Risk mitigation – avoiding disputes

By - , Build 187

Avoid construction disputes and defective building claims by understanding the main areas of risk and acting on any dispute early.

WITH SO MANY pressures on the construction industry right now – both positive (high demand) and negative (supply chain issues and labour shortages) – disputes are likely to increase. Timing pressures also create a greater likelihood of defects in design and or workmanship.

Navigating and defending construction disputes is an expensive education. How can you avoid disputes or defective building proceedings arising in the first place despite all the current pressures?

Key risk areas for disputes

Start by focusing on the key risk areas. The main causes of construction disputes are:

  • lack of understanding of contractual obligations
  • errors and omissions in drafting the contract
  • inadequate scoping
  • incomplete or defective design
  • unrealistic time and cost objectives
  • issues arising from principal and employer-supplied information
  • delays with subcontractors and suppliers
  • late supply of information by contractors for extensions of time/variations poor contract administration
  • tender tags left over from procurement – that is, a failure to close these out.

How can these issues be minimised?

Understand the contract

The first important step is to ensure that your contracts are clearly drafted considering the key risk areas. Ensure the contract is suitable for the project, which isn’t always the case.

The contract and your obligations under it will also entail other documents – including design documentation. It may be stating the obvious, but it is important that you obtain all these supporting contract documents and review them before you enter the contract.

Next, make sure you understand all your obligations. In particular – any time-sensitive requirements such as the timing of variations, extension of time claims and key dates where risk passes (possession of the site and insurance taking effect).

Ensure that you issue timely and compliant payment claims and payment schedules in accordance with the contract and the Construction Contracts Act. This is by no means a plug for lawyers, but taking some advice before entering a contract could well avoid more money being spent with a litigator down the track.

In the event of a defective building claim, it is likely that you will have a personal exposure and or that parts of the claim won’t be covered by insurance. Professional advice on protecting your personal assets is vital, particularly if you’re working on larger developments.

Finally, understanding what insurance cover you will need and ensuring you’re covered from the outset of a project is the best way to protect yourself. There are some very good insurance brokers out there who can help you navigate your insurance requirements and who can also help with the timing of cover through the life cycle of a project.

Good document management vital

The amount of documentation even a small project can generate is massive. Using a document management system and having processes in place for filing documents and diarising key dates is the one step that most significantly reduces the likelihood of a dispute.

Many disputes arise because the information being relied on is not up to date or correspondence or instructions have been overlooked. Good document management and document retention is critical in defending any defective building claim down the track.

Technology can be of real help to streamline and better manage QA processes. Look at investing in a software package that can help you do this. Many businesses have also benefited from an internal audit of their files and processes. Minor changes to how project records are handled can make a very big difference.

The length of time you should retain your records is longer than many think. Proceedings can be commenced against you up to 10 years from the date of any defective work under the Building Act.

For money claims (breach of contract), it’s normally 6 years but with a 15-year deadline taking into account late knowledge and discovery of the breach. The best approach is to keep records for at least 15 years from completion of the project.

One thing that’s important to note is that, while you can shorten these timeframes in your contract, this will only bind the party you contract with. It will not protect you from third parties such as subsequent home-owners who might issue a claim against you.

These days, any records can be scanned and placed into cloud storage – just make sure you’ve done this before you destroy any hard copies.

When a dispute arises

The best time to resolve any dispute is when it is still capable of being resolved informally and relatively inexpensively.

Most dispute resolution clauses call for mediation. Because the process is informal, there is a tendency to underprepare, but assessing your position carefully with help from advisors before heading into mediation can avoid matters leading to more formal proceedings. It’s best to select a mediator who is technically and legally qualified to mediate a construction dispute.

As for adjudication proceedings under the Construction Contracts Act, this process can be a useful tool for simple disputes involving payment claims. However, where a claim is more complex, the tight timeframes allowed to progress these claims present significant challenges and can make the process very costly.

Always assess the cost of issuing more-complex proceedings against the likely amount at stake. Also bear in mind that adjudication determinations are binding and that the parties will need to pay the adjudicator’s fee.

Get advice early to avoid disputes

In summary, it pays to slow down and make sure all your Ts are crossed before signing on the dotted line. Ensure you’re noting your obligations clearly and accurately and that you get advice on anything you don’t understand. Get your broker and lawyer to review any contracts, and make sure you keep all your project documents stored safely in the cloud well after completion.

Above all, don’t use your advisors as the ambulance at the bottom of the cliff. More time and money will be spent if you wait until the dispute has escalated. It may be helpful to undertake a brief audit of each project on completion and use your external advisors to guide you on improvements you could be making to your contracts and day-to-day processes.

These steps will help you and your business minimise disputes so you can spend your time constructively – and on construction.

Note

This is intended as general advice only. For specific advice, contact your legal advisor.

Download the PDF

More articles about these topics

Articles are correct at the time of publication but may have since become outdated.

Advertisement

Advertisement