Infrastructure and capital projects are being hit hard by rising financing costs, inflation and expensive lawsuits, but the latter issue is one builders have some power to mitigate. Contractors can empower themselves by understanding the causes of cost disputes and overruns, and curb the losses of money and time these conflicts routinely incur.
That’s according to the sixth annual Crux insight report on global construction claims and disputes. The research comes from London-based HKA, a consultancy that specializes in construction risk mitigation and dispute resolution, which analyzed 1,800 projects in 106 countries.
In the Americas, the top causes of conflict on a project were:
- Changes in scope.
- Incorrect design.
- Deficiencies in workmanship.
- Unforeseen physical conditions.
- Incomplete design.
The impact of this conflict is enormous: Disputed costs on projects in the Americas reached more than a third of their value, according to the report, averaging $100 million, or 33.6% of capital expenditure. U.S. general contractors are being squeezed by inflation and higher borrowing costs, and as a result, are less inclined to settle and seek to maximize their recovery by litigation, the report found.
Building sectors are also unevenly impacted by claims and conflict. Buildings and transportation infrastructure projects faced claims for longer time extensions than other sectors, while delays tended to be least severe in industrial and manufacturing. Scope change especially stymied offshore projects, both oil and gas (53.6%) and wind (45.0%), while deficient planning and coordination largely explain an uptick in rail disputes.
Headwinds for builders
Inflation, high interest rates and tight labor markets continue to pose challenges for builders, though the economy overall has shown greater resilience than predicted, according to Crux. The report asserts that construction is “unattractive to younger generations and female candidates,” but accessible trades education and a greater investment in technology can help.
Another tip to reduce costly disputes? Slow down and communicate. Clients often pressure contractors to work faster and shorten schedules while contractors may fail to convey the difficulty this poses for fear of souring relations, which results in workmanship deficiencies and escalating costs and timelines. The report found that extra time taken amid the COVID-19 pandemic to review and mature designs improved constructability: Design failure rates dropped 12 percentage points globally after the pandemic hiatus, from 47.6% to 35.5%.
“Late changes by a project owner cause scope change,” 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.”