Construction Lawsuits Are Spiking As Pressure Rises To Accelerate Projects

Construction contracts are landing in court more often — and at higher dollar figures — than ever before, as runaway costs and pressure to build faster have led to a spike in disputes.

The average value of construction disputes in North American courts was $42.8M at the end of 2022, up from $30.1M the prior year, the highest value ever recorded and double the averages between 2016 and 2019, according to a study released by the engineering consulting firm Arcadis.

The number of lawsuits over construction projects also is expected to accelerate this year, according to Arcadis, which surveyed more than 500 construction, real estate and legal professionals.

The jump in disputed amounts is part of a larger maelstrom directly related to the coronavirus pandemic, said Eric Schatz, vice president at Arcadis and one of the authors of the firm’s 13th annual construction dispute report. As construction projects have grown in size and complexity, the window for disputes to arise widened, Schatz said.

Couple that with the urge to get construction projects started faster amid supply chain problems, uncontrolled construction material costs and labor shortages, and more landlords, developers, contractors and subcontractors are finding themselves in court, Schatz said.

“The quicker you are in the private sector, the quicker you are to market,” Schatz said. “That push may be sacrificing some of the more detailed investment in the design phase to be able to advance the project and get construction going.” 

Construction timelines for hotels have shortened from between 10 and 12 months to between eight and 10 months, according to Commercial Construction Blog.

The Arcadis report didn't highlight specific lawsuits, but it said the largest amount in dispute in its survey was $2B. Most are well below that level. 

In May, GE Johnson Construction Co. and the city of Colorado Springs sued each other over a 32K SF visitor center development. The city claimed the contractor refused to handle problems with the parking lot and water treatment system, and GE Johnson claimed the city owed the firm more money on the $60M job, ENR reported. Flatiron Constructors sued Horry County and the South Carolina Department of Transportation in November for delaying its work on a highway extension, allegedly causing the contractor to rack up more than $40M in extra costs, WMBF News reported.

Arcadis’ survey found that the largest cause for legal disputes last year was errors and omissions in contract documents, primarily as a result of developers attempting to rush projects to the construction phase, followed by contractors and subcontractors not fully understanding their obligations in contracts. Both issues are usually among the top reasons for lawsuits, but contract errors rose to the most prominent in 2022, according to Arcadis.

“We continue to see construction disputes related to coordination, project staging, and differing site conditions,” Arcadis said in the report. “The potential for errors and omissions in contract documents is exacerbated by the design and construction of larger and more complex projects being delivered in tighter timeframes than ever before.”

The jump in prices and the number of legal disputes in the court system over construction projects is a lagging but direct impact of the pandemic, said Jordan Nadel, a construction litigator with Florida law firm Mark Migdal & Hayden.

“I think it more or less mirrors the trends we’ve seen for the past few years in light of Covid,” Nadel said. “Initially, it was the result of Covid, but I think now it’s taken a life of its own with supply chain issues and costs.” 

More than 30% of survey respondents said price escalation and supply chain impacts were primary drivers of construction disputes, according to Arcadis.

While some construction material costs have eased this year, the total price tag for things like steel, lumber and concrete for commercial projects was up more than 15% between 2021 and 2022, according to the St. Louis Federal Reserve's producer price index.

Christopher Caputo, vice chairman of Baker Donelson’s construction practice group, said he has seen the volatile swings in commodity prices feeding lawsuits over the past year. He said he has also seen more disputes over force majeure, also known as the act of God or unanticipated event clause in contracts, which waive contractual obligations if an event that is beyond the control of the parties hinders performance.

Caputo said force majeure claims remain prevalent even three years into the pandemic. This expansive view of the coronavirus's effects means that the dollar amount in disputes will grow.

“I think the projects that you’re dealing with now are the ones that the parties couldn’t work through during Covid,” he said. “Nobody [today] is thinking of things in a way that we have to find a solution. During Covid, parties knew they had to find a solution.”

Construction experts interviewed by Bisnow said they don‘t expect the velocity and dollar amounts of lawsuits to ease anytime soon, especially as many expect the overall economy to dip into a recession, prompting parties to push harder to keep from losing dollars.

“I think the pressure on the commercial real estate market could lead to increasing claims,” Caputo said. “The money involved is increasingly worth fighting about.”

Nadel said his firm remains busy handling client construction cases in the court system, a trend he doesn’t expect to reverse anytime soon.

“Frankly, the construction industry is prone to litigation,” he said. “Even in the best of times, claims are there. It’s built into the industry.”