HKA: Causes and Costs of Construction Disputes

The astounding scale of cash and time lost on construction and engineering projects around the globe is revealed in a new analysis of claims and disputes, which heralds a long COVID legacy of heightened uncertainty and risks for capital projects.

CRUX Insight 2021 distils real-world intelligence on more than 1,400 projects across 94 countries to show how they faced overruns approaching half their capital value and three quarters of their scheduled programs.

Consultants at HKA – the leading global specialist in consulting, expert and advisory services – investigated these claims and disputes first-hand. The fourth annual CRUX report combines a regional analysis of this unique empirical knowledge bank with insights from industry-leading consultants in the field, who also propose actionable measures to secure better project outcomes.

CRUX 2021 facts and findings

Headline statistics from this year’s report include:

  • 1,401 projects analyzed
  • $2 trillion – combined capital expenditure
  • $73 billion – total value of claims
  • $100 million – the average disputed costs per project
  • 46.3% – the value of claims as a proportion of planned cost
  • 17 months – the average time extension claimed
  • 71.4% – the typical prolongation for programs
  • 750 years – the cumulative overruns faced by all projects

Causes & COVID effects

These hugely damaging impacts arise from a web of underlying causes that is recurrent and global. The most dominant drivers of claims and disputes are: changes in scope, conflicting interpretation of contracts, design failures, and mismanagement of subcontractors.

CRUX Insight 2021 also explores the market and cultural factors in different regions determining their patterns of causation. These has been distorted by COVID-19 as the pandemic restricted access to sites and labor, constricted cashflow, and exposed the limitations of contract provisions on force majeure and changes in law. By August 21 – the CRUX data cut-off – only one in six projects (16%), begun since the pandemic, generated COVID-related claims, though many more are in the pipeline.

Benign effects are revealed too. Enhanced levels of reporting have helped curb spurious claims and deficient workmanship in some areas. Advanced technologies such as drones and digital modelling gained new advocates. The construction and engineering industry may also learn from other changes in ways of working – often involving closer collaboration – to be more agile and productive in future.

Uncertain times

Ominously, however, COVID has compounded underlying industry weaknesses, intensifying the risk of claims and disputes as the industry is rebounding and governments across the world press ahead with ambitious infrastructure and development plans.

The fourth annual CRUX Insight – themed Operating in Uncertain Times – reports how skills shortages, supply chain disruption, cost inflation, increased market volatility, and the climate crisis are impinging on projects and increasing the potential for conflict in the claims and disputes environment.

  • Skills: More than one in three projects (35.6%) were hindered by gaps in the skills and experience of their management and delivery teams, and associated deficiencies in workmanship. These shortcomings inflated the costs claimed on 499 projects, to $95 million on average – 47.8% of planned outturn expenditure.
  • Supplies: Late delivery of materials and equipment impacted one in nine projects (11.3%), and proportionally more in Africa, the Middle East and the Americas (even before the report’s August 2021 cut-off). Sharp hikes in prices and delivery lags now being reported across all regions are eroding margins and budgets, with increased risk of time and cost overruns.
  • Climate: A tenth of projects too (10.3%) were blown off course by exceptionally adverse weather. But that proportion varies both by region – rising to 12.3% in Oceania, and 15.8% in the Americas – and by sector: 17.6% for resource extraction projects globally. Like the other global uncertainties, the climate emergency requires recalibration of capital project delivery risks.

“Capital projects are haemorrhaging billions of dollars each year to recurrent, predictable and often avoidable claims and disputes,” said Renny Borhan, CEO of HKA“CRUX Insight 2021 not only diagnoses these failings and quantifies the impacts, but also identifies corrective actions to stem these losses.

“The stakes are rising for all involved in delivering capital projects as global pressures increase in parallel with construction activity. Individually and collectively, project stakeholders and the industry can learn lessons from CRUX Insight to operate more effectively amid this heightened uncertainty and deliver better project outcomes. I encourage them to make good use of our analysis and insight along with the CRUX Interactive Dashboard.”

Regional analysis and actionCRUX Insight 2021 maps out the most pressing challenges in each region and practical measures to address them.

Africa: A maturing of the claims culture is overdue. Adopting best-practice protocols for delay and disruption and forensic schedule analysis is a priority, alongside upskilling of employers’ and contractors’ teams.

Americas: The push to design and build is having unintended consequences. A more proactive approach to risk assessment and allocation, with checks on design progress and constructability and designer price adjustments, can limit scope creep and design clashes.

Asia: At every stage of the project lifecycle, risk registers rarely used in the region can mitigate impacts that are not being anticipated. The culture is also resistant to formal dispute resolution mechanisms, but there is a cost-effective alternative for avoiding escalation.

Europe: Claimed costs, averaging 58.3% of project values, are the highest of all regions. Design errors have overtaken change in scope atop the region’s causation ranking. More of these conflicts are being defused by earlier recourse to independent technical expertise. Well-defined handling processes would also facilitate earlier settlement.

Middle East: Projects face the longest time overruns, equivalent to an average 84.7% of schedules. Early contractor involvement – in design development, aligned with robust scheduling, and employer stress-tests of buildability – can pave the way for more systemic change and investment in people and project governance.

Oceania: Booming construction is stressing the projects ecosystem of the two major economies – New Zealand and Australia. The latter’s unprecedented A$110 billion pipeline demands a paradigm shift, involving collaborative working and an integrated infrastructure strategy, to deal with the looming challenges in contracting capacity, skills and the supply chain.

Read the report: www.hka.com/2021-crux-insight-operating-in-uncertain-times

Visit the dashboard: www.hka.com/crux-interactive-dashboard/

About CRUX

CRUX is HKA’s integrated research programme. This draws on incomparable intelligence from investigations by experts providing claims consulting and dispute resolution services on major capital projects around the world. CRUX Insight is our annual publication analysing the root causes of claims and disputes. Our 2021 analysis captured data on projects under construction or started on or after February 2020 up until August 2021, which was analysed against the pre-COVID dataset from 2019-2020. We are committed to sharing lessons with clients and more widely so our industry can effectively manage risks on complex projects.

About HKA

HKA is the world’s leading consultancy of choice for multi-disciplinary expert and specialist services in risk mitigation and dispute resolution within the capital projects and infrastructure sector. Our team has extensive experience advising clients on the economic impact of commercial and investment treaty disputes, forensic accounting matters and in cybersecurity and privacy governance and compliance. HKA also supports companies that conduct business with the US Federal Government, providing consulting services on complex government contracting matters. We employ more than 1,000 consultants, experts and advisors in more than 40 offices across 17 countries.

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