Delays and defects: Conflict in construction

Wednesday May 15, 2024

What’s driving disputes in the construction sector?

It’s an unfortunate reality that disputes are commonplace in the construction sector. And while, they are often resolvable, they can also be incredibly costly.

Delays and defects can often be the issues that trigger commercial disputes, and there have been a number of factors that have combined in the last year to lead to more of these occurring.

Having come into effect recently, preparation for the Building Safety Act – brought in to improve standards following the Grenfell tragedy – is at the top of this list, generating a large number of fire safety defect-related issues in both design and delivery. For example, it’s been common for defective cladding to be stripped from buildings to then expose further issues, like fire barriers and compartmentalisation shortcomings, which have needed to be corrected.

Modular construction is another area that has become more challenging. The industry is based on the creation of modular units in off-site factories, delivered to a ‘just in time’ model. By its very nature, if there are delays on site – be they caused by another contractor or by bad weather – modules can’t be delivered, which can have significant knock-on problems for the completion of contracts and units in the pipeline. Construction contractors are generally as good as any when it comes to working around issues and resequencing works but, ultimately, modular construction provides less opportunity to do so.

Complex calculations

Longer term, we are also seeing the delayed impact of Covid-19 contributing to financial disputes. Indeed, larger projects that began in 2020 and 2021 are now coming to final account, where the ultimate cost of the project is negotiated. Where there has been significant disruption, calculating the value of a claim is often complex and may involve evidencing the impact of numerous minor events that have affected productivity.

There also remain numerous disputes where contractors have sought to renegotiate contracts that have become unviable, though we can expect this to fall away as escalation clauses have now become standard in construction contracts. That said, there is the possibility of negative inflation on some types of materials going forward, so firms should ensure that clauses only cover an upward price escalation, and not a reduction, or risk the potential of having to reimburse any savings to the client.

Resolution: adjudication vs arbitration

Appointing an adjudicator is still by far the most popular form of dispute resolution on the basis that it is fairly accessible, cost-efficient and quick, as an adjudicator is required to decide matters referred to them within 28 days. Speed ultimately suits contractors who, as a rule, tend to prioritise cash flow over final profit.

In contrast, arbitration can be long and expensive, and very similar to litigation in many respects. That said, there has been an increase in domestic arbitration in the past year, possibly linked to the significant backlog in UK court hearings. For contractors considering entering into arbitration, it’s important to recognise that there is a threshold below which conflict resolution becomes financially unviable due to the costs involved.

Even though adjudication has brought the cost down, disputes below £200,000 are likely to recover limited value and therefore, depending on the complexity of the issue, parties should think carefully as to whether a commercially acceptable solution can be reached before deciding to appoint an adjudicator.

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Henry Pocock

Henry Pocock

Henry Pocock

  • Partner
  • Forensic Services
  • Birmingham