Understanding Construction Contract Disputes and Resolution

With the complexity of the construction industry, disputes inevitably arise. 

Just like no two construction projects are exactly alike, neither are disputes and one building dispute resolution process doesn't apply to every project.

If you're wondering about the best construction dispute resolution methods, read on. 

This article will cover the various types of construction contract disputes and resolution methods, so you can make an informed decision for your next project. 

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Managing the details of your company’s cash flow and compliance forms can be challenging and stressful.

Unless you’re using Flexbase.

Flexbase has all the tools construction companies like yours need to stay on top of every detail and stay cash flow positive.‍

Flexbase’s tools include:

• Invoicing
• Payment reminders
• Software integrations
• Automated paperwork and compliance forms, including:

• AIA forms
• Schedule of values
• Lien waivers
• Insurance documents
• Notarizations

And when it comes to contracts, Flexbase has a variety of templates that can be customized to fit the specifics of your project. 

Why Do Disputes Arise in Construction?

Contract disputes may arise for several reasons, including: 

• Delays
• Lack of understanding of the conditions of the contract
• Poor contract administration
• Unsubstantiated claims

How Can You Reduce the Possibility of Disputes?

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Ben Franklin was right.

“An ounce of prevention is worth a pound of cure,” and that could never be more true than in the construction industry. 

If you're hoping to reduce the likelihood of a dispute arising, your best bet is to optimize each part of the construction process along the way.

Here are some things you can do to prevent issues on construction projects:

• Be sure to read the contract carefully and make sure you understand every detail
• Negotiate any clauses that seem unclear or could potentially be problematic
• Identify any possible risks so that you can be prepared
• Give due diligence to pre-construction work, such as estimates, schedules, subcontractors, etc
• Set a realistic project schedule and include extra time for delays or disruptions
• Stay up-to-date on your daily reports, making note of any issues or challenges
• If problems do arise, deal with them immediately

What Are the Key Types of Dispute Resolution Available to You in the Construction Industry?

The most common types of building contract dispute resolution include:

• Negotiation
• Mediation
• Arbitration
• Adjudication
• Expert Determination
• Litigation; and
• Alternative Dispute Resolution Clause

What Are the Key Types of Dispute Resolution Available to You in the Construction Industry?

There are various building dispute resolution methods available for parties to choose from.

You may be wondering if it matters which method is used. 

The answer is a resounding, “Yes!”

Efficiently resolving building disputes can mean the difference between the survival or failure of a project — and the survival or failure of your construction company.

Alternative Dispute Resolution

While litigation may sometimes be a needed form of construction dispute resolution, the majority of construction contract disputes should be resolved by using ADR methods.  

Alternative dispute resolution, or ADR, offers appealing alternatives to traditional litigation when dealing with construction contract disputes. 

In short, ADR is any means of resolving disputes other than litigation. 

A large number of construction disputes are resolved, or are attempted to be resolved, through the use of ADR.

Alternative dispute resolution procedures typically:

• Are more efficient — both time- and cost-wise.
• Give all parties involved more control over the outcome.
• Allow the parties to protect their future business relationship.

How Does an Alternative Dispute Resolution Clause Work?

In the building dispute resolution process, an ADR clause outlines exactly how certain types of disputes must be handled.

Generally, an ADR clause will require that a specific type of alternative dispute resolution be followed before any legal claims can be filed. The clause is written as part of the contract and generally requires all parties to waive their rights to litigation, if dealing with a construction contract dispute. 

A benefit to using an alternative dispute resolution clause is that the parties involved in the project know what they are getting into ahead of time, should a dispute arise.

6 Traditional Methods of Construction Dispute Resolution

There are a number of methods of resolving disputes in the construction industry. It's important to understand the options and to be certain that your contracts contain the appropriate building contract dispute resolution clauses.

Next, we’ll take a look at the traditional options for resolution.

Litigation is the time-honored process that begins with the filing of a lawsuit and continues until a court decision is reached or the parties give in and withdraw the lawsuit.

Unlike some of the other methods we will be discussing, the losing party in litigation has the right to appeal.

Advantages of litigation:

• The final decision is binding and enforceable
• The claim process is managed by a judge from start to finish
• Complex issues can be addressed

Disadvantages of litigation:

• It is generally the most expensive method of building dispute resolution
• The court proceedings are public, removing any opportunity for confidentiality
• It can be an extremely slow process 

Mediation is a non-binding alternative dispute resolution mechanism where the disputing parties bring in a third-party mediator to help them reach a settlement. 

The role of the mediator is strictly to facilitate — not to decide who is correct or how much money needs to be exchanged to finalize the construction dispute resolution. 

Rather, the mediator’s goal is to be certain that the parties understand one another's position and ask all the right questions to help the parties come to a settlement. The mediator has no authority as far as the outcome, and either party is free to walk away from the mediation process at any time.

It’s important to note that for mediation to be successful, all parties must enter into the process with the goal of settling the contract dispute.

Mediation may begin at any stage of a dispute, but many contracts include a mediation provision that requires parties to attempt mediation before resorting to litigation or arbitration.

Advantages of mediation:

• The mediator is an independent party, with no authority to make a decision, judge, or advise
• The mediator facilitates discussion between the two parties with the goal of resolving the dispute
• Typically, mediators are highly experienced and skilled in the area of construction contract disputes and resolution
• The process can help maintain a good business relationship between parties
• The mediation process is quick, typically lasting one to two days
• The cost is considerably less than litigation
• The mediation process is completely confidential
• The mediator encourages parties to come to a contract dispute resolution that is in the interest of both parties 

Disadvantages of mediation:

• Sometimes a party may disclose an important aspect of their argument that could benefit the other party should the matter go to trial
• If an agreement is not reached, the dispute remains unsolved and the cost of mediation will have been wasted 

When selecting arbitration for the building dispute resolution process the dispute is submitted to one or more impartial individuals, who will then decide the outcome. Generally this person is an expert in the construction industry.

Arbitration ends in a … 

• Private
• Binding; and 
• Court enforceable decision

The outcome may be appealed, but an arbitrator's decision may be reversed only in rare circumstances, such as fraud or obvious bias by the arbitrator.

In arbitration, disputes are resolved upon the basis of:

• Documents
• Relevant law principles; and
• Material facts

Advantages of arbitration:

• The process is confidential
• Parties can select an arbitrator who has experience in construction contract disputes and resolution
• It is a relatively fast process
• There is a lot of room for flexibility as compared to court proceedings 

Disadvantages of arbitration:

• The involved parties must bear the cost of the arbitrator as well as the location where the arbitration takes place
• If one party fails to comply with the arbitrator's directions, the arbitrator has very limited power to enforce the final decision
• The right to appeal is limited
• The cost of arbitration can be similar to litigation 

The process of adjudication in contract dispute resolution involves a neutral third party giving the final decision on a dispute.

Adjudication is sometimes viewed as the “pay first, argue later” way for parties to resolve their contract disputes.

The decision of the adjudication is binding unless revised through litigation or arbitration. 

Advantages of adjudication:

• The process is quick and designed to ensure that cash flow is maintained throughout the construction process
• The adjudicator is a neutral party, uninvolved in the day-to-day running of the construction project
• In the majority of cases, the adjudicator’s decision decides the dispute
• Adjudication is less expensive than going to court

Disadvantages of adjudication:

• The powers of the adjudicator are limited
• The dispute needs to have been aired between all parties before beginning adjudication
• If the losing party refuses to pay, court proceedings will still be required to enforce the adjudicator’s decision

Expert determination is a more informal system of building contract dispute resolution and is often employed in a valuation dispute. 

Advantages of expert determination:

• It is less expensive than some other building dispute resolution methods
• Disputes can  be resolved quickly
• It is less formal than other construction dispute resolution options

Disadvantages of expert determination:

• Since expert determination is less tied to legal processes, it is more difficult to challenge the decision of the expert
• The expert’s report cannot typically be enforced without pursuing court or arbitration proceedings

Our final building dispute resolution method is negotiation.

Negotiation is a voluntary process in which both parties enter into discussion and try to resolve their differences and come to construction dispute resolution. 

Generally, negotiation is unassisted, with the disputing parties addressing the issues together and arriving at an agreement without a third party. If desired, attorneys can be brought in to protect the interest of the parties throughout the contract dispute negotiation, but it is not required. 

However, negotiation can also be facilitated. In this case, a neutral person is invited in to guide the disputing parties and help them reach an agreement. 

Advantages of negotiation:

• Focused on problem-solving
• Keeps the interests of both parties at the forefront
• The parties are in control of the outcome
• Less aggressive than litigation and creates an atmosphere of cooperation

Disadvantages of negotiation: 

• Either party may walk away from the negotiation process at any point

Choosing the details for your contract and contract creation are important steps on the front end of a construction project.

Get them wrong and you could pay dearly — in both time and money.

Flexbase can help create and manage your construction contracts so you can spend your time focusing on growing your construction business. 

With our completely integrated processes, you won’t have to worry about missing any details, and you won’t have to enter the same data over and over.

We integrate everything, including:

• Construction ERP
• Project management software
• Accounting software

And the best part is that our system is essentially free to use — you don’t pay us until you get paid. 

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