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Infrastructure and capital projects are hit hard by rising financing costs, inflation and costly lawsuits, but the latter problem is one that builders have some power to mitigate. Contractors can empower themselves by understanding the causes of cost disputes and overruns, and curb the loss of money and time that these disputes commonly incur.
This is according to Crux’s sixth annual global vision report construction claims and disputes. The research comes from HKA, a London-based consultancy specializing in construction risk mitigation and dispute resolution, which looked at 1,800 projects in 106 countries.
In the Americas, the main causes of conflict in a project were:
- Scope changes.
- Incorrect design.
- Deficiencies in the workforce.
- Unforeseen physical conditions.
- Incomplete design.
The impact of this conflict is huge: disputed costs of projects in the Americas reached more than a third of their value, the report found, averaging $100 million, or 33.6% of capital expenditures. U.S. general contractors are being squeezed by inflation and rising borrowing costs, and as a result are less likely to settle and try to maximize their recovery from litigation, the report said.
Construction sectors are also disproportionately affected by claims and disputes. Buildings and transportation infrastructure projects faced claims for longer time extensions than other sectors, while delays tended to be the least severe in industry and manufacturing. The shift in scope particularly slowed offshore projects, both oil and gas (53.6%) and wind (45.0%), while poor planning and coordination largely account for an uptick in rail disputes.
Headwinds for builders
Inflation, high interest rates and tight labor markets continue to pose challenges for builders, although the overall economy has shown greater resilience than expected, according to Crux. The report says construction “is unattractive to younger generations and female candidates”, but accessible trades education and greater investment in technology can help.
Another tip for reducing costly disputes? Slow down and communicate. Clients often pressure contractors to work faster and shorten schedules, while contractors may not communicate the difficulty of this for fear of straining relationships, leading to labor shortages and increased costs and deadlines . The report found that the extra time needed amid the COVID-19 pandemic to review and mature designs improved build capacity: design failure rates dropped 12 percentage points globally after the shutdown pandemic, from 47.6% to 35.5%.
“Late changes by a project owner cause a change in scope,” according to the report. “But more often this cause of conflict arises, as projects evolve, when both owners and design and construction teams discover design gaps and revise their views on specific elements of an asset’s operational requirements.”
