Alternative Dispute Resolution: A Remedy to Costly Contract Litigation

Alternative dispute resolution (ADR) has been touted as the remedy to settling contractor conflicts in the courts. For starters, it’s significantly less costly and timely. But the greatest benefit is that there are truly no “winners” or “losers” in these disputes, as the goal is to find a common ground between the parties involved. It’s no wonder that ADR is commonly used in the construction industry. Read below for more about what ADR involves and how it can be applied in disputes.

ADR: Is it Truly Effective?

ADR is a technique used to assist disagreeing parties in coming to some sort of agreement, short of the traditional legal system. For decades, studies have proven ADR is not simply a fad, but a reliable, less costly process, leaving room to maintain respectable business relationships.

In spite of the statistics, many construction associations have steered clear of mandating ADR procedures in contracts. However, contractors and subcontractors have taken the initiative to individually implement ADR clauses. There are three ADR techniques commonly used by contractors:

1. Non-binding neutral
2. Mediation
3. Arbitration

Non-Binding Neutral

A non-binding neutral is a person or person(s) impartial to the dispute at hand. They hear each respective party’s position, access all of the evidence and legal concerns, and conduct interviews to gather further information when needed. This process enables neutrals to advise both parties on the way to resolve the dispute.

Mediation

Whereas a non-binding neutral provides an opinion on how the dispute should be settled, mediators go a step beyond to help the parties come to an agreement. This process typically involves one or a group of mediators and can be held in an informal, public setting. This can cut court costs and fees, as mediation does not require mandating circumstances or time consumption. It can take a few weeks to come to an agreement in a mediation process, versus the months and even years to settle a court case.

Arbitration

If the above non-binding and mediation processes are ineffective in your particular circumstance, arbitration is another common process that is considered to be more efficient, private and direct. Different from a non-binding approach, arbitration leads to a final, binding decision that results in an “award.” Of the three most common forms of ADR, arbitration is most similar to traditional litigation. Judges can be hired to help facilitate resolution. The parties are given the power to determine the issues to discuss in litigation and even how the award is to be given, which is transferred in writing. Arbitrators overseeing construction legal proceedings are usually a panel of three experts with extensive industry-related experience.

Do the Research and Check Your Facts

Having a solid case is critical to any dispute, and facts are the key. Financial advisors and accountants can be very influential in this process, known as fact-finding. Usually performed in tandem with ADR, a “fact-finder” will either work as a neutral or partial contact, disseminating information and relaying it through reports. Their goal is to assist the parties in reaching a settlement or solution through the bare facts.

Finding the Best Neutral

It takes effort and thorough research to find a neutral (otherwise referred to as mediator or arbitrator) to navigate the issues and find resolutions to complex faults in a project. However, this step is critical in finding the right person to advise your case and reap results. The American Arbitration Association (AAA), along with several industry advisory committees, has established criteria to help you make the best selection. Your neutral should have acquired most or all of the following:

• At least 10 years of construction industry experience
• Mandatory AAA training for dispute avoidance and resolution
• Strong sense of neutrality and commitment to impartiality and objectivity
• Effective judicial skills
• Reputation for neutrality work
• Availability and accessibility to guide this process quickly and with ease

The AAA’s website, www.ADR.org, offers a list of mediators and arbitrators who are trusted in the industry.

While no project will ever be perfect, many disputes can be avoided by simply creating open communication of the responsibilities and resolution options within your contracts with clients and subcontractors.

Contact Doeren Mayhew for more information.

Could You Be Overpaying Your Vendors?

For most businesses, vendors are part of day-to-day operations, generating thousands of payments to suppliers and service providers over the course of a year. Does your business have the internal controls in place to detect whether you may be overpaying?

Overpayment to vendors is a very real risk that could impact your organization’s bottom line and result in significant financial loss if not quickly detected and resolved. A variety of errors can result in overpayment, including miscalculations, duplicate payments, neglected rebates and allowances, misunderstanding of contract terms, tax overpayment, and charges for goods and services not received.

To avoid financial loss, you may want to consider a vendor audit. A vendor audit is an external audit of invoices, contracts and other related data from your suppliers. Other best practices for detecting overpayment include:

Consider the “most favored nation” clause, which is a contract provision in which a seller agrees to give the buyer the best terms it makes available to any other buyer. During a recent Doeren Mayhew audit, the vendor refused to reveal invoices distributed to other clients, which triggered our client to question whether the supplier was in compliance with the agreement.

Compare estimates and invoices to ensure charges are accurately reflected. Often times estimates are used to create contracts, and buyers may forget to review actual invoices versus estimated prices.

Ensure vendor invoices are being regularly monitored. Look out for double costs that may not catch your eye as a mistake.

Conduct select testing on larger suppliers, some of which may tend to increase prices each year. A Doeren Mayhew client was assured a discount for each purchase under a three-year contract with a major automobile parts supplier. Our vendor audit specialists found that third-year prices were significantly higher.

Review contracts before renewing them and take note of percentage-of-fee increases.

Frequently gain bids from other vendors to ensure you’re receiving market prices.

Regularly review vendor charges for expenses to ensure there are no duplicates, such as charged meals to hotels and meal receipts for the same day.

Verify that audit clauses are written into vendor contracts and purchase orders, so that auditors may obtain and review any documents related to your contract and agreement. Should you need a vendor audit, this clause will ensure auditors can review all data necessary to provide an accurate report.

Strong vendor relationships are essential to your business, and while they are trusted suppliers, miscommunication and missteps may sometimes occur. Vendor audits not only help improve supplier relationships, but help detect fraud and improve systems and controls both in your business as well as the vendor’s.

Contact Doeren Mayhew for more information.

New Medicare Tax: Watch Out for Withholding Issues

Under the recent health care act, starting in 2013, taxpayers with earned income over $200,000 per year ($250,000 for joint filers and $125,000 for married filing separately) must pay an additional 0.9 percent Medicare tax on the excess earnings. Employers are required to withhold the tax beginning in the pay period in which wages exceed $200,000 for the calendar year — without regard to the employee’s filing status or income from other sources. So, it’s possible your employer:

• Will withhold the tax even though you aren’t liable for it. You can’t ask your employer to stop withholding the tax, but you can claim a credit on your income tax return.
• Won’t withhold the tax even though you are liable for it. You may use a Form W-4 to request additional income tax withholding to cover your liability and avoid interest and penalties.

Contact Doeren Mayhew for more information.