Construction disputes - Tips on how to avoid them

Posted by Kalev Crossland on November 11 2019 in News

With Auckland crane numbers at almost 100 in July this year, construction litigators have been busy – both vertical and horizontal disputes. Great for lawyers and the experts alike, but not so good for developers, contractors, subcontractors and suppliers. Interestingly, despite the healthy project numbers, there have been notable construction related business failures recently. Anecdotally in New Zealand it also seems a tough way to make a buck. So, what gives?

I recently attended the Law Society’s annual construction lawyers’ day-long seminar. I gained some insights as to why we see a lot of disputes, company failures and thin margins in this industry. Some of what I heard matched our own experience in assisting companies in this industry. Factors driving parties into unhappy places that might bankrupt them or materially delay projects include;

• Contractors often price tenders too low in order to secure the job
• Developers/principals stealthily shunt large amounts of project risk onto contractors
• Contractors not understanding the lengthy special conditions that are added into the industry default standard terms template NZS 3910 (last fully reviewed in 2013)
• Contracts drafted not by lawyers, but engineers or even the parties themselves to achieve perceived cost savings
• A culture of mistrust between parties – tagged tenders where profit is generated through variations
• A failure to properly record and document site meetings during the project which leads to later debate and additional legal costs

As much as litigators might enjoy the fees generated from a good construction scrap, it is only fair that we share some tips to help the industry calling on us to do so less often. Here are seven:

1. Developers/principals need to be more realistic about risk allocation. In the long run, setting up a contractor and sending them broke through litigation won’t help sell your product because it will not be finished on time nor on budget once you factor in legal costs.
2. Utilise Early Contractor Involvement (ECI) in procurement. This means running workshops for all possible tenderers to educate them on (1) the project; (2) the proposed contractual terms as well as seeking feedback on design and contract terms; (3) Risk – health and safety. This may reduce the amount of tags on tenders.
3. Allow greater time for the preparation and presentation of tenders. Break the tender into two literal envelopes (1) technical and (2) price. Open the technical one first! Dispose of the lowest and highest tenders.
4. Broaden the mindset from a single project encounter, to a multi project ten year relationship.
5. Have an independent Engineer go over the contract – one whose firm did not design the project or tender documents.
6. Have all site meetings recorded on an app (such as Formitize) and a written summary produced shortly after the meeting. In the event of later dispute, the details can be checked.
7. Have a lawyer draft the contracts, not parties or non-lawyers (spending money on commercial lawyers rather than litigators post dispute is a better legal spend!).
    

Author: Kalev Crossland.