Projects in the construction industry come with more variables than just about any other. Uncertainty is a fact of life in construction. Firms should seek to control as much as possible. One of the variable costs that increase costs significantly in construction projects is the cost of resolution activity. Resolutions are the result of claims for compensation that can be made by various stakeholders in a project: Owners, subcontractors, workers.
Resolutions are a fact of life in the construction industry; so common are they that it is rare to find a project that does not involve at least some kind of resolved claim. One in four projects in the construction industry has a claim. They might appear unavoidable because the causes are so numerous but there is actually a lot that firms can do to counter claims that result in expensive resolutions. Resolutions can be expensive; the Australian construction industry for example, spends $7 billion on contract disputes per year, adding 6% to the overall project costs. As previously mentioned, the reasons for resolutions resulting from claims are many and varied. Companies need to take a holistic approach to avoid these risks.
5 problems that can lead to expensive resolution activity:
1) Delays to the project – Delays mean money in construction. Quite often construction delays are caused by slow or poor decision-making by management. Making quick decisions allows for certainty for contractors and workers, while slow or jumbled decision-making leads to uncertainty and delays. Disputes between contractors and the funders of the project are extremely common and can be costly. Delays often mean a lot of overtime for workers which can be an expensive and unexpected cost. Overtime adds up quickly for employers as the money piles up. Approximately 80% of all lawsuits involving wages and hours center around levels of overtime. Given the tight deadlines of construction projects, overtime is unavoidable in a lot of projects. Managing overtime is vital to ensure that costs are controlled and situations are organized so disputes don’t arise.
2) Mistakes in the Project Construction – Disputes between the owners and contractors are common, leading to the standard disagreement between ‘what was promised’ and ‘what was delivered’. Sometimes, this problem results from a misinterpretation of the contract agreed upon by parties. Mistakes can also arise from poor quality work done by workers who may not have got the adequate training. Projects that are on a very aggressive timeline are also more likely to result in disputes and expensive resolution. According to the National Academy of Construction (NAC), “33 percent of aggressively scheduled projects have claims as compared to 7 percent of conservatively scheduled projects. This is not surprising since meeting the schedule depends on equipment delivery and other external factors.
3) Confusion caused by the number of workers – Construction projects are worker intensive and large construction projects can often use hundreds, or even thousands of workers. On these very large projects, work is often ongoing on a number of different sites, making the task of keeping track of workers that much more difficult. This can cause several challenges to employers. In terms of the overtime issue that we just mentioned, confusion about workers make this situation even harder. Difficulties keeping track of workers can also lead to problems involved in construction and mistakes being made which can result in lawsuits.
4) Paper Process – It may be surprising given we are in the digital age but a lot of management of workers is still done on paper. Paper is expensive, heavy and damaging to the environment. It’s also easy to make mistakes on paper, leading to disputes, leading to claims, leading to expensive resolutions. Mistakes made on paper can be as simple as mistaking one number for another (“I thought that 7 was a 1”), disputes over the number of hours worked and disputes over the kind of work that was done.
5) Issues with Contracts – There’s a useful definition of a claim in the 2007 report Reducing Construction Costs: Uses of Best Dispute Resolution Practices by Project Owners: Proceedings Report: “A claim is a request for compensation not anticipated in the terms of the original contract.” This shows how important contracts are in the construction industry. Contracts with terms that are not clearly defined can be trouble as they lead to confusion and misunderstandings
5 solutions to help avoid expensive resolutions:
1) Training and technology to reduce mistakes – Investments in technology and properly training your workers will help reduce the risks of mistakes being made in construction. Workers should be given health and safety training when they’re being onboarded to reduce the risk of injury. Workers need to be trained so they are competently able to perform the tasks they are asked to. Technology also has a big role to play. Construction project management software integrates various aspects of project management. BIM dramatically improves the efficiency of planning in the construction industry and technology enables more cost-effective and productive online orientations.
2) Make sure all workers and contracts are in order – We’ve already discussed the importance of contracts in the construction industry. Ensure all your workers are on ‘solid’ contracts, drawn up by the company attorney, which clearly outline the scope of work, the expectations on both sides, how disputes will be resolved and how payment will be made. Before workers are given contracts, they should be properly screened in case there are any problems such as the worker’s employment history or any substance abuse issues.
3) Risk Analysis – Reducing risk is the best way to avoid expensive resolutions as it means you’re avoiding situations that lead to disputes. Investing in risk analysis helps construction project management with the aim of reducing delays and cost overruns. New technology has improved the accuracy of risk analysis to make it an essential for companies looking to reduce their risk. The combination of industry experts and risk analysis software can significantly help a company’s efforts to avoid expensive resolutions.
4) Use Digital Technology to Keep Track of Workers – There is no good reason why companies still use paper to keep track of workers, but they do! 65% of construction companies still use paper or spreadsheets to manage employees, despite paper being expensive, awkward and easy to make mistakes. Using online software makes it easier to manage your workers, the tasks they’re doing, the hours they are working and how much they are being paid.
5) Avoid Overtime – Overtime is a very common claim and an incredibly expensive one in the construction industry. Overtime disputes between worker and employer can often result in expensive resolutions. To avoid any issues with overtime, management should ensure that all contracts are rock solid and that there is no confusion in keeping track of worker’s hours. Workers should also be properly trained so they can competently complete their tasks, hopefully avoiding any construction delays that can result in expensive resolutions.
There isn’t one magical solution for how to avoid disputes and resolutions. Companies need to make a concerted effort to reduce risk and to improve their worker management systems. Strong contracts and integrated use of construction project management software will help to cut down on worker-employer disputes. Properly training your workers is the best strategy to avoid expensive resolutions as it will reduce construction delays and subsequent overtime payments. Disputes are a fact of life in the construction industry but companies can adopt these strategies to minimize the risk of disputes and the expensive resolutions that arise from them.