How local governments can get ahead of the infrastructure wave: Strategies to mitigate risk
Over the next few years, infrastructure projects are expected to take off. Public owners (local governments) will build new highways and bridges, mass transit networks and buildings; they will modernize existing energy systems and more. With any major construction project comes two primary concerns: delivering the project on time and within budget. These concerns are of particular importance considering tight funding requirements and public scrutiny for delays and cost overruns.
Owners pass off these concerns to the contractor by way of the contract. At first, this “hands-off” approach may be easy for the owner. However, once the project incurs issues, claims arise, sometimes leading to costly disputes, which can last years. To (hopefully) avoid these costly disputes, owners need to change their thinking at the outset of the project by actively managing the risk from the beginning of the project, not just when problems occur.
Contractual risk transfer is a false security blanket
Traditionally, parties transfer risk by setting forth terms in the contract. For example, an owner requires a contractor to construct a project in accordance with certain specifications, by a specific date and for a certain price. Those terms are set forth in the contract, leaving the owner with some level of assurance that the project will be constructed under those contract terms. However, that is not reality.
The reality is that issues will arise, impacting cost, schedule or both. As a result, the contractor may seek to transfer its risk back to the owner, whether rightfully under the parties’ contract or not, by requesting an adjustment to the contract time and/or price.
When that happens, the owner is at a disadvantage by evaluating a claim that is already set to impact the project’s cost and/or schedule. This disadvantage is amplified because the interests of the parties are at odds: the owner wants the project built on time and on budget, and the contractor wants to be paid for the work without any costs to absorb. This dichotomy sometimes leads to costly and lengthy disputes. How can the owner better manage this risk?
Project controls are critical to effective decision making
Before the project issues occur, owners should be actively engaged at the outset of a project: evaluating the project proposals and continually evaluating the project progress, costs and issues thereafter. An owner can do this by implementing risk management strategies called “project controls,” which include implementing strategies of cost estimating, construction planning and scheduling, and claims management to evaluate and manage risk.
That means the owner may have its own team of professionals to evaluate the contractor’s progress (particularly, schedule and cost). The team may be comprised of construction professionals, such as engineers and schedulers, who evaluate the contractor’s process (such as work sequencing and crew loading), schedule (analyzing the critical activities for project completion) and change order requests (evaluating reason for the change, work scope, and schedule/time impacts). The team may also include executives and attorneys who assist in resolving complex issues as they arise, not once they become change orders or claims. These methods provide the owner with insight on the project. That way, the owner can better evaluate the work change requests and intervene instead of relying on the contractor to find the solution and assuming that it is the best solution.
Avoiding disputes (if possible) = Big cost savings
When a dispute arises, the claim may not be as simple as an owner making payment to the contractor. Both parties dispute liability (i.e. who is at fault) and/or the damages amount (i.e. what one party owes the other). These claims are subject to the dispute resolution requirements of the contract, typically starting with executive negotiations and/or mediation and followed by a formal proceeding such as litigation, arbitration, or an administrative hearing.
The problem is that parties often rush to get resolution from a formal dispute resolution process (such as arbitration, litigation, or an administrative hearing). Time and time again, parties view mediation as a fruitless endeavor, particularly, based on past experience with failed mediations or the perception that mediation will be unhelpful, particularly, in a highly contested dispute.
However, mediation can be an effective tool for the parties to discuss and explore the project issues without arguing all the facts of the case. During this process, the parties can narrow down the issues to the few issues that prevent the parties from settling and explore the reasons why the parties are unable to resolve their differences. As part of the process, parties can elect to have an “evaluative mediation,” where the parties receive feedback from the mediator (a neutral third-party, typically, well-versed in that particular subject area, such as construction) as to the strength and weaknesses of each party’s claim analysis.
Evaluative mediation can be a cost saving measure when disputes arise. In an example from the authors’ recent experience, a contractor on a large infrastructure project spanning several years failed to timely perform its work, completing the project several years late and way over budget. The contractor contended that the owner and various third parties delayed the contractor’s work throughout the project and that the owner was to pay for the cost overruns. The parties delayed addressing the highly contested dispute until the end of the project. Only then did the owner hire a scheduling expert to evaluate the contractor’s proposed and actual schedules to evaluate as to what went wrong. That expert determined that the contractor’s proposed schedule was never going to work because the contractor’s initial schedule assumptions to complete the project within a particular timeframe were wrong. This issue was effectively uncovered during preparation for a mediation, and ultimately resolved through an evaluative mediation.
While ideally these project issues would have been discovered earlier if the owner had engaged a construction scheduler to evaluate the contractor’s schedule on an ongoing basis from the beginning of the project, when these issues do arise, evaluative mediation is an effective tool to resolve contested cases. And in the authors’ experience, these types of highly contested claims are effectively resolved through an evaluative mediation with significant overall cost savings compared to pursuing the claims through traditional arbitration or litigation.
Sometimes the truth is hard to hear, but it easier to hear when coming from a neutral third party. Ultimately, if the parties are able to understand each other’s position, agree to disagree on a few key issues (instead of arguing every fact), and come to a compromise, both parties “win” by avoiding the costly dispute resolution process of a formal trial, whether litigation, arbitration or an administrative hearing.
While there is no perfect contractual set-up to shift 100 percent of the risk from an owner to the contractor, an owner can be proactive by actively managing a project’s risk, even if the burden primarily falls on the contractor. The key is for the owner to be engaged in the process by evaluating the project information from the beginning. That way, when problems arise, an owner is able to evaluate the issues and address them. Also, the owner can negotiate the appropriate contract changes and save money (i.e. costly disputes). While there is no way to mitigate all the risk of a project, owners are best prepared when they are engaged and educated by their own project team. This strategy results in the best possible schedule and cost for the project. However, when that method fails or is not employed, evaluative mediation is an effective cost savings tool compared to traditional litigation or arbitration as a strategy to resolve claims.
Ken Roberts, Esq., chair of Venable’s Construction Law Group, concentrates his practice on construction law, project controls and procurement contracts. He engages in a range of services, including preparation and negotiation of contracts, project controls monitoring and advice during ongoing projects, negotiation of change orders and contract additions, alternate dispute resolution through mediation, arbitration, dispute review boards, and, when necessary, litigation. Roberts can be reached at [email protected].
Christina Brunka, Esq., is a senior associate of the Construction Group at Venable LLP, representing clients in all aspects of construction. Brunka is experienced in representing owners in public and public-private projects and is routinely engaged at the outset of a project for contract preparation and negotiation. She also supports project teams during construction by preparing amendments and change orders and represents clients in mediations, arbitrations and litigation. Brunka can be reached at [email protected].