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Are you in an adversarial industry? Insights for contract negotiators and managers.

April 23, 2014

Given their business significance, it is interesting how little research has been done on claims and disputes. They impact reputation, trust and bottom-line results, but most organizations have very little insight to the frequency, causes or costs of claims and disputes. As a result, little is done to reduce or eliminate them.

Going beyond this internal perspective, it would surely be interesting to have information regarding potential business partners. How many of their contracts generate claims, how frequently do they encounter disputes? And might this knowledge affect the way we approach or handle entire industries?

Followers of IACCM will be aware of the work that has been done to identify the most frequent causes of claims and disputes. Others – such as EC Harris – have undertaken similar studies for specific industries. This year, as part of its annual study of the Most Frequently Negotiated Terms & Conditions, IACCM included a range of questions about claims and disputes. Some interesting data has emerged:

 

  • On average, approximately 9% of contracts experience a significant claim or dispute (formal disputes are clearly a very small proportion of this – data suggests less than 0.1%)
  • Engineering and Construction is confirmed as the sector with the greatest frequency of claims and disputes, with 21% of contracts affected. Interestingly, with claims procedures so firmly embedded into industry culture, other risk terms appear to attract less attention. For example, Liabilities and Indemnities clauses are less negotiated in this industry than in others.
  • The industry with least disputes is healthcare/pharmaceuticals, recording just 7% of contracts.
  • Overall, the data offers a snapshot of the views and experiences of contract management professionals. However, we must recognize that in many cases it is based on personal experience since few organizations maintain a central record of claims and disputes. In other cases, it may also be influenced by perceptions of what constitutes ‘a claim’. For example, the retail sector emerges below the average, but this may be because ‘penalty clauses’ are so embedded in the industry culture that they are not seen as ‘claims’. Equally, the percentages for the software industry and services / outsourcing appear relatively low compared with others, but the use of service level credits may be so endemic that it is not seen as representing a significant claim – or alternatively, the frequency may be high, but individual monetary value may be low, so again it would not be classified as ‘significant’.

Overall, the top 5 industries for volume of claims and disputes are:

  1.  Engineering and Construction – 20.7% of contracts
  2. Telecommunications – 13.6%
  3. Automotive – 13%
  4. Transportation / Logistics – 12.6%
  5. Oil, Gas, Minerals & Utilities – 12.5%

And the bottom 5 (those experiencing least claims and disputes) are:

  1.  Healthcare / Pharmaceuticals – 7.0%
  2. Banking / Insurance / Finance – 7.5%
  3. Technology / Software – 7.6%
  4. Consumer / Retail – 8.5%
  5. Manufacturing – 8.9%

 

The data for this report came from the 2013/14 IACCM study on the Most Negotiated Terms and Conditions, conducted in the period December 2013 – March 2014. Data was provided by contract management, legal and procurement professionals representing 1,786 organizations from around the world.

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