Major construction projects face significant costs and delays from legal claims and disputes

Legal claims and disputes are causing significant costs and delays to major engineering and construction projects in Canada and worldwide, with their causes often predictable and avoidable.

Major construction projects globally are facing overruns in costs and delivery, with claims exceeding US $91 billion in total value, according to the latest CRUX Insight report from risk mitigation and dispute resolution consultancy HKA. Disputed costs globally averaged US $100 million – more than a third of capital expenditure.

In Canada, many of the challenges impacting construction companies are linked to incomplete design and fast-tracked projects, together with labour force availability, according to Rick Moffat, partner and head of operations at HKA Canada. Construction of large P3 infrastructure projects sometimes starts before the design is complete, due to time constraints, ultimately leading to claims when problems arise, he says.

Labour issues can also be to blame in some cases, with the sixth annual CRUX report “Forewarned is Forearmed” indicating this is one of the top four reasons for claims in Canada, following behind changes in scope, incorrect design, and unforeseen physical conditions.

“This goes hand in hand with what we’re seeing in terms of lack of adequate labour force in Canada and in the US these days, to the extent that some of the retired trades people are coming back to work as contractors, with the difficulty introducing new people to the industry,” says Maged Abdelsayed, partner at HKA. “Maybe that explains why workmanship difficulties were seen as one of the top issues here, but not in the rest of the world.” In the Middle East, for example, Abdelsayed notes that skilled workers are imported from other countries to provide consistent quality.

Legal departments at Canadian construction companies would be wise to provide training on lessons learned from previous projects, to prevent further claims and disputes, and to understand the realities of dispute resolutions, and the obligations of different parties, Abdelsayed says.

“There’s a lot of training that’s required that could be led by the legal department and fed down to the projects teams,” he says.

Engaging consultants early on is also key for legal departments to identify issues early in the lifespan of a project.

“There needs to be an increased emphasis on understanding what the risks are,” says Moffat. “It’s not just a matter of putting a price to a project, but also putting a strategy together to manage the risk as it starts to materialize.”

Though Canada is performing relatively well compared to the US and other parts of the world, there is still room for improvement. At 22 percent of capital expenditure, contentious costs for construction projects in Canada are significantly lower than the global average (33.6 percent) and the US average (34.4 percent), based on data from the CRUX report. Moreover, the average extension of time claimed in Canada was 53.4 percent of the planned project duration, compared to 60.3 percent in the US and 67.1 percent globally.

This distinction is probably due to cultural distinctions, according to Abdelsayed, with Canada being less litigious than other countries. Even with overrunning costs and schedule extensions, cases often settle before they get to trial, and there are even imposed mediations in certain jurisdictions. Standard contracts also give Canada an advantage over other countries. 

“More and more we are seeing standardization of contracts and the reuse of existing templates, so even with P3 contracts in Canada, most contracts would look exactly the same,” adds Abdelsayed. “Some lawyers in Canada know the P3 contract inside out because it’s been used and reused, and they know exactly where to find schedule 12 which deals with delay demonstration requirements.”

As they prepare for continued challenges in the construction industry in 2024, legal departments would be well advised to continue refining their risk evaluation strategies.

“It’s the common-sense approach of knowing your scope, understanding it, and making sure that the contract you’re signing covers what you’ve agreed to do, and the price associated with it is clearly defined, and the scope clearly defined,” says Moffat. Equally important is ensuring that the construction team focuses on contract requirements, he adds.

Abdelsayed notes that it is also important to prepare to resolve disputes mid-project rather than at the end of a project, to avoid waiting until the project has become too complex. This requires having data available and structured in a way that it can be efficiently presented to a dispute review board.