Construction projects are complex undertakings, and disputes can arise even when stakeholders take steps to avoid them. Evolving project conditions, unexpected setbacks, and significant financial and scheduling pressures can all contribute to disagreements between parties. In this article, we’ll explore why construction disputes occur, the most common types of disputes, and the processes available for resolving them.
What Makes Construction Disputes Uniquely Complex?
Construction disputes tend to be complex because they involve multiple stakeholders, tight deadlines, highly technical concepts, and projects with many moving, interconnected parts. Projects must also comply with detailed contracts, building codes, regulatory requirements, and permitting obligations, which can create additional points of disagreement when issues arise. Together, these factors can make construction disputes particularly challenging to resolve. Several typical issues include:
Multiple Stakeholders
Most construction projects involve a complex web of participants and stakeholders, including owners, contractors, subcontractors, architects, engineers, suppliers, financiers, and insurers. With so many parties involved, maintaining clear communication and alignment throughout a project can be difficult. It can also make it necessary to involve multiple parties during the dispute resolution process. Factors such as poor coordination between stakeholders, insufficient documentation, and unrealistic expectations can make projects difficult to manage.
Technical Complexity
Construction projects involve a wide range of technical disciplines. From developing architectural designs and engineering systems to overseeing construction activities, specialists from different fields must work together to complete the project. When a dispute arises, resolving it often requires a detailed examination of technical issues, project specifications, and construction practices.
Ongoing Project Alterations
Construction projects often evolve as work progresses to address changing conditions, unforeseen challenges, or shifting project needs. These changes can complicate disputes, particularly when one party views an alteration as necessary while another believes it conflicts with the project's contractual requirements. Factors outside the parties' control, such as unexpected site or environmental conditions, labor shortages, supply chain disruptions, and changing economic conditions can all impact the project’s progress.
Strict Schedules & Interdependency
Construction projects often operate under strict schedules, making them vulnerable to delays. Because project activities are highly interconnected, a delay or change affecting one aspect of the work can trigger additional delays and disruptions elsewhere in the project, impacting schedules, costs, and performance.
The Five Most Common Types of Construction Disputes
Payment Disputes
A payment dispute may arise when a contractor or other party is not paid the amount specified in the contract or when payment is delayed. These disputes may stem from ambiguity or unclear language in the contract regarding payment schedules, milestones, or how much of the work must be completed before payment is made. There may also be a dispute if one party withholds payment due to alleged poor workmanship or other quality issues.
Disputes Over Delays
Delays are one of the most common sources of construction disputes and can be caused by factors such as unforeseen site conditions, permitting issues, supply chain disruptions, labor shortages, and other challenges. Sometimes, when delays result from weather, natural disasters, or other events outside the parties' control, such as a government shutdown that affects the project, no party is liable for the delay. However, if a delay is determined to be the responsibility of one or more parties, such as in cases involving design errors, late approvals, or labor or material shortages, it may give rise to a dispute. Something as simple as a delayed response from an engineer or project manager, or poor coordination between contractors, can have significant consequences for a project's timeline and productivity.
Scope of Work Disputes
Scope of work disputes can arise when a project's requirements are poorly defined or change over the course of the work. Ambiguous contract language may lead to disagreements about what work is required and which party is responsible for performing it. Disputes can also occur when project changes are discussed informally but are not properly documented through change orders or reflected in the contract and payment terms. While modifications to a construction project are common, parties should follow established procedures and document significant changes in writing. If project changes are not properly reflected in the contract or related documentation, disputes may arise over additional work, responsibility for project changes, or compensation.
Material Cost Disputes
Increases in material costs during a project can lead to disputes between parties as to which party bears those costs. Because construction contracts are often signed months before work begins, unanticipated price increases caused by inflation, tariffs, or supply chain disruptions can significantly increase project costs. A dispute may also arise if a contractor attempts to offset rising expenses by using lower-quality materials, leading to disagreements over the quality of the work or compliance with the contract requirements.
Disputes Over Construction Quality or Errors
Disputes may arise if the quality of the completed work doesn’t meet industry standards, regulations, the owner’s expectations, or the standards and specifications outlined in the contract. The owner may take issue with perceived poor workmanship or the use of low-quality or defective materials. There may be questions not only about the aesthetics or functionality of the building, but also about potential safety issues. A contractor or other party may also claim that the owner has unrealistic expectations and that the quality of the work meets applicable industry standards and the contract terms.
Other Types of Construction Industry Disputes
Other construction disputes may arise that result in delay, project disruption, or claims for compensation. Disputes can stem from contract ambiguities, particularly when responsibilities are not clearly defined among the many parties involved in a project. Conflicts may also arise from unexpected site conditions, such as the discovery of hazardous materials or other physical conditions that were not known or disclosed before construction began. In addition, disputes may involve liability for accidents, injuries, or damages, as well as questions regarding insurance coverage related to the project.
Methods for Resolving Construction Disputes
Contracts that include more detailed and precise language as well as well-defined scope of work, payment terms, and risk allocation provisions may help reduce the likelihood of disputes. Parties should also establish, and follow, change order procedures to manage project modifications and provide flexibility as the project evolves.
When a conflict does arise, alternative dispute resolution (ADR) processes can be useful tools to resolve the dispute before it potentially escalates to litigation. The main ADR methods used for construction disputes include the following:
Dispute Avoidance and Resolution Boards
A Dispute Avoidance and Resolution Board, often called a DARB, is a project-specific panel formed at the start of a project to help prevent and resolve disputes during construction. The board is typically made up of one or more neutral professionals with construction, legal, or technical expertise. When disagreements arise, the DARB can help the parties address issues early, provide informal guidance, or issue recommendations or decisions depending on the parties’ agreement. Because the board is involved during the project, a DARB can help reduce delays, preserve working relationships, and avoid more formal proceedings.
Negotiation
Negotiation is an informal process that allows parties to discuss their conflict and attempt to reach a mutually agreeable outcome without involving third parties. Through negotiation, parties may be able to reach a solution that allows their project to get back on track without disrupting the contractual relationship. The parties may also agree to sign a settlement agreement that acknowledges an error or oversight on the part of one of the parties and provides compensation.
Mediation
Compared to negotiation, mediation provides a more structured process for facilitating discussion between parties. Mediation involves a neutral third party (i.e., the mediator) who helps the parties explore potential solutions. Mediation is a non-binding process, and the mediator doesn’t issue a final award. If the parties reach a mutually agreeable solution through the process, they may agree to sign a binding settlement agreement. Mediation provisions are a common feature of many construction contracts, as mediation allows for flexible solutions for complex projects.
Arbitration
Arbitration is the most formal ADR method for resolving construction disputes. In an arbitration case, parties generally have the ability to select their decision-maker and often can choose an arbitrator with the expertise relevant to the dispute. During the arbitration, the parties have the opportunity to present evidence, witness testimony, and arguments during a formal hearing. Based on the parties’ arguments and evidence, a neutral arbitrator issues a binding award that generally may be enforced in court.
Arbitration may be an appropriate choice for resolving a complex construction dispute when parties are unable to reach an agreement, especially if the dispute involves multiple stakeholders and requires in-depth document review. Arbitration is often less costly and more efficient than pursuing litigation.
Why ADR Is Commonly Used in Construction
ADR solutions such as mediation and arbitration provide a useful, efficient forum for resolving construction disputes. Through ADR, parties to a dispute have more flexibility and opportunity to reach a solution that allows them to maintain a working relationship. In many cases, parties have worked together for years or are involved in multiple construction projects, making it beneficial to preserve that ongoing collaboration. ADR can also help parties reach an efficient solution that helps prevent additional project delays and setbacks on the disputed project.
Litigation, in contrast, is often a more time-consuming process. Litigation generally involves an extensive discovery phase where thousands of documents may be exchanged and numerous individuals deposed. Due to the complex nature of many construction projects, the number of parties involved, and the slower pace of litigation, court cases can take years to resolve. Litigation is also a public forum, with publicly available court records and trials. In the construction industry, pursuing litigation is often seen as a last resort unless necessary to address a serious breach of contract or significant damages.
Compared with litigation, ADR also gives parties greater flexibility to choose an arbitrator or mediator with extensive technical or industry knowledge. A neutral experienced in complex construction dispute cases brings subject-matter familiarity that can support a more informed resolution process. Parties often prefer to work with a neutral who understands the technical aspects of a project rather than bring the dispute to trial, where decision-makers may lack specialized industry knowledge.
Choosing the Right ADR Provider
ADR providers, such as the American Arbitration Association® (AAA®), administer construction arbitration and mediation cases and help parties navigate the dispute resolution process. The AAA offers access to a large roster of panelists with extensive experience handling commercial, industrial, infrastructure, and residential construction disputes. The AAA also offers the Construction Mega Project Panel, representing a select group of nearly 100 construction lawyers and industry professionals. These panelists are chosen by the industry to handle large, complex, high-stakes disputes arising from significant real estate projects such as high-rise buildings, as well as major infrastructure projects and heavy industrial facilities. The AAA is well-equipped to handle challenging, multi-party disputes and provides the administrative experience and industry knowledge needed to guide parties toward efficient and fair resolution.