You asked us: Construction disputes in the Middle East

During the webinar ‘Construction disputes in the Middle East: Managing the world’s highest risk of overruns’, you asked us. Here, our expert panellists respond.

World Built Environment Forum, March 2023

Expert panel

• Nicola Caley, Principal, HKA
  
• Nicky Dobreanu FRICS, Branch Director, Omnium International Ltd (Dubai Branch)

When submitting their tenders, some contractors do not assess the risks correctly, and underestimate the project cost. As the project is ongoing, these contractors face financial crisis, which causes the project to face cost overruns. What is required to avoid this issue in future, and to avoid overruns?

Nicola Caley: My top five recommendations would be:

• Make sure the issue of cost escalation is properly considered and ideally addressed in the contract (or priced accordingly).
  
• Avoid submitting an unrealistic programme.
  
• Don’t let optimism bias override established risk management procedures. This is essentially the over-estimation of the likelihood of experiencing positive events combined with the underestimation of the likelihood of negative events.  Apply an appropriate optimism bias adjustment.
  
• Assess the impact of any new requirements, techniques, or technologies.
  
• Horizon scan to consider the current geopolitical and economic environment and its potential impact on project delivery.  Address or price risks accordingly.

Nicky Dobreanu FRICS: Underestimating project costs or failing to assess project risks correctly can have serious consequences for the project’s success. To ensure the bids received are reasonable – a fair price is obtained – I would also recommend:

• Be clear about the project requirements. Making sure the project contractors fully understand these requirements can help to prevent the misunderstandings and miscommunications that can lead to incorrect pricing.
  
• The project team provide guidance to contractors on how to assess project risks and cost and ensure that they have access to all necessary information.
  
• Review tenders carefully, to identify an unrealistic estimates or incomplete proposals. You can find further guidance on this here.
  
• Learn from past projects and use these lessons to inform the tendering process for future projects.
  
• Ensure the tendering process is transparent and fair. This will help to build confidence in the process and encourage contractors to submit more realistic tenders.
  
• Don’t encourage a race to the bottom with tendering. Such tactic can have serious negative consequences for workers, clients, and the industry. It is important to focus on quality, safety, and innovation, rather than solely on price, to ensure that construction projects are completed to a high standard and that workers are treated fairly.
  

How much, in the panel’s opinion, would The Construction Playbook contribute (if applicable) to reducing the risk of both, Employer and Contractor?

NC: In the UK, the Construction Playbook for the public sector was published in late 2020, while the private sector Playbook was published in late 2022.  
The public sector Playbook is mandated on a ‘comply or explain’ basis for central government and certain other bodies, and the wider public sector is encouraged to take account of it.

The private sector Playbook cannot mandate compliance in the same way, but many of its key contributors from the UK construction industry have expressed commitments to embrace its principles and promote its use.
The publication of the two Playbooks themselves are not enough to convert the industry to new ways, but the implementation of the principles and guidelines is key to improving efficiency, working more collaboratively, and properly sharing and managing risk.

ND: It is too early to assess the full impact. However, the 2020 Playbook does contain measures designed to encourage the use of modern methods of construction, digital technologies, and reduce risks for both employers and contractors.

For employers, the Playbook emphasises the importance of developing a clear strategy for the project, including the selection of the right delivery model and the identification of the desired outcomes. This can help to reduce the risk of misunderstandings or disagreements between the employer and the contractor during the project delivery process. In addition, the Playbook emphasises the importance of early engagement between the employer and the contractor, which can help to identify potential risks and issues early on and enable them to be addressed before they become major problems.

For contractors, the Playbook emphasises the importance of providing accurate and realistic cost estimates and of demonstrating a commitment to high standards of quality and safety. This can help to reduce the risk of disputes or legal challenges, which can be costly and time-consuming for both parties.

Cash flow is now a major factor. Contractors, subcontractors and suppliers are financially stressed, with the war in Ukraine, inflation, and skill shortages. In the panel’s opinion, is cashflow being sufficiently addressed by clients?

NC: With the current political, environmental, and technological challenges, cash flow is a major concern for the whole supply chain. In my experience, clients generally follow the contractual payment mechanism for progress payments.  Where issues sometimes arise is on payment for variations and claims.  This is often related to an underlying disagreement as to whether the matter at hand is in fact a variation or valid claim rather than a refusal to pay per se.  If this disagreement is not resolved quickly then this can contribute to cashflow problems.

In these particularly challenging times, it is vital that the parties work openly and collaboratively to solve these challenges. As mentioned, we have seen evidence of parties seeking to find a pragmatic solution that allows the project to conclude successfully.

ND: Cash flow is a critical issue for contractors, subcontractors, and suppliers, especially in the current economic climate where geopolitical tensions, the effects of calamities, inflation, and skill shortages are obvious. Whether clients are sufficiently addressing cash flow depends on the specific client and project.

Cash flow is a two-way street. While clients play a critical role in ensuring that payments are made on time, contractors, subcontractors, and suppliers also have a responsibility to manage their own cash flow effectively. This may involve setting up payment schedules with their own suppliers, closely monitoring expenses, or seeking out alternative forms of financing, if necessary.

It is crucial for all parties involved in a construction project to be proactive and to work collaboratively to manage cash flow effectively. In doing so, they can help mitigate financial strains and ensure the successful completion of the project.

How do the panellists think that claims made throughout the project can be more efficiently managed? How can we better balance the need to continue construction vs ensuring cash flow?

NC: First of all, make sure the contract provides for a stepped, reciprocal, collaborative, and balanced dispute resolution process.  Each step of the process should be clearly defined and everything that can be agreed upon upfront in terms of the process should be agreed. The contract should also set out a procedure for a fallback as it can be very difficult to cater for every eventuality.

It is our experience that early communication and negotiations help to avoid formal disputes.  

Parties should also consider the use of standing dispute boards, with powers that often include a dispute avoidance role, as well as the adjudication of disputes. Used properly, dispute boards are an effective and economical means of resolving even the most complex of construction disputes quickly and efficiently, which ultimately supports cash flow.

ND: There are several strategies that can help achieve this balance, including:

• Developing a cash flow forecast, which can help identify potential cash flow issues before they become major problems.
  
• Communicating regularly and openly between clients, contractors, subcontractors, and suppliers.
  
• Negotiating payment terms, which could include requesting partial payments for completed work, setting up payment schedules, or seeking advance payments for materials or equipment.
  
• Considering alternative financing options, such as factoring, invoice financing, or other forms of short-term financing.
  
• Prioritising work to ensure that the most critical aspects of the project are completed first.
  

Careful planning, open communication, and a willingness to be flexible and adapt to changing circumstances are required. By working together and taking a proactive approach to managing cash flow, contractors, subcontractors, and suppliers can help to ensure the successful completion of the project while also managing their own financial risks.