Managing construction costs and claims: How APAC is dealing with new pressures

Clear understanding of project plans and processes as well as contractual provisions can reduce the risks posed by inflation and disputes in the Asia–Pacific region, a recent WBEF webinar heard.

Effective management of construction costs and avoiding disruptive claims is crucial to completing projects on time and on budget. With the risk of disputes on the rise in the Asia–Pacific region, though, a recent webinar convened experts to look at what the industry can do.

Careful preparation and understanding reduce risk

The first thing when mitigating the risk of potential disputes is to have a thorough understanding of the project and its purpose. Clients and contractors alike must have a clear vision of what the project entails, and its objectives.

Misunderstandings at this early stage can lead to inaccurate estimates, inadequate planning and changes in scope, all of which can be causes of dispute further down the line.

It is therefore essential to convey the brief accurately to the architect, who must fully understand the project’s complexities and communicate these effectively to the client. This will ensure that the vision aligns with the client’s wishes and business requirements. However, professionals may sometimes overlook the difficulty a client has in visualising a three-dimensional structure from two-dimensional plans.

The accuracy of the project specifications and bill of quantities is pivotal, too. A rush to start projects can lead to premature tendering with incomplete information, resulting in bids from contractors that lack vital details. This can precipitate a cascade of changes that need to be managed and issues leading to disputes and claims.

Contractors sometimes neglect to invest in a capable commercial team to administer the contract in the procurement phase as well, which can lead to challenges as the project advances. Frequently, though, these and other issues are deferred until the end of the project, meaning that unresolved claims emerge when project funds have been depleted.

Robust processes help identify and manage issues

Construction projects will inevitably encounter issues as they progress. Implementing a process for managing these ensures a uniform method is applied across all projects, helping identify risks, establishing clear notification protocols, and maintaining accurate documentation. The latter is crucial for demonstrating cause and effect and enabling transparent discussions with engineers or clients when problems arise.

How changes are documented and integrated into the project plan, and then handled on site, is key. The way that costs associated with changes to the project are allocated is also important, because budget overruns as the project nears completion can often lead to contentious discussions and disagreements.

Drawing on their experience, panellists suggested that cost and value reconciliation practices in the Asia–Pacific region in particular could benefit from improvement. Identifying disruptions is challenging during a project, though, because parties may not be aware of an issue at its outset. Therefore, having mechanisms in place to detect and evaluate such disruptions is crucial for accurate final account negotiations.

Good processes and robust project and risk management strategies can enable the identification and mitigation of potential risks early on, or the management of unavoidable ones later in the project life cycle. However, poor risk management or inadequate planning and execution can severely affect project progress and delay handover.

Digital tools and technologies can also help reduce risks by centralising information and making it accessible to all stakeholders. Document management systems and electronic databases enable notices and updates to be shared efficiently and improve project communication.

Contracts may offer recourse to deal with inflation

Over the past five to ten years, there has also been increasing pressure on executives to pursue revenue growth, particularly at listed companies in Australia. This pressure can lead to the adoption of fixed-price contracts and the under-tendering of scopes of works in bids, with the aim of securing projects and ensuring continuous revenue flow.

Such practices can result in companies attempting to claw back money on costs that should have been accounted for in original estimates, and this often leads to disputes.

More recently, inflationary pressure on supply chains, materials and labour has increased. In some instances, for example, the cost of shipping and freight have doubled. Navigating inflationary challenges, particularly in shipping and freight, requires careful attention to contract details.

Understanding how to manage cost escalations effectively, and the presence of escalation provisions in contracts is therefore crucial. Particular clauses, such as clause 13.8 in FIDIC contracts, enable cost adjustments to preserve financial balance on projects. This capability is essential for managing the risks associated with fluctuating prices, and ensuring that contracts remain viable and fair for both contractor and client without posing unreasonable risks.

Interest in alternative dispute resolution increases

A further complication with disputes in India is that arbitration has not been widely implemented in the past, although awareness is now increasing Historically, the process tended to be managed by legal professionals rather than construction industry experts. Now, however, there is a shift towards alternative, less adversarial dispute resolution methods to avoid lengthy court processes.

This is seen in the trend for including arbitration clauses in contracts, and exploring other forms of alternative dispute resolution such as mediation or specialised resolution services. Increasing attention is being paid to maintaining business relationships and resolving disputes through more amicable and expedient means.

Less adversarial forms of dispute resolution are sometimes sought because the contractor or subcontractor is unable to bear the financial costs of arbitration as well. In some Australian states, and in Singapore and Hong Kong, third-party funding is available, countering imbalances where contractors or subcontractors lack the resources to pursue owed payment or recover costs from the client.

Regional skill shortages exacerbate challenges

Meanwhile, although India’s construction sector may be booming, it is also experiencing a skills shortage and a lack of new entrants into the profession. This is exacerbated by many civil engineering graduates opting to work for major tech companies rather than in construction, and clients increasingly pressing for tighter deadlines. These factors can increase the likelihood of disputes.

In Australia there is similarly a shortage of quantity surveyors, who play a pivotal role in accurately tracking progress and providing comprehensive contract management throughout project life cycles. To help rectify this, RICS has accredited a number of construction degrees at Australian institutions, such as Bond University in Queensland.

One possible way to mitigate these challenges at scale, though, would be for governments and major clients to coordinate their programme of works and reduce peak demand for finite resources. This would also help ease inflationary pressure relating to skilled labour, materials and equipment.

Acknowledgements

WBEF would like to thank the following for their support on this article.

• Suzanne Chinner MRICS, director, Capital Consulting International (CCi), Australia (moderator)
• Áine Flannery MRICS, principal adviser, contracts – development & technology, Rio Tinto, Western Australia
• Deben Moza FRICS, senior executive director – head of project management services, Knight Frank, India
• Andrew Oddie FRICS, managing director, FTI Consulting, Asia–Pacific region
• K. Satyanarayana, managing director, Starworth Infrastructure & Construction Limited, India