The Potential Use of Insurance As a Risk Management Tool for ADR Implementation in Construction Disputes

Alternative dispute resolution (ADR) techniques are being widely adopted in construction projects to help handle disputes in an effective way. However, there are costs related to ADR implementation as it requires expenditures to cover the expenses incurred by the owner's/contractor's employees and third party neutrals. The exact amount of these costs won't be known until the actual occurrence of disputes during the construction phase. Rather than setting aside a certain percentage of contingency fee from the beginning of a project to deal with potential disputes, pre-arranging ADR implementation cost through a fixed cost investment in an insurance-like product may relieve project participants from constant anxiety over what will happen in the future, enable more efficient use of funds, and compensate unknown ADR implementation cost that may be incurred (perhaps up to a specified limit). The fundamental idea of this paper is to compare the known cost of purchasing insurance for ADR implementation versus the unknown cost of bearing the risk of uncertain numbers and costs of disputes. Mathematical calculations are presented in an illustrative construction project to perform the decision making process of risk management, and to show project participants the trade-offs of investing a certain amount of premium in exchange for compensation from the insurance company in the uncertain event of an unknown ADR implementation cost that may be incurred during the construction phase.