Anthony Morgan - Contractors desperately need a reliable "ready reckoner" to assess the merits of different forms of dispute resolution – before they get in too deep
what represents value for money in the settlement of a construction claim? Should you take the traditional route through the courts, and if you do, how can you quantify the costs and benefits? Should you opt instead for arbitration or mediation to resolve a dispute? Is it possible to compare these alternatives and, disregarding the often overblown rhetoric attached to them, give a quick ready reckoner-style answer before you get in too deep? That, of course, is the solution that everyone yearns for: to create a generic formula that is adaptable to different conditions with different inputs. Is it an unachievable fantasy? My experience in Europe specialising in dispute resolution tells me it is realistic and long overdue How would the "ready reckoner" work? Generally, analysis of the costs and benefits has to be carried out early so that the parties can make decisions and hold settlement discussions. The settlement process may involve, a form of mediation, conciliation or mini-trial. But the production of a business case is a necessary prerequisite to deciding to proceed with a formal dispute resolution process.

The essence of such a process is that it must be done quickly, in a way comparable with a fast-track adjudication, but must also be comprehensive, in the sense that it incorporates all the elements critical to the project.

Make it quick
I had experience of this type of evaluation process with a European government on a substantial infrastructure project. The project sponsor was required by law to carry out settlement negotiations before going for arbitration. Any such public sector client might need to provide information to ministers or to the equivalent of our Public Accounts Committee.

In order to be able to carry out such a rapid assessment, it is essential that all the advisers carry out their investigations simultaneously and feed their results into a common evaluation model. For a typical construction project, the advisers would probably come from legal, technical, project management and quantity surveying backgrounds.

The evaluation model could then be used to collate the data and quantify the outcome. It can also, and crucially, be used to evaluate the range of uncertainties identified in the review. For example, modeling different scenarios with different perceived risk profiles.

In a traditional review, one might expect the legal view of entitlement to be followed by a technical review of causation, with an assessment of liability followed by cost calculations – in other words a sequential review.

It is not unusual for discussions on the legal/technical merits to be prolonged, leaving costs to be calculated in a limited amount of time. I am sure that there are a few readers who have burned the midnight oil finalising cost calculations for a reporting deadline.

The big advantage of creating a generic financial model that can deal with different scenarios rapidly is that it allows the legal and technical reviews more time for their investigations.

It is important to use the same project management tools in evaluating dispute resolution as for anything else

In a nutshell the evaluation model is a bit like a "ready reckoner" for heads of claim. These could include such items as prolongation costs, disruption costs, acceleration costs, winter working, additional head office overheads, loss of profit and interest. The cost formula can be linked to appropriate input variables and also to outputs from formulas that drive the delay calculations.

The output from this model can then be used to provide data not only on what a reasonable or fair evaluation might look like, but would also quantify the uncertainties that exist and would be exposed if the issues are put to test in the formal resolution process.

When unrecoverable costs, the value of senior management time and the detrimental effect of a dispute on the business are taken into account in such cost analysis, a better picture of liability starts to emerge. This gives decision-makers a better feel for the uncertainty factor in the dispute and how they might manage this.

Constructing the model
This ready reckoner is constructed as an interactive model of the dispute. It should be flexible enough to evaluate the risks to the outcome. The input is data from the specialists working on legal, technical and time issues. When their scenarios are combined with the risk quantification, this gives a value output.

This value should be weighed against what a firm would have to pay for a successful outcome. The outcome can be called the "net present value" for the project – that project being a dispute.

It is important to use the same management tools and techniques in evaluating dispute resolution as one would for anything else. For example, you should produce a workplan, budget, resource inputs and details of what outputs are required. With large teams, a project manager is required to co-ordinate progress and reassess resource requirements as activities change.

The quantification process follows similar principles to assessing risk at the beginning of a construction project and some of the same quantification techniques can be used. There is generally too little available data on the historic conversion of uncertainty into reality in the legal arena to be able to use regression analysis, but industry norms and experience will generally provide sufficient data to achieve consensus.