Академический Документы
Профессиональный Документы
Культура Документы
Project Disputes:
Adopting a business
case approach
September 2014
At a glance
Plan for project
disruptions from the
start, and be prepared
to resolve conflicts
before they end up in
arbitration or litigation.
When capital projects veer off course, For instance, they will document the
they need not result in a contentious, cases where an owner is asking them
costly dispute. Ideally, problems are to do something different from what
identified early, communications lines was originally planned, as well as
remain open, and projects get back on any delays they experience in getting
track through informal negotiations. responses to requests for information.
The more effort companies put in at Then they will claim they were
the outset to create proper governance disrupted and the owner owes them
and control processes, the more likely money for delays and increased costs.
projects will remain on course.
Owners can mitigate such risks by
Find out more: But the reality is that even the best- establishing oversight including:
run projects experience disruptions.
Its about psychology to some appointing their own staff
extent, says John Wilkinson, PwC or an independent project
Middle East Regional Deals Leader. adviser to provide oversight;
The parties approach projects on
the basis that everything is going looking out for signs that the
to go well, whereas empirical contractor may be trying to develop
experience would tell you that things a disruption claim that could
are always going to go wrong. evolve later into a major dispute.
PwC | 1
More disputes
expected, especially Construction disputes in the Middle East
in emerging markets After the financial crisis of 2008, the number of disputes in the
Middle East began to rise as developers tried harder to keep project
Looking ahead, PwC expects
costs under control. During the boom times before the crisis,
more disputesand more high-
the focus was more on getting projects completedeven if they
stakes conflictsespecially in
went over budgetand then moving on to the next ones.
developing markets, as more large-
scale projects are built there. Several years ago, people might have been able to say, Well fine, well
take a hit on this one, but well get another project down the line and
Its likely that the number of disputes
make our money back on that one, says Jonathan Roe, PwC Middle
will continue to grow because the
East Capital Projects Director. Theres less willingness to do that now.
infrastructure market is expected
People are keen to settle if they can, but the clients Ive spoken to will
to surge in emerging economies.
only settle in situations where they consider the settlement to be fair.
PwC, in conjunction with Oxford
Economics, has developed a Disputes in the Middle East tend to be more complex than in other
detailed forecast of infrastructure regions partly because the projects often involve a host of contractors
development activity that shows the and sub-contractors. Government officials often seek the lowest
shift from developed countries to price and hire a number of different parties rather than assign
emerging markets, especially in Asia, multiple parts of a project to a contractor or sub-contractor.
accelerating over the next 10 years.
They think theyre saving themselves money by going for the lowest
Disputes tend to be difficult to resolve price, but all theyre doing is making the project more complex and taking
in developing markets because they on more of the risks themselves, says James Hanson, PwC Middle East
have less experience with major Capital Projects Partner. When they go with multiple contractors or sub-
projects and dispute resolution. contractors, theyve got different terms with each of them. Consequently, any
Construction disputes in Asia took the dispute situation will be more complex and potentially more costly, he adds.
longest to resolve in 201314 months
on averagefollowed closely by the
Middle East at 13.9 months, according
to an annual study of disputes by
ARCADIS and its EC Harris built asset
consultancy.1 Asia and the Middle East
also had the highest average dispute
value of any region in the study
US$41.9 million and US$40.9million,
respectively (see Table 1).
Middle East 56.3 112.5 65.0 40.9 8.3 9.0 14.6 13.9
Asia 64.5 53.1 39.7 41.9 11.4 12.4 14.3 14.0
US 64.5 10.5 9.0 34.3 11.4 14.4 11.9 13.7
UK 7.5 10.2 27.0 27.9 6.8 8.7 12.9 7.9
Continental Europe 33.3 35.1 25.0 27.5 10.0 11.7 6.0 6.5
Global average 35.1 32.2 31.7 32.1 9.1 10.6 12.8 11.8
Source: ARCADIS Global Construction Disputes 2014: Getting the basics right.
PwC | 3
Resolve claims when theyre big enough
to see and small enough to solve,
advises Tony Caletka, PwC US Capital
Projects & Infrastructure Principal.
PwC | 5
Table 2: Most common dispute causes by region
2013 Rank Cause 2012 Rank
USA
1 Errors and/or omissions in the contract document 2
2 Failure to make interim awards on extensions of time and compensation 5
3 Differing site conditions 4
4 Incomplete design information or employer requirements (for D&B/D&C)
5 Failure to properly administer the contract
Asia
1 Failure to make interim awards on extensions of time and compensation 2
2 Failure to properly administer the contract 5
3 A biased project manager or engineer
4 An unrealistic contract completion date being defined at tender stage
5 Employer imposed change
Middle East
1 Failure to properly administer the contract 1
2 Employer imposed change 3
3 Employer/contractor/sub-contractor failing to understand and/or comply with its contractual
obligations
4 Errors and/or omissions in the contract document
5 An unrealistic contract completion date being defined at tender stage
UK
1 Employer/contractor/sub-contractor failing to understand and/or comply with its contractual 1
obligations
2 Failure to properly administer the contract 3
3 Incomplete design information or employer requirements (for D&B/D&C)
4 Poorly drafted or incomplete and unsubstantiated claims
5 Employer imposed change
Continental Europe
1 Differing site conditions
2 Third party or Force Majeure events 5
3 Employer/contractor/sub-contractor failing to understand and/or comply with its contractual 1
obligations
4 Employer imposed change
5 Failure to properly administer the contract
Source: ARCADIS Global Construction Disputes 2014: Getting the basics right.
For example, the new airport in Berlin, Germany, has faced many
construction problems that have forced it to postpone its opening several
times. The delays have had major financial repercussions for such companies
When airport projects fly off course. as Air Berlin, which intends to make the airport a major hub operation. Air
http://www.pwc.com/en_GX/gx/capital- Berlin sued the airport operator, seeking compensation for the financial
projects-infrastructure/pdf/the_new_ damage caused by the repeated delays in opening the new facility.2
normal_for_airport_investment_-_02_
when_airport_projects_fly_off_course. If an airport is delayed, every airline will be in a position to sue, Burns adds.
pdf
2 Deutsche Welle, Trial starts over Air Berlin damage claim against delayed BER
airport, http://www.dw.de/trial-starts-over-air-berlin-damage-claim-against-
delayed-ber-airport/a-17362076, accessed August 29, 2014.
PwC | 7
Disputes and emerging company, says Michael Burns,
economies PwC UK Airport Advisory Leader.
Consequently, its advisable for
With infrastructure and other
contractors to set expectations that
construction projects being
there will be change and put strong
built increasingly in emerging
communication mechanisms in place.
economies, its important to be
aware of differences that could Disputes are often more complicated
come into play in a dispute. if the local government owns the
project. In Africa, for example, some
Going in, contractors need to
Disputes are understand the political and regulatory
governments dont have the same
understanding of risk transfer or the
increasingly likely environment and choose local
private sectors level of control as
to flare up in fast- partners well. Finding a partner with
international investors do. That may
good in-country relationships with
growing emerging major clients is a good step to take,
give rise to misunderstanding and
frustration when projects go over
markets where says Charles Lloyd, PwC UK Capital
budget and get behind schedule. In
Projects Finance Partner. Youre
the number of more likely to reach resolution if
such countries as China and Vietnam,
large, complex its an Iraqi-to-Iraqi discussion or a
large cost overruns on government
projects simply arent discussed
infrastructure Qatari-to-Qatari discussion than if its
because of bureaucratic obstacles.
a foreign contractor negotiating.
projects is expected
If theres a change in elected
to surge over the next Cultural differences often come
government officials, that can add
into play in the dispute process.
decade, according to Construction dispute experts find that
further complications because a
project spans two administrations.
PwC analysis. in some Asian and Middle Eastern
Theres lack of continuity; the
countries, there is reluctance to
people who made the original
be confrontational and challenge
decisions are no longer accountable.
others, especially the project owner.
Find out more: Such political change can lead to
questioning and cancelling contracts,
Theres a need to suppress the
potentially provoking disputes.
bad news so you dont put egg
on peoples faces, says Mark
Government involvement can also
Rathbone, PwC Asia-Pacific Capital
create political dynamics that affect the
Projects Leader. The problems
dispute resolution process. Challenging
build until there are significant cost
the government could endanger
overruns and delays that, if not
visa renewals and participation in
resolved amicably in private, can
future projects in that country.
become a messy, public dispute.
Another risk in emerging economies
Project changes may not be viewed
is the potential for bribery and
as a normal part of the construction
corruption. For example, there could
process in some inexperienced,
be fraud in the certification of steel
emerging markets. As a result,
that wasnt completed to the proper
Capital project and infrastructure they may not build change control
standard, resulting in delays while
spending. http://www.pwc.com/gx/ procedures into contracts, leading to
en/capital-projects-infrastructure/ the work is redone with the proper
disputes that cant be resolved easily.
publications/cpi-outlook/index.jhtml materials. Bribery, corruption, and
political connections can also result in
There also seems to be less acceptance
people being appointed to jobs theyre
that there will be change in the project.
not ready to do, Colm Tonge, South
Then, when change is required,
Africa Forensic Services Partner says.
their expectation is thats part of
Then that becomes very expensive
the obligation of the construction
if it leads to delays down the track.
The bottom line question to ask: What is the Considering the full
most desirable outcome of this dispute? Is it monetary picture
about resolving the dispute quickly or fighting
An important consideration before
no matter how long it takes? going into a long dispute resolution
process isnt only the potential
settlement amount, but also the
To take emotion and personal monetary interest that might
relationships out of the mix, owners accumulate. A good example of that
and contractors should consider issue was a project to build a womens
doing a business case analysis on the and childrens hospital in the U.S.
costs and benefits of an expeditious The contractor claimed millions in
resolution versus more protracted extra costs because it argued that
arbitration or litigation. They need to the owner and construction manager
take a rigorous, disciplined approach delayed it from carrying out its work.
to assess the chances for success and The owner disagreed and blamed
the potential liability, and to estimate the contractor for the late opening.
the duration, costs and other risks of
various dispute resolution approaches. The dispute went into litigation and
dragged on for years. Ultimately,
The elements of risk will vary from the contractor prevailed, with the
dispute to dispute, depending on judge awarding delay damages for
the nature and scale of the project, the entire 87 weeks in the claim
the contract, the specific problems and all of the 41,000 claimed hours
and the strength of the legal team. for disruption. The contractor did
And there are different cost and even better than expected because
risk profiles for various forms the owner not only had to pay the
of dispute resolution, whether settlement, but interest on it as well.
mediation, arbitration, or litigation.
So, there are angles to these claims
that I dont think people recognise,
says Caletka, who was retained by
the contractor in the hospital case
to provide his scheduling expertise.
The interest on settlements is one of
the factors that goes into the strategy
for how you pursue and settle and
which court you take the claim to.
PwC | 9
Protecting business Conducting a business
reputation case analysis
The value of business reputation Often, it takes an outside advisor,
and relationships will also affect whether an expert witness, consultant,
a partys willingness to resolve or lawyer, to be the voice of reason
disputes quickly and amicably rather and encourage a business case
than take an aggressive approach. analysis early in the dispute process.
For example, contractors are often The analysis can be done relatively
concerned about their reputation, quicklyoften in a month or so.
both in the marketplace and with The result is a much clearer view
the owner involved in the dispute. of the preferred way to proceed
rather than an impulsive reaction
Some companies say we have a to jump into expensive and time-
reputation we have to uphold and if consuming arbitration or litigation.
anyone tries to mess with us, were
going to litigate every time and we will For example, the owner and operator
never give up, says Erik Skramstad, of a sports stadium in the UK retained
PwC US Forensic Services Leader. PwC in 2006 to do a detailed analysis
Other clients say, No, no, we dont when the Australian contractor made
want to litigate. Lets just resolve this a claim for additional compensation
in a good manner. We want to have because it blamed project delays
a reputation as being reasonable. on design changes by the owner.
PwC | 11
When contractor claims go unchallenged
Because they have so much project experience, many contractors realise
that disputes are simply part of the project life cycle and are often better
at documentation than owners. They may leave a document trail for
lawyers and consultants to use in a dispute and swing an arbitration
panel in their favour. For example, in a monthly report, a contractor
might document an event that occurred and blame the owner. If the
owner fails to challenge that contention in a letter, the contractors
claim may be accepted at face value. Owners are sometimes nave
because they havent experienced many projects and disputes.
Keeping good
documentation to
support claims
Information is power when it comes
to disputes, which is why meticulous
and extensive record keeping is so
important. A complete document
trail is needed to demonstrate why
certain actions were taken. It can
mean the difference between winning
and losing. Theres only so much
you can do when youve got bad
documentation, Lechner says. You
can be right and you can still lose.
PwC | 13
Engaging in the dispute resolution process
CEOs and high level executives are main decision makers of litigation
In your organisation,
and arbitration proceedings who makes the ultimate decision
whether to initiate ligitation or arbitration proceedings?
6% Corporate Counsel
in charge of matter
54%
Board of Directors/
Senior Executive/
CEO
PwC | 15
I think its a pity that the dispute review boards
and their like are not used more often, says Richard
Foley, head of the construction advisory and disputes
group at Pinsent Masons, an international law firm.
Theyre kind of keeping parties honest, but also
enabling matters to be resolved as they come up.
%
Expertise of
19 28 10 6
decision maker
Neutrality 28 15 3 7
Confidentiality 21 16 10 13
Enforceability 20 15 17 11
Flexibility of
13 13 9 10
procedure
Speed 6 15 23 14
Cost 2 24 35
Source: PwC and Queen Mary University of London 2013 International Arbitration Survey
PwC | 17
If a dispute ends up in arbitration, project owners or contractors need to
put their money and management time fully behind the case. Its risky to
start off half-heartedly in the expectation that the other party will settle.
Rank the following dispute resolution mechanisms in Rank the following dispute resolution mechanisms in
order of preference order of preference for your industry sector
Chart 2: Companies preferred dispute resolution mechanisms
Arbitration 52 29 13 6 Arbitration 56 28 16
Adjudication/Expert 5 21 Adjudication/Expert
33 41 17 24 35 24
determination determination
Mediation 18 20 31 31 Mediation 5 11 16 68
Mediation 9 36 37 18
Construction %
Arbitration 68 21 11
Court litigation 11 26 26 37
Adjudication/Expert
44 28 28
determination
Mediation 22 11 45 22
1 (Most preferred)
2
3
4 (Least preferred)
%
Strength of legal
40 26 7 2
position and arguments
Strength of evidence 15 36 10 8
Likely recoverable
18 15 12 4
damages
Ease of enforcement of
award/solvency 15 9 24 15
of respondents
Likely legal costs 9 12 23 24
Gaining an advantage
in subsequent settlement 8 5 22 46
negotiations with the
other side (terminating
the proceedings being 1 (Most important) 2 3 4 5 6 7 (Least important)
used as a bargaining chip)
Source: PwC and Queen Mary University of London 2013 International Arbitration Survey
PwC | 19
If a dispute goes to arbitration, its Thats what a developer and a Arbitration in
important to set a specific monetary construction company in the UAE emerging markets
target and develop a clear strategy decided last year. They announced
Legal experts usually recommend
that addresses the key issues plans to hold amicable discussions
arbitration over litigation in
necessary to succeed. Project owners to try to resolve a long-running
emerging markets where there is less
or contractors also need to put their multibillion-dirham dispute over
experience with disputes and fewer
money and management time fully construction of leisure facilities
legal precedents, creating even more
behind the case. Its risky to start off in Dubai. Both parties agreed
than the usual uncertainty. There
half-heartedly in the expectation to withdraw their case from the
could also be a lack of impartiality
that the other party will settle. Dubai International Arbitration
with a local court, but even when
Centre after realizing there wasnt
However, some companies do return that isnt a concern, its unlikely
sufficient progress in the dispute
to negotiations when arbitration drags in a less developed market that a
after several years of arbitration.
on too long without a resolution. judge with expertise in construction
So, despite the popularity of disputes will preside over the case.
arbitration, in many situations, When youre in arbitration, you
settlement is preferable to arbitration are picking specialists who have
when the terms of settlement are fair dealt with these sorts of projects
and acceptable to the disputing parties. and issues many, many times,
Foley says. And youre getting
the benefit of that experience.
While the goal of any project As more major projects are being
owner or contractor should be to built in emerging economies, owners
resolve small problems before they and contractors should also consider
mushroom into major disputes, the cultural differences that will affect how
parties also need to be realistic and problems are handled, as well as the
enter into contracts fully aware that legal environment for settling disputes.
disputes are an unfortunate but
inevitable fact of capital project life. But whatever the location, project
owners and contractors can make
When disputes do develop, owners and dispute resolution part of the planning
contractors should take a business case process upfront and establish the
approach to assess their positions and proper controls and oversight to
determine the preferred approach to manage and document issues as they
resolving the conflict. A quantitative occur. Not only will that reduce the
risk analysis can be a valuable way to chances of a major dispute developing,
assess the best resolution strategies. but it also will help them prevail should
Of course, much will depend on they end up in arbitration or litigation.
the quality of documentation.
PwC | 21
www.pwc.com/capitalprojectsandinfrastructure
2014 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see http://
www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with
professional advisors.
MW-15-0018 JP