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April 30, 2015
Trained neutrals performing interpretation and dispute decisions on construction contracts are an example of a continuous quality improvement step for project owners that involves little, if any, additional costs while providing substantial benefits. This process improvement will often avoid unexpected project owner dispute resolution expenses and higher claim payments, if the project team is unable to successfully negotiate a resolution to change proposals.
Industry practices for decades have used the engineer or architect as the interpreter and initial dispute decision-maker in construction contracts when disputes cannot be resolved through negotiation. Concerns have been raised about the potential conflict of interest in having the designer interpret contractual implications or decide disputes arising from their design documents.
Owner consultants are asked to be their client’s advocates while providing neutral interpretations and decisions. In addition, these same decision-makers are often the ones involved in the unsuccessful negotiation of the change proposal.
Architects have recognized this inherent potential conflict of interest.
In 2007, AIA revised its design and construction documents to allow the project owner to designate a neutral third party as the initial decision-maker.
This article summarizes the benefits of a neutral decision-maker, and why public agencies should consider this dispute resolution approach. Involvement of a neutral does not reduce the important role of consultants in analyzing claims and advocating for their clients, but a neutral perspective often allows a project owner to more accurately assess its rights, defenses and exposures.
Neutrals move quickly
Construction documents published by professional engineering associations and WSDOT Standard Specifications still designate the engineer as the initial interpreter and dispute decision-maker. Under these contracts, the involvement of a true neutral dispute resolution board or mediator does not occur until much later in the dispute resolution process, often after several iterations of dispute analysis by the engineer has occurred.
This on-going designer role as the initial decision-maker often results in additional expenses of analysis and entrenching of positions prior to the involvement of a neutral that can bring a broader perspective and more insight in contract interpretation and claim evaluation concepts.
Industry experience confirms it is unrealistic to expect a designer to reconsider its initial determination during the dispute resolution process. Instead, project owners typically will see their staff or consultants “double-down” or reconfirm their initial determination, creating a higher barrier to any early resolution of a dispute.
Even if owners continue to use their staff or consultants in the interpreter and decision-maker role, it is recommended that a neutral second opinion and assessment be obtained before extensive expenses are incurred in reconfirming an earlier determination.
An ideal time to involve a neutral interpreter and decision-maker is when the project team is unable to resolve an initial dispute through negotiation.
A neutral can quickly evaluate the contract provisions and issues relating to each party’s position, which should have been developed through the earlier project team negotiation process. This neutral review can be done quickly, minimizing extended delays and costs with a more formal claim process.
This step of moving the dispute to another party is a common feature in well-designed dispute resolution procedures.
For project owners who feel their current practices of using designers, CMs or agency staff to perform these interpretations and dispute decision-making roles is adequate, the following example will provide sobering evidence of losses that can arise when they do not use a neutral professional with adequate expertise in contract interpretation and claim evaluation principles.
The following construction dispute was evaluated and resolved in binding arbitration. A public agency contracted to design and construct an $8.5 million facility. The design contract provided that the architect would be the initial interpreter and decision-maker on disputes and claims. The architect was to act in a neutral and unbiased manner, which is a typical contract provision.
Major structural redesign issues were identified early, which affected the critical path of the project. The architect denied many cost adjustments without much explanation and denied all schedule extensions without any analysis. Many more non-structural design deficiencies were identified by the contractor, and the architect again generally rejected any requests for additional costs and time with little substantive analysis.
The contractor accelerated its performance to make up for the delays caused by the deficiencies in the design because no time extensions were granted. Four trade contractors went out of business on the project due to inability to recover extra costs denied by the architect. The prime contractor was forced to curtail its business operations while it attempted to recover its losses in arbitration.
In spite of project delays of approximately four months, the architect and its schedule consultant did not approve any time extensions. The three construction arbitrators in the hearing each expressed surprise during deliberations at the lack of any reasonable basis for the architect’s interpretations and determinations on contract adjustments. The evidence confirmed the architect was defending its design from criticism.
The three arbitrators had the skills and expertise to provide early neutral interpretation and determination services.
Each arbitrator indicated that had an experienced and knowledgeable neutral been involved on the project, many of the contractor’s claims would have been promptly approved. This would have resulted in approved change orders of approximately $142,000 for direct costs and $127,000 for delay damages had time extensions been approved. The time extensions would have avoided the contractor’s need to accelerate its performance.
Instead of paying the contractor an entitlement amount (as determined by the arbitrators) of $269,000 for direct and delay costs, the public agency spent considerably more to defend the claims.
The claim was decided in arbitration, with a final award of $1.54 million assessed against the public agency.
This award amount included $545,586 in acceleration damages due to the lack of approved time extensions. The agency’s withholding of the $314,000 contract balance to cover liquidated damages was also rejected in arbitration. Finally, the agency was required to pay the contractor approximately $408,000 in attorney’s fees, interest and arbitration expenses.
These amounts do not include the costs of attorneys, consultants and arbitration expenses incurred by the agency defending the claim.
This claim is not a unique situation. In my 30 years of providing construction neutral services, I have seen many instances where the lack of a well-trained neutral interpreter and dispute decision-maker resulted in additional claim evaluation expenses and unexpected payments on contractor claims by public agencies.
Here are some recommendations:
1. Designate a third party neutral for contract interpretation and dispute determination duties under the initial contract. This individual can be engaged by the public agency under a sole source selection process because the costs should be below competitive procurement thresholds. The individual can also be engaged by the designer or construction manager to facilitate the contracting process.
2. If no change is made in using the engineer as interpreter and decision-maker, a second opinion assessment can be obtained from a neutral at any stage of the contract’s dispute resolution process. This would provide guidance on any adjustment to dispute resolution positions or approaches that should be considered before additional analysis expenses are invested.
3. Where do agencies locate qualified neutrals? Consultant rosters may be a good source. Referrals for construction arbitrators and dispute review board members are another good source, although DRB members would preferably have training and expertise in contract interpretation and claim analysis in order to fulfill their neutral role under the contract.
Lack of legal background on the state Route 99 tunnel DRB was cited by the project expert panel as a reason the DRB recommendations on the project have not been accepted by either party, as the claims were believed to have a legal context not addressed by the DRB.
Benefits at little cost
Project owners desiring to improve their construction administration practices should look carefully at the use of a qualified and trained neutral to render unbiased interpretations and dispute resolution decisions. The process can be easily implemented and provide benefits far in excess of the minimal costs.
Ron Leaders has been designing and implementing dispute resolution processes and providing construction neutral services for more than 35 years. He also writes articles and trains on construction issues.