SEEKING PROTECTION AGAINST CONSTRUCTION COST ESCALATION
Construction Week Middle East rounds up its Dispute Resolution Question Time UAE conference with key discussions regarding the industry’s recovery process from in ation
The price of critical building materials are up, and even a casual glance at the price of steel or wood at your local hardware store will tell the story. In a way, this storm was predicted well in advance since the outbreak of Covid-19, yet the construction industry was not ready for the real repercussions of the phenomenon.
As with any changes in price, clientcontractor relationships have gone under fire for disputes floating within the inflation circle. No developer or contractor wants to go over its set budget, and any threat to this will most likely involve the arbitration of a lawyer. Though beyond budget-related disputes are the overall consequences of inflation to a company’s competitiveness and profitability. Cost escalation during a new product development process, for example, could impact a successful launch of the product.
From a supply chain point of view, manufacturers could be put in a very vulnerable position where it could lose competitive advantage against its industry peers. For such a fast-paced economy like the UAE, competitive advantage is critical for survival, propelling contractors to maintain its edge through other ways.
During the Dispute Resolution Question Time UAE event, construction law experts acknowledged this ongoing issue with powerful messages around mitigating cost escalation when designing contracts and key findings.
Hosted on 14 September at the Taj Exotica Hotel The Palm, Dubai, the panel discussion was moderated by Mark Raymont, partner at Pinsent Masons, and featured Daniel Xu, partner at KWM; James Plant, partner at HFW; Phil Duggan, head of expert services at CCi; Michelle Nelson, partner at Reed Smith; and Rohit Singhal, managing director at Masin Projects.
Xu is a construction and dispute resolution specialist based in Dubai. He focuses on international arbitration and cross border dispute resolution such as construction, engineering, and infrastructure related disputes.
He also has extensive experience advising international contractors and developers on issues regarding project risk management and dispute avoidance. During the panel, Xu stressed on threats facing clients in the industry. He said: “There are two common threats that run through projects. One, everyone has a budget that they critically have to stick to, and two, no one is willing to pay more for what they’ve bargained for.”
This is what it is of paramount importance to talk about cost escalation with all parties involved. According to Duggan, there is one question that is commonly asked in this regard. “The most asked question to us at the moment is what could contractors and the supply chain, particularly, do about the cost escalation factors that are hitting their ongoing projects?”
Duggan deals with the preparation and valuation of variations; claims for prolonged disruption and acceleration, disputed accounts, counter-claims and damages in the construction industry.
During the conference, Duggan’s fellow panellist Neslon reiterated the need to strengthen communication between stakeholders when it comes to sharing details about the impact of cost escalation. She said: “The employers don’t want to be left with huge increased costs compared to what they told their management that the projects are going to be.”
Nelson is a partner at Reed Smith’s Energy and Natural Resources practice. Her primary practice focuses on the Middle East, advising on major oil and gas and construction infrastructure disputes.
According to Plant, Moreover, Plant specialises in construction and engineering disputes in the Middle East, stakeholders have more support due to the many clauses available in the contracts. He said: “We are quite fortunate in this part of the world that we don’t just have force majeure, as the only doctrine that’s applicable in the circumstances.”
Plant also acts for contractors and employers on disputes relating to oil and gas projects, process plants, infrastructure, renewable energy, and airport projects. Simultaneously, he advises on disputes under Kuwaiti, Qatari, and UAE law.
Wrapping up the discussion, Singhal shared his observations about cost escalation in the industry.
Singhal, who has over 24 years of international experience involving construction contract disputes, expert testimony, and project management, said: “I’ve seen a massive increase in the interest rates of steel, transportation, and shipping rates. These are the areas that have seen cost escalation.”
On a concluding note, panellists collectively agreed that cost escalation disputes could be most effectively mitigated through confrontation rather than collaboration, where both parties acknowledge a middle ground rather than argue on individual conditions.