Introduction to Construction Dispute Resolution Feniosky Peña-Mora Gilbert W.Winslow Career Development Associate Professor of Information Technology and Project Management MIT Room 1-253, Phone (617) , Fax (617) Department of Civil and Environmental Engineering Massachusetts Institute of Technology Intelligent Engineering Systems Laboratory Center for Construction and Research Education Stage 2: Negotiation

© Peña-Mora, et. al. 2002Introduction to Construction Dispute Resolution Chapter 5: Negotiation 2 Definitions WHAT Participants’ Interaction for Problem Resolution WHO Participants in All Levels of Management WHY Mutual Acceptable Solution Avoidance of Conflict Escalation Time and Money Saving, Relationship Rescue HOW Distinction Between Positions and Interests Negotiation Style and Techniques Congruent With Atmosphere

© Peña-Mora, et. al. 2002Introduction to Construction Dispute Resolution Chapter 5: Negotiation 3 Highway Interchange Project Underground Highway Interchange Construction Project Design-bid-build Contract, 3 ½ Year Project Major Participants: Owner, Program Manager, General Contractor, Designer Major Impedance: Interference With 10 Other Contracts High Risk of Schedule Delays Construction Starting up With Incomplete Design Due to Tight Schedule 13 Major Design Changes After Bid Award Main Change Order Related to the Closure of the Tunnels; 21% Price Increase From Original Contract Price

© Peña-Mora, et. al. 2002Introduction to Construction Dispute Resolution Chapter 5: Negotiation 4 Case Study: Important Issues Could the Owner Have Foreseen the Change Orders Before Construction Startup? Could This Change Order Be Handled in a Non Confrontational Manner? Could This Change Order Be Resolved Through Simple Negotiations at the Jobsite? Should the General Contractor Take a Hard Position on Some of the Issues that the Owner Would Consider More Important? What Are the Interests/positions of the Owner or the Contractor? What Are the Sources of Power of the Negotiating Parties? Are the Interests of the Owner and the Contractor Aligned?

© Peña-Mora, et. al. 2002Introduction to Construction Dispute Resolution Chapter 5: Negotiation 5 Outline  The Field of Negotiation Positions versus Interests Negotiation Styles Preparation Step Negotiation Structured Negotiations Facilitated Negotiations/Meetings

© Peña-Mora, et. al. 2002Introduction to Construction Dispute Resolution Chapter 5: Negotiation 6 The Field of Negotiation Theories of Negotiation Taught in Business and Law School Programs Negotiation as the Second Stage Following Prevention and the First Phase in Dispute Resolution Negotiations Defined as Communications between Parties in an environment of Trust, Collaboration and Objective Alignment to Get Jointly a Solution to a Problem Acceptable by All Parties Result : Fair and Amicable Settlement Through Communication, Win/win Outcome No Involvement of a Third-Party

© Peña-Mora, et. al. 2002Introduction to Construction Dispute Resolution Chapter 5: Negotiation 7 Outline The Field of Negotiation  Positions versus Interests Negotiation Styles Preparation Step Negotiation Structured Negotiations Facilitated Negotiations/Meetings

© Peña-Mora, et. al. 2002Introduction to Construction Dispute Resolution Chapter 5: Negotiation 8 Positions vs. Interests Focus in Negotiations on Individual and Collective Interests rather than Positions Example of a Position: “He wants $100,000 for the change order now.” Example of an Interest: “Although he is willing to do the extra work, he is low on cash and cannot fund the work.” Interest-Based Negotiations Leading to “Non- Zero Sum” Solutions and Avoiding Court A “Zero Sum” Solution is When Benefits for One Party Are Expenses for the Other “Positional” Bargaining as a Common Practice in Construction: Assuming a Position and Defending it Based on Contract Clauses and Law

© Peña-Mora, et. al. 2002Introduction to Construction Dispute Resolution Chapter 5: Negotiation 9 Positions vs. Interests : Example A Position-Based Negotiation Between SUB and GC: SUB: I will not be able to finish on time. GC:You will finish as scheduled. SUB:I need two extra weeks. GC:You cannot have two weeks. SUB: If I do not get two weeks, I will not be able to finish on time. GC: No, you will finish according to the contract or we will collect damages and replace you. An Interest-Based Negotiation Between SUB and GC: SUB: I will not be able to finish on time. GC:Why Can’t you finish as promised? What are the reasons? SUB: My supplier will not be able to deliver the materials until next week, causing me to finish two weeks behind schedule. GC: As you know, the schedule is very tight for this project and there is little float available. Are there any other suppliers who can deliver on time? SUB: Yes, but they are more expensive, more than the damages incurred by finishing late. GC:Although you are responsible for meeting the milestone, I understand your dilemma. Let me see what I can do. I know some other suppliers that might be able to help.

© Peña-Mora, et. al. 2002Introduction to Construction Dispute Resolution Chapter 5: Negotiation 10 Negotiation Aspects Substantive: Money, Time, Long-term Market Procedural: Confidentiality, Protocol, Administration Psychological: Need for Respect, Status, Security, Recognition Hollands, 1989

© Peña-Mora, et. al. 2002Introduction to Construction Dispute Resolution Chapter 5: Negotiation 11 Outline The Field of Negotiation Positions versus Interests  Negotiation Styles Preparation Step Negotiation Structured Negotiations Facilitated Negotiations/Meetings

© Peña-Mora, et. al. 2002Introduction to Construction Dispute Resolution Chapter 5: Negotiation 12 Negotiation Styles Avoiding: Ignoring Worthless Problems Competing: Refusing to Budge Accommodating: Meeting the Interests of Requests of the Other Side Compromising: Finding the Middle Ground When All Parties Have Valid Complaints Collaborating: Finding a Common Ground

© Peña-Mora, et. al. 2002Introduction to Construction Dispute Resolution Chapter 5: Negotiation 13 Examples of Negotiation Styles Avoiding: Compare the two situations Situation 1 : Union Workers are upset because there are only 20 bathrooms on-site instead of 22.-This Problem is not worth a lot of time. Situation2 : Union Workers are upset because there are 20 bathrooms on-site and no female bathrooms.- This may be a legitimate problem that should not be ignored. Competing: Compare the two positions Sub requests some leniency in meeting certain safety requirements. GC firmly refuses because he /she is responsible for safety on construction site.- Adequate Usage of the Competing Style Sub continues with the competing style.-Unwise Position

© Peña-Mora, et. al. 2002Introduction to Construction Dispute Resolution Chapter 5: Negotiation 14 Examples of Negotiation Styles Accommodating: Refer to the Previous Example The SUB Should Take an Accommodating Style So He Reaches an Acceptable Outcome Even If He Is at Fault Compromising: Adverse Weather Conditions Contractor Asks 10-day Time Extension. Owner Thinks That the Weather Does Not Impede the Work. Both Parties Compromise: the Contractor Is Given a 6- day Time Extension Collaborating: Contractor and Designer Brought Into the Project Early to Give Their Input and Help Steer the Project Based on Their Expertise

© Peña-Mora, et. al. 2002Introduction to Construction Dispute Resolution Chapter 5: Negotiation 15 Outline The Field of Negotiation Positions versus Interests Negotiation Styles  Preparation Step Negotiation Structured Negotiations Facilitated Negotiations/Meetings

© Peña-Mora, et. al. 2002Introduction to Construction Dispute Resolution Chapter 5: Negotiation 16 Preparation Determination of the Best Alternative To a Negotiated Agreement Example: An Owner Negotiating with Contractor 1 for the Lowest Price on a Quality Guaranteed Contract- Bid Price=$100,000. For the Negotiation with Contractor2, the BATNA is $100,000 Identification of the Sources of Power of Each Party Determination and Prioritization of Needs and Interests Prior to Facing the Other Party Developing Solutions Acceptable to Both Sides

© Peña-Mora, et. al. 2002Introduction to Construction Dispute Resolution Chapter 5: Negotiation 17 Outline The Field of Negotiation Positions versus Interests Negotiation Styles Preparation  Step Negotiation Structured Negotiations Facilitated Negotiations/Meetings

© Peña-Mora, et. al. 2002Introduction to Construction Dispute Resolution Chapter 5: Negotiation 18 Step Negotiation CONTRACTOR ORGANIZATION OWNER ORGANIZATION Level 1 (e.g., Field Supervisor or Project Engineer) Level 2 (e.g., Project Manager) Level 3 (e.g.,V.P. Operations) Level 1 (e.g., Architect or Engineer ) Level 2 (e.g., Project Representative Level 3 (e.g., Senior Management) Step 1 Step 2 Step 3 Communication Lines Peña-Mora,et.al,2002

© Peña-Mora, et. al. 2002Introduction to Construction Dispute Resolution Chapter 5: Negotiation 19 Outline The Field of Negotiation Positions versus Interests Negotiation Styles Preparation Step Negotiation  Structured Negotiations Facilitated Negotiations/Meetings

© Peña-Mora, et. al. 2002Introduction to Construction Dispute Resolution Chapter 5: Negotiation 20 Structured Negotiations Steps Selection of Authorized Agents by Each Party Final Settlement of Some Disputed Items by Agents Adjudication of Unresolved Disputed Items by a Third Party Neutral Documentation of Decisions and Administration of Contract Changes

© Peña-Mora, et. al. 2002Introduction to Construction Dispute Resolution Chapter 5: Negotiation 21 Pros of Structured Negotiation Process Control and Time Saving Expertise of Agents

© Peña-Mora, et. al. 2002Introduction to Construction Dispute Resolution Chapter 5: Negotiation 22 Outline The Field of Negotiation Positions versus Interests Negotiation Styles Preparation Step Negotiation Structured Negotiations  Facilitated Negotiations/Meetings

© Peña-Mora, et. al. 2002Introduction to Construction Dispute Resolution Chapter 5: Negotiation 23 Facilitated Negotiations Neutral third party acting as a facilitator Two negotiation phases Clear definition of both parties’ claims Exploration of settlement strategies for a win/win outcome

© Peña-Mora, et. al. 2002Introduction to Construction Dispute Resolution Chapter 5: Negotiation 24 The Facilitator Role of Facilitator Channel of Communication Translator of Position into Common Ground for Settlement Facilitator’s Attributes as Specified by AAA Impartiality and Trustworthiness Basic Understanding of Construction Solid Organizational Skills Knowledge Of ADR and Arbitration

© Peña-Mora, et. al. 2002Introduction to Construction Dispute Resolution Chapter 5: Negotiation 25 Outline The Field of Negotiation Positions versus Interests Negotiation Styles Preparation Step Negotiation Structured Negotiations Facilitated Negotiations/Meetings

© Peña-Mora, et. al. 2002Introduction to Construction Dispute Resolution Chapter 5: Negotiation 26 Highway Interchange Project High Potential of Conflict Prior to Construction Startup Delivery System (DBD) Incompatible With the Incomplete Design Changes, Variations and External Uncertainty Incomplete Scope Definition-internal Uncertainty Owner and Contractor With Similar Interests Successful Interest Based Negotiation Collaborative/compromising Strategy Equitable Cost Compensation for the Contractor $US 31 million Paid to Contractor at 80% Completion An Independent 3 rd Party Hired by the Owner to Verify the Numbers Construction Completion on Time

© Peña-Mora, et. al. 2002Introduction to Construction Dispute Resolution Chapter 5: Negotiation 27 Summary Negotiation as the First Stage after the Occurrence of a Dispute Participants with High Degree of Control Over the Possible Outcomes Possible Involvement of a Third Party Facilitator Interests Based rather than Positions Based Negotiations Attempt to Reach a Non-zero Sum solution with a Win-win Outcome Different Negotiation Styles: Avoiding, Competing, Accommodating, Compromising, Collaborating Three Techniques in the Negotiation Process : Step, Structured and Facilitated Negotiations

© Peña-Mora, et. al. 2002Introduction to Construction Dispute Resolution Chapter 5: Negotiation 28 References [AAA, 1996] : American Arbitration Assiociation. Building Success for the 21st Century: A Guide to Partnering in the Construction Industry. Dispute Avoidance and Resolution Task Force of the American Arbitration Association [Berman, 1995] : Berman, Gary S., (1995). Facilitated Negotiation, An Effective ADR Technique. Dispute Resolution Journal pp April-June [Boskey, 1993] :Boskey, James B., (1993). Blueprint for Negotiations. Dispute Resolution Journal pp December [Fisher, 1981] : Fisher, Roger, Getting to yes : negotiating agreement without giving in / Boston: Houghton Mifflin, [Hill, 1995] : Hill, Richard, (1995). Non-Adversarial Mediation. Dispute Resolution Journal pp July [Hoctor, 1989] : Hoctor, David,(1989). Techniques for the Resolution of Major Construction Contract Disputes. Public Utilities Fortnightly Vol. 123 (9) pp April 27 [Hollands, 1989] : Hollands, David S. FIDIC Provision for Amicable, Settlement of Disputes. International Construction Law Review. Issue 1. pp [Kane, 1992] : Kane, Christopher. Mitigation Construction Contract Disputes. Public Utilities Fortnightly. Vol. 130 (1). pp July [Langeland, 1995] : Langeland, Erik, (1995). The Viability of Conciliation in International Dispute Resolution. Dispute Resolution Journal pp July [Lewicki et al., 1985] : Lewicki, Roy. Negotiation : readings, exercises, and cases / Homewood, Ill. : R.D. Irwin, [Peña-Mora et al, 2002] : Peña-Mora, F., Sosa, C., and McCone, S. Introduction to Construction Dispute Resolution. Prentice Hall, New Jersey, [Susskind et al., 1987] : Susskind, Lawrence. Breaking the impasse : consensual approaches to resolving public disputes / New York : Basic Books, c1987. [Thomas, 1976]: Thomas, Kenneth. Handbook of Industrial and Organizational Psychology. Chicago. Rand McNally College Pub. Co., [Treacy, 1995] : Treacy, Thomas B., (1995). Use of ADR in the Construction Industry. Journal of Management in Engineering Vol. 11 (1) pp January/February, [Ury et al., 1988] : Ury, William. Getting disputes resolved : designing systems to cut the costs of conflict / San Francisco : Jossey-Bass, 1988.