With disputes on the increase, solicitor Jason Kallis argues that a new breed of integrated ‘Modern Master Builders’ could be the way ahead.
In its recent report Global Construction Disputes: Getting the Basics Right the consultancy Arcadis reported an increase in the average value of disputes it was advising on in 2013 to a whopping $27.9m. This figure reflects the activities of Arcadis’s practice, of course, but there seems to be a trend forming: the regularity and size of disputes is increasing.
Given the upturn in the construction market, and the need to improve infrastructure after a period of underinvestment (especially in the US and the UK), it is inevitable that the value of disputes will increase, as there are more projects on the go. However, in the UK, whilst activity in the industry has been improving for some time, this improvement does not seem to match the exponential increase in dispute costs recorded in Arcadis’s figures.
Interestingly, the report found that poor administration was the most common cause of dispute. However, the report also found that failure to understand contractual obligations, and incomplete design information, were the next two most common causes. Having spent years listening to quantity surveyors, construction managers, engineers and architects tell me how and why they came to be at the sharp end of a professional indemnity claim, none of this comes as a surprise to me.
So what impact has this increase in the cost of disputes had on the construction industry and what can be done about it?
One little-noticed effect is that professional indemnity insurers are incurring unsustainable levels of loss, resulting in large-scale withdrawals from the construction professional indemnity market – in May 2014 one of the biggest providers of cover for architects and design and construct builders, the Royal & Sun Alliance, withdrew from the professional indemnity market. Last year Aviva, another large provider, withdrew from the indemnity market altogether. Both insurers had their own problems, but also recognised that continuing to provide indemnity cover in the UK was unprofitable.
"The Arcadis report confirms what all construction litigators already know – a lot of the time projects end up in a dispute because those engaged on them do not understand their roles or do not communicate properly."
Although there will no doubt be other insurers who will step into these insurers’ shoes, this withdrawal indicates a reluctance to insure the UK construction market, and may well lead to smaller specialised construction companies, or professional designers, finding reasonably priced indemnity insurance harder to come by. This could encourage further consolidation and mergers, which ultimately could lead to the UK construction industry being less competitive, driving prices up. During a period when we need to be productive more than ever before, this is surely bad news for the UK construction sector.
Of course, there will always be client-led variations on projects, and the odd bad egg that underperforms, but those issues aside, the Arcadis report confirms what all construction litigators already know – a lot of the time projects end up in a dispute because those engaged on them do not understand their roles or do not communicate properly.
In recent history, the industry’s answer to this problem has been to encourage the use of supposedly simpler contracts (NEC3), place design risk on the contractor (design and build contracts) and to introduce quick methods of dispute resolution (adjudication). However, these solutions have not stopped the flow of disputes or sped up their resolution.
I would say that this is because the structures of our businesses are the problem, and not the contracts or the dispute resolution process. We have great designers, project managers, lawyers and builders, but they do not necessarily work together very efficiently and their skill sets do not match the contracts they sign.
If the construction sector is to consolidate further, should small to mid-sized design practices merge with similar-sized builders, to create a market of mid-sized “Modern Master Builders”, that only design and build? While culture differences on merger might be difficult to manage, designers and contractors could choose those they like to work with as business partners, making the implementation and development of design safer. These highly skilled mid-sized practices would have the skills required to sign a design and build contract with confidence (without needing to novate). They would be able to run their projects themselves, and find communication easier too.
The time it would take to resolve disputes involving a Modern Master Builder, and therefore their cost, would also be reduced from current levels, as liability would be easier to establish in the less likely event of something going wrong.
Jason Kallis is a consultant solicitor at Keystone Law
