Construction projects are fraught with risk. Increased cost, delayed schedules, site safety, property damage, and poor quality are just a few.
Procurement is uniquely positioned to mitigate these risks. The key is knowing when and where these risks could arise and having the expertise to know how risks can be mitigated.
The trouble with construction is there are so many types of risk that it is impossible to avoid them all, but what if we could pinpoint the behaviors and practices that bring on the greatest opportunities for risk?
Pinpointing Risks in Construction
That is what the HKA’s Fifth Annual CRUX Insight Report, published in 2022 has done.
HKA is a leading global consultancy in risk mitigation, dispute resolution, expert witness, and litigation support services. They are a global company with locations in the Americas, EMEA, APAC, and Africa.
Their Crux Insights report (which you can download here) provides a summary of claims and causes for disputes on construction projects around the world.
In addition to the downloadable report you can access an interactive dashboard here.
The dashboard and the report offer amazing insights into the leading and recurring causes of claims and litigation in construction.
Most Common Primary Causes for Claims
Universally, the report tells us that “Changes in Scope” are the number 1 most common cause of claims. Changes in Scope are so common and disruptive that they were cited 51% more than the next most common causes for claims.
The next most common primary cause for claims was “Design was Incorrect” followed closely by “Design Information Issued Late”.
Together, these three top causes for claims point overwhelmingly to poor or improper designs as the primary problem.
Are Architects to Blame?
If poor or improper designs are the primary causes leading to claims in construction, are we to interpret that Architects are to blame for the primary causes of claims in construction?
It would not be unreasonable for someone to reach such a conclusion, but anyone with experience in construction knows that an Architect’s drawings are only as good as the quality of information provided to them and the time allowed to develop the design.
The CRUX reports indicates that “Changes in Scope”, “Design was Incorrect”, and “Design Information Issued Late” are the primary causes for claims across the globe, but let’s consider if there are regional nuances.
Regional Practices
In order to do that, we must first ensure that we understand contracting nuances within each region.
The US Model
Lump sum contracts rely heavily on the accuracy of the design which is developed by an Architect hired directly by the Owner. In order to secure a fixed price quote (typically under a competitive bid) the contractor interprets the Architect’s design to determine the scope of the work.
This is an excellent model for smaller construction projects (less than $5M USD) with low complexity. However, the model’s reliance on the accuracy of the design suggests that investing more time and more effort in documenting the design is of critical importance.
The UK Model
In a report produced by Rider Levett Bucknall (a global independent construction, property and management consultancy) with offices throughout the UK and Europe, their report “Getting Closer to your Supply Chain” indicates that in the UK, “Design and Build (D&B) projects are the most prevalent procurement route with approximately two thirds of reported workload according to our survey”
Design and Build contracts are used around the world for speed and simplicity. D&B contracts create a single responsible party (typically a General Contractor) that is responsible for producing both the design and the construction.
This model is less straight-forward than a Lump Sum or Traditional model (as it is called in the UK) because some level of design is still required prior to engaging the GC.
In other words, the Owner can’t just call a GC and ask for a price without some idea of what is to be built. The Royal Institute of British Architects have defined a standard “Plan of Work” which is widely used in the UK to define the various level of design development. These levels begin with Stage 0 and end with Stage 7. The actual design work occurs during stages 2, 3, and 4.
In order to secure a price for a Design and Build project, most Owners will have a Stage 2 or 3 design already done when they solicit the GC. Once again, we can see that the development of the design is a key constraint.
This approach does not hold throughout all of Europe, but it is common in many countries. The terminology and legal terms will vary but the concept remains the same.
The APAC Model
Despite the wide range of cultures, the APAC region generally favors design-build models as well. This is particularly true in countries like China, Singapore, and Malaysia where many suppliers are Engineering Procurement and Construction (EPC) firms with in-house design and construction capabilities.
In Australia, a report by the State Government of Victoria reports that Design and Construction (D&C) contract are, “dominant for large-scale projects”. The Australian model is a bit more nuanced in that the predominant D&B model there is known as the Novation model. The Novation model follows the UK model closely in that the GC subcontracts the Architect for the technical design after the Architect develops a conceptual design for the Owner.
However, in a white paper from Research Gate we see survey findings that, “DB/EPC (35.9%) and other derivative systems are more commonly used in the Chinese construction market”, once again confirming that the APAC market favors EPC DB
The Causes of Risk by Region
Now that we understand the different contracting models by region, what does the CRUX report say about the primary causes for claims in these regions?
Filtering on Asia where the EPC DB model reigns supreme, the primary cause for claims “Changes in Scope” was a whopping 50% more common than the second most common cause. This points towards a lack of thought and development in the design.
If we float West to Europe and the UK, the primary cause for claims is “Design was incorrect” followed closely by “Changes in Scope”. Once again recalling that Design-Build models are most highly favored in UK and Europe, we can surmise that the focus on good quality design is simply not there.
The story in the US where lump sum contracts are the predominant model, is not that different. “Changes in Scope” and “Design was Incorrect” are the 1 and 2 top causes for claims.
Universally a lack of emphasis and attention to the quality and completeness of the design is the leading cause regardless of the contract model selected.
To put a finer point on this, out of the top 7 primary causes for construction claims, 4 causes point to a problem with the design.
Now We Know the Risks
Now that we have a more precise sense of the greatest causes of risk in construction, we can begin to consider which best practices and behaviors will mitigate these risks.
A Focus on Designs is Imperative
In more than 90% of my construction procurement engagements, I am met with haste and an overwhelming sense of urgency, only to find that there is little or no design available.
Stakeholders are under tight time constraints. Spending time on design seems unimportant and for many Stakeholders, design is a phase of work they think can be accelerated.
Knowing what we just learned about the primary causes of claims and their association with design, a strong procurement organization must understand that ensuring a high-quality design mitigates risks during construction.
Regardless of contract model, an emphasis on good quality design is imperative and procurement must drive that message to the business.
The Contract Model
In addition to understanding the importance of design, procurement cannot be afraid to challenge regional practices.
As we read, there are regional contractual preferences that we must be aware of, but these preferences should not be taken as absolute. In some cases, being aware of these models, may mean deviating from them.
Remember the Novation model in Australia?
In an article published by the Australian Institute of Architects, the model is blamed for poor construction outcomes including improper substitution of materials, poor workmanship, and other undesirable results.
Similarly in a 2017 report written by Architect John Cole where he investigated the causes of 17 structural failures in elementary schools in the UK, Cole demonstrated that the use of Contractor led design build was partly responsible for “a series of other potentially fatal safety defects at PFI schools”.
In short, procurement cannot allow business and regional practices to lead the organization down a perilous path. Procurement must be knowledgeable and well-informed to navigate these challenges.
Closing
For all the reasons I’ve noted, our practice promotes custom contracting models that support healthy checks and balances between builders and designers, while also fostering a collaborative environment between the parties. We invest in a comprehensive design scope which benefits from planned stage gates where all parties can review and comment on the design.
Keen market insight together with experience allows us to craft contracts that blend pricing models that evolve throughout each stage of the project.
This approach helps mitigate Clients from a wide range of risks, including risks associated with cost and risk associated with construction claims.