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Dealing with Construction Disputes: How Should Your Business Proceed?

Dealing with Construction Disputes: How Should Your Business Proceed?

If you’re operating a small construction firm, you may be working on a razor-thin margin to stay competitive. That means you can’t afford additional costs or drags on your time without being compensated.

All too often, construction firms lose both time and money when they became embroiled in disputes over projects. Worse, a dispute could ultimately damage a firm’s reputation.

Fortunately, however, there are several steps you can take that may help avoid potential disputes and quickly resolve any that pop up.

Reasons for Disagreements

What’s the cause of most disputes? Typically, parties will disagree about the terms of a contract. But disputes may arise for the following reasons:

  • Errors or omissions in contract documentation,
  • Failure to properly administer the contract (the primary reason globally), and
  • Failures of owners, contractors or subcontractors to understand or comply with contractual obligations.

How to Try to Avoid Disputes

In the worst-case scenario, a dispute can turn into a breach of contract, an outright termination or a claim against surety bonds (see right-hand box) or some other legal action. The best way to resolve a dispute is to ensure that it never happens. Although there are no absolute guarantees, the following eight steps may help:

1. Set out your work plan. It may reveal potential trouble spots as it addresses how the project will be organized and how major jobs within the project will be controlled to finish the work on time and within budget.

2. Be certain you completely understand the documentation, clarify terms you don’t understand, and are sure there are no conflicting clauses or loopholes.

3. Comply with all pre-construction work, such as providing estimates, creating schedules, contacting subcontractors, ensuring orders and the like.

4. Establish realistic schedules and plan for risks and potential disruptions and delays.

5. Check that all contracts are signed, document in writing potential disagreements and issue daily reports.

6. Set up systems that take all the processes and procedures into account to provide sufficient information and transparency to all the parties.

7. Deal with problems as soon they arise so that issues don’t fester and explode into full-scale disputes.

8. Consult with professionals regarding hazards and other possible impediments.

Explore Resolution Methods

Some disputes are unavoidable, so contracts usually include alternate dispute resolution clauses addressing one or more of the following:

Negotiation. A clause can require disputing parties to attempt to reach a satisfactory resolution without initiating further action (often the optimal result).

Mediation. Although mediation by an independent party isn’t legally binding, it may provide an “easy way “out of a jam.

Specialists. A close relative of mediation — and a way to save time and money — is to use a specialist to find a non-binding resolution.

Adjudication. Typically, an adjudicator hands down a decision and the contract includes a clause that gives a court authority to enforce the decision.

Arbitration. In this process, an arbiter delivers a ruling that may be final or may be appealed.
If all else fails, the parties may opt for litigation. The specifics of litigation should be spelled out in the contract. Litigation is often settled by agreement, but it may also be heard and decided by a jury or a judge in court. Not surprisingly, this is often the most expensive and time-consuming method of resolving a dispute and is best avoided.

A Fall-Back Position

Surety bonds are common in the construction industry because they offer some measure of protection in the event of a dispute.

These bonds are contracts between three entities:

1. The surety, who promises to pay a specified amount if you fail to meet a contract obligation.

2. The principal (that’s you), who must get the bond and is expected to abide by its terms.

3. The obligee (the owner), who requires that you get the bond and gets the money if you don’t live up to its terms.

Essentially, the surety guarantees that you’re good for the money if something goes wrong.

Surety bonds can be costly, so the surety has a vested interest in helping to resolve disputes or at least minimize the damages. For instance, a surety may become involved when the parties can’t come to an agreement and suggest satisfactory resolutions. Keep this option in mind when disputes arise.

Please contact Thomas Burton via our online contact form for more information.

Councilor, Buchanan & Mitchell (CBM) is a professional services firm delivering tax, accounting and business advisory expertise throughout the Mid-Atlantic region from offices in Bethesda, MD and Washington, DC.   

Contact Thomas J. Burton, CPA, MBAView Profile

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