Forewarned is Forearmed

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A regional and sector analysis of claims and dispute causation

Controllable causes of claims and disputes hold key to relieving intense pressures on construction.

Sixth Annual CRUX Insight Report, Forewarned is Forearmed, quantifies the damage done to engineering and construction projects worldwide, and the recurrent causes, which are often predictable and avoidable

As infrastructure and capital projects around the world are hit hard by higher financing costs and inflation, promoters and contractors can relieve the pressure by curbing the significant losses of money and time routinely incurred across market sectors and the world.

The massive scale of these disputed costs and overruns, and their often-controllable causes, are revealed in the Sixth Annual CRUX Insight Report, Forewarned is Forearmed, and its analysis of 1,800 projects in 106 countries.

Sixth Annual CRUX Insight report key facts and figures

Headline statistics from this year’s report include:

The major projects analysed had a combined capital expenditure value (CAPEX) of $2.247 trillion. CRUX found that disputed costs amounted to more than a third of project CAPEX (33.6%), on average. Claims for extensions of time (EOT) also reflected extreme project distress, typically prolonging planned schedules by more than two-thirds (67.1%).

• Three design-related causes – inaccurate, incomplete and late designs – afflicted a greater proportion of projects overall (44.8%) than scope change alone (38.8%).
• Clashes over contract interpretation – on less than a fifth of projects (19.8%) – was the other ‘top five’ factor.
• Similar proportions of projects suffered from poor management or administration of contracts (19.5%), or of subcontractors and supplier interfaces (19.4%).

Under the theme Forewarned is Forearmed, this year’s CRUX Insight surveys emerging risks – from political to environmental – as well as sharing insights into the most common lapses in the planning and execution of capital projects in regions and sectors.

Significant regional variations
Deficiencies in design and workmanship loomed larger in Europe and the Americas. Incorrect design topped the European ranking, disrupting close to one in three projects (32.3%), and ranked second in the Americas, where more than one in five projects were affected (20.4%).

Defective work was most common on Europe’s buildings, especially residential schemes (38.3%). Within North America, design failures overall were more prevalent in Canada (41.8%); yet cost and schedule overruns tended to be higher south of the border.

The Middle East and Africa faced the worst prolongation of schedules (82% and above).

Scope change and design failures stymied more than half of Middle Eastern projects. Africa’s most persistent problems involved restrictions on access and cashflow, with spurious claims also disproportionate compared to the rest of the world.

CRUX’s largest megaprojects were in Asia (where CAPEX averaged $5.32 billion), still much higher than next-in-line Oceania ($2.94 billion).

Time extensions neared two-thirds of schedules (63.6%) in Asia – the only region where client-side management failures rose post-pandemic (from 29.7% to 43.3%). Change in scope – project enemy number one in Oceania – impacted 53.5% of projects, but risks may shift with the end of Australia’s construction boom as investment tilts toward energy projects.

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“Modern megaprojects are increasingly complex, but the cruel conundrum for the global construction and engineering industry is that these most common causes of claims and disputes are highly predictable and largely within the control of the contracting parties. The purpose of CRUX is to better inform all stakeholders so they can apply these lessons, raise the standard of risk management, and achieve better outcomes.” Renny Borhan, Partner and CEO.

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Sectoral anomalies and other insights

DESIGN DIVIDEND
CRUX reinforces anecdotal evidence that extra time taken, amid the pandemic, to review and mature designs improved constructability. Design failure rates dropped 12 percentage points globally after the hiatus (from 47.6% to 35.5%). That gap widened to 14 points in the Middle East and 18 in Europe.

WIND OF CHANGE
Despite the maturity of the wind-power market, offshore projects were still more likely to be thrown off course by change in scope (45.0%) than other renewables or non-energy sectors. Onshore farms fared better than solar on schedules (30.6% vs. 53.4% prolongation) but not on disputed costs (29.3% vs. 19.6% of project CAPEX).

OFF TRACK
Deficient planning and coordination largely explain an uptick in rail disputes. Changing scope contributed to more than half worldwide (57.1%), closely coupled with incomplete design (40.3%).

EPC ALERT
Employers’ sense of security from all-risk engineering, procurement and construction (EPC) contracts may be false. The advantage over other forms of contract was less than expected in the power sector. But in oil and gas, EPC contracts endured worse prolongation onshore – averaging 71.2% of schedules, against 60.1% under non-EPC arrangements. Offshore, there was little difference between procurement routes as contractors sought extensions stretching to around three quarters of planned duration.

Regional analysis and actions
Across all projects globally, the leading cause of claims and disputes was change in scope, followed by conflicting contract interpretations and delayed design information. Within the regional analysis of the dataset, notable variations emerge in both causes and effects:

• Restricted or late access to sites and/or workfaces was one of the top three triggers for claims and disputes in Africa, Asia and Oceania (ranking first, second and third, respectively).
• Nearly one in five projects (18.8%) worldwide are impacted by conflicts over unforeseen physical conditions on site. In the Americas, this is the second most common project pitfall.
• Deficient workmanship was a far more significant cause of contention in Europe and the Americas than in other regions – on 23.2% and 20.3% of projects, respectively.
• While various design-related failings rank highly in all regions, in Europe incorrect design is the prime culprit for distress on almost a third of projects (32.7%).
• Projects in the Middle East faced the worst delays (83.1% of schedule duration or 22.5 months, on average); even at their least severe, overruns averaged almost a year in the Americas (prolonging schedules by 58.2%, equivalent to 11.3 months). 
• Contentious costs were lowest in Oceania, but still significant at over a quarter of CAPEX on average (26.2%).

­CRUX Interactive dashboard
The CRUX database is searchable via an interactive dashboard, which can be used to gauge risks in various sectors and regions, benchmark causes, and help to identify areas for improvement.

Industries unevenly impacted by claims and disputes
The CRUX dataset can also be analysed by sector, among various other parameters.

Buildings and Transportation Infrastructure projects faced claims for longer time extensions than other sectors, averaging 76.7% and 70.0% of planned duration, respectively. A serious concern for owners and the wider industry, the implications may be even more troubling for governments and state agencies promoting new infrastructure as a stimulus for economies emerging from the pandemic.

Delays tended to be least severe in the Industrial and Manufacturing markets, but sums in dispute were higher, proportionately. Claimed extensions of time would prolong schedules by 54.6% (11 months on average). Contentious costs, averaging 54.8% of CAPEX, were significantly higher than the all-sector average (35.1%).

“The tougher economic context has intensified the uncertainty and risks facing infrastructure and capital projects. It is essential that the construction and engineering industry delves into the root causes of the most prevalent claims and disputes, and applies the lessons to current and future projects. Our growing dataset, CRUX Insight, and the interactive dashboard help employers, contractors and the wider industry do just that. The high cost of capital and the losses sustained through avoidable disputes make the case for proactive risk management all the more compelling.” Toby Hunt, Partner, CRUX Sponsor.

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