Hope for the Best, Prepare for the Worst: Construction Disputes Rising in the EU
September 22, 2022
The familiar economic headwinds in the European Union have worked their way into the construction industry. As a result, parties involved in large-scale projects may find themselves at odds over outcomes. How best to avoid disputes?
“WARNING: Trouble Ahead.”
All signs within the European Union are pointing to a bumpy future for parties involved in large-scale construction projects. Headwinds such as high inflation, labour shortages and energy price spikes are creating an economic climate ripe for dispute over outcomes related to costs and schedules.
The headwinds are hardly breaking news. Bolstered by skyrocketing energy prices, Euro-area inflation in August 2022 reached 9.1%, up from 8.9% the previous month, according to Euronews. Meanwhile, historically low unemployment continues on the continent: In July, the jobless rate across the monetary union reached 6%, its lowest point since 1 January 2008 and was well off its 15-year high of 11.5% in 2012-13, as per Eurostat. Media reports say these numbers are contributing to local labour shortages, particularly in Germany and France.
These factors are creating a perfect storm for disputes, particularly around scheduling and pricing line items in budgets that are exposed to volatile commodities prices and dramatic local labour market fluctuations.
Ideally, the parties would amicably resolve disputes among themselves through direct negotiations and a mutually beneficial resolution. But given the current climate, such an outcome is not always realistic ¬— or even possible. Ultimately, it’s wise to hope for the best while preparing for the worst.
Preventing, Mitigating Disputes
Amid these challenging headwinds, the various parties involved in large-scale construction projects can employ a number of strategies to prevent construction disputes — or at least mitigate their disruption after a claim is made. In such a stormy environment, think of these strategies as an umbrella in case of rain.
As most claims represent the difference between what was planned and what occurred, transparency and documentation are key components to success throughout a project’s life cycle. Why? Because they allow the parties to exhaustively define a project’s plan, set forth any assumptions and explain any consequences.
Another important precaution is to synchronize the execution of risk between the client and the subcontractors so that adjustments can be made when the macroeconomic ground shifts. Keep in mind that a generation ago fluctuating steel prices — not energy prices —¬ caused the bulk of construction disputes, so it’s important to include broad provisions in contracts to provide flexibility in the event of future price hikes.
In addition to addressing price adjustments to reduce conflict, construction contracts should schedule changes based on external risks. While banks and other project financers typically prefer certainty, building contingencies for schedule changes into a project’s budget can prevent costly delays down the road.
Assessing Your Risk
With so many details involved in construction projects, it can be difficult at any given moment for parties to determine the risk that future construction disputes may pose to them and their balance sheets. In these situations, it can be beneficial to conduct a commercial project assessment to help identify weaknesses in a construction project plan.
The first step to assessing exposure to potential construction disputes is to identify the deviation between the original plan and the actual execution to date, including scope changes, force majeure, schedule changes and other aspects that involve multiple parties.
Next, it’s important to articulate the rationale for any possible future efforts. For example, if a project’s design changes after construction begins, it may be necessary to update the architectural drawings or re-engineer structural aspects of the build after the fact. Inevitably, such updates would result in additional costs for materials, labour or both, and would need to be amended into the project plan with the reasons why these changes were necessary.
Finally, a commercial project assessment should determine whether the parties involved are being transparent enough in comprehensively detailing the contours of any given project. For example, what if a contract changes and requires an additional 1,000 hours of labour, but few records are kept about how exactly that money was spent? Without the right documentation, a formal dispute is likely to occur.
A company that can anticipate these pitfalls as early as possible in the process can prevent possible work stoppages, unanticipated fees or worse. Even more, knowing exactly how this macroeconomic climate may affect a project — and possibly the entire business as well — can mitigate challenges before they occur by enabling the company to identify and limit the complex risks during this historic time.
September 22, 2022
Senior Managing Director, Head of Germany Construction, Projects & Assets
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