Bryan Green
2023-04-13
You probably got into construction because you enjoy creating. Maybe you have a passion for building or engineering.
You probably didn’t get into construction because you enjoy long, drawn-out contract dispute procedures.
Contract disputes are an unfortunate reality in many industries, particularly in construction and project management.
In my last post, I addressed the importance of viewing the contract as a tool to completing the project’s goals. In an ideal world, the contract represents the mutual agreement of the expectations of the contractor and client.
But regardless of how well the contract is written, disputes are bound to arise.
And regardless of the nature of the dispute, dispute resolution procedures can be complicated.
For the purpose of this post, we’ll consider a dispute to be a formal action that can lead to mediation, arbitration, or litigation.
The Nature of Contract Disputes
Contract disputes arise when there is a disagreement between parties regarding the terms and conditions of a contract, the quality of work performed, or the fulfillment of obligations. Common causes of contract disputes include:
- Ambiguities in contract language
- Differing interpretations of contract terms
- Changes in project scope or specifications
- Delays in project completion
- Disagreements over payment terms or amounts
While contract disputes can occur in any industry, they are particularly prevalent in construction and project management, where projects are often complex, involve multiple stakeholders, and are subject to changing circumstances.
While contract disputes are rarely fun for either party, there is inequality in the benefits of a contract dispute. What can be gained from a contract dispute and the timelines of disputes often bias in favor of the client.
what everyone wants from a contract
Before we look into what each party stands to gain and lose from a dispute, we’ll first need to look at the motivations of each party.
Ignoring third-party stakeholders and internal politics for a minute, the two key players in most contract disputes are the client and the contractor.
client’s motivations
The client has retained the contractor with the intention of completing some project.
They likely have a ideal timeline or deadline defined for this project and they almost certainly have a budget. Whether this is a soft budget (there’s only so much money allocated to the project) or a hard budget (there’s literally no money available for cost overruns) will affect the client’s risk profile.
But ultimately, the client wants the project done on-time, to their quality standards, for the agreed upon price.
The client does not want to pay for any work or material that was not previously agreed upon, and they don’t want to pay for work that isn’t done. With the exception of some unique items like material deposits and mobilization fees, work is to paid for after the work is complete.
Contractor’s motivations
The contractor has engaged the client to complete the work for an agreed upon price. The price might represent a profitable endeavor for the contractor, or there may be other benefits to the contractor, like experience or covering overhead costs. Depending on the type of contract, the contractor’s incentives will change. But in most cases, the contractor benefits from finishing the project on time and under budget.
The contractor does not want to do any work over and above the contract scope unless payment terms have been agreed upon. The contractor wants to be able to access the work area unimpeded for as long as is needed to complete the work.
The exact details of scope, payment, and access should be outlined in the contract and the contractor should have taken all of these terms into account when preparing their bid.
Keeping these motivations in mind, it seems both the contractor and client are incentivized to get the project completed on time and under budget. But what if an unexpected condition is discovered that will cost more money?
What previously seemed like clear language may now feel ambiguous. Perhaps the contractor believes something out of scope, while the client believes otherwise?
The client does not want to pay any more money, and the contractor doesn’t want to do work that wasn’t considered in their bid. So, we’re at a stand still.
Does it benefit the contractor to formally dispute the change in work? Does it benefit the client?
Let’s see.
Why Clients Can Benefit from Contract Disputes
There are several factors that contribute to clients often coming out ahead in contract disputes:
Leverage:
Clients typically have more leverage in contract disputes due to their control over payment and the potential for future business opportunities. This gives them an advantage when negotiating settlements or pursuing litigation.
Access to resources:
Clients often have greater financial resources and legal support at their disposal, allowing them to pursue contract disputes more aggressively and with a higher likelihood of success.
Public perception:
In many cases, clients are perceived as the “victim” in contract disputes, with contractors seen as the party responsible for project delays or substandard work. This public perception can work in the client’s favor during negotiations or litigation.
Flexibility:
Clients may have more flexibility in terms of finding alternative contractors or adjusting project timelines, making them less reliant on a positive outcome from the dispute.
The Challenges Faced by Contractors in Contract Disputes
Conversely, contractors often face a number of challenges when it comes to contract disputes:
Financial strain
Pursuing a contract dispute can be financially draining for contractors, particularly smaller businesses with limited resources. The cost of legal fees, expert witnesses, and potential damages can quickly add up, putting significant strain on the contractor’s finances.
If the dispute is about the amount or timing of payment, the contractor is already in a weakened position because the client has the disputed funds available at their disposal.
Reputation damage:
It sucks to admit it, but trying to make a name for yourself as an honest, transparent contractor is an uphill battle in an industry with a generally negative public perception.
Being involved in a contract dispute can harm a contractor’s reputation (especially if your client is seen favorably by the public), making it more difficult to secure future projects and maintain a positive business image.
Lost time and resources:
Contract disputes can be time-consuming and resource-intensive, diverting the contractor’s attention away from their core business activities and potentially delaying other projects.
Weaker bargaining position:
Contractors may be in a weaker bargaining position when it comes to contract disputes, particularly if they are reliant on the client for payment or future business opportunities.
I’ve been there
I was working on a modestly-sized landscaping job a few years back. The first item on the schedule required that we remove a handful of small trees and saplings, along with a large amount of overgrown grass and brush. A typical clear-and-grub that we’ve done 100 times before.
The project setup phase had taken longer than we’d anticipated and we were anxious to get on site and start generating revenue. We were confident we’d satisfied all the requirements to mobilized to site, and we sent a formal letter to the client announcing our intention to begin work the following week.
I’m not a fan of the “ask forgiveness, not permission” approach to anything. But sometimes in construction, you have to formally state your intentions and request objection rather than request permission. Because, its easy for inexperienced or overwhelmed clients to disregard the urgency that construction requires.
We received no formal objection, so the following week we arrived on site and began cutting down trees and clearing brush.
In a meeting the following week, the client (much to our surprise) asked when the were planning to start, and we informed them that we already had.
It was clear the client felt caught of guard, and the responded (perhaps understandably) negatively. What followed was a pair of non-conformance reports outlining all the ways in which our tree-cutting endeavor had breached the contract and a supposed $25k fine for damage to their property.
While we were confident that everything we had done was above board, the client felt deceived and wanted us to know about it.
The possible dispute
I strongly believe in taking ownership for your actions. In this case, I was willing to accept that our approach to client communication was lacking and I had a plan to improve our notification process to better align with the client’s expectations.
But that $25k fine was punitive and unfair. The trees we removed were contractual required to be removed. And the schedule showed them being removed the week we took them down. The idea that the client experienced any loss from the removal of those trees is absurd.
So we sent a letter stating a formal objection to the fine. The client returned a letter reaffirming their stance. We sent a follow-up letter, and so did they.
Neither party was budging on the issue.
We held meeting after meeting in an attempt to make this disagreement go away but neither party would budge.
Failure to resolve this disagreement was preventing further work on the project, so we did the only thing we could: we initiated the formal dispute procedures as outlined in the contract.
The Actual dispute
The formal dispute process required that we convene a meeting of senior management. Representatives from both organizations met to discuss the issue.
If the meeting of senior management failed to resolve the issue, then we could pursue non-binding mediation. If that failed, then the final step was binding arbitration.
At each phase in the dispute, both parties are spending time and money with the ultimate goal to collect or avoid a $25k fine.
Eventually, it became an issue of establishing precedent that we would not accept punitive measures when there was no breach of contract.
I’d love to share that this dispute was resolved amicably. We managed to avoid the $25k fine and we didn’t have to proceed to mediation. But the actual and assumed costs of fighting cost us well over $25k when you account for the time spent engaging in continued discussions and the delay to the project.
so what’s the real problem?
If I had to consider the number one indicator of project success, in my experience, it would be schedule continuity. The type of low that occurs when we, as contractors and project managers, can move a project forward with limited and manageable obstacles.
Disputes Over Cost/Price
Contract disputes often arise due to disagreements about cost or price, which can impact both the contractor and the client. However, contractors are generally more vulnerable in such disputes, as they are often required to continue working on the project despite pending payments.
Delays in payment can strain a contractor’s cash flow, making it difficult to pay subcontractors, suppliers, and workers. On the other hand, clients may have more financial resources at their disposal and can afford to engage in lengthy legal battles to protect their interests. This disparity puts contractors at a disadvantage, as they may be forced to accept unfavorable terms to avoid bankruptcy or other financial difficulties.
The best the contractor can hope for is to receive full payment for work they believe they are rightfully owed. In pursuing a formal dispute, both parties will spend time and money and there’s a chance that a mediator, arbitrator, or judge may compel the contractor to accept only a fraction of the money owed in order to settle the dispute.
Many contracts include language requiring all parties to split dispute resolution costs, and there may be limits or restrictions on claiming additional damages.
This is especially frustrating if your dispute is about the timing of payment because disputes take time.
Disputes Over Schedule
Disputes related to project schedules can also have a disproportionate impact on contractors compared to clients. Delays in project completion can result in penalties or liquidated damages, putting further financial strain on the contractor.
Additionally, contractors may be required to accelerate their work at their own expense to make up for lost time. Clients, however, are often better protected in such situations, as they can enforce contract provisions that shield them from the negative effects of schedule disruptions. Furthermore, clients can use the contractor’s failure to meet deadlines as leverage in negotiations or legal proceedings, further weakening the contractor’s position.
If the schedule is delayed due to circumstances beyond the contractor’s control, the client may be responsible for both schedule relief from liquidated damages and the increased cost of a slower project.
Understandably, if the delay is also beyond the client’s control, they may be uninterested in bearing the full cost and its in their interests to mitigate damages by passing some of the responsibility to the contractor.
But disputes over schedule delays take time and resources away from the project and can potentially add additional delay.
Disputes Over Schedule
Scope-related disputes, such as disagreements over the interpretation of contract documents or the extent of work required, can also be detrimental to contractors. Inaccurate or incomplete specifications can lead to costly change orders or rework, which can erode the contractor’s profit margins.
While clients may also incur additional costs due to scope disputes, they are generally in a stronger position to negotiate or litigate these issues. Contractors, on the other hand, are often under pressure to maintain a positive relationship with the client to secure future work, which may force them to accept less favorable terms in order to resolve the dispute.
I’ve been in a number of situations where the threat of dispute, and the costs associated with it, led us to complete extra-contractual work for free or at severely reduced rates because doing so was the more expedient option.
This imbalance between client and contractor underscores the importance of clear and comprehensive contract documentation and the need for contractors to be diligent in protecting their interests throughout the project lifecycle.
Strategies for Contractors to Minimize the Risks of Contract Disputes
While it’s not always possible to avoid contract disputes, there are several strategies contractors can employ to minimize their risks and protect their interests:
Develop clear and detailed contracts:
Ensuring that contracts are clear, detailed, and unambiguous is crucial in reducing the likelihood of disputes. Make sure to include specific terms related to project scope, payment terms, and dispute resolution procedures.
If you get a chance to be involved in the contract negotiation phase, take the necessary time to review, and don’t be afraid to suggest changes.
Even if you aren’t, it can be helpful to start keeping a journal of contract terms that you’ve found unfavorable. Consider how you’d better like them structured. When you do inevitably get involved in contract negotiations, you’ll have a set of criteria to look through. Contract language is an often ignore lessons learned item.
Maintain open communication:
Open and transparent communication with clients can help to address any potential issues before they escalate into full-blown disputes. My tree-cutting example from before is evidence of this. While the client was able to come up with many formal reasons why they believe we were wrong to cut down the trees, I continue to suspect that they just felt blindsided.
Regularly updating clients on project progress and discussing any changes or challenges that may arise can help circumvent disputes.
Document everything:
Keeping thorough records of project progress, communications, and any changes to the scope or specifications can provide valuable evidence in the event of a dispute. This documentation can help to support the contractor’s position and potentially lead to a more favorable outcome.
Seek legal advice:
While engaging a legal expert with experience in contract disputes may cost money, it will be much cheaper than a full-blown dispute and can help contractors navigate the complex legal landscape and ensure that their interests are protected. This may involve reviewing contracts, providing advice on dispute resolution strategies, or representing the contractor in negotiations or litigation.
Don’t skimp on legal representation to save a buck.
Implement a proactive risk management strategy:
Identifying potential risks and taking steps to mitigate them can help contractors minimize the likelihood of contract disputes. This could involve conducting regular risk assessments, implementing quality control processes, and ensuring that project timelines and budgets are realistic and achievable. We’ll discuss effective risk planning and strategies in a future post.
The Importance of a Balanced Approach to Contract Disputes
While it’s essential for contractors to protect their interests and minimize the risks associated with contract disputes, it’s also important to recognize that not all disputes can or should be avoided. In some cases, pursuing a contract dispute may be necessary to ensure that your rights are upheld and that they receive fair compensation for their work.
The key is to strike a balance between protecting the contractor’s interests and maintaining positive business relationships with clients.
Many contractors go broke because they don’t know which hill to die on. Is going broke through a legal fight worth it over a small fine and some trees? Probably not. But using the dispute process to protect yourself against months of extra work can be the difference between a profitable project and a losing one.
By implementing the strategies outlined above, contractors can reduce the likelihood of contract disputes and increase their chances of achieving a favorable outcome when disputes do arise.
Stay safe out there
Contract disputes are drains on time, money, resources, and good will. All of which are important on a project.
When deciding whether to enter into a formal dispute, just know that a dispute initiated by the contractor cannot drive the project forward. Disputes of this kind are usually to collect money, compensate for lost time, or reinforce contract language.
The client can propel the project via dispute. Client disputes can compel the contractor to continue working, to finish abandoned work, or other such claims.
Disputes are a double-edge sword: often benefiting the client while posing significant challenges for the contractor.
By understanding the factors that contribute to this imbalance and taking proactive steps to minimize the risks associated with contract disputes, contractors can protect their interests and maintain a successful business.
Developing clear and detailed contracts, maintaining open communication, documenting project progress, seeking legal advice, and implementing risk management strategies are all essential steps in reducing the likelihood of contract disputes. In cases where disputes are unavoidable, considering alternative dispute resolution methods and maintaining a balanced approach can help contractors navigate the complex world of contract disputes and achieve a more favorable outcome.
BG
