Construction industry incurs $5bn to $7bn of dispute costs annually

Asia Pacific CEO for Aurecon and ACEA Tony Barry, in his role as task force chairman said, “We have enough evidence to believe it’s more than $5bn and possibly nearer $7bn. At the same time, the costs of dispute resolution amount to between $560m and $840m a year, taken out of the industry largely by legal experts.”
Speaking to the 2009 Victorian Civil Contractors Federation conference in July, Barry said there was also a huge cost built into all businesses, to protect themselves from this outcome.
“It has been estimated at two or three times that $5bn to $7bn. But even if it’s just one and a half times, it’s a big number,” he said.
Barry said risk managers, “and all those other wonderful people, if they focussed on the technical risks of something actually going wrong with the physical works, that would be great. But they spend much of their time just making sure their own companies don’t get into trouble.
“We found many circumstances where project teams have not been honest with their own management teams about their own responsibilities. They couldn’t because their jobs would suffer. Managers need to ask staff: what responsibility do we have? Why are we here? If we answer that sort of question honestly we might go to the client or the contractor and say, ‘There’s a problem here and we need to sort it.’
Polarised views
But managers don’t ask and eventually boards of both organisations come to polarised views based on false information about their positions. “We have heaps of points along the way to stop spending those billions of dollars and $600 to $800m a year in dispute resolution,” he said.
Barry said he became immersed in a tunnelling dispute in Sydney that ended up in court. “The client and the contractor, each ended up paying four point something million dollars in legal fees, in a dispute worth about four point something million dollars. I don’t know why people do that but they do,” he said.
Another cost of disputes that has never been costed is the damage to participants in a dispute.
Barry said, “If you’ve seen a QC take a person apart on the stand, and you find out what subsequently happens to that person’s life, you’ll realise the damage is huge. There are a huge number of people just like you put in witness stands and taken apart by QCs.
“At the very least many relationships are soured and careers get hammered. The costs of that you can’t even begin to estimate.”
Two suicides
He said two close professional colleagues had taken their lives as a result of being caught up in major disputes. “One dispute was worth $280m, where the person involved was the director of one of the companies, and got sued by the other party for $40m. He invited them all around for lunch on Sunday and hung himself at 11 o’clock in the garage, so they could arrive at just the right time,” he said.
Barry said there is a real issue around the inconsistencies and uncertainties of many projects. “You sign a contract and you’ve got some certainty. But things change because you tend not to build the same thing twice on the same site. The project is always unique so there’s always uncertainty.
“For example, it doesn’t matter how good your consultant is in determining inconsistencies in what’s on the site, because clients will not pay them to do the exhaustive work that is required.
“I’ve been involved in many tunnels. We have clients who only want to do one bore hole every 200m. But an awful lot happens in 200m. However the clients don’t get it: to spend $2m on a geotechnical investigation might well save them $5m later. They are just not prepared to invest,” Barry said.
Poor documentation
He said poor contract documentation was a key causal factor of the $5bn plus costs of disputes every year. “I’m talking about the way the whole contract is conceived. Legal documents are not often aligned well with project delivery mechanisms. They do not align with the capacity of the parties in terms of taking risks; they certainly do not align with the perceptions of the reality of where the risk lies and who can solve it,” he said.
Things like certification of technical criteria, do not align with the design work being done, or the contracting. “The lawyers might think its OK, but if the practical people doing the work can drive trucks through it, and show you where they don’t align, then it’s not. But the legal contract dominates and suppresses the reality. It actually causes people to have to walk into these projects with unaligned expectations,” he said.
Culture
Barry said the knub of the huge dispute problem, was contractors and clients being adversarial from the word go, without even thinking about it.
“The client organisation, somehow or other teaches its people - subtly without realising they’re doing it - to talk about contractors in derogatory terms. And contractors do likewise. They talk about starting from an adversarial position because that’s how they’ve been cultured,” he said.
Barry said one of the problems they’d had with the dispute avoidance project was the difference in perceptions from different parts of the industry. He said no one in the industry seemed to be prepared to look at projects through other participant’s eyes.
“They don’t listen to each other and they’re not prepared to solve each other’s problems. We have to get past our positions and be prepared to collaborate to get better solutions. We have to take ourselves out of the content of disputes and think about the outcomes,” he said.
A slide that this point in Barry’s presentation headed “Intractable Problem,” said that the positions taken by clients as contract makers, and contractors, makes disputes inevitable.
“To solve the industry problem we have to see the other view and take responsibility for changing what causes it,” he said.
Changing an organisational culture was not easy. Barry said one way of doing so was to employ an outside organisation to investigate objectively, make recommendations and oversee the changes.
While most of the benefits of reducing disputation were fairly obvious, Barry said one was quite “weird.” He said extensive Canadian research had shown that ongoing operating and maintenance costs were lower where disputes had been minimal. “Those who focus on better project outcomes build better projects than those who only look after their own sectional interests,” he said.
The Dispute Avoidance and Resolution project will be launched on November 17 followed by a series of seminars nationally. It will be available online at www.construction-innovation.info.
The PowerPoint presentation of Barry’s address to the CCF conference and others is available at www.civilcontractors.com/victoria/training/victoriantrainingnews/.