How Effective Documentation and Project Controls Help Avoid or Mitigate Claims

Preventing Disputes, Preserving Success: Mastering Claims Avoidance and Mitigation

In the world of construction and project management, avoiding disputes is significantly more cost-effective than resolving them through litigation. This session, led by industry experts, explored practical strategies to help professionals mitigate claims risk and improve project outcomes through robust documentation, effective controls, and proactive contract management.

The Cost of Avoidance vs. Litigation

Understanding the Financial Implications:
Disputes in construction can be incredibly expensive, with litigation costs ranging from hundreds of thousands to millions of dollars. Beyond the financial burden, these disputes often cause significant delays, reduced productivity, and strained relationships among stakeholders. Litigation processes, including attorney fees, third-party expert testimony, and forensic analysis, can take years to resolve, further impacting ongoing and future work.

The direct costs of litigation often include:

• Financial Expenses: Legal fees can range from hundreds of thousands to millions of dollars, depending on the complexity and length of the dispute. Expenses for attorneys, third-party experts, forensic analyses, and trial preparations accumulate quickly.
• Time Lost: On average, disputes in North America take 16.7 months to resolve. For larger cases, this timeline can extend into years, delaying project completion and disrupting day-to-day operations.
• Delay Costs: Prolonged disputes lead to extended equipment rentals, increased overhead for jobsite and office management, storage fees, and potential cost escalations for materials and labor.
• Relationship Strain: Litigation often damages relationships between project stakeholders, making future collaboration challenging and increasing the likelihood of adversarial interactions.
• Uncertainty and Risk: Litigation outcomes are inherently unpredictable, making the process stressful and potentially financially devastating.

The Bigger Picture:
A global survey revealed an average dispute value of $52.6 million, with North American disputes averaging $30.1 million. The largest reported dispute was valued at a staggering $2 billion. The construction sector—particularly education, healthcare, retail/commercial, and government projects—experiences the highest frequency of claims, exacerbated by challenges like labor shortages, supply chain disruptions, and pandemic-related delays.

The Cost of Avoidance

Avoidance costs are significantly lower and focus on proactive measures to resolve issues at the project level before they escalate into formal disputes. These costs include:

• Direct Costs:

  • Labor, including overtime or premium pay to address urgent issues.
  • Equipment, materials, and supplies to remediate problems promptly.
  • Subcontractor costs for adjustments or additional work.

• Impact Costs:

  • Addressing minor disruptions and inefficiencies through swift action rather than allowing them to compound.

• Indirect Costs and Benefits:

  • Effective project management ensures issues are resolved in real-time, reducing the potential for disputes.

By investing in robust documentation practices, clear communication, and adherence to contract provisions, teams can significantly reduce the likelihood of disputes.