International Journal of Project Management Vol. 17, No. 3, pp.

189194, 1999 # 1998 Elsevier Science Ltd and IPMA. All rights reserved Printed in Great Britain 0263-7863/98 $19.00 + 0.00

PII: S0263-7863(98)00027-1

Critical factors aecting the use of alternative dispute resolution processes in construction
Sai-On Cheung
Department of Building and Construction, City University of Hong Kong 83, Tat Chee Avenue, Kowloon, Hong Kong

The use of Alternative Dispute Resolution (ADR) techniques in construction have gained great momentum in the public sector during recent years in Hong Kong. The Hong Kong Government has initiated the inclusion of ADR methods as an integral part of the dispute resolution procedure in the standard forms of contracts for use in Government projects. However, the use of ADR in the private sector has not been apparent, probably due to lack of experience and knowledge. This paper discusses the philosophies behind ADR and reports on an evaluative study on the critical attributes of ADR techniques. Two evaluation methods, scale rating and percentage rating, were employed to establish attribute importance rankings through soliciting views from practitioners with ADR experience. The attributes were then grouped into factors as extracted from Factor Analysis. The rankings of the factors so obtained from the two evaluative methods match well. The study reveals that users of dispute resolution processes are pragmatic and consider obtaining benets as the most critical factor aecting the use of ADR in the construction industry in Hong Kong. Such benets include cost minimisation and relationship preservation. It is also suggested that if ADR is to sustain its growth in use, these processes must facilitate a speedy resolution. # 1998 Elsevier Science Ltd and IPMA. All rights reserved
Keywords: Alternative dispute resolution, critical attributes, benets, speedy resolution

Introduction
In todays complex construction projects, resolving dispute has become an inevitable part of a project manager's work. This includes a wide variety of activities ranging from the selection of a dispute resolution process to the participation in the actual negotiation. An understanding of the various forms of dispute resolution processes and their critical factors will no doubt be invaluable to project managers in handling disputes. Formalised dispute resolution techniques like arbitration and litigation have been well developed for the resolution of construction disputes. However, the lengthy process and the high cost involved have called for alternatives. These alternatives are characterised by the exibility allowed. Collectively, these processes are called Alternative Dispute Resolution (ADR). The use of ADR in the construction industry in Hong Kong is still embryonic. In the public sector, it was in the early 90's that the Hong Kong Government incorporated mediation as an integral part of the dispute resolution clause in all the standard forms of contracts for use in Government projects. In the private sector, arbitration remains the prevailing dispute resolution method. It has been suggested that resistance to

change is the major obstacle to the implementation of ADR in construction. Lack of knowledge and experience underpin such resistance.

Construction dispute resolution techniques

The stair-step chart of Figure 1 depicts the dispute resolution methods currently commonly used in the construction industry. Most of these are private except arbitration and litigation that are statutory controlled. The rising steps in the chart intimate the escalating levels in hostility and cost associated with the various forms of dispute resolution. The hierarchy starts with the prevention techniques. The use of prevention techniques aims at creating teamwork and harmony, thereby preventing dispute from arising. Equitable risk sharing and incentive for cooperation are usually initiated by clients, whereas the success of partnering relies on contributions from all parties involved in the construction process. It has been suggested that where long-term relationship is important to the contracting parties, prevention techniques should be adopted. Prevention techniques do not guarantee total dispute elimination. Problems cropping up during construction still need to be resolved. Resolving construction pro189

Critical factors aecting the use of alternative dispute resolution processes in construction: S.O. Cheung

Formalised disputes resolution processes

Construction ventures are characterised by a high degree of uncertainty and complexity. Drafting of construction contract documentation is no easy task and typically involves the inclusion of provisions for anticipatory contingencies. However, complete visualisation of all eventualities is almost impossible. Construction disputes often arise over such unanticipated happenings. Whilst formalised dispute resolution processes such as arbitration and litigation are useful in vindicating right and wrong, however, this may not be the real desire of the disputants. In this context, a rationalised dispute resolution process that meets the real expectations of the dispute resolution users would gain wide acceptance. Alternative dispute resolution techniques have been introduced to meet this need.
Figure 1 Construction Dispute Resolution Steps (Adapted from Groton1)

blems typically start with negotiation between the disputants. In negotiation, the parties have absolute freedom with respect to the form, process and type of agreement. Negotiating construction problems demand cooperative eort from the disputants. If negotiation fails, the disputants may choose to seek assistance from a neutral third party. There are two possible formats, the standing neutral and nonbinding resolution. The standing neutral concept involves the participation of a neutral person adjunct to the construction phase of a project, solving problems at the source. This method is relatively inexpensive because problems are addressed relatively informally and while facts are fresh. Dispute review boards and dispute resolution advisors have been used for this purpose. Alternative Dispute Resolution techniques such as mediation, mini-trials and adjudication are typical examples of non-binding resolution. These are employed after a problem has become fully developed into a dispute. These processes require more development of historical facts and greater preparation. Beyond this stage, positions become more polarised and costs to both parties begin to mount. If the dispute is not resolved amicably through ADR procedures, the next step is to refer the dispute to a third party for a binding decision. This, typically, is a giant step, involving formal identication of opposing positions and issues. These require considerable preparation by the parties, typically with the assistance of lawyers, consultants and expert witnesses. This will be a case for arbitration, a proceeding before a private judge, or the even more public and expensive step of litigation. Arbitration is by far the most commonly used method to resolve construction disputes. Most construction contracts contain arbitration clauses requiring the parties to refer any dispute to arbitration. At the top end of the stair-step chart as seen in Figure 1 is litigation. Litigation is a rigidly regulated process, the process is subject to the rules and procedures set out by the court. By adopting the litigation route, the parties surrender their control over the process and the outcome will be imposed by a third party. 190

Alternative dispute resolution

Alternative dispute resolutions arose in the last two decades as a response to the high cost and lengthy process associated with arbitration and litigation. Both methods involve the application of strict procedural rules and the involvement of the legal professions. ADR techniques however do not require the involvement of the legal profession. Tyrril2 provides a comprehensive list of the alternative dispute resolution methods available for use in the construction industry in Australia. These include expedited arbitration, S27 conferences conducted under the Commercial Arbitration Act; structured negotiation; conciliation; mediation; non-binding expert appraisal; expert determination; senior executive appraisal; mini-trial; dispute board of review. Although dissimilar in the details, these methods do exhibit a common theme: advocating a problem-solving approach and break out of the embrace of the legal profession and the adversarial and confrontational approach. It is believed that arbitration and litigation tend to generate strong emotions and drive out rational discussion, thus preventing amicable resolution. Although there exists a wide range of ADR techniques, however, the common forms used in the construction industry in Hong Kong include mediation, dispute resolution advisor and adjudication. Many writers have oered denitions of ADR.38 In this study ADR is taken as those resolution methods other than negotiation, arbitration and litigation. Mediation and conciliation will also be treated as synonymous. Conciliation and Mediation are very similar both in nature and in process. Distinction has been placed on the degree of participation by the neutral person. However, it has been suggested that the distinction between conciliation and mediation by active/passive involvement is not useful. Conciliation seems to be the preferred choice in international and European usage; in North America and Australia mediation is pre-eminent.9 In Hong Kong mediation is the favoured choice. The advantages of ADR processes can be summarised in three contexts; cost, relation and exibility.3 In terms of cost, the use of ADR will save cost in legal fees and also management resources. ADR is also considered as a way to avoid bitter feeling that may result

Critical factors aecting the use of alternative dispute resolution processes in construction: S.O. Cheung

from the adversarial process such as arbitration and litigation. The third advantage is the exibility allowed in ADR processes. The procedures to be used in an ADR process can be tailored to suit the parties' requirements. In particular, the processes should be designed to enhance ecient communication8, 10 The use of ADR would increase the probability of achieving a `win/win' result for all the parties involved and the advantage of having access to an expert skilled in all aspects of ADR to develop innovative techniques and solutions for dispute resolution.11 The use of ADR will not be successful unless certain prerequisites are understood and adopted by the users. According to Pengilley11 the philosophical prerequisites to a successful use of ADR are: . All ADR is compromise. . ADR must involve a "win/win" solution to the problem (actual or perceived). . Parties must be realistically aware that ADR is the Best Alternative to Negotiated Agreement (BATNA). . There must be realistic company administrative procedures to encourage ADR as company policy. In support of the above, The Senate Standing Committee on Legal and Constitutional Aairs in Australia12 points out that an ideal dispute resolution mechanism should contain, inter alia, the above requirements. The No Dispute document13 further adds that ADR would not be successful if the parties did not have mutual respect and understanding between the parties. In a similar context, ADR will not bring the desired outcome if either side did not have the genuine desire to resolve the dispute by the simple method. It must also be realised that ADR processes are not always the preferred mode of dispute resolution. Bevan14 expresses his reservation in the use of mediation under circumstances where there is a wide power disparity between the parties. Pengilley11 opines that some types of dispute are better handled in the court system: . Cases where the purpose of the dispute resolution is to establish a societal norm or legal precedent. . Some issues will commend themselves for judicial decision when at least one of the disputants does not want to take the responsibility for any ultimate decision. . Only courts can provide ocial recognition of some events, for example, divorce and bankruptcy. . ADR will be inappropriate where one party does not want a settlement. Personality factor can be a reason. It may also be in the commercial interests of a party to delay a hearing. . In some cases, there simply is no adjudicator other than a court which has the authority to decide the issue and whose decision will be accepted. Not all the above are directly applicable to the construction industry. However, if the matter in dispute is about a point of law and legal precedent is sought, then ADR would not be the appropriate method. Obviously, if the disputing parties are not willing to settle, going through a ADR process would just be a waste of time.

The study
The promoters of ADR advocate the use of a problem-solving approach to resolve construction dispute rather than the adversarial point scoring approach as exhibited in arbitration and litigation. Furthermore, ADR, by its nature, allows the disputants exibility to exercise control over the resolution process through a tailor design. One who is left with this design task would nd a knowledge of dispute process users' real concern of immense value. This investigation seeks to identify the critical attributes of ADR processes from the perspective of the users. ADR facilitators will nd the result of the study of great value for their formulation of strategies to bring out the best result. The study also serves the purpose of providing empirical support to the advantages purported by ADR promoters. In these contexts, twelve ADR attributes were to be evaluated: . . . . . . . . . . . . Bindingness of the decision (Bindingness); The cost involved (Economy); Condentiality of the process (Condentiality); The parties' ability to control over the proceeding (Control); Obtaining creative remedies (Remedy); Enforceability of the decision (Enforceability); Obtaining fairness (Fairness); Flexibility of the proceeding (Flexibility); Privacy of the proceeding (Privacy); The duration of the proceeding (Speed); Preservation of relationship (Relation); The width of the remedy (Remedy).

These attributes are fairly self-explanatory and the name of the variables used in the Factor Analysis is shown in bracket. The respondents were carefully selected and include clients, consultants and contracting organisations. In addition, the selected organisations all had involved in projects employing conditions of contract with ADR provision. A sample of 100 organisations was selected and subsequently approached. Fifty-three responding organisations participated in the evaluation study. The 53% return rate is considered reasonably good in this type of study. The return rate of similar study done in the US was 10.22%7 and in Singapore was 46.22%.15 The composition of the respondents by organisation type is shown in Table 1.

Importance rankings of ADR attributes

In this study, two methods, scale rating and percentage rating, were employed to obtain the importance rankings of the twelve selected attributes of ADR processes. In the rst method, the respondents were to rate each attribute on a 5-point scale (not important to very important). The means of the scale ratings were calculated and used as the basis for priority ranking. If two or more attributes happened to have the same mean rating score, the one with the lowest standard
Table 1 Composition of respondents Organisation type Developer Consultant Contracting Number 6 20 27 Percentage 11.3 37.8 50.9

191

Critical factors aecting the use of alternative dispute resolution processes in construction: S.O. Cheung
Table 2 ADR critical attributesranking by scale rating Attributes Speed Economy Relation Flexibility Condentiality Enforceability Privacy Fairness Bindingness Control Remedy Creative Mean Score 4.226 4.094 3.981 3.717 3.660 3.491 3.415 3.415 3.340 3.321 3.057 3.019 Std. Dev. 0.800 0.925 0.747 0.907 1.055 0.993 0.949 0.989 1.192 1.033 0.949 0.990 Ranking 1 2 3 4 5 6 7 8 9 10 11 12 Table 4 Comparison of rankings Attributes Speed Economy Relation Flexibility Condentiality Enforceability Privacy Fairness Bindingness Control Remedy Creative Priority by scale ranking 1 2 3 4 5 6 7 8 9 10 11 12 Priority by percentage ranking 1 2 3 8 6 4 5 12 7 10 9 11

deviation will be assigned the highest importance ranking among these attributes. Table 2 gives the result of the importance ranking based on the mean scale rating scores. In the second method, the respondents were asked to give a percentage rating against the twelve attributes, with the condition that the total of all percentage ratings assigned should add up to 100. The means of the percentage rating were compared and the ranking so obtained is shown in Table 3. The rst method tends to give results that cluster around the scale rating range of 3 to 4. The second method provides more rigor as it requires the respondents to assess the relative importance of the attributes and should give a better indication of the priority. The two sets of importance rankings were compared for any inconsistency. This process adds reliability of the ranking result. Table 4 gives the comparison of the ranking obtained from the two methods: The two rating methods give the following results:
(i) Consistent ranking: Four attributes including Speed, Economy, Relation and Control. (ii) Inconsistent ranking: The other eight attributes.

Principal Component Factor Analysis

Principal Component Factor analysis was performed on the set of data obtained from scale rating to identify a relative small number of factors that can be used to represent relationships among sets of many interrelated attributes. Table 5 shows the attribute correlation matrix. The KaiserMeyerOlkin Measure of Sampling Adequacy is 0.52745 which is greater than 0.5, hence considered acceptable. The Bartlett Test of Spericity is 227.4447 with signicance 0.0000. These indicate that the sample data is adequate for the purpose of carrying out Factor Analysis. The Principal Component Factor Analysis was performed by SPSS program. Five factors with Eigenvalue greater than 1 were extracted. Factor Matrix after VARIMAX rotation is presented in Table 6. Table 7 gives the nal statistics of the Principal Component Factor Analysis. As indicated in Table 7, the factors extracted also account for 77.5% of the variance.

Interpretation of the factors

The three attributes as extracted signicant for factor 1 are Bindingness, Enforceability and Fairness. All these three attributes relate to the settlement agreement as may be obtained in an ADR process. Factor 2 consists of the attributes; Economy and Preservation of Relationship. These address the benets that may be resulted from a successful ADR process. Factor 3 includes the attributes: Condentiality and Privacy. It is apparent that these attributes relate to the nature of the proceeding that has been specically designed to avoid dispute becoming known to the public. Width of remedy and creative solution are the attributes extracted for Factor 4. Both attributes concern the outcome of a dispute resolution process. Factor 5 consists of three attributes; Flexibility, Control and Speed. These attributes critically describe the process of the proceeding. In sum, the 5 factors extracted can be described as follows:
Factor 1: Factor 2: Factor 3: Factor 4: Factor 5: Settlement Agreement Benet Nature of Proceeding Outcome of the Process Process of Proceeding

It can also be noted for the same attribute, the two ranking positions are not too apart. This suggests that interpretation might be enhanced if the attributes are grouped into factors. To achieve this objective, Principal Component Factor Analysis was carried out to investigate any underlying construct of the attributes.
Table 3 ADR critical attributesranking by percentage rating Attributes Speed Economy Relation Flexibility Condentiality Enforceability Privacy Fairness Bindingness Control Remedy Creative Mean percentage rating 20.71 19.09 12.25 3.67 7.76 10.23 8.07 2.35 5.45 3.54 3.55 3.33 Standard Deviation 11.8 4.71 9.12 3.96 5.21 2.17 3.08 3.14 4.97 1.94 3.38 3.12 Priority 1 2 3 8 6 4 5 12 7 10 9 11

192

Critical factors aecting the use of alternative dispute resolution processes in construction: S.O. Cheung

Remedy

1.00000

Attribute ranking revisitedfactor ranking

After the attributes are grouped into factors as described, Factor Scale Rating Scores and Factor Percentage Rating Scores were computed by the following formulae:
n ASRij

Relation

1.00000 0.19155

Fi SR Fi PR Where

j1

n
n APRij j1

1.00000 0.23268 0.16010

Speed

Flexibility

1.00000 0.11207 0.40814 0.30445 0.06367

Fi(SR) is the Factor Score based on Scale Rating. Fi(PR) is the Factor Score based on Percentage Rating. A(SR)ij is the Mean Scale Rating of the j-th Attribute of Factor i. A(PR)ij is the Mean Percentage Rating of the j-th Attribute of Factor i. For example
KaiserMeyerOlkin Measure of Sampling Adequacy = 0.52745Bartlett Test of Spericity = 227.44470, Signicance = 0.00000.

1.00000 0.24349 -0.01523 0.17937

Privacy

Fairness

1.00000 0.34015 0.26354 0.02580 0.06553 0.10149

F1(SR) = (3.34 + 3.491 + 3.415) 6 3 = 3.41 F1(PR) =5.45 + 10.23 + 2.35 = 18.03 The Factor Scale Rating and the Factor Percentage Rating Scores are listed in Table 8. After the attributes were grouped into factors. It can be observed that Factors 2, 4 and 5 have the same ranking under the two evaluation methods. Factors 1 and 3, though reverse in ranking under the two methods, both lie in the middle range of the ranking scale. In addition, their respective scale and percentage ratings are close to each other. This suggests a greater consistency in rankings for the factors. The factor ranking scores indicate that the users are most concerned with the benets that can be obtained by adopting an ADR method to resolve their dispute. These benets can be tangible such as cost minimisation or intangible as in the case of preserving relationship. The second most important factor relates to the process of the proceeding. Obtaining a settlement within the shortest time is generally what the disputing parties sought after. The exibility allowed and the high degree of control by the parties are essential to a speedy settlement. The factors lying in the middle range of importance are those relating to the private nature of the proceeding and the quality of the settlement. In the percentage rating method, the quality of the settlement ranks higher than the privacy factor. As enforceability of the decision is considered critical in many practitioner's opinions,16 it would appear the percentage rating gives a better reection of the users' view. Width of remedy and creative solution, according to this study, are ranked as factors of lesser importance. It suggests that no other remedy can have the equal status as monetary compensation.

Enforceability

Condentiality

Economy

Table 5 Attribute correlation matrix

Binding Economy Condentiality Control Creative Enforceability Fairness Flexibility Privacy Speed Relation Remedy

Binding 1.00000 0.14474 0.27696 0.33133 -0.05441 0.66901 0.41682 0.01947 0.18804 -0.02169 0.05056 -0.17032

1.00000 0.07284 -0.19310 0.08197 -0.03041 0.02024 0.23870 0.08246 0.38621 0.67072 0.05950

1.00000 0.01364 -0.15942 0.14377 0.20104 -0.06220 0.72740 0.16120 -0.17920 0.09639

1.00000 -0.04361 0.21855 0.23408 0.24237 0.18625 0.09654 -0.14155 -0.29336

Control

1.00000 -0.10742 0.07334 0.11316 -0.10634 0.21299 0.28666 0.67422

Creative

1.00000 0.35112 -0.03507 0.18034 -0.09411 0.01273 -0.11169

Concluding remarks
Dispute resolution has been identied as one of the key areas that require improvement13 in the construction industry. ADR techniques have been advocated 193

Critical factors aecting the use of alternative dispute resolution processes in construction: S.O. Cheung
Table 6 Factor matrix after VARIMAX rotation Binding Enforceability Fairness Economy Relation Condentiality Privacy Remedy Creative Flexibility Control Speed Factor 1 0.87032 0.85478 0.61532 0.01931 0.08821 0.14589 0.14712 -0.09824 -0.00446 0.01636 0.35318 -0.21157 Factor 2 0.10691 0.00478 -0.05474 0.92274 0.83793 -0.03003 0.00076 0.07300 0.09568 0.24348 -0.34941 0.38814 Factor 3 0.13572 0.06311 0.16089 0.10293 -0.117150 0.92096 0.88427 0.18964 -0.17581 -0.02302 -0.02905 0.31447 Factor 4 -0.12786 -0.08229 0.21312 -0.03459 0.20592 -0.03893 0.04106 0.91513 0.87922 0.08497 -0.22052 0.12139 Factor 5 0.02347 -0.09439 0.35672 0.07467 0.12189 -0.07342 0.15859 -0.07392 0.12470 0.81700 0.63890 0.57167

Table 7 Final statistics of principal component Factor analysis Percentage of variance 21.7 20.4 13.3 11.6 10.6 Cumulative percentage of variance 21.7 42.1 55.4 67.0 77.5

Factor 1 2 3 4 5

Eigenvalue 2.60440 2.44443 1.59957 1.38887 1.26855

Table 8 Ranking by Factor scores Factor Scale rating 3.41 4.04 3.64 3.04 3.76 Factor Percentage Ranking Rating Ranking 4 1 3 5 2 18.03 31.34 15.83 6.88 27.92 3 1 4 5 2

Factor 1 2 3 4 5

Description Settlement Agreement Benet Nature of proceeding Outcome Process of proceeding

for use in lieu of arbitration and litigation. Lack of experience in these processes has hindered the acceptance of the potential users. Furthermore, as ADR is not part of the mainstream legal system, proposed settlement arrangement can be ignored if no formal agreement concluded to accord the binding eect. Aboveall, new method will only be widely accepted for use unless it meet the needs of the users. This empirical study conrms that in selecting a process of dispute resolution, the disputants are mostly concerned with the benets, be it actual or perceived, that may be derived. Such benets include speedy resolution, low cost and preservation of relationship. The two rating methods provide compatible results after the attributes are grouped into factors. For ADR system designers, process should be designed and developed to enhance the achievement of such benets.

3. Naughton, P., Alternate forms of dispute resolutiontheir strengths and weaknesses. Construction Law Journal, 1990, 6(3), 195206. 4. Hanbury, W., Alternative dispute resolutionthe Australian model. Solicitors Journal, 1992, April, 334335. 5. Goldberg, S. B., Sander, F. E. A. and Rogers, N. H., Dispute Resolution, 2nd Edn, Little Brown and Company, USA, 1992. 6. Pears, G., Beyond DisputeAlternative Dispute Resolution in Australia. Corporate Impacts Publications, Australia, 1989. 7. Stipanowich, T. J. and Henderson, D. A., Settling Construction Disputes by Mediation, Mini-trial and other processthe ABA Forum Survey. Construction Lawyer, 1992, pp. 610. 8. Kwayke, A. A., Alternative Dispute Resolution in Construction. Chartered Institute of Building. Occasional Paper no. 21, UK, 1993. 9. Street, L., The Language of ADRits utility in resolving International Commercial Disputesthe role of the Mediator. Arbitration, 1992, 58(2), 1722. 10. Mackie, K. J., Alternative Dispute Resolution and Construction Disputes. Proceedings of the rst International Construction Conict Management and Resolution Conference, University of Manchester Institute of Science and Technology, UK, 1992, pp. 302305. 11. Pengilley, W., Alternative dispute resolution: the philosophy and the need. Australian Dispute Resolution Journal, 1990, 1(2), 8195. 12. Senate Standing Committee on Legal and Constitutional Aairs, Method of Dispute Resolution, Cost of Legal Services and Litigation. Discussion Paper No. 4, Australia, 1991. 13. National Public Works Conference/National Building and Construction Council. No Dispute: Strategies for Improvement in the Australian Building and Construction Industry. Australia, 1990. 14. Bevan, A. H., Alternative Dispute Resolution: a Lawyer's guide to Mediation and other forms of Dispute Resolution. Sweet and Maxwell, 1992. 15. Lim, L. Y., Alternative Dispute Resolution in Singapore's Construction Industry. Australian Dispute Resolution Journal, 1993, 4(2), 114124. 16. Cheung, S. O., A Study of the Practice of Resolving Disputes in the Construction Industry in Hong Kong, Research Report BC/92/09, Department of Building and Construction. City Polytechnic of Hong Kong, 1992. Sai-On CHEUNG is an Assistant Professor of the Department of Building and Construction, City University of Hong Kong, where his teaching and research interests include construction dispute resolution, construction law and management.

References
1. Groton, J. P., Supplementary to Alternative Dispute Resolution in the Construction Industry, Wiley Law Publications, USA, 1992. 2. Tyrril, J., Construction industry dispute resolutiona brief overview. Australian Dispute Resolution Journal, 1992, 3(3), 167183.

194