For many years, the construction industry stood as one of the last bastions of informal arrangements. A cursory glance at the contract (if there was one), verbal change orders in the middle of a project, undocumented changes in the schedule, and famously flexible deadlines were the order of the day.

Today’s litigious landscape, however, has meant a new way of doing business for the construction industry. The harsh reality in the construction industry is that pervasive regulation and mushrooming, multi-party litigation often makes the costs of breaking ground on a new office building or factory excessive.

Judges, seeing courtrooms packed with lawyers and litigants, have recently started to push very hard for parties to seek professional mediation or reach a traditional settlement. The goal of your company in such a dispute should be to reach an acceptable compromise sooner rather than later, as the costs associated with the dispute will be far less. Better yet, issues with contractors, subcontractors, and other stakeholders should be identified and quantified before they become disputes. If they cannot be resolved, then at the very least a framework can be set up to settling the issues at a later time.

In the Public Eye
There has been a second major sea change in the construction industry culture. The media, politicians, and regulators have come to fully realize that most major construction projects worldwide are financed primarily with public money. The pending reconstruction of the World Trade Center site and several other high-profile projects around the globe have cast a hot, bright spotlight on the construction industry.

What the public will see when the spotlight hits your project depends on a number of factors. Let’s face it: the potential for problems on construction projects is very high. Lenders, insurers, owners, architects, builders, contractors, and subcontractors must all perform their roles well, and, just as importantly, in the proper sequence. Failure to manage the entire construction process can result in construction defects and costly delays at the root of many construction project disputes.

What Will You Say When They Ask What Happened?
You can better prepare your company to avoid construction project disputes and litigation by asking yourself the following questions throughout a construction project:

• Does my company have a signed, written contract?
• Do I understand the liquidated-damages clause of my contract?
• Have I included audit rights in the contract to enable me to control cost?
• Have I left profit and overhead undefined on change orders?
• How are pre-construction costs being segregated from project costs?
• Are general-conditions costs fully defined?
• Have I selected the most appropriate contract type (cost plus, GMP, etc)?
• Have I hired a knowledgeable construction attorney to review the contract?
• Does my team understand all the provisions — especially the scheduling provisions — in the contract?
• Are any midstream changes in the project specifications reflected in the contract?
• Are all changes to the project reflected in the schedule?
• How frequently are we updating the schedule?
• Are we fairly paying our contractor for the work performed to date? In other words, are the progress payments tied to schedule performance?
• Do I have enough insurance to cover all phases of the construction project?
• Have we made contingencies for delays relating to weather, obtaining materials, and likely adaptations to the specifications?
• Has my contractor established a successful track record with companies I know and trust?
• Is the project using appropriate scheduling and accounting software?
• Are we fairly paying our contractor for the work performed to date?
• Does my team know that in the United States contractors can be denied interim payments if they fail to provide specified documentation on time?
• Does my team know that outside of the United States, traditional standard contracts do not include scheduling provisions?
• Does construction actually have to be underway for my insurance to cover litigation costs?
• How is project “completion” defined in the contract?
• How do I ensure against losses due to faulty workmanship, which are often excluded from insurance policies?