After the Dust Settles - Exploring Common Causes and Cures of Mega-project Failures
Published for the 8th International Society of Construction Law Conference-Chicago (September 26-28, 2018). Reprinted here with permission.
ABSTRACT— Far too many mega-projects have failed because of recurring root causes. These causes include: (1) First of a kind (FOAK) projects, either in terms of new technologies or scale; (2) Insufficient information to develop effective project controls and schedules; (3) Design schedules, scope and schedule creep; and (4) cultural differences, whether inside the organization or outside. When one or more of these conditions exist, careful planning at the earliest stages; contract drafting at the risk allocation stage; implementation of certain project management techniques; and early intervention with a variety of dispute resolution techniques can avoid or mitigate costly litigation or arbitration – even before the dust finally settles.
A panel of arbitrators with professional lifetimes of experience dealing with global mega-projects will: (a) explore common root causes of project failures; (b) suggest what changes could have been made at the project planning stage to avoid failure; (b) explain various contracting options to avoid or mitigate risks; (c) discuss practical options during the project to correct or mitigate impending failure; (d) identify various options short of litigation and arbitration to resolve project disputes.
Common Causes and Cures – Planning Stage
Distinctive Aspects of Mega-projects
Mega-projects are generally defined within the industry as very large-capital investment projects that attract a high level of public attention or political interest because of substantial direct and indirect impacts on the community, environment, and companies that undertake such projects. 1 The projects are typically so large that not one company can provide sufficient resources and personnel for all aspects of the project. Nor can a single company afford to finance or absorb all the risks associated with a project of such large magnitude over an extended period of time – a period in which most of the original project team may not even be around to see the ribbon cut at final completion. Typical attributes of a megaproject include:
- Cost above $1 billion USD
- An extended project schedule (greater than four years measured from initial concept development to final completion)
- Multiple and multi-national involvement of designers, engineers, contractors, equipment suppliers and specialty material vendors
- Multiple specialty trade contractors and specialty trade workforces numbering in the thousands of individuals
- Execution of an engineered facility, structure or asset which is technically complex or unusual
- Consortium financing and/or ownership, with multiple, multi-national project stakeholders and investors
- Government involvement with enhanced political dimensions and risks, and
- Cultural and social differences and risks.
As each mega-project features its own complexities and the environment in which it is executed there is often a lack of suitable benchmark projects. It is well known that no two megaprojects are alike, and therefore, such projects cannot be compared. Nevertheless, there are common denominators with respect to cost development and typical underestimation of costs during project appraisal.
Cost overruns occur on almost every mega-project. Without doubt, it can be said that the main cause of cost overruns is the lack of realism in initial cost estimates. Generally, initial cost estimates do not account for changes in project specifications, changes in design, delays and cost of delays, as well as changes in exchange rates among currencies, financing arrangements and safety and environmental demands. Cost underestimation and overruns cannot just be explained by clerical errors and seem to be best explained by strategic over-optimism and misinterpretation of the need, scope and cost of the projects. The usual focus is to get the project underway, then deal with problems as they progress.
At one point in time it was believed that projects executed in the public sector were more prone to cost overruns; but with privately owned, privately financed, and privately-operated projects, the phenomenon of cost underestimation and overruns would disappear -- for example, by inducing more discipline and accountability in the planning and execution stages. However, the data indicate, whether the project is managed and executed within the public or private sector or as a public-private partnership, the dual phenomena of cost underestimation and resulting overruns still occur.
While there is some commonality, the challenges faced on a typical construction project are several orders of magnitude less challenging that those faced on a megaproject. The technological complexities, in and of themselves, mean that each mega-project presents unique challenges, any one of which may have a direct bearing on the context within which the management of a project should be examined and judged.
Management of Mega-projects
The management of a mega-project is more challenging than the management of a typical construction project. For example, in a megaproject there is simply not a "one-size-fits-all" or "best" methodology for sub-contracting for the numerous different sub-scopes of work required in a mega-project. The sheer size and complexity of most mega-projects generally results in an execution methodology that involves multiple delivery methodologies and contracting approaches. For example, the specialty trade elements of a process or power generation mega-project may cost more and take longer than the average construction project, requiring the use of multiple specialty trade contractors, each working on an element of the whole and each under a different tailored contractual agreement. A typical construction project may hire one specialty trade contractor to execute the entire scope of that specialty work. But, on a mega-project, management will have to work with multiple contractors to gain sufficient resources to execute that trade specialty scope of work.
Mega-projects are primarily delivered using methods known as Design Build (DB), Engineer-Procure-Construct (EPC), construction manager at risk (CMAR) or construction manager/general contractor (CMGC). Often these approaches are referred to as alternative delivery methods as opposed to the more traditional approach of Design-Bid-Build (DBB). In each case the designer and builder have a relationship that allows for substantial collaboration and interaction, as opposed to the relationships that are formed under DBB where the owner develops the design without substantial input from the contractor who will build the facility.
And, there is the time factor. It is a given in life that the further one attempts to see into the future the less reliable one’s predictions of future conditions will be. The same given applies to mega-projects. The only thing anyone really knows for certain about the future, insofar as a mega-project is concerned, is that there will be changes which will impact the planned execution of that mega-project, and these changes must be managed.
The two primary factors in successfully planning and executing a mega-project are (1) how well the megaproject is managed; and (2) establishing and maintaining control during planning and execution. Management and control are two different, yet interrelated, factors on which the ultimate success of the megaproject rests: 2
Management is best defined within the Project Management Institute’s (PMI) Body of Knowledge: Project Management is application of knowledge, skills, tools and techniques to project activities to meet project requirements. PMI then identifies 42 "logically grouped project management processes" 3 that form the application platform from which project management activities and actions are taken. (PMI 2008) Essentially, project management is a process (or set of processes) employed to guide and focus work towards achievement of goals which have been set for the project.
Control however is not so easily defined. According to to exercise restraining or directing influence over; Black’s Law Dictionary control would be "To direct or indirect power to govern …" the planning and execution of a megaproject. 4 In more common usage, control means to "to exercise restraining or directing influence over; 5 Within megaprojects, and all construction projects, control means primarily to hold in check, to prevent such things as cost overruns and schedule delays or to maintain minimum required quality.
Why is this distinction important? Simply because one can manage a mega-project well, using all of the best available tools and processes, and yet still fail to exercise control over the mega-project during planning and execution. Such failure almost always results in the mega-project failing to meet its scope, cost, schedule and quality goals. Inattention to either management or control at any point in the project execution can have devastating impacts on the success of the megaproject as a whole.
First of a Kind (FOAK) Mega-projects
One often recurring cause of project failures are first-of-a-kind (FOAK) elements via technology, equipment and/or various components. Mega-projects that are one-of-a-kind, by definition, do not have typical historical cost records and data from which to develop a basis for estimates or projections so as to understand whether the technology, the design, the equipment or the components will actually perform to the "theoretical" calculations that formed the basis of the prototypical engineering concepts.
There are good examples and good reasons for wanting to proceed with FOAK projects. For example, in the early 2000s’, the United States Government believed that with its rich and extensive reserves of coal deposits, proceeding with technologies that allowed integrated gasification, combined with combined cycle power plant technology (IGCC), would allow utilities to utilize coal deposits while producing power with significantly less harmful air emissions. But, even though small pilot projects, such as the TECO-IGCC project in Florida, produced economic power at 250 MW, when scaled up to over 600 MW, the impact of that scale up had an unforeseeable and negative impact on the estimated price and schedule. The result was an operating plant, but late on the schedule and with cost overruns of over $1 billion.
Another example was a different IGCC technology, which again based its technology on successful small-scale pilot plants. Yet, the scale up when combined with the unknowns of interconnecting pieces of equipment finally resulted in billions of dollars of cost overruns, coupled with shareholders having to absorb those cost overruns. The end result was a decision to abandon the integrated gasification portion of the plant using only the combined cycle portion of the project to generate electricity.
The question who bears the liability and cost of FOAK impacts becomes even more complicated when there are several parties involved in the engineering planning, typically involving the Employer, the manufacturer of equipment, the designer of the technology and the constructor, all or some of whom may typically be in consortium with the designer who is constructing the FOAK project.
The most effective way to achieve a successful FOAK or complex design that meets the Employer’s requirements and is constructible is to involve both the Employer and the constructor in the design process from the beginning, so as to better understand expected scope, responsibilities and allocations of risk. Attempting to reduce the cost of a mega-project by reducing engineering staff too quickly, or to a level that cannot efficiently and effectively support construction, can cost more than it can save the mega-project.
Project Change and Evolution
The typical construction project is developed in several discrete stages, the most common of which are Initial Project Planning, Engineering/Design, Procurement, Construction, and Commissioning. There may be additional stages, such as testing and start-up of process systems, but almost every construction project includes these basic stages. Within the construction industry there are two methods by which one can stage the execution of a project:
(1) One can move sequentially through those stages generally in the order in which we have listed them, or
(2) One can overlap those stages, initiating each subsequent stage as the preceding stage reaches a point at which it can maintain a lead over the subsequent stage -- which is generally referred to in the construction industry as a "fast-track" project schedule.
In a typical construction project, the Employer and constructor have some flexibility as to which sequencing method they will follow over the execution of the project. Mega-projects, from a practical perspective, do not have the same choice for project sequencing. Virtually, all mega-projects are executed on a fast-track schedule, simply due to the fact that sequential staging adds a tremendous amount of time to the already lengthy duration to complete a mega-project. As noted above, the more time it takes to execute a mega-project the less reliable the future project condition predictions. And, the less reliable the future project condition predications, the higher the probability that those conditions will change.
Managing Scope Creep 6
When design is not well managed and design changes ensue, scope creep is introduced. Not surprisingly, the impacts that can occur on a mega-project is significant. Everyone involved with construction projects generally understands the phenomenon of "ripple effect". For example: the delay to the delivery of a needed commodity will "ripple" through a particular string of schedule activities necessary to complete a specific element of the full scope of work. Ripple effects are likewise common within mega-projects, but which exhibit another effect which we call the "ricochet effect." In fact, it is almost impossible to introduce a significant change into one element of work in a mega-project which does not have some unexpected and unintended impact on some other element(s) of work in the mega-project. While ripple effects are generally isolated to a particular string of logically related activities within a scope of work, a ricochet effect can bounce through non-logically linked activity strings in unexpected and unpredictable ways all of which can result in unintended impact consequences for those other activities and often the entire project.
Change management cannot remain a more or less ad hoc activity during which only involve those directly responsible for planning and managing the activity. When a change in any work activity string is contemplated, then it is wise to designate "change representatives" from each of the primary participatory stakeholders who can be actively involved in examining the change. Their particular responsibility will be to determine if there are any ricochet effects which would impact other activity strings thought to be outside of the impact zone of the change. 7 If any such ricochet effects are identified then the cost and schedule estimates for that change, and the planning to execute the change, need to reflect the ricochet effects.
Controlling cost on mega-projects requires that project management transition from a reactive based cost management to a predictive based cost management. There are three "givens" when it comes to controlling cost on mega-projects.
- First: cost on a megaproject cannot be definitively estimated – for the very simple fact that no one can foresee economic conditions 4 to 7 years (or further) into the future. In the last ten years it has become abundantly clear that the typical historical factors (i.e., average escalation over the previous five years in the construction industry) are not reliable indicators of future economic conditions.
- Second: "the economy" is no longer confined or defined by local, national or even regional location; what happens in one region of the globe can (and does) impact the economy in every region of the globe.
- Third: there is nothing that anyone can do to control the first and second "givens", including mega-project estimators and project managers. However, participatory stakeholders can stop making the situation worse by overoptimistically "assuming the best possible outcome" at the start of every mega-project.
The hard reality is that there is no basis in fact for a "promised cost" to the participatory stakeholders. No matter how often the term "estimate" is used on a mega-project, the only two realistic data points that can be relied on by non-participatory stakeholders are the original total cost, handed out in the promotional materials, and the actual final cost at the end of the project. Hence, the very first action to take in controlling "cost" is to do a better job of setting non-participatory stakeholders cost expectations. Never give "a number" from which a single promised cost is assumed. Risk models should provide the participatory stakeholder with a probabilistic range of cost results depending upon certain assumptions. Planners should simply provide the range, together with the primary factors which explain the range from best case to at least the most probable case. Then describe how project management intends to exercise control over that which it has control.
Cost control is not the same thing as cost accounting. Cost accounting tells project management where it’s been by reporting where money was expended and compares the costs to date against the control budget. However, once an expenditure has been made and is accounted for, it is history, and even the best project management team cannot control what has already happened. Unlike cost accounting, cost control is focused on where the megaproject cost is at a specific point in time and forecasts where it will be at given points in time in the future based on current conditions, evolving expectations, and cost performance on the megaproject to date. Project computerized cost control tools are amazingly powerful and sophisticated and if properly populated and used can provide project management with cost data in almost real time. Such tools can also perform any number of "what if" forecast scenarios from which project management can chart a cost course through the megaproject.
Managing Schedule Creep
Unlike cost management and control – two distinct elements, schedule management and control are encompassed in one master document which reports where the mega-project has been, where it is headed, and the plan for completion of the Project. From that perspective schedule data is more easily captured, recorded and distributed than cost data. However, the fact that the data is encompassed in a single schedule may also be one of the significant weaknesses when attempting to exercise control over "the schedule." This is because of the nature of scheduling and preconceptions relative to CPM scheduling which have been set over years of experience with CPM scheduling on "typical" construction projects. For example, unlike a typical construction schedule:
- the megaproject schedule will encompass a much longer total duration than the typical project
- the mega-project schedule will cover a broader, more complex scope of work
- the megaproject schedule will most likely involve initial input and updating from a higher number of participatory stakeholders
- the megaproject master schedule is not easily converted into a document which can be used by separate participatory stakeholders to actually plan, manage, and control their own individual scopes of work.
The first schedule control point is to recognize that developing a schedule for a mega-project is an iterative process which necessarily involves input and by-in by participatory stakeholders, all or some of whom may not be known until planning is underway or complete. Consequently, mega-project management is often forced into the position of prematurely trying to forecast a completion date, without having the details which would confirm the reasonableness of the completion date, which, of course sets the stage for stakeholder frustration.
The second schedule control fact is that optimistic bias is actually built into the schedule in the form of the critical path, which assumes no float in that critical path schedule. However, as much as cost is impacted by events and issues completely outside of management’s control, schedule is even more vulnerable to such impacts as they can flow from something as catastrophic as an earthquake or as seemingly benign as having to move a heavy haul crane more times than expected.
The third schedule control fact is that schedule is much more sensitive to both ripple effects and ricochet effects than cost, which makes both identification, trending and forecasting more complicated as those effects may pass through hundreds of different and even seemingly unrelated activities on a given megaproject.
Fortunately, some of the most powerful planning and control tools available to project management are specifically designed to address planning, managing and controlling schedule on what is essentially a real time basis. Those sophisticated schedule and control tools, operated by enough properly trained and experienced schedule control staff, provide project management with both a sound trend and forecasting capability. Most often, however, the problematic issues are not in the tools, but failing to use the tools effectively.
Managing Cultural Differences
Although effective schedule and cost control are crucial to the success of the mega-project, effective management also requires knowledge about dealing with people, organizational options, and communications. Cultural factors may differ significantly in the diverse cultures which exist around the world. For example, an examination of cultural perspectives of engineers and constructors from Japan reveals that the Japanese consulting engineers have traditionally designed and constructed projects in a different manner than that of their counterparts in the United States and Europe (collectively the "Western Nations"). These differences are typically reflected in management and operation methods and have primarily been based upon Asian values, which from a cultural perspective are quite in contrast with the values perceived to be important in the Western Nations.
One of the most significant cultural differences, for example, resides in the difference in perspective between the Japanese contract management basis of "mutual trust" versus the Western Nations contract management basis of "mutual mistrust". This dichotomy is a major contributor in Japanese consulting engineers having difficulties managing multi-national mega-projects with a high level of Western Nation stakeholder participation. Simplistically, "mutual trust" assumes that regardless of what a contract document might state, the parties will ultimately resolve issues "fairly" once the mega-project has been completed. "Mutual trust" leads the Japanese consulting engineer to resist preparing formal written notices of impacts, regardless of what the contract document may require. The assumption by the Japanese consulting engineer is that everyone is fully aware of the impact issue, and that the Employer will, in fairness, adjust the cost and/or schedule requirements contained in the contract in recognition of those known impacts. To submit a formal notice is seen as an insult, implying, for example, that the Employer will not act "fairly" or honorably.
While our example was based on one country, Japan, and one region, the Western Nations, such differences in cultural perspectives exist around the world, and among all countries. Mega-projects by their very nature are seldom owned, financed, planned, executed, and operated by stakeholders residing in a single country. Mega-project management structures by their very size, breadth and complexity involve stakeholders from different countries, each with a different cultural perspective which influences how that stakeholder executes their role within that particular management structure. Success of multi-national mega-projects demands that those stakeholders recognize, and proactively work through, those cultural differences. In particular, project management should ensure that it has sensitized the control staff to the possibility of cultural differences and established processes and systems which address the areas where such differences are most likely to arise:
- Miscommunication across cultural lines is usually a primary cause of cross-cultural problems. Miscommunication can have several sources, including differences in body language or gestures, different meanings for the same word and different assumptions made in the same situation. 8 Different languages also contribute to the problem, and frequently, the language barriers seem to be ignored, creating confusion and a sense of mistrust among the parties.
- Differing approaches to problem solving is another source of cross-cultural problems. The approaches used by engineers and project managers of different cultural backgrounds to tackle the same technical problem are likely to differ widely. The type of approach used to solve engineering problems is often a reflection of what is emphasized in educational curricula leading to engineering degrees in various countries.
- Differences within organizational cultures can also be problematic. Large companies operate quite differently from small companies, and the same occurs as between government entities and private ones. Some of the most noticeable differences include: the way information is shared and distributed, the hierarchy of departments, approval and decision-making processes. Large firms, as well as government agencies have the tendency to be more bureaucratic.
In order to overcome cross-cultural differences, all stakeholders need to be aware of these differences from the onset of the mega-project. Successful communication is essential, including clarification to ensure that the team players understand everything that needs to be done, as well as getting into the details to avoid the temptation of agreements based on general principles that can create major problems in the long run. At a minimum, training is required with respect to doing business in a given country, as well as doing business with people with different cultural backgrounds. Selection of the right people and with the right attitude towards international and multinational assignments should be a top priority of the executive team. Executives, senior management and management teams should include at least one person originally from the location where the project is to be executed and staff which have experience working with the other cultures represented within the participatory stakeholders on the megaproject.
Common Causes and Cures – Contracting Stage
It is not prudent to discuss legal considerations regarding mega-projects in a vacuum. Strategic objectives and risk tolerance must shape the legal considerations at each stage of the life cycle of the project. Construction lawyers work with all disciplines, including operations, engineering, procurement, finance, project controls and risk assessment. Construction lawyers also work in several roles: to assist with the planning and development of the project, to refine the scope of Work, to select the appropriate project delivery system, to negotiate the relevant contracts, to document the transactions, to provide advice and claims avoidance strategies during the execution of the contract, and, finally, to assist with project closeout and resolution of disputes, if any.
While axiomatic, contract negotiations are, at their core, the negotiation of the risk matrix for the project. Assumption of additional risk in exchange for the payment of additional money or risk premium does occur, and, most efficiently, each risk should be borne by the party best able to manage that particular risk. It is very difficult to allocate risk and establish a risk matrix for the project unless the foreseeable risks are identified pre-contract and expressly allocated to one party or the other during the contract negotiation process.
Project Delivery System
The importance of selecting the appropriate mega-project delivery system cannot be overstated. There are a variety of project delivery methods on mega-projects, 9 including the one-stop EPC or "turn-key" model, the multiple Contractor model, the Employer’s performance of all or some of the engineering or procurement functions, or the Employer’s responsibility for the engineering, procurement, and construction functions through a cost-reimbursable model. Each approach presents certain advantages and disadvantages, particularly with respect to financial risk, project management responsibilities, and cost control. It is fair to say that the contracting relationships, and the resulting allocation of risks, are defined by the project delivery system. 10 Consequently, the project delivery model must be carefully considered and evaluated to ensure that a proper project delivery method is selected for this particular project, this owner, these financing parties and stakeholders. The failure to select an appropriate project delivery system can be the death knell to a mega-project and can have disastrous financial consequences to all involved.
EPC Consortiums
Given the size, complexity, and duration of mega-projects, EPC consortiums have become the preferred and most common method used for projects of that scale. 11 Using the EPC consortium arrangement, the Employer contracts with a consortium on an EPC basis, while the consortium participants internally allocate responsibility for development and execution of the project among themselves. The consortium participants are generally jointly and severally liable to the Employer or Owner, with allocation of responsibility for schedule, costs, and performance for consortium partners addressed in the consortium agreements. A typical collection of participants forming an EPC consortium could include one or more major equipment suppliers, an international engineering firm, and multi-national contractors, and local market contractors. 12
The EPC consortium allows each of the consortium partners to pool their resources and knowledge in an effort to effectively complete the project, but requires a heightened level of communication and coordination among the consortium members. This method contemplates a single line of communication between a designated representative of the consortium and the Owner, and a separate and distinct internal line of communication between the designated representative of the consortium and the designated representative of each participating members of the consortium and potentially their subcontractors and suppliers.
There are a number of risks and challenges associated with an EPC consortium, each of which must be identified and addressed in order to achieve a successful project. Two of the primary challenges facing consortiums are differences in culture among its members and differences in approach to a project.
EPC Consortiums - Cultural Differences
EPC consortiums are typically composed of members that are based in different countries and which come from different legal traditions. 13 The presence of these fundamental legal and cultural differences can present increased difficulty with communication and in achieving consensus and agreement regarding the development and execution of the project. Aside from the potential communication-language barrier, varying business practices and approaches stemming from each members’ culture can present significant obstacles if not dealt with directly and affirmatively. For example, on a large fossil fuel power plant, the design and major equipment for the boiler works may come from Japan, while pipe and structural steel for the boiler works are supplied to the boiler OEM from China and eastern Europe. The design and major equipment for the air quality control system may come from France, the design and major equipment for the turbines and related scope of supply may come from Germany, and the balance of plant design and civil design is subcontracted to a local engineer, while structural steel, miscellaneous metals, and other supplies come from China, Asia, or other regions of the world. The Contractor, and its project execution, project management, contract management, and project scheduling and controls teams may come from the United States. Under this scenario, the consortium must clearly define the responsibilities and potential liabilities of each participant, and must ensure that each participant understands the unique nature of constructing a megaproject in the local region. Each country or region has many unique features that must be clearly understood, anticipated, and managed if a project is to be successful. Labor unions rules and the price of labor, for example, may be a significantly larger cost in the United States and Canada than it may be in Japan, China, Latin America, or other areas of the world. Consortium participants that typically work in parts of the world with low labor costs may not commonly face the same demand for labor efficiency and competition for skilled resources that is present in the U.S. Many of the mega-projects, in particular, power projects, that have been built in the U.S. and Canada in the recent past have experienced enormous overruns in labor hours and labor costs. Typically, these cost overruns resulted from schedule delays as a result of late or incomplete engineering or late, incomplete, or out of sequence equipment supply, all of which resulted in a shorter duration for construction. Constructors added crews and worked overtime, often on an extended basis, and also added second or third shifts, leading to significantly higher labor costs than originally anticipated. Because the number of the craft labors significantly increased (doubling or more in some cases), extended travel and lodging were required on most of these projects, further adding to the cost of labor and stressing the capacity and quality of labor pool.
Similar issues have existed with large multi-national contractors performing work in regions remote to their base of operations. A number of contractors have encountered significant issues with the quality of foreign labor contracted to the project. To offset issues with foreign labor, contractors may significantly increase the number of expatriates dedicated to the project, causing an increase in overall labor and staffing costs. Other issues, such as fundamental differences in project scheduling and project controls, can create significant difficulties among consortium members from different cultures and backgrounds.
EPC Consortiums - Differences in Experience and Approach
EPC consortiums often include a collection of participants that have had significant successes on EPC projects and have developed certain approaches and methods that have proved to be "the right way to do it" through their respective experiences. This blending of knowledge and experience is one of the benefits of the consortium, but it also presents practical difficulties in executing the project because there is normally not necessarily a singular entity guiding the project. The consortium partners must identify and discuss their respective experiences and approaches prior to consortium formation, and they must establish communication and chain of command processes so that the consortium can decide which approaches are best suited for the successful completion of the particular project. The consortium must designate a Project Representative who shall have the singular responsibility of interfacing with the Employer on behalf of the consortium. Selecting a qualified and experienced Project Representative to interface with the Employer, while at the same time effectively communicating within the consortium, is critical to the success of the mega-project.
Another example of differing experiences has to do with the approach to project controls, project scheduling, and cost management. Different organizations may have different approaches to project controls, scheduling, and cost reporting. In addition to the tracking that is performed at the member level, the consortium must have a unified approach to project controls, scheduling, and cost management. This requires a team that is employed by the consortium to monitor and report on behalf of the consortium. Independence from the individual participants is highly desirable, and transparency with the Employer and the EPC participants yield the highest likelihood for a successful project.
It is particularly important to fully consider all aspects of project controls prior to negotiation of the Contract. The Employer must fully develop its own internal controls and reporting requirements, as well as the reporting requirements of the financing parties and the "independent engineer." The Contract must consider and integrate these project controls and project reporting requirements with the information being provided to the Employer by the Contractor. This integration is typically handled through detailed appendices to the Contract which provide specific requirements for schedule, cost, quantities, progress, and other performance metrics. The appendices also typically address the requirements for demonstrating entitlement to any extension of contract time and/or contract price, including the requirements of any schedule analysis or time impact analysis. In many cases, the appendices will incorporate recommended standards, protocols, and practices, such as those of the AACE International (AACEI) or the Society of Construction Law (SCL). 14
Proactively identifying cost and schedule issues and trends allows the parties to evaluate mitigation options and other strategies to minimizes schedule and cost risk on large capital projects. It is worthy of note that some of the information that the Employer requires to proactively manage the project execution is exclusively developed by the Contractor. 15 The process of integrating the information and submittal requirements of the Contract with the Employer’s project controls process and project reporting obligations are critical functions that are sometimes overlooked during the contract drafting process. The requirements of the Contract should be designed to require the Contractor to provide to the Employer any information needed so as to meet the Employer’s internal and external reporting requirements, and to fully assess mitigation strategies when adverse schedule or costs trends arise on the project.
Project controls should allow the early identification of performance, budget, and schedule risks, and allow prudent decisions to be made in light of the issues identified. While the level of detail and definition of the project controls system and staff will vary, based on the size, location, complexity, contract type and risk profile of the project, the Employer typically should perform the following functions during the Execution Phase of the project:
- Report costs to date and forecast costs to complete
- Monitor, verify, and document project status against various metrics, including budget, schedule, and payments
- Verify schedule status, including schedule status of major engineering, procurement, and construction activities
- Monitor status of major scopes of supply
- Change management, including design maturation, and
- Internal and external reporting of project data.
Contractors are typically required to submit to the Employer the following types of information on a monthly basis as a precondition to invoice approval and payment:
- contract and payment status
- schedule status
- schedule progress
- quantities installed and stored
- work-in-process
- total project costs
- project progress and other project metrics
- submittal logs
- drawing logs
- status of pending change requests
- status of requests for information
- safety and quality data
- manpower and equipment utilization, and
- a myriad of other project information.
This information is typically provided through a detailed monthly progress report. The key from the Employer’s perspective is to ensure that the Contract requires the Contractor to submit the quantity and quality of information needed in the form most useful. At a minimum, the information must meet the tracking and reporting needs of the Employer and must be sufficient to allow verification of the validity of the construction and schedule progress and all other relevant aspects of the Work.
Addressing Risk Allocation in the EPC Contract
Perhaps the most important task faced by the project participants is the clear allocation of responsibility and risk in the Contract. Identification and acceptance of defined risks by each participant at the outset of the project is crucial, as is trying to ensure that all potential risks are allocated to at least one of the parties and, to the extent possible and financially prudent, mitigated by insurance or other financial instruments. The parties must work diligently at the outset of the project to identity and address all foreseeable risk contingencies. In the context of the EPC Contract, it is generally the Employer’s goal to shift as much risk as possible to the Contractor. Nevertheless, in a general sense, the Employer provides the performance criteria for the project, the site for the project, and access to the work areas as needed to complete the Contract. The Contractor in a general sense agrees to construct the project to meet the agreed criteria within the agreed schedule and in compliance with all applicable laws.
Risks Typically Retained by the Owner/Employer
Although one of the primary benefits to an Employer in utilizing an EPC project delivery system is reduction of risk (and presumably the payment of a risk premium to the Contractor), there are still certain elements of risk that an Owner or Employer typically retains. Examples of the general responsibilities and risks often retained by the Employer include:
- Payment – Securing project financing and being able to pay pursuant to the terms of the Contract
- Environmental Permits and Permissions – Because the Employer assumes the risk of hazardous substances on the site, typically the Employer will obtain the necessary environmental and other permits required to allow for the performance of the work on the project site
- Site Availability and Access – Providing the site for the project, along with the logistics related to accessing the site and often retaining responsibility for materially differing subsurface conditions at the site;
- Site Power - Providing permanent power interconnection to the facility
- Owner’s Representative – Providing an Owner’s Representative with authority to make decisions for the Owner in a timely basis
- Owner Non-performance – The Owner must fully and timely perform its obligations under the Contract
- The right to direct variations and changes in the scope of the Work, with a concurrent obligation to assume the impacts on cost and schedule
- Owner’s Suspension of the Work – While retaining the right to suspend all or part of the work, the Owner will typically bear responsibility for any suspension of the work that it initiates
- Force Majeure and Changes in Law – Force majeure events and changes in law during the execution of the work are typically Owner risks, but are sometimes allocated to and assumed by the Contractor in an EPC Contract
- Performance Guarantees and Performance Testing – Providing achievable performance criteria and evaluation prior to the execution of the Contract. 16
In addition to these responsibilities and risks expressly retained by the Employer under the Contract, there may be certain implied obligations that may be imposed upon an Employer under the federal, state, or local laws of the United States. 17 These implied obligations may include the following:
- The duty to disclose material information to prospective bidders
- Implied warranty of the adequacy of any plans and specifications provided
- The duty to provide accurate performance specifications, and to provide performance criteria that are achievable
- The duty to provide accurate site information, including information concerning known subsurface conditions
- The duty to obtain necessary regulatory approvals, permits, and easements to allow, at a minimum, access to the project site of the purpose of completing the contractual works
- The duty to provide access to the work site, and
- Duties relating to owner-furnished products, materials or equipment.
Risks Typically Allocated to the Contractor in an EPC Contract
The following are items for which the Contractor typically assumes responsibility and risk under an EPC project delivery method: 18
- Site Safety – Ensuring that the labor force is utilizing construction practices and procedures that minimize the potential for incidents and injuries and comply with all applicable health and safety regulations, norms, and standards
- Price – Committing to complete the project at an agreed price
- Labor Risk – Labor risks, including risks relating to labor productivity and labor quality, and labor availability
- Schedule – Managing and implementing an overall project schedule in order to achieve the contractual completion dates, including coordination with all designers, suppliers and subcontractors to ensure compliance with overall schedule and deliverable obligations
- Management of Subsurface Conditions – Constructing the project without disruption or delay due to subsurface conditions that were identified and disclosed by the Owner
- Performance Guarantees – Committing to provide a facility that functions within the specifications and performance criteria agreed in the Contract
- Environmental Compliance – Committing to provide a facility that operates in compliance with environmental rules and regulations required by the government or the underlying environmental permits and environmental laws
- Compliance with Applicable Laws – Committing to comply with all applicable laws, permits, and regulations governing the performance of the works
- Quality Assurance/Quality Control – Developing an appropriate Quality Assurance/Quality Control Plan to ensure that the project complies with the specifications and satisfies the warranty obligations of the Contractor, and
- Craft Support of Commissioning – Providing and managing the craft labor necessary in order to support the start-up and commissioning of the facility.
Ideally, the EPC delivery system should attempt to assign the risks to the party that can best manage and minimize the that particular risk. The failure to properly identify, allocate and manage project risk can be devastating to the overall project, causing severe to catastrophic financial implications to each of the project participants.
Common Causes and Cures – Execution Stage
We have addressed disputes in our last section, below, but it is extremely important to try to resolve individual disputes on the project during execution and as they arise. For example, notice letters are often written during the execution or performance stage of projects, identifying disputes, putting a party on notice, or otherwise "preserving" a position on an issue. Often, these letters become change requests, including a request for additional costs and a request for an extension of time supported by a time impact analysis. Rather than attempt to resolve the issue at that point, project participants often wait until the project is nearing completion, or until consideration is given to assessing liquidated damages for failing to achieve an interim milestone, or, in a worst case scenario, until notice is sent and a default termination is threatened. By that point, the losses have grown, the claims have morphed, positions have polarized, and amicable resolution of the underlying dispute(s) becomes a difficult possibility. Proactive leadership between the project participants is imperative if the project is to be successful. If left unresolved, small, manageable disputes tend to tend destroy cooperative working relationships among project participants, give rise to major claims with significant cost and schedule impacts.
It is often the case that communication issues are at the root of these problems. The personality, background, culture, or perspective of the designated representatives clash, impeding the ability of their respective organizations to communicate with one another to resolve a discrete and manageable issue. If this pattern develops, it can become difficult to control unless addressed promptly by strong management action. 19 Similarly, due to the duration and physical location of mega-projects, there tends to be turnover of the senior site management personnel, and often of the executive management personnel. This can present a number of issues, including the loss of institutional knowledge of both sides. Unless the situation is managed properly, issues that were resolved at an earlier time are questioned, and relationships among project personnel that once existed are lost. Project Examples and Solutions
In dealing with performance problems on mega-projects, identification of "root causes" is critical. We have identified the most common recurring problem scenarios. Now, we shall take several project examples and illustrate how first of a kind" (FOAK) projects can present challenges if not anticipated in contracting and project controls , including schedule preparation. Also, the absence of good communication and accountability for change management and early identification of risks can result in "scope creep." This increase in work which normally results in major claims occurs particularly when project personnel approach a project from the perspective of a "cost reimbursable" culture as opposed to the contract is "lump sum" or GMP. These cultural differences can also manifest on budget-controlled cost reimbursable projects in substantial overruns and schedule delay. After we examine several projects and illuminate the "root causes of failure or challenge," we shall suggest a remedy that can minimize risk, identify and resolve issues early, and help record cost and time for later resolution.
Offshore Wind Farm, Europe
An EPC company undertook a windfarm project in conditions that were FOAK – at the time the largest -- at least in terms of number of actual wind turbine generators (WTGs) sitting in nacelles supported by masts set into transition pieces which were on top of monopiles driven deep into the seabed. Installation of the WTGs required specialized vessels and were only allowed to work (and in certain cases, only available) in certain months of the year. Further, the conditions at the wind farm were windy — good for electric generation — and stormy. The surrounding seabed was 1,000 feet plus deep, with the sandbar where the WTGs were installed only 35 feet deep in places. The depth differential, plus the wind, resulted in occasional 60-foot high waves, all of which necessitated a careful design, timing, and installation of each unit. The approach taken by the project controls team was challenging – to try to measure wave height, wind speed (and hence a force majeure event for cost, time, or both); it was also extensive, complicated, and required constant record keeping, regardless of season, to record non-work days and adjust schedule activities.
These unique conditions for work under unique circumstances, with a defined force majeure, resulted in substantial additional cost and over a year’s delay of the project to completion. Further, the unique conditions made the inter array cables — which linked with ocean substations for collection and transmittal by massive cables to onshore transmission facilities — were particularly challenging, especially in an area of shipwrecks and unexploded WWII ordinance. The failure by the owner and EPC contractor to contemplate risks of such a FOAK project manifested in prodigious cost and schedule growth.
Processing Facility, Western Hemisphere
A reimbursable EPCM services contract for a FOAK processing facility was designed and built for an owner based on the owner’s proprietary process technology. The owner had previously designed a pilot plant (1:200 scale). After trial runs on the pilot plant, the owner then procured front-end engineering design (FEED) work for a full-scale facility. The owner then procured on a fast-track basis an EPCM services contract from a different firm to perform detailed design, procurement and construction management where all trade contractors reported to the owner (i.e., a multi-prime arrangement).
The FEED work-product, which was given to the EPCM contractor upon award, turned out to be poor and incomplete. Not only was the "scale up" of the owner’s proprietary process inaccurate, but the FEED missed or under-designed usual and customary utilities support (boilers, chilled water systems, building HVAC, etc.). The EPC was challenged to exercise project controls in terms of cost and schedule in an environment where the engineering was being determined as field work progressed. The resulting difficulties included a plethora of design and long-lead procurement problems that ultimately cascaded through all execution aspects, given the fast-tract nature of the project. The problems in construction were exacerbated by the multi-prime approach and the owner’s communications to the multiple prime contractors on how to complete the project.
Lump Sum Turnkey Contract (LSTK) Gas Turbine Power Plant
As a result of a truncated bid exercise, an EPC contractor familiar with the client-Employer was short-listed on a lump sum turnkey gas turbine power plant with a compressed schedule. The Employer maintained responsibility for procurement and delivery of key equipment, including a gas turbine and heat recovery steam generator (HRSG), but elected to use the EPC Contractor as "agent" for final erection and completion. The project controls team could not develop a detailed schedule or cost itemization without delivery information that was slow to materialize; in fact, delivery was incomplete to project controls even after site construction commenced. The culture that evolved over time between the Employer and EPC Contractor was akin to a "cost-reimbursable" relationship, meaning that the EPC’s activities as "agent" included, at the request of the owner, certain installation and erection duties normally undertaken by the suppliers. In addition, the "lay down" area should have been smaller to accommodate parking on the congested site. This fact necessitated "double handling" of materials from a rented yard to the (now) smaller laydown area at the site. The materials handling (and productivity and safety issues) were not improved by placing the laydown yard between the parking area and the actual construction site.
While this particular project had no aspect of new or novel design or construction, insufficient information on deliveries and problems with material and equipment handling exacerbated productivity problems because trades were required to walk some distance, even in bad weather to get to their work stations. The scope of work on scheduled activities was extended as additional tasks were undertaken by the EPC at the owner’s request or default in failing to assign matters to suppliers. Thus, project controls were challenged to keep budgets even close to plan, and the change management was not consistent with a lump sum turnkey project. As a result of the tight time lines and mixed relationships of the parties, the culture of the project evolved into a "get ‘er done" mentality, without careful contemplation or recording of impacts to schedule or cost. The inevitable result was substantial delay, increase in cost of many activities without relief from supplier’s costs, plus redesign costs because of moved valves and instrumentation. Ultimately, liquidated damages were assessed and project overruns became a significant percentage above the contract value.
Hydrocarbon Facility, Europe
In this example of an EPC/LSTK hydrocarbon facility for an international oil company on a brownfield, congested site, the Employer’s contract documents included both site specific and company-wide requirements. The Employer’s team consisted of two disparate stakeholders with two different internal philosophies and cultures – the projects group (with a company-wide purview) and the local site team (whose interests stopped at the site boundary). The requirements from each Employer group were often in conflict; and, to solve its own internal culture conflict, the Employer adopted a "most stringent" approach to interpreting Contract documents.
Added to this unhappy scene, the execution plan called for diverse design resources by the EPC contractor in India and in the Far East. This, in turn, compounded the issues by not alerting project management to potential conflicting directions and led to increased scope growth from each Employer faction. The divided design resources were not sensitive to the need for close coordination, because they were accustomed to pleasing their own clients on cost-reimbursable jobs, coupled with the cultural circumstance that it could be viewed as offensive to correct the Employer on conflicting directions.
These challenging conditions ultimately manifested into cost growth and substantial schedule slippage. Compounding the problems were that the site was highly congested and required significant off-site modularization. Modular-intense projects are particularly impacted by late design and logistical/procurement decisions.
Suggested Execution Stage Solutions
The common causes of mega-project failures we have outlined above, including FOAK technologies, ineffective management and control teams, and cultural differences during execution of major projects can be dealt with to the benefit the Employer and design and contracting disciplines. We now suggest a possible solution by augmenting the project team with an individual filling a key position whose task it will be to early identify and resolve developing problems on mega-projects – before the problem threatens the success of the project. We believe that this measure will be cost-effective, minimize risk, while not displacing or threatening the normal project management team with a "police informant.")
The "Early Action" Coordinator
The key objective in avoiding or minimizing threats to the success of a mega-project is to first identify and then timely respond to developing issues. Many large EPC and EPCM organizations, including joint ventures, have tried a project counsel; 20 but, we believe there is a better, less costly way. Our suggested solution is therefore to establish a position that administers the contract within the terms of the EPC/EPCM agreement that begins with the final contract negotiations and who remains "on site" and on duty through contract close out. The position we have in mind would be described as follows:
JOB DESCRIPTION
A. Position established to: (1) support the business manager or project manager/director on all high-risk capital projects; (2) have responsibility to prepare and deliver appropriate notices under the contract; (3) liaise with [the Law Department or transactional attorney] on change, claims and issues under the prime contract or subcontracts. Specific expertise and responsibilities are as follows:
- Reports at minimum monthly (and more as developments dictate) to [the Law Department or transactional attorney] on any dispute issue or contested change order
- Reads and understands the legal nuances and terms of the prime contract
- With the guidance of [the Law Department or transactional attorney], business manager or project manager, writes or reviews draft formal project correspondence (e.g. letters to the client or subcontractor/suppliers) with input/focus given to potential legal interpretation, intent, protection, and contract compliance
- Works within the project change management program to ensure compliance with the contract notice and other follow-on notice requirements, including cost and schedule analysis
- Acting as liaison with [the Law Department or transactional attorney], provides input, coordination, and assistance in the packaging of potential claims and change orders with focus given to potential legal interpretation, intent, protection, and contract compliance
- Interfaces and coordinates with [the Law Department or transactional attorney] during the execution of the prime contract on legal or potential claim matters
- Performs minimal administrative duties associated with prime contract administration, such as taking meeting notes, preparation of draft communications including letters, and performing document retention as appropriate, and
- In conjunction with [the Law Department or transactional attorney], develops negotiation strategy on prime contract issues and subcontractor claims.
MINIMUM REQUIREMENTS
Position requires:
- Contract or construction [paralegal] experience; or (2) contract management experience on capital projects; or (3) claims work (schedule and cost analysis, strategic contract communications) on capital projects
- Strong team work and collaboration skills
- Strong verbal and written communication skills
- A Self- starter who is pro-actively motivated
- Strong organizational skills and attention to detail
- Proficiency in Microsoft Office (Word, Excel, PowerPoint, etc.)
- Oil and Gas background or Infrastructure background on capital projects preferred
- Associates and/or Bachelor degree preferred; or equivalent work experience.
REPORTING LINE
[Reports to Business Manager or Project Manager with "dotted line" responsibility for communications with the Law Department.] 21
To avoid potential resistance by the project personnel to the concept of having a "project king," we suggest that the Early Action Administrator should report directly to the project manager/director and interface with the Law Department or transaction attorney, all with a view toward addressing issues proactively over the life of the project. 22 Unlike a project counsel, the position would be the focal point for contract and execution related issues, with a keen eye toward change management in terms of work conditions, scope creep, multi-prime coordination breakdowns and, of course, to be on especial alert for the inevitable FOAK surprises. The suggested position will require accountability for change and risk management, and coordination with project management and in-house counsel.
The suggested position should be the focal point of formal contract communications, and the individual filling that role should act as the project director’s expert. Clearly, change notices, surprise issues and claims should be handled in a proactive, not a reactive, mode. The position further contemplates the formulation of strategies and tactics for addressing "over the horizon" contract issues and major subcontractor risks while facilitating legal support of the project team throughout the life of a major project. With this one key position, and with the right set of experience and skills, the consequences of the issues that all mega-projects face, including FOAK, flow of project control information, timely communications and notices, "scope creep" and cultural clash, all can be avoided or mitigated by early identification and resolution at a project level.
Common Causes and Cures – Dispute Resolution Stage
It is perhaps fitting that the last topic of this paper is the dispute resolution provision, which all too often is treated as the last issue or afterthought during the negotiation of the Contract. The commercial teams heavily negotiate the commercial terms, and the technical teams carefully negotiate the technical terms. The legal and risk teams spend many hours negotiating the contract provisions governing indemnification, limitation of liability, consequential damage, delay liquidated damages, performance liquidated damages, insurance requirements, letters of credit, bonds, and other financial security instruments, changes, default and termination, lender’s rights, and the twenty pages of definitions that inevitably are included in the Contract. The commercial team does not want to think about the disputes that will inevitably arise. The technical team is unconcerned with dispute resolution because they are excited about the capabilities of the new facility. As a result, the legal team often takes the last EPC form contract that was negotiated and "cuts and pastes" that "disputes" provision into the new Contract, without really thinking through the ramifications and importance of the provision.
The dispute resolution provision is of critical importance on megaprojects. Arbitration, often preceded by mandatory negotiation and/or mediation, is the dominant dispute resolution mechanism for mega-projects. The issues that must be considered and addressed include potential consolidation and joinder of related disputes, the appropriate arbitral institution and arbitral rules, the language of the arbitration, the governing arbitral law, the seat of the arbitration, the number of arbitrators and their manner of selection, retention and exchange of relevant project data (and reasonable limits upon information exchange), recoverability of attorneys and expert fees and expenses, arbitrator compensation, and arbitration association fees, and a host of other issues. 23 Nevertheless, given the importance of dispute resolution on megaprojects, failure to specifically negotiate meaningful dispute resolution provisions in the Contract that are appropriate for the scope of the project, the project delivery process and the parties, can and often does lead to the waste of millions of dollars as the parties head to arbitration or litigation. With these realities in mind, a carefully thought out strategy for the early and efficient resolution of disputes saves everyone involved significant time and money at the conclusion of the project, even if arbitration becomes necessary to resolve any lingering disputes.
The Range of Dispute Resolution Options
The range of modern alternative dispute resolution (ADR) methods available for construction industry disputes comprises a "continuum" – running from informal to formal – of several alternative dispute resolution methods short of the ultimate sanction of binding arbitration or court warfare. These most widely used construction industry ADR options available for use alone or in tandem with others on any project are discussed in the following sections.
Informal Negotiation, Partnering and the "Hot Tub"
Used from time immemorial, 24 direct effective communication through informal reasoned discussion should be the beginning point in every effort to resolve a dispute. 25 Whether this beginning takes place between disputing parties at the project, on the golf course, in a health club’s "hot tub" or just over dinner, the objective is to encourage senior authorized persons to talk through their disputes and to settle them promptly. This hallmark of construction ADR works only so long as parties communicate well and engage in principled negotiation. There are no rules applicable to this option other than principled negotiation, ethical conduct, 26 patience, sensitivity, 27 good humor, careful listening, and a reasoned evaluation of risks.
One construction industry innovation of the 1990s that encouraged improved communication through informal discussion between and among decision-makers was "partnering." 28 The process of "partnering" is not itself an ADR method, primarily because the goal of partnering is to avoid, rather than to resolve, existing disputes. The goal of partnering is to promote good working relationships among parties at the outset of the project 29 and to encourage in a non-adversarial atmosphere early agreement on ADR methods for governing avoidance and resolution of future disputes. 30 The partnering approach to dispute resolution is especially appropriate for preventing disputes on mega-projects, as was confirmed recently by the United States Transportation Research Board:
“Partnering has become a common practice on large construction projects both within and outside of government, and many transportation agencies have used it in large or complex projects. Technically, partnering is a dispute avoidance process, rather than a dispute resolution method; it entails committing to use a process that seeks to change the attitude and the relationship between parties to a long-term contract or other relationship to promote recognition and achievement of mutual beneficial goals….” 31
Structured Negotiation
Because differing cultures, personalities 32 and lack of adequate information are prime causes for the failure of mega-projects, construction contracts frequently include an ADR clause requiring, as the first among various methods, a disciplined “structured negotiation” process. This ADR method establishes a formal timely dispute resolution procedure: (1) for full disclosure and prompt exchange of information, (2) for timely commencement and conduct of project level negotiations (sometimes with a “mediator chaperon” or “facilitator”), and, if needed, (3) for moving negotiation up to successive levels of higher management levels in the parties’ respective organizations, before turning a dispute over to third parties either for a non-binding recommendation or for a binding decision. 33 Successful negotiators always seek a “win/win solution” and to “keep the high road.” 34 Structured negotiation provisions typically mandate exchanges of documents and other information prior to commencement of negotiations. 35
The process by which “structured negotiations” is to be conducted must be agreed by the parties, either in the Contract or by post-contract agreement. Like the “structured negotiation” plan on the “Big Dig,” such an agreement may contain a host of other provisions relevant to the negotiation, such as interim provisional payments, claim submission requirements, claim evaluation commitments, access to records and information, timelines for moving negotiation forward, negotiation participants and their authority to settle, possible mediator assistance, and oversight by senior management to assure compliance with respective negotiation process obligations. 36 Conversely, such agreements need not be complicated. One illustration of an uncomplicated “structured negotiation” clause is Article 12.2 of the 2007 ConcensusDocs 200 General Conditions, which reads:
12.2 DIRECT DISCUSSIONS. If the parties cannot reach resolution on a matter relating to or arising out of the agreement, the Parties shall endeavor to reach resolution through good faith direct discussions between the parties’ representatives, who shall possess the necessary authority to resolve such matter and who shall record the date of first discussions. If the parties’ representatives are not able to resolve such matter within five (5) business days of the date of first discussion, the parties’ representatives shall immediately inform senior executives of the parties in writing that resolution was not effected. Upon receipt of such notice, senior executives of the parties shall meet within five (5) business days to endeavor to reach resolution. If the dispute remains unresolved after fifteen (15) days from the date of first discussion, the parties shall submit such matter to the dispute mitigation and dispute resolution procedures selected herein.
Disputes not settled by such "direct discussions" may be referred, under the "dispute mitigation and dispute resolution procedures" in Article 12.3, either to a project neutral or to a dispute review board, or may be submitted directly to mediation and then ultimately to either arbitration or court litigation where costs will be borne by the "non-prevailing" party. 37
Standing Project Neutral and Initial Decision Maker
Another dispute resolution process peculiarly suited to mega-projects is the use of a "standing project neutral". This process contemplates that one or a number of individuals either identified in the contract or later appointed shall be "on call" to assist the parties either to agree upon dispute resolution procedures, facilitate negotiation, mediate disputes or to render recommended proposals for settlement – in short, to relentlessly push settlement. 38 Perhaps the most important role for a project neutral is "early neutral evaluation" of the facts and law governing a dispute in order to give parties the neutral’s non-binding view on the merits of the dispute. The trend in favor of a standing project neutral constitutes a rejection of the historic role of the design professional as the key party to whom disputes should be initially referred for a nonbinding decision.
One significant change made by the American Institute of Architects in its A201-2007 General Conditions of the Contract for Construction was to allow parties to remove the architect of record from its historic role as the "professional peace keeper" and initial decider of disputes between the owner and contractor, and to authorize the parties to appoint their own "initial decision maker" to whom disputes initially are to be submitted. Giving the parties the right to appoint a third-party to act in the architect’s stead was an extraordinary alteration in traditional construction industry relationships, which had existed for 120 years under standard construction industry contract documents. From the 1888 Uniform Contract until the 2007 AIA A201 General Conditions, the architect of record exercised a strong hand in resolving disputes between the owner and contractor over scope of work, design document intent, and termination for default disputes. 39 The architect’s retreat in 2007 from its historical initial dispute resolution role was explained by the distinguished American lawyer and dispute resolver, Carl M. Sapers of Boston, as follows;
"Very few contractors or subcontractors today would put their trust in the disinterestedness of the architect. A number of factors have brought about this change. One factor was certainly the increased complexity of construction projects, which made more convincing any challenge to the architect’s judgment… Perhaps the most significant change, however, has been the change in the way professionals now fit into American society. At least until World War II, doctors, lawyers, and architects, as members of the "learned professions," operated with broad independence and with the broad respect of the community. In general, they were recognized as pursuing professional interests rather than personal enrichment. That independence, applied to the construction industry, gave the architect the special standing to resolve disputes in a fashion which both sides accepted as disinterested." 40
The appointment of an independent and impartial Initial Decision Maker is also apt for EPC mega-projects in that the engineering team will normally be constituted as part of the constructing team and, therefore, hardly in a position to play a neutral role as between the EPC Contractor and the Employer.
Dispute Review Board
Under the impetus of the American Society of Civil Engineers and the Dispute Review Board Foundation, many mega-projects projects in the United States today are awarded under contract provisions that require the parties to establish, at the beginning of the project, a standing dispute review board to which all disputes arising on the project will be submitted for nonbinding determinations. 41 Board members designated by the parties typically have both substantive and procedural expertise. According to the Dispute Review Board Foundation, 42 the dispute review board process has achieved extraordinary results in which 98+ percent of over a thousand projects on which the DRB process has been invoked were complete without resort to arbitration or litigation. 43 One criticism of DRBs is the up-front cost, but considering the cost-benefit contrast with a failed mega-project, in most cases the potential benefits and cost avoidance or savings will more than offset the cost of a standing DRB.
Expert Determination
We have focused on FOAK projects as a prime breeding ground for excessive cost, delay and disputes. Because FOAK projects are by definition technically challenging, it stands to reason that there will likely be disputes involving discrete technical issues which may be appropriate for expert determination. This concept has been advocated for over thirty years by the International Chamber of Commerce. 44 According to one commentator:
"The expert should, as soon as possible after ... consulting with the parties, prepare a provisional time table for the conduct of the expertise proceedings.... The ultimate task of the expert is to issue a written expert’s report in which he denoted the findings that he made within the limits of his mission statement. This report can only be issued once the expert has heard the parties and/or allowed the parties to make written submissions. The expert’s report will not be binding upon the parties unless the parties agree otherwise." 45
This expert determination process bears similarities to court appointment of experts under Rule 706 of the Federal Rules of Evidence, and to court appointment of a special master under Rule 53 of the Federal Rules of Civil Procedure to, inter alia, hold trial proceedings and make or recommend findings of fact and conclusions of law on issues to be decided by the court without a jury.
Dispute Adjudication Board – Combined Dispute Board
Today, dispute adjudication boards are being used in all of the FIDIC standard forms of contract. The 2017 revised editions of the FIDIC conditions of Contract and previous editions essentially required disputes not resolved by negotiation or submission to the Employer’s representative be submitted to resolved in instance by a Dispute Adjudication Board (DAB) or Avoidance/Adjudication Board (DAAB). 46 A distinction, however, should be made between a dispute review board which is primarily designed to avoid or nip early disputes in the bud, and a dispute adjudication board, in that the DAB is empowered to make binding interim decisions. It would be a rare situation that a mega-project would not be well served by appointing a dispute adjudication board at the commencement of the project. If a dispute of any kind whatsoever arises between the Parties in connection with, or arising out of, the Contract or the execution of the Works, including any dispute as to any certificate, determination, instruction, opinion or valuation of the Engineer, either Party may refer the dispute in writing to the DAB for its decision, with copies to the other Party and the Engineer. Following submission of the dispute, within 84 days after receiving such reference, or within such other period as may be proposed by the DAB and approved by both parties, the DAB shall give a reasoned decision, which shall be binding on the parties, unless, within 28 days thereafter, either party gives a “notice of dissatisfaction.” 47 If the DAB has given its decision and no notice of dissatisfaction has been given as required by the FIDIC Conditions, the decision of the DAB shall become final and binding on both parties. Where the notice of dissatisfaction has been given as required, both parties are further required to “attempt to settle the dispute amicably” before the commencement of arbitration. However, unless both parties agree otherwise, arbitration may be commenced within a specified number of days after the day on which the notice was given, even if no attempt at amicable settlement has been made. 48
Instead of having to select either a dispute review board (DRB) or a dispute adjudication board (DAB) to resolve construction disputes, the ICC Dispute Board Rules permit the parties to choose a hybrid form of dispute board called a “Combined Dispute Board” (CDB). The CDB may issue nonbinding recommendations as in the case of a DRB, or, if the parties agree that it may do so, the CDB may issue a binding decision. 49 If the parties disagree on whether the CDB shall or shall not issue a binding de- termination, the CDB can decide whether to issue a binding decision, taking into consideration, for example, the urgency of the conditions and whether a binding decision would facilitate performance of the contract. 50
On the international plane, the likelihood is that DABs will continue to be increasingly incorporated into both national and international contracts for mega-projects as a process to avoid or resolve disputes by encouraging the parties to resolve their own issues before a DAB is called upon, and to reach at least an interim resolution of disputes that cannot be negotiated.
Mediation and Conciliation
Where neither informal nor structured negotiations result in settlement, parties frequently invoke the assistance of a third-party mediator to assist them in the dispute resolution process. The world’s administrators and judiciary has been supportive of this trend. 51 Success frequently depends upon the quality of the mediator selected, the parties’ preparation, the extent of information disclosure, other document discovery prior to mediation, and other factors. 52 Mediators who practice mere "shuttle diplomacy" are viewed as less effective than "evaluative mediators" – those who understand the construction industry and offer meaningful insight and risk analysis to the parties based on the relevant facts, applicable law and practical considerations. The evaluative mediation process allows the parties themselves to retain control over settlement but affords the parties the benefit of perspectives brought to the process by the mediator. 53 The broad international acceptance of mediation recently was confirmed in 2008 by the European Union Mediation Directive, 54 which required member states, by 2011, to give formal recognition to mediation as a part of their justice systems. Although in the United States "mediation" and "conciliation" frequently are deemed to be synonymous and used interchangeably, the concept of "conciliation" in international construction clearly contemplates an “evaluative” process rather than mere “shuttle diplomacy.” 55 As explained by a British commentator:
“[T]he difference between mediation and conciliation lies in the role played by the neutral party. In one, he simply performs the task of persuading the parties in dispute to change their respective positions in the hope of reaching a point at where those positions coincide, a form of shuttle diplomacy without actively initiating any ideas as to how the dispute might be settled. In the other method, the neutral party takes a more active role probing the strengths and weaknesses of the parties’ cases, making suggestions, giving advice, finding persuasive arguments for and against each of the parties’ positions, and creating new ideas which might induce them to settle their dispute. In this latter method, however, if the parties fail to reach agreement, the neutral party himself is then required to draw up and propose a solution which represents what, in his view, is a fair and reasonable compromise of the parties. This is the fundamental difference between mediation and conciliation.” 56
One growing use of mediation is in pre-hearing management of litigation or arbitration that focuses on resolution of disputes over acceptable discovery plans. 57 Such disputes in large, mega-project cases can involve a myriad of problems, such as those related to document exchanges, electronic discovery of documents, and number and scope of depositions. Some trial courts appoint mediators or special masters to facilitate, hear, and resolve such disputes in the interests of moving cases along toward trial.
Mini-Trial/Mini-Arbitration
Suppose that the parties to a mega-project dispute desire an "early read" of an issue, but do not want to incur the time and expense of a full-scale arbitration. In that case, the parties may agree to participate in nonbinding "mini-proceedings" in which judges or arbitrators offer recommended non-binding decisions on either selected issues or on the entire matter based on limited admission of evidence and arguments of counsel. 58 The matter or issues in dispute often are submitted either on affidavits, expert reports and memoranda, and on the taking of limited testimony. Like all other “evaluative” non-binding recommendations of third party neutrals, the mini-trial or mini-arbitration offers a nonbinding third party perspective on the likely outcome of matters in dispute.
Arbitration
Arbitration, 59 of course, should be the last resort for resolving intractable disputes on mega-projects. Parties who continue to use arbitration are those who know how to assure its efficiency and cost-effectiveness. 60 Critical elements in assuring satisfactory use of arbitration are (1) pre-contract planning for conflict management with competent counsel, 61 (2) drafting a well thought out arbitration agreement that confirms applicable law 62 and rules, 63 defines the powers of the arbitrators, 64 grants broad rights of consolidation of cases and claims and joinder of nonsignatory parties, 65 and other conditions, (3) selecting arbitrators with requisite skill and expertise in construction industry practices, construction law and case management, (4) filing (or otherwise making early disclosure of) detailed statements of claims and defenses, (5) requiring information exchanges and limiting document and deposition discovery to the issues, 66 (6) encouraging pre-“neutrals” throughout the proceedings). 67 That process offers the parties the greatest confidence that the right arbitrators have been selected to hear their particular disputes.
In crafting an arbitration agreement, counsel should also focus on defining the remedy parameters, for example, high/low limitations on awards, “baseball” arbitration, elimination of punitive damages, award of attorney’s fees to the prevailing party, powers of the arbitrators and the issues to be decided. Arbitration agreements sometimes place limits on damages or other remedies that can be awarded by the arbitrators. Where damages or remedies are not limited and where the arbitrators are empowered to decide “all disputes under the contract or arising out of the breach thereof,” the arbitrators are accorded extraordinarily broad discretion to fashion equitable remedies. 68
Tailoring Dispute Resolution Options to Mega-project Contracts
Early and effective resolution of mega-project disputes requires careful tailoring of ADR options to foreseeable types of technical and other problems related to issues of legal causation, liability and damages. Illustrative of the types of such problems are:
- Disputes arising out of “first of a kind” technologies, equipment or materials which invariably require “root cause” analyses to determine causation and sort out responsibilities. The most expeditious ADR options for resolving such disputes could be binding Expert Determination or Neutral Evaluation.
- Disputes arising out of lack of disclosure of information critical to contract completion usually require a careful review of legal and contractual responsibilities for investigation and disclosure of risks and for preparation of an adequate design. The best ADR Options for expeditious resolution of disputes over such legal and contractual responsibilities could well be a Dispute Review Board, a mini-trial or an expedited decision by a Dispute Adjudication Board (DAB).
- Disputes likely to impact continued contractor performance due to withholding of funds pending dispute resolution can best be addressed by a DAB or expedited adjudication decisions binding for the duration of contract performance but appealable thereafter.
- Disputes over adequacy of contractor performance progress impacted by various types of delay conditions – excusable, inexcusable, concurrent, compensable or sequential – can be efficiently resolved by an Expert Determination or perhaps "hot tubbing" of the parties’ delay experts.
- In virtually all mega-project disputes, mediation should be considered either as a backstop to other ADR mechanisms or as a stand-alone process.
Conclusions
Mega-projects are generally defined within the industry as very large-capital investment projects that attract a high level of public attention or political interest because of substantial direct and indirect impacts on the community, environment, and the companies that undertake such projects. Far too many mega-projects have failed because of recurring root causes. We have defined project "failure" in terms of massive cost overruns and lengthy delays which frequently lead to expensive and time consuming arbitration and litigation.
The most common root causes of project failure include: (1) first of a kind (FOAK) projects, either in terms of new technologies or scale; (2) insufficient information to develop effective project management controls and schedules; (3) design schedules, cost and schedule creep; and (4) cultural differences, whether inside or outside the participating organization.
The most effective way to achieve a successful FOAK or complex design that meets the Employer’s requirements and is constructible is to involve both the Employer and the constructor in the design process from the beginning, so as to better understand expected scope, responsibilities and allocations of risk.
Effective management cannot remain a more or less ad hoc activity during which only involve those directly responsible for planning and managing the activity. When a change in any work activity is contemplated, then it is wise to designate "change representatives" from each of the primary participatory stakeholders who can be actively involved in examining the change.
Controlling cost and schedule creep on mega-projects requires that project management transition from a reactive based cost management to a predictive based cost management. Fortunately, some of the most powerful planning and control tools available to project management are specifically designed to address planning, managing and controlling schedule on what is essentially a real time basis. Those sophisticated schedule and control tools, operated by enough properly trained and experienced schedule control staff, provide project management with both a sound trend and forecasting capability. Most often, however, the problematic issues are not in the tools, but failing to use the tools effectively.
In order to overcome cross-cultural differences, all stakeholders need to be aware of these differences from the onset of the mega-project. Successful communication is essential, including clarification to ensure that the team players understand everything that needs to be done, as well as getting into the details to avoid the temptation of agreements based on general principles that can create major problems in the long run.
From a contracting perspective the importance of selecting the appropriate mega-project delivery system cannot be overstated. There are a variety of project delivery methods on mega-projects, including the one-stop EPC or "turn-key" model, the multiple Contractor model, the Employer’s performance of all or some of the engineering or procurement functions, or the Employer’s responsibility for the engineering, procurement, and construction functions through a cost-reimbursable model. Each approach presents certain advantages and disadvantages, particularly with respect to financial risk, project management responsibilities, and cost control. It is fair to say that the contracting relationships, and the resulting allocation of risks, are defined by the project delivery system. Consequently, the project delivery model must be carefully considered and evaluated to ensure that a proper project delivery method is selected for this particular project, this owner, these financing parties and stakeholders. Ideally, the EPC delivery system should attempt to assign the risks to the party that can best manage and minimize the that particular risk. The failure to properly identify, allocate and manage project risk can be devastating to the overall project, causing severe to catastrophic financial implications to each of the project participants.
The common causes of mega-project failures we have outlined above, including FOAK technologies, ineffective management and control teams, and cultural differences during execution of major projects can be dealt with to the benefit the Employer and design and contracting disciplines. We have suggested a possible solution by augmenting the project team with an individual filling a key position whose task it will be to early identify and resolve developing problems on mega-projects -- before the problem threatens the success of the project. We believe that this measure will be cost-effective, minimize risk, while not displacing or threatening the normal project management team with a "police informant."
An effective scheme for dispute resolution is of critical importance on mega-projects. Arbitration, often preceded by a variety of alternative dispute resolution processes, including mandatory negotiation or mediation, can be effective in avoiding or mitigating the cost and time of disputes on mega-projects. Given the importance of dispute resolution on megaprojects, failure to specifically negotiate meaningful dispute resolution provisions in the Contract that are appropriate for the scope of the project, the project delivery process and the parties, can and often does lead to the waste of millions of dollars as the parties head to arbitration or litigation. With these realities in mind, a carefully thought out strategy for the early and efficient resolution of disputes saves everyone involved significant time and money at the conclusion of the project, even if arbitration becomes necessary to resolve any lingering disputes.
Endnotes
1 See, generally, "Managing Gigaprojects: Advice from Those Who’ve Been There, Done That," edited by Patricia D. Galloway, Kris R. Nielsen, Jack L. Dignum, Part 1 Megaprojects to Gigaprojects, page 1, ASCE Press, 2013.
2 Managing Gigaprojects: Advice from Those Who’ve Been There, Done That, Edited by Patricia D. Galloway, Kris R. Nielsen, Jack L. Dignum, Part 1 Megaprojects to Gigaprojects, page 1, ASCE Press, 2013, Chapter 8.
3 Project Management Institute (PMI). (2008) A Guide to the Project Management Body of Knowledge, 4th Ed., Newtown Square, PA, Section 1.3, p. 6.
4 Black's Law Dictionary 378 (9th ed.2009). For a discussion of "control" with respect to taking on legal liability for the acts or omissions of other participants in the construction industry, see Bruner & O’Connor on Construction Law, §§ 15:22 – 15:29 (2002, supplemented annually).
5 Merriam Webster Dictionary.
6 These next several sections have been loosely adapted from Managing Gigaprojects: Advice from Those Who’ve Been There, Done That, ASCE Press (2013), at Chapter 8, "Six Challenges to Controlling Megaprojects," Patricia D. Galloway and John J. Reilly.
7 We have suggested a role for such a "change representative" in our Section or project execution, below.
8 Laroche, L.; Managing Cross-Cultural Differences in International Projects.
9 Creative minds have fashioned many different types of project delivery systems. Project delivery system means the manner in which an Owner contracts for the engineering, procurement, and construction services. There are many variants to these common types project delivery models.
10 For a more in depth discussion, see Managing Gigaprojects: Advice from Those Who’ve Been There, Done That, ASCE Press (2013), at Chapter 18, Bates, "Strategic Considerations in North American Gigaprojects" at pp. 349 – 362; Bates, "Proactive Project Management: Documentation and Control Suggestions for Megaprojects," Construction Law International, Vol. 7, Issue 4 (January 2013); Bates, "Proactive Project Management: Integrating The Contract Documents With The Owner’s Project Control Processes," Building Better Construction Contracts (PLI) (2012).
11 This section have been loosely adapted from Managing Gigaprojects: Advice from Those Who’ve Been There, Done That, ASCE Press (2013), at Chapter 18, Bates, "Strategic Considerations in North American Gigaprojects" at 362 – 368.
12 Major Equipment Suppliers often supply the technology, design, and equipment to be assembled and erected by the contractor/constructor. As an example, on large conventional power projects, equipment suppliers typically provide the major systems for the project, such as the boiler works, the turbine works, or the air quality control system works. The civil works and balance of plant are typically not provided by equipment supplier or suppliers.
13 It is not uncommon for the law governing the project Contracts to be New York law or English law, if the financing is coming from the capital markets of the United States or England, even if none of the consortium members come from common law traditions. Nevertheless, the consortium agreement is often governed by a different law than the Contract. The differences in legal traditions among the project participants can introduce additional risk if not properly recognized and managed.
14 For example, the SCL Delay and Disruption Protocol (2nd ed. 2017) is often incorporated as guidance for managing delay and disruption issues that arise on projects. Alternatively, the AACE International Recommended Practices, such as 29R-03, "Forensic Schedule Analysis," and various AACE recommended practices may be incorporated or referenced as guidance for addressing delay and disruption issues.
15 This is not to suggest that the Owner does not independently survey and verify work progress, installed qualities, design maturation, contractor labor and equipment quantities, or other objective and observable criteria. However, much of this type of information is developed by the Contractor in the first instance.
16 The Owner also typically retains specific responsibilities relating to performance testing, start-up, and commissioning of the project, while the Consortium warrants all or certain defined aspects of the project for a defined period of time after mechanical completion and/or final completion.
17 This should not be confused with the obligation of the Contractor to comply with applicable laws, regulations, and permits, which is typically a risk assigned to and assumed by the Contractor.
18 It is important to understand that the lenders may also make certain demands of the Contractor, particularly in the case of a single purpose project entity with non-recourse financing as the Owner. A discussion of these issues is beyond the scope of this paper, but could be very significant on certain megaprojects.
19 For these and other reasons, the use of Project Neutrals, Dispute Resolution Boards, Partnering Sessions, and other binding and non-binding "real-time" dispute resolution processes have been successfully implemented on Megaprojects. While this extensive discussion of these techniques is beyond the scope of this Chapter, these methods have a great deal of utility on Megaprojects, and can be very effective is minimizing disputes and their attendant effects on the project if the major project participants (whether between Owner and EPC Consortium or among EPC Consortium participants) agree to and fully support the process.
20 A project counsel is a qualified lawyer (usually in the appropriate jurisdiction) assigned to a mega project to carry out the duties and responsibilities described below with the added benefit (in many jurisdictions) of keeping communications, strategies and suggested actions privileged. The counsel can come from in-house resources or, especially in the case of a JV or LLC, be hired from the outside. The reporting requirements described below remain similar, but care must be taken to avoid the appearance of favoritism when reporting to one or a selection of JV partners, especially if counsel previously worked for one JV partner. Two obvious drawbacks to hiring project counsel include higher costs and skill but without the expected project knowledge or experience.
21 See Appendix 1, attached.
22 A suggested organization chart is included as Appendix 1, attached.
23 By way of example, the IBA Guidelines for Drafting International Arbitration Clauses (2010) provide eight basic drafting guidelines, which should be viewed as the minimum requirements to be included in an arbitration provision. The IBA Guidelines also provide seven additional optional elements for consideration, as well as guidelines for multi-tier dispute resolution clauses and multi-party dispute resolution clauses. The International Center for Dispute Resolution has developed an online tool called "ClauseBuilder" to assist organizations in developing clear international arbitration agreements. See https://www.clausebuilder.org/cb/. Many other good dispute clause drafting guides exist as well. The takeaway is that the dispute clause should be carefully considered at the time of contracting.
24 See Isaiah 1:18-19 (King James Version) ("Come now, and let us reason together, saith the Lord: though your sins be as scarlet, they shall be white as snow; though they be red like crimson, they shall be as wool. If ye be willing [to reach agreement] ye shall eat the good of the land").
25 See generally Roger Fisher and William Ury, Getting to Yes (1981) (presenting approaches to "principled negotiation" developed by the Harvard Negotiation Project).
26 See Steven G. M. Stein and Melissa R Pavely, Good Faith in the Negotiation, Performance and Enforcement of Construction Contracts, 4 JAMS Global Construction Solutions 4 (Winter 2011).
27 See Roy S. Mitchell, Cultural Sensitivities in International Construction Arbitration, 3 JAMS Global Construction solutions 1 (Spring 2010).
28 See Kurt L. Dettman, Martin J. Harty and Joel Lewin, Resolving megaproject claims: Lessons From Boston’s "Big Dig," 30 Constr. Law. 5, 7 (Spring 2010) ("Partnering…consisted of an effort by trained facilitators, initially at off-site conferences and later repeated during the course of the contract, to educate all Project participants on the mutual benefits of working toward common goals rather than each participant independently pursuing its own selfish ends. By using partnering, Project management attempted to establish a way of doing business that emphasized open communications and joint solutions, rather than the win-lose battles that would sour relationships and waste recourses on fighting legal battles rather than getting the job built"). See also Chris Skeggs, Project Partnering in the International Construction Industry, 20 Int’l Constr. L. Rev. 456 (2003); Frank Carr, Partnering in Construction: A Practical Guide to Project Success (1999); Partnering Manual of the Associated General Contractors of America (1995)).
29 See James H. Kell, The Benefits of Partnering, 54 Disp. Resol. J. 29 (February 1999) (offering a "step by step" partnering process checklist).
30 See Kimberly A. Kunz, Counsel’s Role in Negotiating a Successful Construction Partnering Agreement, 15 Constr. Law. 19 (November 1995)("Partnering, simply put, is the express recognition of the implied covenant of good faith and fair dealing. It requires contracting parties to use best efforts, through a mutually developed, formal strategy of commitment and communication, to create an environment of trust and team-work for the cooperative avoidance of disputes, and the facilitation of project completion on a timely and cost-effective manner").
31 Current Practices in the Use of Alternative Dispute Resolution, Legal Research Digest 50 (U.S. Transportation Research Board; October 2008, updated September 29, 2009).
32 See, e.g., Embrey v. United States, 17 Cl. Ct. 617 (1989) (noting that different perspectives on the adequacy of the contractor’s performance led to a deterioration of jobsite relationships that caused the contractor’s superintendent to describe the government’s contracting officer in correspondence as an "arrogant jerk," "a bully," "a running sore of malcontent," and "an individual who won’t change, without the pain and suffering he apparently needs").
33 See James Groton, The Progressive or "Stepped" Approach to ADR: Designing Systems to Prevent, Control, and Resolve Disputes, in Construction Dispute Resolution Handbook (1997).
34 See generally Roger Fisher and William Ury, Getting to Yes (1981); 5 Contract Pricing Reference Guide § 1.2 (2000) (U.S. Department of Defense Guidance to Government Negotiators); Ava Abramowitz, Architect’s Essentials of Contract Negotiation (2d ed. 2009) (a comprehensive guide to negotiation principles, tools, and techniques); X. M. Frascogna, Jr. and H. Lee Hetherington, The Lawyer’s Guide to Negotiation: The Strategic Approach to Better Contracts and Settlements (2001); Robert A. Rubin, The Ethical Negotiator: Ethical Dilemmas, Unhappy Clients, and Angry Third Parties, 26 Constr. Law. 12 (Summer 2006).
35 See ICDR Guidelines for Arbitrators Concerning Exchanges of Information (May 2008). See also John W. Hinchey and Troy L. Harris, International Construction Arbitration Handbook § 1:8 (2008):
"A prime cause of construction disputes is insufficient knowledge held by either or both parties to the dispute. The more facts that can be placed on the table, the more discernable the solution to the problem. In fact, information exchange is at the heart of construction dispute resolution because, in most instances, the truth of the matter will usually be found in the contemporaneous documentation. The starting place to provide for the exchange and communication of data relative to the dispute is in the construction contract itself. The contract may require that the parties prepare, maintain, and preserve certain categories of records and other sources of information with respect to the project – for example, tender estimates, accounting records, job meeting minutes, change order logs, reports of weather conditions, and test reports. More to the point, the contract can require that these categories of documents be presented to the other party as a contractual condition to assert a claim. It will be easier and far more economical for the parties to exchange information and documents at this early stage of the dispute rather than under the formal requirements of discovery in the context of a lawsuit or even arbitration."
36 See Kurt L. Dettman, Martin J. Harty and Joel Lewin, Resolving Megaproject Claims: Lessons from Boston’s Big Dig, 30 Constr. Law. 5, 7 (Spring 2010).
37 For a notable recent opinion interpreting "prevailing party" and addressing other construction issues, see Weitz Co. v. MHWashington, 631 F.3d 510 (8th Cir., 2011).
38 See Kenneth C. Gibbs, Five Tips on Educating Your Clients about Project Neutrals, 1 JAMS Global Construction solutions 2 (Fall 2008); Linda Debene, Assisted Solutions by Neutrals to Common Project Challenges, 3 Global Construction Solutions 10 (Fall 2010).
39 See Philip L. Bruner, The "Initial Decision Maker": The New Independent Dispute Resolver in American Private Building Contracts, 27 Int’l Constr. L. Rev. 375 (Summer 2010).
40 Carl M. Sapers, In With the Initial Decision Maker, 3 JAMS Global Construction Solutions 12 (Winter 2010). See also John W. Hinchey and Laurence Schor, The Quest for the Right Questions in the Construction Industry, 57 Disp. Resol. J. 8, 13" (Aug.-Oct. 2002) ("Notwithstanding tradition, the quasi-adjudicative role of the design professional has been controversial, especially in light of the multiple roles and allegiances of design professionals. For example, many of the ABA Forum survey responses indicated that a substantial majority of design professionals and contractors agreed that design professional decisions should not be final and binding, unless the parties so agreed after the dispute had arisen," citing as authority Dean B. Thomson, Arbitration Theory and Practice: A Survey of AAA Construction Arbitrators, 23 Hofstra L. Rev. 137 (Fall 1994)).
41 See Duncan Glaholt, Reviewing Dispute Review Boards, 3 JAMS Global Construction Solutions 7 (Fall 2010); Daniel McMillan and Robert A. Rubin, Dispute Review Boards: Key Issues, Recent Case Law and Standard Agreements, 25 Constr. Law. 14 (Spring 2005) ("expanding use of DRBs on major construction projects requires that construction lawyers become more familiar with the DRB process, standard DRB agreements, and the varied roles lawyers may play in the DRB process").
42 See www.drb.org.
43 See generally John W. Hinchey and Troy L. Harris, International Construction Arbitration Handbook, § 1:10 (2008).
44 See ICC Rules for Expertise, ICC Pub. 649 (effective 1 January 2003). See also Donald Marston, Final and Binding Expert Determinations as an ADR Technique, 18 Int’l Constr. L. Rev. 213 (April 2001); John W. Hinchey and Troy L. Harris, International Construction Arbitration Handbook § 1:16 (2008).
45 Nael G. Bunni, The FIDIC Forms of Contract 460 (3d ed. 2005).
46 See, e.g., FIDIC Conditions of Contract for EPC/Turnkey Projects (2d 2017 (Silver Book), Cls.21.1. If the Parties so agree, they may jointly re the DAAB to provide assistance by informally discussing and attempt to resolve any issue or disagreement that may have arisen during the performance of the Contract, or if a "Dispute" has arisen, then either Party may refer the Dispute to the DAAB for a binding decision. Id., Cls.21.3. See also Aitken & Bier, "Dispute Adjudication Board Clauses in the FDIC Conditions of Contract (Red Book)," 5 Construction Law International 13-17, No. 3 (Aug. 2010) (discuss- ing DABs in the context of the FDIC forms and the interaction between the DAB clauses in the FDIC Red Book and national legal systems).
47 FIDIC Conditions of Contract for Construction (1999 ed.) at § 20.4. The "notice of dissatisfaction" (NOD) may also be given if the DAB fails to give its decision within 84 days. The notice shall state the reasons for dissatisfaction. See also, FIDIC Conditions of Contract for EPC/Turnkey Projects (2d ed. 2017), Cl. 21.4.4.
48 FIDIC Conditions of Contract for Construction (1999 ed.) at § 20.5; FIDIC Conditions of Contract for EPC/Turnkey Projects (2d ed. 2017) Cls.21.4 to 21.6. Questions have arisen as to whether the FIDIC DAB procedural requirements are mandatory, such that when a DAB has not been properly formed, the parties may proceed directly to arbitration; see, Burr, "Failure Properly to Constitute a DAB Under the FIDIC Terms and Conditions of Contract," 11 Construction Law International, Issue 1, pp. 19 to 26 (March, 2016). That issue has resolved in the 2017 revisions, whereby if a Dispute arises and there i DAAB in place, the Dispute may be referred directly to arbitration; see, FIDIC Conditions of Contract for EPC/Turnkey Projects (2d ed. 2017), Cl. 21.8.
49 ICC Dispute Board Rules, art. 6.
50 ICC Dispute Board Rules, art. 6(3). Correctly anticipating the future as reflected in the ICC Dispute Board Rules and 2017 FIDIC revisions, a pro- was proposed by Peter G. Merrill, whereby, an "Extended Dispute Review Board" (EDRB) would provide full dispute resolution services and function as a or arbitral panel making binding decisions, depending on the agreement of parties. See Merrill, "New ADR Processes Revolutionize Project Disputes," Construct! (ABA Section of Litigation, Spring 2008) at 7 to 10.
51 See, for example, the new European Union Mediation Directive (IP/08/628: Brussels, 23 April 2008). In a March 29, 2008, speech supporting mediation, England’s Lord Chief Justice, Lord Phillips, exclaimed: "It is madness to incur the considerable expense of litigation…without making a determined attempt to reach an amicable settlement. The idea that there is only one just result of every dispute, which only the court can deliver is, I believe, often illusory…. Parties should be given strong encouragement to attempt mediation before resorting to litigation."
52 See Douglas S. Oles, Ten Common Reasons for Failure in a Mediation, 3 JAMS Global Construction Solutions 1 (Fall 2010); Paul M. Lurie, Using Failure Analysis to Design Successful Mediations, 3 JAMS Global Construction Solutions 1 (Fall 2010); Deborah S. Ballati, Success in Claims Resolution and Mediation: The Insurance Component, 4 JAMS Global Construction Solutions 1 (Winter 2011).
53 See Stephen B. Goldberg and Margaret L. Shaw, The Secrets of Successful (and Unsuccessful) Mediators, 8 JAMS Dispute Resolution Alert (Winter 2008); Scott R. Belhorn, Settling Beyond the Shadow of the Law: How Mediation Can Make the Most of Social Norms, 20 Ohio St. J. on Disp. Resol. 981 (2005); Robert J. Gomez, Mediating Government Contract Claims: How Is It Different, 32 Pub. Cont. L.J. 63 (Fall 2002). See also John W. Hinchey and Troy L. Harris, International Construction Arbitration Handbook § 1:9 (2008).
54 (PI/08/628, April 23, 2008). See also Joe Tirado, The European Mediation Directive, 3 JAMS Global Construction Solutions 12 (Fall 2010); Hubert Andre-Dumont, The New European Directive on Mediation – Its Impact on Construction Disputes, 26 Int’l Constr. L. Rev. 117 (Spring 2009).
55 See ICC ADR Rules (July 2001); UNCITRAL Conciliation Rules (December 1989).
56 See Nael G. Bunni, The FIDIC Forms of Contract 443 (3d ed. 2005). See also John W. Hinchey and Troy L. Harris, International Construction Arbitration Handbook § 1:9 (2008).
57 Mediation can be effective in litigation and arbitration as an effective case management process by which to reach consensus of the parties on deposition discovery, scheduling, hearing time allotted to each party, and how the case otherwise might most efficiently be tried. See Laurence M. Watson, Jr., The Case for Mediated Case Management, 1 Am. J. of Mediation 1 (2007) ("’Process debates’ are procedural arguments that seem to erupt and flourish in complex cases. They can involve a wide range of peripheral issues. They are always focused on the litigation process (the way we are going to argue) rather than the subject of the lawsuit (what we are arguing about)").
58 See Jon T. Anderson and G. W. Snipes, Stretching the Concept of Mini-Trials: The Case of Bechtel and the Corps of Engineers, 9 Constr. Law. 3 (April 1989); Paul F. Geller, When the Walls Come Tumbling Down: A Call For ADR in the CIC, 13 Constr. Law. 12 (Jan. 1993) ("If the dispute cannot be prevented and cannot be resolved through negotiation, mediation or DRBs, the parties can consider the innovative procedure known as the mini-trial. The mini-trial is a hybrid process, combining elements of negotiation, mediation and adjudication – and may be particularly useful where the parties are at negotiation impasse").
59 For an overview of the Construction industry arbitration process, see generally Philip L. Bruner and Patrick J. O’Connor, Jr., 6 Bruner & O’Connor on Construction Law, §§ 21:2 et. seq. (2002, supplemented annually). See also John W. Hinchey and Troy L. Harris, International Construction Arbitration Handbook, §§ 20:1 et. seq. (2008); The College of Commercial Arbitrators Guide to Best Practices in Commercial Arbitration (2006).
60 See Zela Claiborne, Designing a Cost-Effective Construction Arbitration, 3 JAMS Global Construction Solutions 10 (Spring 2010); Thomas J. Stipanowich, Arbitration: The Choice is Yours, 3 JAMS Global Construction Solutions 7 (Winter 2010); Michael Timpane and Linda Debene, Reshaping ADR Strategies for Today’s Global Engineering and Construction Market, 2 JAMS Global Construction Solutions 1 (Summer 2009).
61 See Celeste M. Hammond, The (Pre) (as) summed "consent" of commercial Binding Arbitration contracts: An Empirical Study of Attitudes and Explanations of Transactional Lawyers, 36 J. Marshall L. Rev. 589 (Spring 2003) ("The thesis of this article is not that transactional attorneys perpetrate legal malpractice when they advise business clients about pre-dispute arbitration provisions. Instead, the thesis is that where the lawyer, as advisor/counselor, is egregiously incorrect in her own understanding and expectations, the client has not "knowingly" assented to arbitration and the agreement to arbitrate is not legally enforceable.").
62 See James F. Nagle, ADR in Federal Contract Disputes: What Law Applies? 4 JAMS Global construction Solutions 13 (Winter 2010)(addressing prime and subcontract issues over law applicable in Federal procurements).
63 See, e.g., JAMS Construction Arbitration Rules, JAMS Construction Rules for Expedited Arbitration, and JAMS Rules for International Arbitration and International Mediation at www.jamsadr.com; AAA Construction Industry Arbitration Rules (regular track, fast track, and large complex case procedures), AAA Construction Industry Mediation Rules, ICDR International Arbitration and Mediation Rules at www.adr.org.
64 See David Co. v. Jim W. Miller Constr. Inc., 444 N.W.2d 837 (Minn. 1989) (upholding an arbitration award, held to be authorized by an arbitration clause covering "all claims, disputes and other matters in questions…arising out of or relating to the contract documents or the breach thereof", that required the contractor to by the defectively built project at the developer’s full resale price.)
65 See, Philip L. Bruner, Dual Track Proceedings in Arbitration and Litigation: Reducing the Peril of "Double Jeopardy" by Consolidation, Joinder and Appellate Arbitration, 31 Int’l Constr. Law Rev. 536 (2014).
66 See JAMS Recommended Arbitration Discovery Protocols (2009). See also 2010 Revised IBA Rules of Evidence for International Arbitration; Nathan O’Malley, An Annotated Commentary on the 2010 Revised IBA Rules of Evidence for International Arbitration, 27 Int’l Constr. L. Rev. 461 (October 2010). See also Richard Chernick, Discovering New Ways to Make Arbitration More Attractive, The Recorder (April 12, 2010) (discussing new rules for streamlining the discovery process proposed by international ADR groups).
67 See John W. Hinchey, Selecting Qualified Arbitrators is the Key to Success in International Construction Cases, 1 JAMS Global Construction Solutions 1 (Fall 2008); Christopher R. Seppala, Obtaining the Right International Arbitral Tribunal: A Practitioner’s View, 25 Int’l Constr. L. Rev. 198 (Spring 2008).
68 See David Co. v. Jim W. Miller Constr., Inc., 444 N.W.2d 836 (Minn. 1989) (upholding an arbitration award requiring the contractor to buy from the owner/developer the defectively built project at the full resale price that the owner/developer would have received if the project had been properly constructed, even though the resale price was well in excess of the contractor’s construction price).
The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.