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• Equitable Risk Allocation Provisions (See CPR’s Realistic Risk Allocation Briefing)
• Incentive Agreements for Cooperation
• Disputes Potential Index (Created by the Construction Industry Institute)
• Partnering (See CPR’s Partnering Briefing)
• Multi-Step Negotiation
• Single Standing Neutral or Dispute Review Board (See CPR’s Dispute Review Board and Standing Neutral Briefing)
• Initial Decision-Maker (See AIA Forms, 2007) or Project Neutral (See Consensus.DOCS Forms, 2007)
• Dispute Review Board
• Alternatively, in special situations the Standing Neutral could be a Standing Arbitrator or Standing Mediator
• Arbitrator or Standing Mediator; or the parties could name a dispute specialist to recommend processes when disputes arise.
• The DRB stays abreast of project developments and potential disputes through regular periodic site meetings with the owner and contractor and review of progress reports and project documents;
• The DRB encourages parties to resolve disputes that are brewing at the job level;
• The DRB can issue advisory opinions about disputes, at parties’ request, to guide prompt party-controlled negotiation and resolution;
• Ultimately, disputes that cannot be resolved by the parties may be referred to the DRB to conduct “real-time” resolution: hearings where parties present their positions and answer questions from the DRB. The DRB then issues a non-binding recommendation for resolution of the dispute. The recommendation is usually admissible in subsequent arbitration or litigation if the parties choose not to accept it, but parties can agree otherwise in their contract. (See “Confidentiality of DRB Recommendations” at p. 14, below.)
• Direct Costs include Fees and Expenses of the DRB Members
DRB members and Standing Neutrals typically charge an hourly rate commensurate with their experience. These rates are typically split between the parties and can range from $150 to $400 per hour depending on the expertise of the member and the area of the country. DRB agreements require that expenses be reasonable and well-documented. According to the DRB Foundation, total cost for a three-member DRB range from about .05% of final construction contract cost for a relatively disputes-free project, to about .25% for so-called “difficult” projects with a number of DRB hearings, for an overall average of about .15% of final construction contract costs. These percentages typically apply to projects whose costs range from $50 million to $100 million. In projects greater than $100 million, percentages are lower; conversely, in smaller projects, the percentages for three-member DRBs are higher. The expense of a single Standing Neutral is of course commensurately lower, and there have been instances where the cost of a single Standing Neutral are as little as a few hundred dollars.
• Indirect Costs of Participants’ Time
Indirect costs of the process will include most notably the time for members of the owner and contractor teams to prepare for and participate in the DRB process, to attend periodic site meetings and to provide ongoing project information to the DRB members.
Because hearings before a DRB are held while facts are still fresh and witnesses are readily available and are currently familiar with the facts, the transactional costs of hearings can be expected to be substantially lower than the costs associated with more adversarial proceedings.
However, perhaps the greatest source of cost savings on projects that use a DRB is the elimination of disputes, as exemplified in the following discussion of success statistics.
• 60% of projects with a DRB had no disputes (this statistic attests to the “dispute prevention” benefit that accompanies any Standing Neutral process).
• 98% of disputes that have been referred to a DRB for hearing result in no subsequent litigation or arbitration.
• The worldwide use of DRBs is growing in excess of 15% per year, and through the end of 2006 it was estimated that over 2000 projects with a total value in excess of $100 billion had used some form of DRB.
• Dr. Ralph Ellis, a University of Florida civil engineering professor, has studied the use of DRBs by the Florida Department of Transportation involving over $10 billion of that agency’s construction projects. He concluded that use of DRBs resulted in:
- Net cost growth savings equal to 2.7% of construction costs; and
- Net time growth savings of 15.1%.
- Net cost growth savings equal to 2.7% of construction costs; and
- Net time growth savings of 15.1%.
• Provide an Informal & Non-Adversarial Process. The DRB is essentially informal and non-adversarial and typically produces a non-binding recommendation by experts in construction for the parties’ consideration.
• Serve a Preventive Function. The very existence of the DRB has been shown to create a cooperative relationship that provides impetus to settle disputes without taking them to the DRB.
• Preserve Relationships. DRBs help preserve and promote productive project relationships by focusing on the resolution of problems quickly at the source before they escalate.
• Enhance Communication. DRBs provide a logical extension of partnering, because they foster open communication, trust and cooperation between parties.
• Address Disputes Rapidly while Construction Continues. DRBs offer “real-time” disputes resolution contemporaneous with performance of the construction contract.
• Avoid “End-of Job.” Claims.-For owners DRBs help reduce the possibility of the big “end-of-the-job” claim.
• Address Change Orders Quickly and Efficiently. For contractors, DRBs encourage the prompt and relatively inexpensive resolution of claims and changes.
• Reduce Bids. Some commentators have asserted that for owners, DRBs often lead to more and lower bids since contractors are less likely to include large contingencies in their bids if the contract provides for a DRB. They find that some contractors maintain that they are hesitant to bid certain projects, e.g., tunnel jobs, when there is no DRB provision.
• Provide a Useful Imprimatur. For public owners, the written DRB recommendation provides the often needed credibility to justify a claim resolution or settlement to oversight bodies such as a city councils, county commissioners, or boards of directors.
• Qualifications for Members of the Board, including absence of conflicts of interest;
• Member selection process;
• Termination or replacement of DRB Members;
• DRB operation during construction;
• When and how disputes will be referred to the DRB, how hearings will be conducted, and the DRB’s report/recommendation requirements;
• Confidentiality provisions regarding materials submitted to the DRB (See page 14, below);
• Small claim procedures with possible monetary caps or fast-track claims in some projects.
• Agreeing to deadlines such as requiring selection no later than the first Partnering meeting if Partnering is to be employed on the project. (See CPR’s Partnering Briefing).
• Requiring that the members be selected as an express condition precedent to commencing contract performance.
• Naming a default appointing authority. If the parties fail to select DRB members by a specified deadline, the appointing authority will proceed to do so. This practice is common in arbitration where ADR organizations, such as CPR, serve as the default appointing authority and the same concept can be used in the DRB setting.
• As part of the selection process, parties should demand complete disclosure of any relationships or potential conflicts of interest that might affect a member’s impartiality. Disclosures of past or present employment, consulting, financial, professional or personal relationships with the parties or the project that might indicate bias or might even create the perception of bias should be disclosed. Such disclosures should include relationships with the primary contracting parties but also with those who will become involved in the construction, such as construction managers, sub-contractors, architects, engineers and other consultants and suppliers who are known. As new players come into the project, such disclosure obligations should continue.
• Disclosures should cover past DRB service on a project in which the parties or other key players were involved.
• DRB members should avoid potential discussion with any participant in the project of future employment with such participant while the DRB is in existence to avoid the perception of bias.
• Additional requirements may apply to DRB members who are attorneys including disclosure of representation of contract participants by other members of the attorney’s firm. Lawyers are aware of such requirements mandated by ethics codes and ADR case law.
• Once disclosed, parties can evaluate whether such disclosures render the DRB member acceptable or not; a party can always waive conflicts, once they are disclosed.
• Admissible? Most contracts provide that the DRB recommendation is admissible in subsequent litigation or arbitration if not accepted by the parties. It is believed that the substantial risk that a judge, jury or panel of arbitrators will place great weight on the DRB recommendation deters the losing party from filing a lawsuit and taking another bite at the apple. DRB Foundation statistics and anecdotal evidence tend to support that belief.
• Inadmissible? Others argue that there is reason to believe that the admissibility provision sometimes results in a more formal and contentious DRB process. Knowing that the DRB recommendation might be a part of subsequent legal proceedings could cause some parties to demand more extensive information exchange and hearing time, and take other actions to “protect their rights.” Some owners simply will not agree to the admissibility provision – opting instead for a purely consensual DRB process. If the process works – great. If not, owners will take their case to court without the threat of admissibility of the recommendation hanging over their heads. A typical contract provision to avoid admissibility and protect the confidentiality of the DRB recommendation might state:
All information presented to the DRB and all deliberations and recommendations, shall, except as provided herein, be kept strictly confidential. The DRB Members shall not, during their tenure as Members, and at any time thereafter, reveal any information presented to the DRB or obtained in their capacity as DRB Members, or disclose any recommendation, to any third-party.
In most matters, non-attorneys serve on DRBs given their actual expertise in the particular type of construction at issues and its unique problems. In some cases, the parties choose to have an experienced construction lawyer serve on the DRB. This can be very beneficial with respect to issues involving contract law and interpretation consistent with the parties’ intent when the contract was written. Attorneys might also assist in the effective administration of a hearing, and the drafting of written recommendations. Some users believe that the presence of attorneys can lead to longer, more formal and more adversarial proceedings with more litigation-like procedures. All things considered, the more reasoned conclusion is that experienced construction lawyers, knowledgeable and supportive of the DRB and other alternative disputes resolution processes, can fill a valuable role on the DRB.