New South Wales Government
Resolving disputes in
construction contracts
under the Procurement System for Construction
a guide for Project Directors and Project Managers
One dispute can double
the cost of a project
Three key objectives
of dispute resolution
Five levels
of dispute resolution
A single dispute can
substantially increase
project cost and duration
and consume an enormous
amount of project
resources and time. Project
Directors need to actively
monitor dispute resolution
and risk.
When resolving a dispute there
are three key objectives.
There are potentially five levels
in the dispute resolution process,
each more costly and involved than
the previous level. It is always best
to fairly resolve the dispute at the
lowest level possible.
1
3
1 Resolve issues
cost-effectively
Resolution agreements must be
based on contract entitlements;
however, the resolution process
should be aimed at achieving value
for money. It is rarely appropriate to
incur substantial resolution costs
over relatively minor matters.
2 Act quickly
Definition
A dispute occurs when a
disagreement between the
Contractor and the Project
Manager is not resolved, and one
party gives formal notice to the
other party that it wishes to pursue
the matter. (A dispute is called an
Issue in C21/GC21 General
Conditions of Contract.)
Speedy action can resolve issues
before they become formalised
into disputes. Promptly working
through the resolution process
can protect project objectives,
maintain productivity and prevent
further disputes. The resolution
process must be driven—do not
allow it to stall.
5
Most contract disputes are resolved
by negotiation. Negotiations occur
throughout Levels 1 to 5. At
different levels, negotiation may be
driven by different people.
Which Agencies does
this approach apply to?
This brochure summarises the
Contract Dispute Resolution
Guideline which is part of the
Procurement System for
Construction. Agencies that are
required to use the System are
required to adhere to the approach
outlined in this brochure.
3 Maintain probity
Probity includes adhering to public
sector standards of behaviour, such
as fairness, impartiality, consistency,
and accountability. Probity is doing
things the right way and being seen
to do things the right way.
Levels of dispute resolution
There are potentially five levels in the dispute
resolution process, each more costly and
involved than the previous level. At different
levels, negotiation may be driven by different
people.
Level 1
Deal with
Level 5
Litigation
Level 4
Expert
determination
Level 3
Intensive
negotiation
Level 2
Senior Executives
confer
disagreements
Negotiation driven by
Project Manager
Senior Executive
Dispute Manager
Litigation Overview Team
Level 1
Level 2
Level 3
Deal with disagreements Senior Executives confer Intensive negotiation
Level 4
Level 5
Expert Determination
Litigation
(the contract prescribes the Expert Determination process,
intensive negotiation is recommended in parallel)
Disagreements and differences of
opinion are common in contracts – but
they don’t need to escalate to disputes.
If the Project Manager and Contractor
disagree and a formal dispute is notifi
ed the matter is elevated to the
Principal’s and Contractor’s Senior
Executives. The majority of formal
disputes are resolved at this stage.
Negotiation is relatively quick and
inexpensive. The majority of contract
In Expert Determination an independent
industry Expert makes a decision about
disputes are resolved by negotiation.
the dispute. This has generally resulted in
Level 3 specifi cally focuses on intensive
a satisfactory outcome and is signifi cantly
negotiation, however negotiations
continue throughout Levels 1 to 5.
cheaper and quicker than litigation.
Litigation is an expensive and timeconsuming process. Careful consideration
is required before initiating litigation. New
negotiations directed by the litigation
overview team should also commence.
Typical initial trigger
Contractor verbally expresses
dissatisfaction with an unresolved
variation or other matter
Contractor or Principal formally advises
the other party that the matter is a
Either party decides to reject Expert
Contractor or Principal formally refers the dispute to Expert Determination.
Determination.
dispute under the contract.
Key actions at this level
Re-examine the issues
Senior Executives confer
Disagreements and differences of opinion
can often be resolved by reasonable
discussion. Considering the viewpoint of
the other party and being objective is vital
to resolving disagreements.
C21/GC21 contracts typically require the
Contractor to wait for at least 21 days
after notifying a dispute before referring
the issue to Expert Determination. During
this time the Principal’s and Contractor’s
Get advice
It’s always worthwhile for the Project
Manager to get another person’s
opinion about the claim – they can
provide a fresh perspective.
Consider contract as a whole
Consider the matter in the context of the
overall contract and how it has been
administered. Beware of focussing only
on selective phrases from the contract.
Work cooperatively
Make every effort to help the Contractor
meet its contractual obligations.
Compromise on matters that will not
adversely impact the project outcome
while maintaining control over contract
cost, quality and timing.
Prepare thoroughly
Prepare thoroughly
Be aware of Government policy
The Expert Determination process
requires a coordinated and managed
strategy. Additional resources may be
required: programmers, engineering or
building consultants, and solicitors.
Senior Executive must promptly confer
to resolve the dispute.
Effective negotiation requires thorough
preparation and an in depth
understanding of the contractual and
factual issues surrounding the dispute.
Negotiation must be approved by the
Agency and undertaken by experienced
and well-informed people.
It is NSW Government policy to resolve
disputes using alternatives to the court
system wherever possible. Litigation is
generally a last resort. Usually litigation
is initiated by the Contractor but is
occasionally initiated by the Principal.
‘Conferring’ typically involves making
contact with the Contractor,
understanding its position, presenting the
For risk management reasons, at least
two people must be present in intensive
negotiations to represent the Principal.
The Expert Determination process and
timeframe will be specifi ed in the contract.
Principal’s opinion and reasons for it,
and seeking to resolve the issue.
Follow the contract
dispute procedure
C21/GC21 contracts prohibit the
Contractor from referring an issue to
Expert Determination (or taking any
other action) more than 49 days after
notifi cation of a dispute. This ensures
issues are addressed promptly and it
is important to preserve this time bar.
The dispute resolution method and
timeframes defi ned in the contract
must be followed unless there are
exceptional circumstances and
Contractor agreement. Failure to follow
the contract may result in waiving the
Principal’s rights.
Negotiate
The negotiating team should be
receptive to the Contractor’s arguments
yet examine them rigorously.
Negotiation involves each party working
to convince the other of their position.
Typically each party moves towards a
compromise position both can accept and
justify. Negotiation is an opportunity to
resolve all outstanding disagreements,
not just the issue in dispute. To avoid
misunderstandings, a list of matters
agreed, including payment and related
issues, should be prepared at the time of
negotiation and then formalised.
Engage an Expert
The parties agree on an Expert, or the
independent body nominates one. The
Principal engages the Expert, and both
parties share equally the fees of the
Expert and bear their own costs.
Make submissions
Establish a litigation
overview team
This team provides advice regarding the
instruction to be given to the legal team
– the outcome of litigation is only as good
as the instruction given. The team must
include the Project Director, the Dispute
Manager, representatives of the Agency,
and a person from the Contract Dispute
Resolution Unit.
Both parties make submissions to the
Expert within timeframes defi ned in the
contract. The Expert considers the
submissions and makes a determination.
The process may take some months.
Engage a legal team
The legal team receives instruction,
provides legal advice, prepares for court
proceedings and represents the Principal.
The Expert’s determination is fi nal and
binding if the value is under a specifi ed
amount. If over the specifi ed amount
(often $500,000) the decision is not
binding and either party can choose to
commence litigation.
Project Manager (including Contract Administrator / Principal’s Authorised Person / Principal’s Representative)
Seeks advice from others in their
own organisation and the Senior
Executive under the contract
Becomes familiar with the
contract dispute resolution
clauses and timeframes
Re-examines the issue
Liaises with Senior Executive and
Attempts to resolve the
disagreement with the Contractor
provides relevant documents
Advises Senior Executive if a
dispute is expected
If resolution is achieved, prepares
submission to obtain Agency approval
and formalises the agreement.
Prepares the initial position paper
(typically within 14 days of
dispute notifi cation)
Formally notifi es Contract Dispute
Resolution Unit
If resolution is achieved, prepares
submission to obtain Agency approval
and formalises the agreement.
Provides information to Dispute
Manager, including copies of the
contract documents; relevant
communications; and details of other
related disputes or disagreements
Contributes to the Expert
Determination process as required
Contributes to the litigation process
as required
Reviews summary of determination
and makes comment.
Reviews updated position papers and
gives advice on the issue as required.
Reviews updated position papers
and provides input
Provides information to the
negotiation team
Assists to formalise resolution
if achieved.
Senior Executive (or Principal’s Agent)
May take a proactive role in
preventing disputes
Receives copy of dispute notifi
cation from Contractor
Continues to takes part in negotiation
process if requested by the Project
Contributes to the Expert
Determination process if required
Contributes to the litigation process
if required
Provides advice to Project Manager
Provides support to Project Manager
and reviews initial position paper
Director
Reviews summary of determination
and makes comment, if required.
Reviews updated position papers
and makes comment, if required.
Responsible for resolving the dispute
Responsible for resolving the dispute
Reviews all relevant documents and
gathers information from Project
Manager, Senior Executive and the
Contractor
Manages the Expert Determination
process, including defi ning the issue,
preparing recommendations for
Agency approval and helping to
select and engage the Expert
Updates the previous position paper,
including the litigation strategy and a
new negotiation strategy and
provides further updates of position
paper as required
May speak informally with people
at an equivalent level in the
Contractor organisation
May attend some or all key
site meetings.
Promptly confers with Contractor’s
Senior Executive to resolve dispute
Reviews updated position papers
and provides input
May assist to formalise the resolution.
May assist to formalise the resolution.
Dispute Manager (role usually performed by Project Manager if dispute is less than $250,000)
Not involved at this level
Not involved at this level
Prepares updated position paper,
including a negotiation strategy and
an Expert Determination strategy, and
provides further updates if required
Implements negotiation and Expert
Determination strategies
Manages and usually prepares
the Principal’s submissions
Summarises determination and, if it is
not binding, recommends whether it
should be accepted or not and why.
Supports the litigation overview team
and the legal team, including
preparing detailed estimates and
taking part in negotiation as required
Drafts Agency briefi ng notes and
recommendations as required.
Reports on outcome of negotiations to
Project Director
If resolution in principle is achieved,
prepares submission to obtain Agency
approval and formalises the agreement.
Project Director (the link to the Agency)
Monitors the dispute risk factors
(including the number and duration of
unresolved claims) and intervenes as
required
Finds out whether the relationship
between the Project Manager and
the Contractor is becoming adversely
affected by disagreement. If so,
addresses the issues.
Reviews issues and cost estimates
presented in the initial position paper
Engages Dispute Manager
Obtains Agency approval of proposed
Reviews updated position papers
Expert
Provides support to the Senior
Executive, including obtaining Agency
approval and funding to settle if
required
Selects the people to be involved
in negotiation
Monitors Expert Determination process
Liaises with Agency and obtains
approval of strategies. Seeks approval
for additional resources if required
Assists Agency to make a decision to
accept or reject the determination.
Monitors resolution progress and
intervenes if progress stalls
Prepares to engage Dispute Manager
should dispute not be resolved at this
level.
Monitors negotiation process
and intervenes, if required.
Reviews summary of determination
Regularly
informs
Agency
of
progress, provides advice to and
takes directions from Agency
Appoints litigation overview team as
approved by the Agency and
considers their advice
Engages, briefs and gives instructions
to the legal team as directed by the
Agency, upon consideration of
litigation overview team’s advice.
Position papers provide rigour
Position papers are prepared for
the Principal and the contents
must not be disclosed to the
Contractor or its agents.
Writing a position paper provides a
disciplined procedure to re-examine
the issue in dispute and to consider
it from different perspectives.
It provides a concise summary to the
Agency so that it can make informed
decisions about the resolution process.
All disputes require a position paper
including a risk assessment.
Over time, position papers provide
an audit trail of the dispute
management process.
Selecting a Dispute Manager
The Project Manager manages the
dispute resolution process at Levels 1
and 2. However, if a dispute
resolution process stalls at Level 2, or
if the Project Manager has a conflict
of interest,
the Project Director should engage
a different person as Dispute
Manager.
Once the matter is referred to
Expert Determination, the Project
Director engages a Dispute
Manager who may be:
• the Project Manager (if the dispute
is less than $250,000)
• the Senior Executive
• selected from the Prequalification panel, or
The Dispute Manager must have the
necessary skills, experience, aptitude
and time and have no conflict of
interest.
Feb 2007
Position papers should include:
• a description of the dispute and
all contributing factors
• a consideration of the possible
sources of liability and the likelihood
of each being accepted by an Expert
• an estimation of the range of
possible amounts involved—
most probable outcome and
worst case scenario
• a discussion of the options available
to resolve the dispute and the costs
associated with each
• a recommendation for the next step
in the dispute resolution process.
The importance of a formalised
settlement agreement
Successful negotiations should
result in full and final settlement of
all issues. Writing down a list of
agreed matters jointly prepared at
the time of the discussion creates
a shared understanding and
reduces the opportunity for future
disagreement. The agreement
must then be formalised, for
example by:
• a variation approval (suitable if
a disagreement has been
resolved early),
• an exchange of letters (suitable
if a dispute has been notified
but resolved quickly), or
• a Deed of Release (suitable
for negotiated resolution of
more complex matters).
The level of detail in the position
paper should be appropriate to the
complexity of the dispute and the
stage of the resolution process.
When the threshold stated in the
guideline (typically $100,000) is
exceeded, direction-setting position
papers must be reviewed by the
CDRU. The CDRU will either confirm
the direction or suggest alternative
approaches. See the Contract Dispute
Resolution Guideline for more detail. It
is available from the web at
www.procurepoint.nsw.gov.au
.
‘Security of Payment’ and disputes
The Building and Construction
Industry Security of Payment (SoP)
Act 1999 addresses Contractor cash
flow.
Some Contractors may attempt to
deal with a dispute by submitting
an adjudication application under
the SoP Act.
If an adjudication requires the
Principal to pay the Contractor, the
Principal must make this payment.
However, an adjudication does not
resolve the underlying dispute–either
party may still pursue the matter as a
dispute under the contract. If both
parties choose to accept the
adjudication as an appropriate
resolution, it is still necessary to
close the dispute and formalise the
agreement.