, especially if work has already been completed prior to the change.
Common situations that lead to change orders are common across all projects.
- Unforeseen obstacles like an unmarked gas line that delays construction.
- Incorrect or ambiguous architectural plans.
- An inspector may require additional work before providing building permits.
- Delivery delays.
- The budget does not accurately account for the scope of work.
Change orders are essential in all of these cases, therefore, it’s good to have a solid understanding of how to use change orders effectively before beginning any construction project.
A vital part of running a successful construction company is understanding how to adapt to the changing circumstances that are common on construction sites.
Guiding principles help master change orders:
- Accurately estimate the scope of work during the initial contract.
- Inform the client that any changes to the original contract can result in changes to the timeline and cost of the project.
- Never undertake additional work until a formal change order is signed by all parties.
Most change orders include, at minimum, the following elements:
- Project name, location and date
- A list of proposed changes with materials involved
- An explanation of the effect on cost and schedule
- A summary of the total cost of the revised contract
- Signatures by all parties
When one contract changes, it does not mean the other contracts will change. If the contractor and owner execute one change order and the contractor fails to get a change order from subcontractors, a gap in the work scope can be caused. Therefore, ensure that both the contractor and subcontractors get your change orders.
While cost and length have changed since 2019, risk management was still seen as the most effective claims avoidance tactic, while owner/contractor willingness to compromise was once again the top-ranked factor for the mitigation/early resolution of disputes.
Smart contracts and blockchain technology are becoming the “right tool for the job” to ensure change orders are implemented correctly to reduce construction disputes and costs. Because data is decentralized and readily available throughout the network, the need for document duplication is eliminated. Change orders and delays are immediately traceable to a point of origin, eliminating the need for time-consuming oversight.
All contracts that live in the blockchain and are accessible with a simple search. The sequential nature of a blockchain setup holds all parties accountable.
DigiBuild is a blockchain-enabled construction project management platform. Our customers manage workflows such as procurement, budgets, schedules, contracts, and payments. DigiBuild allows for collaboration across 50+ disparate construction stakeholders – all on a single platform.
We are the first to merge our construction management expertise with blockchain technology to create the world’s most revolutionary technology bringing risk management and visibility to your projects.
Through verifiable collaboration, we eliminate risk, disputes, save time and create a healthier and happier global construction industry.