Dispute Resolution Boards (DRBs): Effective Resolution in the

Construction Industry

Dispute Resolution Board Foundation

Dick Fullerton – DRBF MemberConstructive Options

DRB Presentation Outline

•Review of Dispute Resolution in Construction•The development of DRBs•How a DRB functions•Advisory meetings / Formal hearings•DRB cost guidelines• Incredible success rate (98%) of DRBs•The DRB Foundation•Application of DRB principles to other dispute

forms

Segments of the Construction Industry

Three industry segments:

Residential Commercial *Heavy/Highway

History of Construction Disputes

•Pattern of litigation • multiple trades on each project• trade boundary disagreements • rigorous schedules • tight budgets• disputes inevitable

•Litigation the norm until the 1980’s •Supreme Court encouraged arbitration and ADR

in the 1980s • Industry proactive in seeking alternatives

A Contentious Environment

Construction litigation expenditures in the United States :

•increased at an average rate of 10 percent per year over the last decade

•now total nearly $5 billion annually•construction industry on the innovative edge

regarding dispute resolution (ENR 2000). •despite progress, there remains much room

for improvement

Most Prevalent Dispute Options

•Arbitration•Litigation•Mediation•Partnering (highway/public construction)•Dispute Resolution Boards (DRBs)•Med-Arb•Neutral Fact Finder•Project Neutral

Low Cost Resolution High Cost Resolution

Les

s C

on

tro

l

Mo

re C

on

tro

l

Negotiation

Facilitation

Early Neutral Evaluation

Joint Experts

Mediation

Mini-Trial

Arbitration

Court Special Master

Court Settlement Conference

Bench or Jury Trial

Partnering

Continuum of Dispute Cost 7

DISPUTE REVIEW BOARD

DISPUTE REVIEW BOARD

Arbitration the current norm

• 2005 Study of Colorado contractor dispute preferences (Dispute Resolution Journal - Feb/Apr 2005)

• Asked to choose between arbitration and litigation, fully 85% of the interviewees prefer arbitration

• The majority of construction attorneys prefer arbitration for construction cases

• Asked to choose between arbitration and litigation, none preferred litigation

Beginning of DRBs•1972 U.S. National Committee on Tunneling

Technology Study - Concluded that U.S. contracting practices increased costs and disputes

•1974 Published Report: “Better Contracting for Underground Construction”

•1975 First DRB utilized - 2nd bore of I-70 Eisenhower (Johnson) Tunnel

•1993 University of Washington began using DRBs•1996 DRB Foundation

established and the DRB Manual published

Current DRB Usage•Most common on large public projects ($10-

$15M+)

•Embraced by many state and local agencies for highway and tunnel construction

•Worldwide, roughly 100 DRB contracts over $ 5 billion start each year

•1975–2010 - over 2,200 completed projects, over $200 billion total construction value

DRBs compared with other ADRprocesses• Only ADR process that includes

disputeavoidance

• DRB process precedes other methods, such as arbitration and litigation

Adoption of DRB Provisions

•Other Recent Model DRB Provisions

• American Arbitration Association (AAA): 2000 Model Documents

• International Chamber of Commerce (ICC): 2004 “Dispute Board Documents”

• Consensus Docs (2008 allows DRB selection)

State DOTs Using DRBs

• Alaska, California, Colorado, Delaware, Florida, Hawaii, Idaho, Louisiana, Massachusetts, Maine, Mississippi, Nevada, New Mexico, New Jersey, New York, North Dakota, Ohio, Oregon,

South Carolina, Texas, Utah, Virginia,

Washington, West Virginia, Wisconsin

(25 total in 2010)

Description of a DRBA DRB is a board of • panel of neutrals with particular

expertise and reputations• impartial (despite selection

process)• from beginning of the project,

follows construction through completion

• encourages dispute avoidance• assists in the resolution of disputes for the

duration of the project

Different Forms of DRBs•Standing DRB – Initiated

at the beginning of a project to meet periodically throughout construction duration

•On-Demand DRB – a similar board that is formed to hear a dispute when there is no Standing DRB and the dispute has not been resolved at the Resident Engineer level (not recommended by the DRBF)

Formation of DRBsEach of the parties (owner and contractor) nominates an industry expert for approval by the other Party. All members must be experienced and respected

• The approved panel members select a third member for approval. The third member may become Chair

• 3-Party Agreement (Owner, Contractor, Board) requires strict neutrality

• Members indemnified from personal or professional liability

• All DRB expenses of the members shared equally by the Owner and Contractor – majority of costs ultimately borne by the Owner

Role of the BoardBoard Members

• become familiar with plans/specifications• meet with Owner and Contractor on site periodically to

review the project• maintain neutrality, refrain from ex parte communication• discuss job progress and potential problems, encourage

resolution• when requested, conduct:

• an informal hearing of disputes, issuing an advisory opinion for further negotiations

• a formal hearing resulting in a non-binding recommendation

Role of the Project Owner

•Selects use of DRB based on applicability of the project

•Establishes DRB specifications, Three-Party Agreement, and member selection

process•Awards construction contract requiring DRB•Participates in regular DRB meetings and

resolution process

Joint Role of Owner and Contractor

•Select Board members approved by bothparties

•Convene an initial DRB meeting• Three-Party Agreement is signed• Project is overviewed

•Attend DRB meetings and site visits held at regular intervals – approximately quarterly

Limited role of attorneys• Attorney participation as members of

dispute boards is often allowed but may be limited to a single member of a board

“Some users believe that the presence of attorneys can lead to longer, more formal and more adversarial proceedings with more litigation-like procedures…”

• Legal advocacy during a hearing is also limited as

“[a]ttorneys are encouraged not to attend hearings and, if they do attend, they are rarely permitted to make presentations or participate in the proceedings…”

An Informal (or Advisory) Hearing

• Informal meeting can be held during the course of the project, contemporaneous with work

• If parties agree, the Board will hear a dispute when initial negotiations come to impasse and provide the parties with an “informal” opinion, usually given orally…

• And, DRB can hear a dispute again at the end of construction

Benefits of an Advisory Hearing• Issues don’t accumulate,

“poisoning the well”• Issues are resolved before

positions harden• Issues don’t compound,

creating the dreaded “end of job claim”

• Process costs for the resolution of the dispute(s) are reduced significantly

Relaxed Tone of Advisory Hearings

• The number of Advisory Meetings varies from project to project

• Advisory Hearings normally are relatively straightforward involving the GC and one subcontractor

• Presentations are made by the Project Staff

• The recommendation of the Board is provided orally

A Formal DRB Hearing • Formal Hearings occur months after a dispute emerges, often

at the end of the project

• Similar to non-binding arbitration case presented by the construction practitioners, usually those most familiar with the work…not attorneys

• Each party is given an opportunity to present its case;• Rebuttals are permitted• The DRB asks questions• The DRB confers• The DRB provides a timely written opinion in the form of a

recommendation – can be for entitlement or quantum or both, at the discretion of the parties

Estimated Cost of a Standing DRB Program (no disputes)

• Total cost for a three-member DRB range from about .1% of final construction contract cost for a relatively disputes-free project, to about 0.25% for so-called “difficult” projects with a number of DRBs

•These percentages typically apply to projects whose costs range from $20 million to $100 million

• 6 hours/person x 3 members x 9 meetings in 24 months x $200/hour = $32,400 (plus travel)

Cost Estimate of an Informal Hearing

Each DRB Member spends:• Two (02) hours document review• Four (04) hours in the hearing• Two (02) hours in deliberation

8 hours x 3 members x $200/hour = $4,800

(Additional travel expenses are handled variously by different agencies – sometimes disallowed altogether, sometimes limited)

Cost Estimate of a Formal Hearing

Each DRB Member spends:• Eight (8) hours document review• Sixteen (16) hours in the hearing• Eight (8) hours in deliberation and writing a

recommendation

32 hours x 3 members x $200/hour = $19,200

(Travel expenses same as prior slide)

Non-financial expectations of the Team

• Distribute progress updates and other documentation to the DRB members

• Participate in periodic meetings with the Board

• Put all concerns on the table

DRB Variations•Single-neutral Board – for projects less than

$250,000 (WSU)•Dispute Adjudication Board (DAB) provides a

decision that has interim-binding force (used in GB)

•FIDIC (international federation of engineers) Projects use DAB –, used in the rest of the world, especially projects financed by World Bank and regional financing agencies

•DB under ICC Rules- allows DRBs, DABs or Combined Dispute Boards (CDBs), can be binding/non-binding at direction of Board

Incredible Success Rates

•North American project values have ranged from one over $1 billion: a hundred under $5 million: six projects under $1 million; and have averaged $42 million each

• 58% of the projects were “dispute free” - no disputes requiring hearings were brought to the DRB

• 98.7% of the projects were completed without resorting to arbitration or litigation. This is considered the success rate of the DRB process

• Idea is to reduce resolution costs, make for better relations on the project. Often saves up to 80% of claims costs

Reasons for Success•Party involvement in Board selection•Respected members of the construction community•DRB fully immersed in project details•Hearings conducted only on request of both parties•Prompt availability for advisory opinion•Non-binding recommendations that parties can

reject or use for further negotiation•Recommendations typically admissible in

arbitration/litigation

Results of DRBs• Claims avoidance:

During periodic meetings, the DRB reviews the status of outstanding issues and inquires about any potential problems, disputes, or claims

• Claims resolution:If the parties cannot agree, issues can be forwarded to the DRB for an advisory or formal hearing

Direct Benefits of DRBs• Reduce legal and consultant fees• Encourage contractors to bid because of fair process• Reduce bid amounts by ensuring dispute resolution• Facilitate positive relationships, open communication,

trust and cooperation with less posturing• Focus on early identification and evaluation of disputes• Promote mutual resolution• Provide an impartial, informal and rational forum for

resolution• Provide informed decisions by experienced Board with

direct project knowledge• Reduce job delays due to disputes

Arguments against DRB Acceptance• DRBs add expense but not add value to the project • presence of bias or lack of qualifications in Board members• DRBs impose personal equity rather than contract

provisions• presence of a DRB will promote claims• DRBs are unreliable because they lack the formalities of

legal proceedings• historical culture of “power & control”• expectation of a binding decision• in high value disputes, losing party motivated to try litigation• parties may undermine the DRB process (withholding

information, for example)

Colorado’s DRB Connection• First board utilized 1975 on 2nd bore of I-70 Eisenhower Tunnel

(Johnson Tunnel)

• Largest single DRB – TREX Project $1.67 billion • Motivated by a backlog of 58 potential arbitration cases involving

$49 million in claims, CDOT introduced a DRB program in 2008 requiring standing DRBs for projects over $15 million. It provides for on-demand boards for projects with active claims not otherwise covered

• Since program implementation in 2008, only 13 claims have resulted in DRB hearings; 12 were resolved, only 1 not resolved. All other claims were prevented

DRB Experiment in Vertical Construction• The University of Washington began using DRB’s in 1993

• DRBs have proven extremely effective on building projects, though use is much narrower.

• The largest vertical program in the country

• Since inception, required on all projects over $10 million. 57 buildings totaling $3.7 billion in construction costs with not a single claim has gone beyond the Board level.

• The overwhelming majority of issues have been resolved after an informal hearing

• UW had had only 4 dreaded “end of Job” hearings in 15 years

UWBioengineering and Genome Sciences Physics Building

Molecular Engineering Building

UW Summary

•The University of Washington has been pleased with the DRB Process

•Using a DRB Process has dramatically reduced the programmatic cost for disputes resolution

•The University has never gone to court since it began using DRB’s on its major contracts

The Dispute Resolution Board Foundation (DRBF)•Formed in 1996 to promote the use of DRBs

worldwide•Nonprofit corporation•Over 700 members from more than 59 countries•Organized into three regions worldwide

• Region 1 – North America• Region 2 – Rest of the world• Region 3* – Australia, New Zealand, New Guinea,

and Pacific Island nations

Educational Outreach of the DRBF

The Dispute Resolution Board Foundation can provide assistance to Owners, Contractors and DRB Members in a variety of ways:

• The DRBF regularly holds classes for Owners, Contractors and DRB Members

• The DRBF Practices and Procedures Manual is available on the DRBF website and a hard copy can be purchased from DRBF Headquarters

• The DRBF holds conferences in the United States and Europe annually to discuss the latest developments in Dispute Board or Dispute Review Board practice

DRBF Training Courses

•Administration and Practice Workshop for Owners, Contractors and DRB Members

•Chairing Workshop

•Workshop: How to Present to a DRB

•Refresher Training for DRB Practitioners

DRBF Practices and Procedures Manual• Concept • User Guide

• Includes guidance and a template for the Parties for the Owner to use in drafting a DRB Specification and “Three Party Agreement”

• Includes guidance for the Parties in selecting members and preparing for the hearing

• Includes Practice Guidelines for all the Parties• Member Guide• Ethics• Multinational Practice

Dispute Resolution Board Foundation (DRBF)

• 19550 International Blvd, Ste 314Seattle, WA 98188

• Phone: 206-878-3336888-523-5208

• Email: info@drb.org• Website: www.drb.org

Region 1 (North America) DRBs 1975-2010

Beyond Construction•Financial services industry •Maritime industry•Long-term concession projects•Operational and maintenance contracts•Council of Yukon First Nations•Medical peer review•Corporate governance •Research & development • Intellectual property • Information technology•Utility Rate Regulation

Distilling the DRB Success

•Respected members chosen by the parties•Neutrality of members•Tone of conciliation

throughout project•Non-legal engagement

•Non-binding recommendations•Admissibility of

recommendation

Questions ?

dholen@comcast.net

Dick FullertonConstructive Optionsadr@richardfullerton.com303-229-8668