Why Traditional Construction Contracts Can Cause Disputes

In our first article, The NEC Contract: Why?, we looked at the backdrop to the NEC suite of contracts.

In the UK, the catalyst was the Latham Report. In Australia, similar concerns continue to be raised. The recent report by the Australian Constructors Association, Disrupt or Die, found that the industry continues to be characterised by low trust, poor collaboration, increasing insolvencies and a contracting model that too often encourages claims and disputes rather than project success.

Most construction disputes do not begin when something goes wrong on site.  The foundations are laid at the time the method of procurement are decided and the contract formed.

Many traditional construction contracts encourage defensive behaviour and conflict rather than collaboration. They define rights and liabilities, but often fail to provide a practical framework for dealing with the uncertainty and change.

 A construction contract does far more than record the deal between the parties. It determines:

• who carries the risk
• who makes decisions
• how changes are managed
• what happens when something unexpected occurs
• whether and how the parties work together

In that sense, the contract is effectively the operating system for the project. If it is poorly designed, the project often becomes adversarial regardless of the parties’ intentions.

Many of the standard forms or adaptations of them have their origins in forms of contract that are more than 30 years old. At the same time, projects have become larger, faster, and more complex, requiring more collaborative approaches, however, many contracts still rely on:

• outdated drafting styles
• highly legalistic language
• lack of support for collaborative working
• unclear or convoluted procedures for dealing with change
• mechanisms that focus on claims rather than problem-solving

The result is that project teams often become defensive very quickly.When the contract fails to reward collaborative working, parties stop focusing on solving the problem and instead focus on protecting their position. Communication deteriorates.

 In practice, most construction disputes arise from only a handful of recurring issues:

• unclear roles and responsibilities
• ambiguous or convoluted wording
• changes in scope
• payment disputes
• unforeseen site conditions
• site access
• poor communication and interfaces
• delays in dealing with issues

None of these issues are unusual. Construction is inherently uncertain. Ground conditions change, designs evolve, interfaces shift, and programmes move.

The problem is not that these issues arise.

The problem is that many contracts are not focused on the inherent problem-solving required in construction projects.

In my experience, the parties usually begin a project with good intentions. Most clients want a successful project. Most contractors want to deliver it.

However, even well-intentioned teams can quickly become adversarial when the contract is unclear, doesn’t allocate risk appropriately or is poorly suited to the realities of the project.

The most effective contracts are not necessarily the longest or most legally complex, they:

• clearly define roles and responsibilities
• use language that is readily understood
• provide a practical and collaborative process for dealing with change
• allocate risk to the party best able to manage it
• encourage early discussion and problem-solving

The emergence of the NEC suite of contracts was, in many respects, a response to these shortcomings in the traditional forms.

Rather than relying on heavily legalistic drafting and rigid contractual positions, the NEC was designed around the practical realities of construction projects. It recognises that change is commonplace and seeks to manage it proactively through mechanisms such as early warning notices, collaborative programming, clear allocation of responsibilities and obligations on the parties to act in a spirit of mutual trust and cooperation.

The NEC seeks to identify and manage issues before they become disputes. That is not to say the NEC is perfect, but it reflects a fundamentally different philosophy: that better project outcomes are achieved through collaboration, transparency and active management rather than simply relying on contractual rights.