Pakistan Construction Disputes Report
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Our Main Takeaways from PCDR 2022
PCDR confirms that the construction industry is consumed in fault finding and defensiveness which results in disputes and litigation. We received comments from various professionals, contractors, and government clients that the industry is highly adversarial. In particular, the client and contractor relationship need to be thoroughly re-examined.
Pakistan’s construction industry is not alone in having adversarial attitudes, however, the developed world (United States, United Kingdom, Middle East etc) has taken positive steps to try to reduce such attitudes with the growth of ADR. The debate over adjudication, conciliation/mediation and arbitration has been very strong throughout this report and there has been growing consensus over the action needed. The launch of the CIArb’s Pakistan Branch is just one of the steps taken to promote and introduce ADR and support avoidance and amicable resolution of disputes without recourse to the courts, through its Dispute Resolution Service.
PCDR was designed in the form of 30 questions that were asked to understand and develop a comprehensive nature of Pakistan’s construction industry. PCDR reveals the following results:
Number of disputes per project
- 95% of projects had 1 or more disputes, with 11% of projects having more than 11 disputes.
- The value of disputes ranges from less than PKR 1 million for 29% of the disputes to greater than PKR 500 million for 8% of the disputes.
- The disputes that were of low value were largely resolved through negotiation with 58% of the disputes being resolved in less than one year.
- The high-value disputes tended to have a longer duration, with 8% lasting five or more years. The main causes of disputes were extension of time (10%), payment delay (10%) and the behaviour and competency of people (9%). This is due to unrealistic project programmes and timelines agreed upon between the parties. When sequencing and project outcomes do not go as planned, it results in non-payment and the adversarial behaviour of project teams, causing minor variations to transform into major disputes.
- Unrealistic contract programme (7%) also received a high return as a cause of dispute. After further investigation, it appears that due to delay in design information (6%), construction programmes are squeezed resulting in poor workmanship and, in some areas, cutting corners. Health and safety practices were not listed as a cause of dispute, however, respondents flagged that in most cases, quality, health, safety and environment do suffer due to time constraints.
- Despite the impact of COVID-19 (5%) in the last 2 years, the construction industry continued across the globe yet experienced many delays and disruption due to lockdowns, social distancing and Standard Operating Procedures (SOPs) which were adopted to remain safe and vigilant.
- We were keen to understand how aware respondents were of ADR in Pakistan and their views on its effectiveness and efficiency. Just 56% were aware of ADR with 53% viewing it as effective. Only 22% agreed that the legal system in Pakistan is supportive of ADR.
- The main methods of ADR used are negotiation with the other party (50%), arbitration (18%) and mediation (11%); surprisingly, litigation was only 4%. Several respondents cited that they are involved in lengthy claims and disputes with litigation costs on the rise.
- The proportion using expert evaluation (9%) in construction was unexpected and is an area to be explored further.
PCDR Global Comparison
The PCDR and the global reports by Arcadis and HKA’s CRUX contain many similarities in the way they identify disputes across industry sectors and geographical regions; namely, listing the main causes of dispute before similarly making recommendations. However, the way these factors are discussed differs greatly.
The PCDR lays out three main causes for construction disputes, namely payment delay, access to site and behaviour and competency of people. These three causes alone account for 25% of the reasons behind all construction disputes in Pakistan. The Arcadis report goes on to discuss dispute causes by region, while the CRUX report discusses them by sector. Nevertheless, we can compare the main and most prominent causes identified.
Arcadis does not identify payment delay as being one of the most common causes of dispute, despite accounting for 10% of all construction disputes in Pakistan. However, CRUX identifies ‘cash flow and payment issues’ as the ninth most reported cause of dispute, linking such issues with delays in approvals and design information, halting contractors’ tasks (as discussed later).
Similarly, access to sites is not identified as one of the main causes in the Arcadis report but is considered in the CRUX report. In the latter report, ‘access to site/workplace was restricted and/or late’ was the eighth most common cause for construction disputes, mainly in the defense sector. The CRUX report, which identifies causes and solutions based on sectors, comprehensively explains how different factors affect each sector. For example, in the case of access to site it goes on to illustrate how this is hindered when requirements such as security clearances and strict vetting limits are put into place.
Lastly, when considering ‘behaviour and competency of people’ which comprises 9% of the causes behind construction disputes in Pakistan, both the Arcadis and CRUX reports contain similar findings. Arcadis identified ‘failure to make interim awards on extensions of time and compensation’ and ‘owner/contractor/ subcontractor failing to understand and/or comply with its contractual obligations’ as two of the main causes reported for construction disputes in North America, the UK and the Middle East. Both of these factors relate to the behaviour and competency of the stakeholders involved in the project(s). Upon analysis, the report recognises the causes relating to human factors such as biases, relational breakdowns and a lack of collaboration and communication between parties.
Moreover, the CRUX report identified ‘change in scope’, ‘design information was issued late’, ‘level of skill and/or experience’ and ‘poor management of subcontractor/supplier and/or their interfaces’ as some of the most common causes of dispute.
In contrast, however, there are two factors identified in the Arcadis and CRUX reports that are not in the PCDR. Firstly, regarding ‘poor drafting of/and contractual issue’, the Arcadis report highlights those errors and omissions in the contract documents cause issues in administering them, directly leading to disputes and a plethora of other issues that eventually result in a dispute. The report recognises this as the number one cause behind construction disputes, particularly in North America and the Middle East, reporting that 60% of their respondents believe that ‘proper contract administration’ would have the single largest impact in avoiding disputes. It also identifies ‘errors and/or omissions in the contract documents followed by an unrealistic contract duration or completion date and a failure to properly administer the contract’ as one of the main causes reported in Continental Europe.
Similarly, the CRUX report recognises poor drafting of contracts and administration of contract management as the second and third most reported causes of disputes, respectively.
The other factor stated in these two reports, but not highlighted in the PCDR, relates to design challenges and the communication gap between stakeholders when changing design plans. In the CRUX report, this was identified as the number one leading cause for all construction disputes prevalent across sectors. The biggest challenge with this factor is how it affects stakeholders at all stages and causes delays, leading to many other issues such as payment delay, delivery delay, change of circumstances and hindrance to access to sites.