ICC Guest blog: Re-adjusting risks in international construction projects

The construction industry has always faced unexpected risks, of which the COVID-19 crisis is an extreme example. These risks result in heightened tensions between stakeholders and frequently result in disputes. The pandemic has accentuated many of the typical frictions that occur in the construction industry, as well as highlighted new challenges.  

The latest edition of the annual CMS International Construction Survey showcases primary market trends — from increased enthusiasm for arbitration as the preferred form of dispute resolution and mounting preferences for mediation and other forms of alternative dispute resolution to the industry-wide recognition that keeping better records and managing change more effectively are the keys to minimising tensions and potential disputes. The Survey drew responses from across the world and includes interviews with leading figures that have responsibilities for construction contracts, projects and the resolution of disputes. 

Tackling tension 

Of course, while pragmatic responses to the effects of the COVID-19 crisis have calmed the turbulence (at least in the short term), they have not completely hidden the points of tension in contracts and the difficulties that have percolated the industry. Delays to projects are the most obvious consequences of the lockdowns, social distancing and other restrictions that have been forced on states and governments. The Survey indicates that time is one of the primary risks for causing tension or a dispute in a construction project. 

Some 47% of respondents identify time as the key risk, compared with only 38% in 2020. This is logical given the unique challenges the industry is facing due to the crisis. Cost appears to be slightly less of a concern in 2021 than in 2020, with a 5% fall in respondents identifying this as a principal concern, almost certainly because time is now of higher importance. Further research has highlighted the importance of communication and understanding the counterparty, with interviewees pointing to the greater need to align expectations during this unique period. 

Making improvements 

Nearly all Survey respondents believe that improvements can be made to how risks are managed during the course of projects. Survey participants refer to a variety of key areas where these can be made. 

A considerable 73% believe that keeping better records is a primary factor in managing risks during a project. This was consistently raised in CMS’ research, given its importance in resolving disputes whether through informal negotiations or more formal proceedings. One of the reasons for this is likely to be that arbitral tribunals seem to be becoming much less interested in witness evidence (often compiled many years after the event) than what people were saying at the time.  

Additionally, respondents also singled out a range of other primary factors such as earlier indication of risks during the tender phase, better management of the supply chain/sub-contractors and improving the understanding of the local market and region-specific factors prior to project execution. 

The resurgence of arbitration 

When it becomes clear that an early-stage resolution of a dispute is no longer feasible and cases need to be addressed through formal channels, a sizeable majority of the respondents singled out arbitration as the most appropriate form of dispute resolution. While CMS’ research shows that mediation can also be effective when parties want to reach a ‘commercial’ or pragmatic solution, arbitration remains the most effective method when undertaking more formal proceedings. 

Although arbitration has suffered from a perception that it is a long and expensive process, the main arbitration institutions have worked hard in recent years to make it more attractive to end users. These institutions are becoming more innovative, offering expedited proceedings, the availability of emergency arbitrators, and the ability to secure arbitral awards even faster. There is also more flexibility in ‘designing’ the arbitration itself and scope to dispense with some traditional but time-consuming and expensive steps such as witness evidence and document disclosure. It is now easier than ever for the parties to tailor the arbitration process to their needs. 

Conclusion 

The construction sector has a reputation for being tense and fractious, given the tight financial margins that many parties operate under, coupled with the many events that cannot be anticipated. The COVID-19 pandemic is one such example, and has further highlighted the need to prepare for, and constantly address, risk; deal with tensions and disputes promptly; and select the most appropriate processes for this to happen. 

At the same time, the mechanisms for resolving disputes are constantly evolving. The Survey shows that mediation and other forms of ADR have a real place in the market and that arbitration is still gaining popularity thanks to efforts to expedite arbitral proceedings and make them less expensive. Like the rest of the economy where COVID-19 has supercharged certain industries and transformed working practices, it has also accelerated change within the construction industry. While the sector is certainly suffering from the pandemic, it is responding positively. 

The ICC-FIDIC International Construction Contracts Conference will take place virtually from 11-12 October. Register your place today.  

*Disclaimer: The content of this interview does not reflect the official views of the International Chamber of Commerce. The opinions expressed are solely those of the authors and other contributors.