1. 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)253-7142, Fax (617)253-6324 Email:feniosky@mit.edu Intelligent Engineering Systems Laboratory Center for Construction and Research Education Department of Civil and Environmental Engineering Massachusetts Institute of Technology The Construction Industry

2. Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002 2 Definitions WHAT One-time Unique Construction Projects Over Three Trillion US Dollars of Investment WHO Owners, Engineers, Contractors, Suppliers Different Roles and Objectives WHY Large, Complex and Unique Projects Susceptible to Conflicts HOW Understanding Organizational Issues and Uncertainties Defining Roles, Contractual Relationships and Delivery System

3. Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002 3 LNGT Project Organization BRITISH ENERGY CONGLOMERATE (CLIENT) CALIFORNIAN CONSTRUCTION MANAGER (CM) BRITISH DESIGN BUILD (fast-track) CONTRACTOR FOR LNG TANKS (DESIGNER) GERMAN DESIGN CONSTRUCTION HOLDING COMPANY VENEZUELAN SUB-CONTRACTOR ABOVE GRADE WORK PACKAGE CIVIL WORKS (SUB-civil) ITALIAN CONTRACTOR FOR FOUNDATIONS AND CIVIL WORKS LNG TANKS (GC-civil) BID negotiations and TECHNICAL communications during construction Formal Sub-contract agreement Letter of intent to form joint venture, assuming 100% responsibility over cost and schedule for portion of work through corporate and personal guarantees Construction Management contract for Refinery Complex Formal communications and payment request to British firm Corporate bid and performance bonds for 100% of the work

4. Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002 4 Project Communication Lines Italian GC Job Formal lines of communication Informal lines of communications New York Arbitration California CM British DESIGNER

5. Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002 5 Case Study:Important Issues Are the contractual and communicational relationships favorable to limit conflicts? Is there anything about the project structure that would give an indication on how this project will handle conflicts? Does this project have mechanisms to handle uncertainty in this project? Is there a process by which conflicts on this project will be handled?

6. Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002 6 Outline  Sources of Conflict and Dispute Organizational Issues Participants Issues Project Structure Process Problems Project Uncertainty External Uncertainties Internal Uncertainties

7. Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002 7 Sources of Conflict and Dispute One-time Experience Projects Correlated Variables: Difference between a Manufacturing Process and a Construction Project Different Reasons for a Particular Dispute Need to Identify the Roots of Controversy to Avoid Unnecessary Litigation

8. Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002 8 Sources of Conflicts Fenn et al.,1997 Research AuthorSources of Conflicts and Disputes in Construction Bristow, 1998Six Areas: unrealistic expectations; contract documents;communications; lack of team spirit; and changes. Conlin et al., 1996Five Areas: payment; performance; delay; negligence; quality; and administration. Heath et al.,1994Seven Areas: contract terms; payment; variations; time; nomination; renomination; and information. Hewit, 1991Six Areas: change of scope; change conditions; delay; disruption; acceleration; and termination. Rhys Jones, 1994Ten Areas: management; culture; communications; design economics; tendering pressures; law; unrealistic expectations; contracts; and workmanship. Semple et al., 1996 Four Areas: acceleration; access; weather; and changes Sykes, 1996Two Areas: misunderstandings; and unpredictability

9. Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002 9 Hierarchical Sources of Conflicts Peña-Mora,et.al,2002

10. Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002 10 Owner-Contractor Objective Alignment Disagreements Resulting from Incompatible Objectives Contractors Objectives Contractors’ and owners’ objectives Owners Objectives

11. Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002 11 Contractors' Objectives Achieve Profit and other Financial Gains Satisfy Client and Generate Repeat Business Manage Cash Flow Limit Long-term Liability Develop Employees and Create Satisfaction Optimize Employment Level

12. Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002 12 Owners' Objectives Meet Return on Investment Goal Minimize Operating and Maintenance Costs Minimize Project Downtime and Outrages Achieve High Product Quality Provide Design Flexibility for Future Demands Minimize Disruptions to Existing Operations Avoid Negative Impact on Environment and Community Reduce Design and Construction Time for a Timely Usage of the Facility Exceed Customer’s Expectations

13. Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002 13 Contractors’ and owners’ Objectives Complete the Project within Budget Complete the Project within Schedule Maintain a High Level of Quality Execute the Project Safely, without Wasted Time or Accidents Minimize Claims and Litigation

14. Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002 14 Outline Sources of Conflict and Dispute Organizational Issues  Participants Issues Project Structure Process Problems Project Uncertainty External Uncertainties Internal Uncertainties

15. Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002 15 Major Participants Owner : Public and Private Owner Architect/Engineer General Contractor Construction Manager

16. Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002 16 Outline Sources of Conflict and Dispute Organizational Issues Participants Issues  Project Structure Process Problems Project Uncertainty External Uncertainties Internal Uncertainties

17. Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002 17 Project Structure Seven major project delivery systems Traditional Design-Bid-Build (DBB) Pure or Agency Construction Management (PCM) Construction Management at Risk (CMR) Design-Build (D/B) Turn-Key (TKY) Design-Build-Operate (DBO) Build-Operate-Transfer (BOT)

18. Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002 18 Four Main Delivery Systems: Relationships Between Participants Design-Build Owner General Contractor Subcontractor A/E Traditional Design-Bid-Build Owner Trade contractor C/M Trade contractor A/E Pure or Agency Construction Management Owner Trade contractor C/M Trade contractor A/E Construction Management at Risk Owner Sub contractor Construction Function Design Function D/B Entity Contractual Relationship Communicational Relationship Internal Relationship

19. Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002 19 Type of Relationships Among Participants

20. Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002 20 Traditional Design-Bid-Build Owner General Contractor Subcontractor A/E Contractual Relationship Communicational Relationship

21. Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002 21 Traditional Design-Bid-Build Sequential Construction Process Lump Bids Commonly Adopted, Resulting in Adversarial Relationship between the Owner and the Contractor Collaborative Relationship between A/E(Chosen on Qualification Basis) and Owner Different Participants’ Interests: Owner: Quality and Value Product, Delivery Schedule, Site Safety Contractor: Profit, Construction Time, Relationships, Reputation A/E: Profit, Aesthetics, Relationships, Quality, Recognition

22. Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002 22 Pure Construction Management Owner Trade contractor C/M Trade contractor Contractual Relationship Communicational Relationship A/E

23. Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002 23 Pure Construction Management Great Flexibility in the Schedule and for Changes Market Competition for the Work Fiduciary Relationship with the Contractor Small Financial Risks of PCM and High Risk of Loss of Reputation PCM Generally Paid a Fixed Fee PCM as Facilitator/Mediator in Conflicts

24. Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002 24 Construction Management at Risk Owner Trade contractor C/M Trade contractor Contractual Relationship Communicational Relationship A/E

25. Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002 25 Construction Management at Risk CM Guaranteeing Maximum Price: GMP Reduced Owner’s Risk Half-way between the DBB and the PCM System Contractual Relationships between CM and Trade Contractors

26. Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002 26 Design-Build Owner Sub contractor Contractual Relationship Communicational Relationship Internal Relationship Construction Function Design Function D/B Entity

27. Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002 27 Design-Build One Contractual Team Responsible for Design and Construction Function Owners with more Emphasis on Schedule Despite Less Control and More Uncertainty of Cost Loss of Control Over Design and Flexibility in Changes Owner with Enough Knowledge about Design and Construction to Establish the Initial Parameters, Review Proposals and Monitor the Process

28. Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002 28 Outline Sources of Conflict and Dispute Organizational Issues Participants Issues Project Structure  Process Problems Project Uncertainty External Uncertainties Internal Uncertainties

29. Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002 29 Process Problems Process Problems Inherited from the Choice of Project Structure and Contract Type Distinction between Contract Type and Delivery Process

30. Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002 30 Contract Types Lump Sum or Fixed Price Contract Most Common and Most Adversarial Cost plus Contract Risk Shifted to the Owner Risk of Cost Inflation by the Contractor to Increase Profit Guaranteed Maximum Price Cost Reimbursement plus Profit, with a Fixed Ceiling

31. Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002 31 Outline Sources of Conflict and Dispute Organizational Issues Participants Issues Project Structure Process Problems Project Uncertainty  External Uncertainties Internal Uncertainties

32. Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002 32 External Uncertainties Result of External Forces on the Project: Inclement Weather, Political Risk, Acts of God Some Issues Addressed with Insurance Policies, Contract Clauses or Other Forms of Mitigation Identify the Type of Uncertainties ahead of Time and Account for Them to Avoid Conflict

33. Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002 33 Outline Sources of Conflict and Dispute Organizational Issues Participants Issues Project Structure Process Problems Project Uncertainty External Uncertainties  Internal Uncertainties

34. Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002 34 Internal Uncertainties Errors in Design, Unforeseen Site Conditions, Incomplete Definition of Scope Need for a Proper Monitoring and Control to Reduce the Impact of Internal Uncertainties

35. Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002 35 Outline Sources of Conflict and Dispute Organizational Issues Participants Issues Project Structure Process Problems Project Uncertainty External Uncertainties Internal Uncertainties

36. Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002 36 Conflicts in LNGT Project Omission of Civil Works Contract between DESIGNER and GC Misplacement of the Contract between GC and SUB Cash Flow Problems and Cost Overruns : The SUB invoicing 55% of the Contract to the GC while only 30% is in Place

37. Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002 37 Remedies and Consequences DESIGNER’s Takeover of GC’s and SUB’s Work GC and SUB’s Responsibility For All Costs Going Forward Concerning the Civil Works Package DESIGNER with Total Control of the Project and GC and SUB Assuming the Cost Risk Consequences One Year Delay Increase in Overhead Cost Claims for Changed Site Conditions and Design Changes Issued by GC and SUB against DESIGNER Counterclaims Arbitration in New York with High Expenses

38. Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002 38 Summary Conflict in the Construction Industry Is Inherent of the Characteristics of the Industry. Project Uncertainties and Sub-optimal Contractual Relationships Are a Major Source of Conflict. Legal Costs of Dispute Resolution Constitute a Burden for the Industry. Dispute Avoidance and Resolution Techniques Should Be Implemented to Resolve Conflicts With Time and Cost Savings.

39. Introduction to Construction Dispute Resolution Chapter 1: The Construction Industry © Peña-Mora, et. al. 2002 39 References [Conlin et al.,1996] : Conlin, J., Langford, D.A., and Kennedy, P., 1996. The Relationship Between Construction Procurement Strategies and Construction Contract Disputes Proceedings of CIB W92, North Meets South, pp. 66-82. Durban, (January). [Fenn et al., 1997] : Fenn, Peter, Lowe, David, and Speck Christopher, (1997). Conflict and Dispute in Construction. Construction Management and Economics (1997) 15, p. 513 [Gordon, 1991] : Gordon, Chris. (1991). “Compatibility of Construction Contracting Methods with Projects and Owners” MS Thesis, MIT, Cambridge. [Howell et al., 1998] : [Peña-Mora et al, 2002] : Peña-Mora, F., Sosa, C., and McCone, S. Introduction to Construction Dispute Resolution. Prentice Hall, New Jersey, 2002. [Porter, 1985] : Porter, M. (1985). Competitive Advantage, Free Press, New York. [Scott, 1995] : Scott, Donahey M., (1995). Seeking Harmony. Technique Dispute Resolution Journal. pp. 74-78. April-June [Stipanowich, 1996] : Stipanowich, Thomas J., (1996). Arbitration: Innovation and Evolution in the United States Construction Industry. Wake Forest Law Review Vol. 31 (1) pp. 65-182. Spring [Sykes, 1996] : Sykes, John. Claims and Disputes in Construction: Suggestions for their Timely Resolution. Construction Law Journal. Sweet & Maxwell. Vol. 12 (1) pp. 3-13