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Analytical Framework for the Choice of Dispute Resolution Methods in

International Construction Projects Based on Risk Factors

Article  in  Journal of Legal Affairs and Dispute Resolution in Engineering and Construction · May 2011
DOI: 10.1061/(ASCE)LA.1943-4170.0000067

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 Scholarly Paper

Analytical Framework for the Choice of Dispute Resolution

Methods in International Construction Projects
Based on Risk Factors
Ghada M. Gad1; Satyanarayana N. Kalidindi, Ph.D.2; Jennifer Shane, Ph.D., M.ASCE3;
and Kelly Strong, Ph.D., M.ASCE4
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Abstract: International construction projects provide opportunities for developing countries to advance in the global economy and for
international construction and design firms to increase their profit and market share. Despite the attractive opportunities that international
construction offers, international contractors are faced with many challenges and difficulties when moving into international markets. Many
risks are associated with international construction, whether external or project-specific risks. Those risks affect how contract clauses are
written, including the dispute resolution clause. This paper discusses the different dispute resolution methods employed in international
construction contracts and develops an analytical framework (DRM-Risk matrix) suggesting the use of specific dispute resolution methods
depending on the risks expected in the project. The matrix may eventually help international contractors in the selection of the appropriate
dispute resolution method during contract formation depending on the risks involved in a project. DOI: 10.1061/(ASCE)LA.1943-4170
.0000067. © 2011 American Society of Civil Engineers.
CE Database subject headings: Dispute resolution; Risk management; Contract management; International factors.
Author keywords: Dispute resolution; Risk management; Contract management; International.

Introduction firms contracting with a single company for global architecture,

“Globalization” is defined as a situation in which political borders
become increasingly more irrelevant, economic interdependencies
are increased, and national differences become more obvious owing
to dissimilarities in societal cultures and central issues of business
(Ngowi et al. 2005). Globalization first appeared in the construction
industry with the emergence of international contracting resulting
from facilitated movement of goods, services, and labor across
borders and communication advancements. Contractors entered
the international market in many forms. Most remarkable was
the oil-derived economic boom in the Middle East and North Africa
that created a huge construction demand. Foreign firms with
high levels of expertise were introduced to these countries to per-
form large, complex jobs. In addition, the emergence of multilateral
agreements among countries (e.g., NAFTA and the EU) and
companies (such as joint ventures and alliances) enabled firms
to perform business in one another’s countries. Multinational
1
Ph.D. Student, Dept. of Civil, Construction, and Environmental
Engineering, Iowa State Univ., 456 Town Engineering, Ames, IA 50011
(corresponding author). E-mail: gmgad@iastate.edu
2
Professor, Dept. of Civil Engineering, Indian Institute of Technology,
Madras, Chennai, India. E-mail: satyakn@iitm.ac.in
3
Assistant Professor, Dept. of Civil, Construction, and Environmental
Engineering, Iowa State Univ., 498 Town Engineering, Ames, IA 50011.
E-mail: jsshane@iastate.edu
4 levels (Dikmen and Birgonul 2006). For a company to enter a for-
Associate Professor, Dept. of Civil, Construction, and Environmental
Engineering, Iowa State Univ., 54 Town Engineering, Ames, IA 50011.
E-mail: kstrong@iastate.edu
Note. This manuscript was submitted on July 22, 2010; approved on
January 14, 2011; published online on January 18, 2011. Discussion period
open until October 1, 2011; separate discussions must be submitted for
individual papers. This paper is part of the Journal of Legal Affairs
and Dispute Resolution in Engineering and Construction, Vol. 3,
No. 2, May 1, 2011. ©ASCE, ISSN 1943-4162/2011/2-79–85/$25.00.
engineering, and contracting (AEC) services also offered a platform
for international firms to operate in foreign countries (Ngowi
et al. 2005).
In general, an international construction company is defined as a
company that resides in one country and performs work in another
country to diversify and expand its market shares. Most of these
companies are from advanced industrialized countries and perform
work in newly industrialized or less developed countries (Dikmen
and Birgonul 2006; Ngowi et al. 2005). This provides the oppor-
tunity for emerging countries to access the most up-to-date exper-
tise and knowledge in a cost effective manner (Chan and Suen
2005). International construction work includes design consult-
ancy, contracting, equipment supply, construction products and
materials, and facility management. The annual volume of the
global construction market is greater than US$3,000 billion
(Dikmen and Birgonul 2006).
Although many attractive opportunities are available in the
international market, international contractors are faced with many
challenges and difficulties associated with moving into those
markets. International construction involves all the uncertainties
common to domestic construction projects and risks specific to
international transactions. Many risks associated with international
construction arise from differences in culture, economic conditions,
specifications or standards, legal frameworks, and productivity
eign market, evaluation of all aspects affecting the project should be
considered (Chan and Tse 2003). Many studies have been per-
formed to identify and measure international risks and to suggest
mitigation measures. Some of these studies examined indicators of
the market/project attractiveness such as availability of funds, mar-
ket volume, economic prosperity, and country risk rating (Dikmen
and Birgonul 2004). Other researchers attempted to develop

JOURNAL OF LEGAL AFFAIRS AND DISPUTE RESOLUTION IN ENGINEERING AND CONSTRUCTION © ASCE / MAY 2011 / 79

J. Leg. Aff. Dispute Resolut. Eng. Constr., 2011, 3(2): 79-85

 decision support tools aimed at facilitating the analysis of such a
critical decision (Dikmen and Birgonul 2006).
Once international firms make the decision to venture into
international contracting, they must be aware that the international
contracts they will sign may be similar to their own domestic con-
tracts, but will still include some major additional or modified
clauses that address international issues. One of these very critical
clauses is the Arbitration/Dispute Resolution clause. In most con-
tracts, arbitration is used as a standard dispute resolution method
(DRM) with minimum thought placed on how the dispute resolu-
tion process can be designed to control or lessen both the risk of
claims and the cost of disputes that may arise (Gebken and Gibson
2006; Seifert 2005). Contractual disputes are time consuming, ex-
pensive, and unpleasant. However, they do occur from time to time,
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employed in international construction contracts. Risk factors
involved with the methods studied are determined, and an analyti-
cal framework (DRM-Risk matrix) is developed, which suggests
the use of specific dispute resolution methods depending on the
risk factors involved in the project. The presented matrix may even-
tually help in developing a model to aid international contractors in
the selection of the appropriate DRM during contract formation.
Construction Disputes
International projects provide opportunities for developing coun-
tries to gain access to construction expertise, efficiently develop
infrastructure, and advance the quality of life for citizens. These

and the importance of bringing the dispute to a conclusion as effi-
ciently and cost effectively as possible cannot be overstated. Many
research studies described the different DRMs and their character-
istics (Chan and Suen 2005; Yates and Smith 2007), whereas others
focused on risk management in projects (Baloi and Price 2003;
Wang et al. 2004).
A study conducted by Gebken and Gibson (2006) proposed a
dispute management system following the concepts of the risk
management process (risk identification, assessment, and control)
as shown in Fig. 1. The system focused on dispute identification,
assessment, and control. Dispute assessment was further explored
to measure the disputes’ impact by quantifying the dispute fre-
quency and severity. The different DRMs were quantified by trans-
actional cost to determine if different DRMs have a significant
impact on the resolution costs. Accordingly, such quantification
helps parties choose the appropriate DRM depending on its equiv-
alent transactional costs (Gebken and Gibson 2006). On the basis of
this study, project parties can review and tailor the contracts in each
project depending on the dispute management system.
However, the choice of the DRM in relation to the risk factors
involved in international projects is not addressed in existing liter-
ature. Thus, identifying risks associated with international projects
that may be mitigated by choosing an appropriate DRM takes on
greater importance. This paper discusses the different DRMs
projects also allow international firms to increase their profit
and market share. However, firms should be able to understand
and deal with differences in cultures, values, traditions, and
languages of the other party. They should know whether the legal
system they will be operating under is similar or different from their
home country (Yates and Smith 2007). Such comprehension will
affect the success of their businesses (Chan et al. 2006).
Different contractual factors, cultural backgrounds, legal and
economic factors, languages, technical standards, procedures, cur-
rencies, and trade customs may make international projects more
vulnerable to disputes. International construction disputes represent
a significant number of disputes arbitrated in the international com-
mercial arbitration system, accounting for almost 20% of all dis-
putes referred to the International Chamber of Commerce (ICC)
each year (Seifert 2005). If not properly managed, disputes may
lead to project delays, reduced team spirit, increased project costs,
and damaged business relationships (Chan and Suen 2005).
Disputes in international construction typically occur for rea-
sons such as parties’ lack of knowledge and experience in construc-
tion law (such as conflicts of laws and jurisdictional problems),
differing project management practices (local versus foreign),
and differences in parties’ expectations of cost, duration, scope,
and risk. Many studies confirmed that the differences in those fac-
tors have an effect on the causation and resolution of construction

Dispute Resolution Management System

(Risk Management)

Dispute Identification Dispute Assessment Dispute Control

(Risk Identification) (Risk Assessment) (Risk Control)

• Causes of Conflict • Dispute Frequency • ADR

Differing Conditions Likelihood of Event Mediation
Change Orders Dispute Potential Index (DPI) Arbitration
Delay Company History Dispute Review Board
Poor Design Market Environment Mini-Trial
• Methods of Identification • Methods of Identification • Other Strategies
Prequalification Direct Costs Partnering
Dispute History Legal Fees Alliance Contracting
Safety Record Expert Witnesses Design-Build
Court/Other Fees Equitable Risk Allocation
Indirect Costs Preproject Planning
Management Time
Staff Time
In-house Counsel
Hidden Costs
Business Relationships
Inefficiencies
Delay
Loss of Quality

Fig. 1. Application of risk management theory to dispute resolution management (Gebken and Gibson 2006, ASCE)

80 / JOURNAL OF LEGAL AFFAIRS AND DISPUTE RESOLUTION IN ENGINEERING AND CONSTRUCTION © ASCE / MAY 2011

J. Leg. Aff. Dispute Resolut. Eng. Constr., 2011, 3(2): 79-85

 disputes (Chan et al. 2006; Chan and Tse 2003). Those factors
generally affect the way the contract is set up and the selection
of the dispute resolution mechanisms. Parties involved are con-
cerned with the clarity of local laws and the interpretation of those
contracts governed by these local laws (Chan and Tse 2003).
Dispute Resolution Methods
In the global arena, many forms of DRMs are adopted, each with its
own particular characteristics (Chan et al. 2006). The types of
DRMs typically used in the industry are similar whether the project
is international or not. However, the choice of which DRM to adopt
for international projects is complicated by cultural, political, and
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economic factors not found in domestic projects. DRMs other than
litigation are referred to as alternative dispute resolution (ADR)
techniques. Because most ADR processes offer disputants the op-
tion to determine the process they will use, the outcomes are usu-
ally more satisfying and easier to comply with. More cooperation
and less competition is involved with ADR processes compared
with litigation. For this reason, ADR helps maintain relationships
between parties, which is considered a key advantage in construc-
tion disputes, as parties continue to interact on ongoing and pos-
sibly future projects after settlement is reached (Cheung 1999;
Layng Ross 2009).
In the context of large international projects, ADR techniques
offer significant advantages to parties of different nationalities. This
is primarily because it allows parties to reach agreement in dispute
settlement taking into account the national and cultural differences
and the conflict of laws or jurisdictional problems (Chan and Tse
2003). According to a study conducted by Brooker and Lavers
(1997), disputing parties tend to favor ADR methods over litigation
for its cost and time efficiency and its lower procedural complexity.
The following sections briefly introduce some of the most com-
monly used forms of ADR in international contracts.
Mediation and Conciliation
Mediation is considered one of the most popular ADR methods
(Kelleher and Walters 2009). It is a voluntary nonbinding process
in which a mediator assists the parties in achieving a negotiated
settlement. The parties retain full control over how their dispute
is to be resolved as the mediator’s role is to help the parties explore
various settlement options. At the end, it is entirely up to the parties
to decide whether any of the options suggested by the mediator will
resolve the dispute (Layng Ross 2009; Kelleher and Walters 2009;
Yates and Smith 2007). The mediation process is strictly confiden-
tial and designed to preserve the relationship among the parties in-
volved (Chan et al. 2006; Yiu and Lai 2009). One of mediation’s
major benefits is that the solution agreed upon may not be in com-
pliance with the respective contractual rights and obligations of the
parties (Layng Ross 2009; Yiu and Lai 2009). Unlike mediation in
which the mediator facilitates communication among the parties
to reach a negotiated settlement, in conciliation, the conciliator
recommends a settlement that the parties may accept or reject
(Layng Ross 2009; Yates and Smith 2007).
Adjudication
In this process, a neutral adjudicator decides on a resolution of a
contractual dispute among the parties within a predetermined time
limit. If stated in the contract, the decision is binding on the parties.
The time limit for the decision is a very distinguishing character-
istic of this process because a fixed time is set during which the
adjudicator should make a decision. However, the parties can still
challenge the decision if they are not satisfied with it and seek a
JOURNAL OF LEGAL AFFAIRS AND DISPUTE RESOLUTION IN ENGINEERING AND CONSTRUCTION © ASCE / MAY 2011 / 81
J. Leg. Aff. Dispute Resolut. Eng. Constr., 2011, 3(2): 79-85
more lengthy thorough procedure. If the decision reached by the
adjudicator is challenged by one of the parties, it is still enforced
but the party for whom the adjudicator ruled in favor controls the
disputed amount of money during the subsequent dispute resolu-
tion procedure. Adjudication thus becomes most appropriate in
cases in which time is of the essence especially in payment
decisions or when work is required to continue while awaiting
the decision of a judge or arbitrator (Layng Ross 2009; Sweet and
Schneier 2009).
Dispute Adjudication Board
The dispute adjudication board (DAB; also known as dispute
resolution board or DRB) was developed by the international con-
struction industry in response to the perceived inadequacy of arbi-
tration to provide an efficient and cost-effective means of dispute
resolution (Seifert 2005). DAB members are a panel of construction
industry experts who work on a particular construction project and
are familiar with the project’s construction contract and progress
(Sweet and Schneier 2009). DABs adjudicate quasi-binding dis-
putes that arise out of the contract, and those are held periodically
to ensure smaller disputes do not negatively affect the project
schedule or budget. By using a DAB, parties also avoid submitting
construction claims (sometimes very technical) to a court and can
instead rely on the board to settle matters in a timely manner. In
international projects, it is most desirable to have DAB members
of the same nationalities as the parties involved. Today, both the
World Bank and the FIDIC (International Federation of Consulting
Engineers) documents have DABs replace arbitration as the pri-
mary form of dispute resolution in construction projects (Seifert
2005). However, the decision issued by a DAB is often advisory
in nature and not binding, thus any of the parties can contest
the decision by employing any other DRM (Yates and Smith 2007).
Arbitration
Arbitration is a nonjudicial international forum to settle disputes
(Yates and Smith 2007), and is an alternative to litigation with prior
contractual agreement of the parties (Kelleher and Walters 2009).
The benefit of arbitration emerges because disputes in the construc-
tion industry often require the decision maker to be well versed in
relevant technical and industry matters and legal issues (Layng
Ross 2009; Yates and Smith 2007). Many arbitration associations
provide lists of arbitrators with construction experience that disput-
ing parties can choose from. A popular arbitration organization is
the International Arbitration Association (Yates and Smith 2007).
Arbitration is a confidential process in comparison to litigation
(Chan and Tse 2003; Layng Ross 2009). The decision reached
is final and binding and is usually enforced through the courts
of any jurisdiction, not necessarily the jurisdiction in which the
arbitration was held. Such characteristics make it considerably
attractive in international disputes (Chan and Tse 2003; Layng Ross
2009; Yates and Smith 2007).
International contracts usually specify the location of the arbi-
tration proceedings (local jurisdictions may vary in regulating the
arbitration process) and the governing language (Yates and Smith
2007). Sometimes the choice of law may also be included within
the arbitration clause. International contracts usually insist on the
use of international arbitration to overcome distrust and anticipated
problems with local laws. Arbitration decisions are enforceable
worldwide under the New York Convention (Sweet and Schneier
2009). However, when arbitration is chosen to resolve disputes, the
process ends with a win-lose situation, i.e., the arbitrators decide
the outcome and the parties lose the power to self-determine the
resolution. Although it still remains the most popular DRM in
international construction contracts, other DRMs are sometimes
 favored by the disputants as arbitration can be overly formalized,
time consuming, and expensive (Seifert 2005).
Expert Determination
In expert determinations, the parties refer the dispute to an expert
(usually chosen by both parties) who has the full authority to make
a decision solely on the expert’s own knowledge and without any of
the parties’ consultation. The contract may dictate the terms of
reference including the procedure to be followed, expert’s power,
duties and liability, and the matters of dispute. The expert’s deci-
sion is usually final and binding. This form is usually chosen in
complex technical issues in which the parties themselves may lack
the technical expertise. It is considered a very inexpensive and
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expeditious form of dispute resolution that requires the parties’
confidence in the expert’s competence (Layng Ross 2009).
Hybrid Methods
Hybrid ADR methods exist in many forms. Mediation-arbitration,
or med-arb, is an ADR method combining both mediation and
arbitration. In this process, the parties start with mediation and then
move to arbitration if no agreement is reached (Sweet and Schneier
2009) or if one or two outstanding issues need to be resolved before
the arbitrator. Another hybrid method is minitrials or summary jury
trials. In a minitrial, a nonbinding trial is held before a three-person
panel (one senior representative selected from each corporation and
a neutral third party, often referred to as the panel’s chair), after
which the senior representative tries to find a resolution with the
help of the mediator. Thus, the parties’ representatives act as jury,
judge, and negotiators. In the summary jury trial, a nonbinding trial
is held before a mock judge and jury, after which the parties nego-
tiate a settlement. This settling helps both parties realize the case’s
weakness and strengths and reach a resolution with no real trial
(Kelleher and Walters 2009).
A study by Chan et al. (2006) compared the different DRMs by
many factors such as cost, speed, and business relationship pres-
ervation. An illustration of the most common dispute resolution
methods and their escalating levels in hostility and cost is shown
in Fig. 2. Those steps usually start with the prevention techniques
that aim primarily to prevent the dispute from occurring either with
risk mitigation measures or by creating a teamwork environment
(Cheung 1999).
After discussion of the most common types of ADR, it becomes
important to determine which ADR process is appropriate when
dealing with different disputes in different situations and projects.
As noted by Marcus (1988), stating the goals and objectives that
may be realized from a particular ADR process helps in the iden-
tification of the appropriate ADR process to use. Characteristics of
the dispute’s language in the contract may be influenced by the
potential risks encountered in the course of the project. Risk factors
involved in international projects determine the disputes’ contract
language and are identified in the next section. A risk matrix is
developed for international projects that address different DRM
options appropriate for different project risk characteristics.
Fig. 2. Construction dispute resolution continuum
82 / JOURNAL OF LEGAL AFFAIRS AND DISPUTE RESOLUTION IN ENGINEERING AND CONSTRUCTION © ASCE / MAY 2011
J. Leg. Aff. Dispute Resolut. Eng. Constr., 2011, 3(2): 79-85
Risks Involved in International Projects
Risk is the possibility that the impacts and interactions of events
may turn out differently than anticipated. Many studies have
addressed the possible risks from international projects that either
stem from country conditions (political and economic risk factors)
or from the project conditions (Dikmen and Birgonul 2004). Every
construction activity on an international construction project in-
volves some kind of risk. The most common approach to risk
analysis follows these steps: risk identification, risk assessment,
and risk response.
A common method in considering the most frequent and severe
risk factors is to classify them according to their sources and by
using a hierarchical structure. Risk in construction projects is
derived from two main sources:
1. Project-specific risks are uncertainties existing in the project
itself and may include the unexpected occurrences during
the construction period that are inherent to the companies in-
volved, or they may be determined by the nature of the project.
They primarily lead to time and cost overruns or shortfalls in
performance parameters of the completed project (Bing et al.
1999; Zhi 1995). The risk factors at the project level are usually
similar for domestic and international projects (Zhi 1995), and
thus only project risks that differ in an international project will
be further discussed in this paper.
2. External risks are factors relating to the national or regional
market or the local construction industry that significantly im-
pacts the project. External risks originate from the competitive
macroenvironment that the project operates within (Bing et al.
1999; Zhi 1995). International projects have more external-risk
uncertainties primarily because of the large size of the projects
and the international issues involved (Zhi 1995). Those risks
are usually unfamiliar to the international contractor compared
with those of the domestic environment (Zhi 1995).
Project-Specific Risks
Project-specific risks include the following:
1. Client related risks may include excessive demands and varia-
tions issued by the owner during the course of the project.
These may significantly affect the project scope leading to
claims that may develop into disputes. Although disputes
are inevitable in any construction project, the complexity of
disputes in an international level increases owing to many dif-
ferences (legal, social, and economic) among the parties.
2. Organizations’ relationship risks may stem from the lack of
communication and poor relationships occurring among par-
ties in a project, such as the consultant or designer, subcontrac-
tors, or suppliers. Such risks are amplified at an international
level when differences cannot be disregarded, and a sound
working relationship should be established early on to deal
with them.
3. Technical risks include design and construction issues impact-
ing the project’s progress (Kalayjian 2000). It may also cover
improper planning or budgeting, or the parties’ inexperience in
 similar projects. From an international perspective, technical
risks may be attributed to differences in construction standards
and codes such as regulations and standards for construction
practices and methods.
4. Schedule delay risks may arise for many reasons such as in-
complete design, late construction site possession, increment
weather, or unforeseen ground conditions. (Kalayjian 2000).
From an international perspective, all these uncertainties
increase significantly and may lead to loss of efficiency and
schedule delays.
5. Cost overrun risks may arise from ambiguous project scope,
unclear boundaries of work, inaccurate estimation, and price
fluctuations (Kalayjian 2000). On complex international
projects, such risks become more serious because of the com-
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plexity anticipated with the financial concerns like credit
availability or cost of borrowing.
External Risks
External risks include the following:
1. Political risks refer to inconsistencies in a country’s policies,
changes in laws and regulations, restriction on fund repatria-
tions, import restrictions, war, revolution and civil disorder
(Bing et al. 1999; Zhi 1995). Because of the wide variety
of ruling political systems (e.g., democratic, authoritarian,
socialist, communist, and dictatorships), political risks are a
great concern (Bing et al. 1999). Some unstable governments
in developing nations sometimes face serious problems that
could jeopardize the stability and continuity of large construc-
tion projects (Zhi 1995).
2. Legal risks stem from the legal conditions that impact the
country’s governmental attitude toward foreign firms (Han
and Diekmann 2001; Kalayjian 2000). The strength of the
legal system in the host country is important because it deter-
mines the management of claims, conflicts, disputes, and all
other related contract problems. The legal system may be in-
compatible to the dispute resolution procedures set forth in the
contract, and parties may be unable to enforce judgments
through the local courts. Constraints may also exist on the em-
ployment and availability of materials, in addition to the dif-
ferences in construction law and regulation and contract
systems (Zhi 1995).
3. Economic and financial risks refer to economic fluctuation, in-
flation, tax rate, monetary restrictions, and foreign exchange
rates that may have substantial impact on the profit or loss
of participants in a project (Bing et al. 1999). Changes in
exchange rates under a floating (freely-traded) currency con-
dition have drastic impacts on the financial success of the
projects (Han and Diekmann 2001).
4. Environmental risks include untouchable natural catastrophes
which may result in destruction of facilities, equipment or
material, and death or injury.
5. Social risks include country security problems, language bar-
riers, different cultural traditions, and religion backgrounds
(Bing et al. 1999). International projects commonly involve
parties with different cultural backgrounds (Chan and Tse
2003). Cultural differences affect the system and mode of
communication that all construction projects require to coor-
dinate the technical, administrative, and legal issues. Miscom-
munication often arises among parties with very different
social customs, work ethics, and religious beliefs (Kalayjian
2000). Local workers, for example, may not be accustomed
to the reporting policies and procedures that are routinely
instituted in large multinational and foreign construction com-
panies (Han and Diekmann 2001).
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J. Leg. Aff. Dispute Resolut. Eng. Constr., 2011, 3(2): 79-85
Identifying, mitigating, or avoiding these risk factors is important
to minimize the number of claims and the potential negative
economic impact on the project. Risk management becomes more
crucial for international construction projects especially in the
precontracting stage when numerous uncertainties are involved
because of the lack of available information when working with
foreign entities (Zhi 1995).
Risks and Dispute Resolution Methods
Not all risk factors have an effect on the choice of a DRM. Some
risks are addressed by using other risk mitigation strategies.
Risks can be transferred, shared, or accepted through contract lan-
guage, insurance requirements, and retention policies (Zhi 1995).
For example, by establishing a good relationship with the host
government, the impact of inefficiencies in bureaucracy, inconsis-
tent policies, changes in laws and regulations can be less severe to
ongoing projects. Also, by using lump-sum subcontracts with local
construction firms to reduce the inflation will also reduce economic
impacts on construction costs (Zhi 1995). Consequently, in the next
section, only risk factors affecting the choice of a DRM will be
incorporated into the proposed DRM-to-Risk matrix.
DRM-Risk Matrix
In this section, only risk factors affecting the choice of a DRM in
the contract between the general contractor and the owner will be
discussed and incorporated into the proposed DRM-to-Risk matrix.
Table 1 summarizes the choice of a DRM that is recommended
depending on the risks involved in an international project by using
a DRM-to Risk matrix. The relationship of the risks to the choice of
the DRM as defined in the matrix is based on viewing the risks
factors as threats to the international contractor (negative impact)
rather than opportunities (positive impact).
The DRMs were selected considering the risks involved accord-
ing to the following descriptions:
1. Excessive demands or variations risks: If the owner is expected
to issue excessive variations through the course of the project,
it is recommended to choose DRM clauses that allow less for-
mal processes and involve negotiations among parties such as
mediation or conciliation, DAB, and expert determination.
This is primarily because such variations are expected to lead
to perceived incompatibility of goals, and by using a flexible
ADR method such as mediation, every culture will have space
to evolve its own ways of managing the conflict (direct versus
indirect mode of communication) and to reveal its priorities.
When multiple issues (excessive variations) are involved,
parties may trade low-priority issues in their cultural view
for high-priority issues (Brett 2000).
2. Lack of communication and poor relationship risks: When
poor communication and relationships among parties already
exists, it becomes more appropriate to employ DRM clauses
that employ third parties and give binding decisions such as
litigation, adjudication, arbitration, and expert determination.
The negotiation process becomes very difficult to handle with
international parties that lack cultural comprehension or have
biased perceptions regarding other cultures (Brett 2000). Thus,
involving third parties to make final binding decisions may
make the process less complicated. This is contrary to the case
in which good business relationship exists and needs to be
maintained. In such a case, an ADR process that is less formal
and less public, such as mediation, is preferred. Employing
litigation in such a case may negatively affect the business
relationship (Marcus 1988).
 Table 1. DRM-Risk Matrix
Risk Expert
category Number Risk Items included Effect a Litigation Mediation Adjudication DAB Arbitration determination
Project- 1 Parties’ relationships Excessive variations 2 x ✓ x ✓ x ✓
specific 2 Lack of communication 3 ✓ x ✓ x ✓ ✓
3 Schedule Schedule delays 5 x ✓ ✓ ✓ x ✓
4 Cost Cost overruns 5 x ✓ ✓ ✓ x ✓
5 Technical Design and construction 1 x ✓ ✓ ✓ x ✓
External 6 Political conditions Policy inconsistencies 5 x ✓ ✓ ✓ x ✓
7 Legal conditions Changes in laws and regulations 5 x ✓ ✓ ✓ x ✓
8 Economic conditions Economic fluctuation 2 x ✓ ✓ ✓ ✓ ✓
Inflation 2 x ✓ ✓ ✓ ✓ ✓
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Foreign exchange rates 2 x ✓ ✓ ✓ ✓ ✓

9 Social conditions Different cultures 5 Depends on country of interest
Local customs backgrounds 5
Note: The symbol “✓” = recommended DRM for the corresponding expected risk factor. The symbol “x” = not recommended DRM for the corresponding
expected risk factor.
a
The significance of the respective risk in determining the choice of a DRM with 1 = “least significant” and 5 = “most significant.” The rates defined in the
“effect” column are subjective assessments considering the weight of evidence from existing literature.

3. Schedule delays: This risk is best handled by a DRM clause
that allows disputes to be resolved while the project is on-
going within a meaningful period of time (Marcus 1988).
When schedule delays are anticipated and the project is time
constrained, it is recommended to employ methods that reach
fast decisions and have less lengthy procedures such as med-
iation or conciliation, adjudication, DAB, and expert determi-
nation. The litigation and arbitration process is very slow
compared with other ADRs because they involve lengthy,
complex procedures. The time aspect is of great importance
in the international setting as the parties involved may have
different perceptions of time, and defining set times for
the dispute resolution process allows both parties to have
common ground.
4. Cost overruns: When cost overruns are expected, it is recom-
mended to employ DRM clauses that allow for efficient
methods such as mediation or conciliation, adjudication,
DAB, and expert determination. Litigation and arbitration
are not recommended as they are expensive compared with
other DRMs. This risk factor is related to the time risk factor
because the less time available for the ADR process translates
into less cost of preparation and completion (Marcus 1988).
5. Technical risks: When technical risks are expected owing to
complexity of the project, it is recommended to employ
DRM clauses that employ third parties who are technically
competent such as arbitration, mediation or conciliation, adju-
dication, DAB, and expert determination. In arbitration, for
example, parties can select an arbitrator with expertise in con-
struction and familiarity with construction terminology such as
an experienced construction lawyer, engineer, architect, or
construction professional. The arbitrator can quickly focus
on the disputed issues. However, litigation is not recommended
as litigants cannot pick the judge, and judges making decisions
in such disputes usually lack construction technical knowledge
(Joyce 2008). Another aspect of technical risks is finding crea-
tive and flexible solutions to disputes, which is not an option
in litigation. ADR, compared with litigation, offers creativity
and flexibility as it encourages mutually advantageous solu-
tions with the problems clearly communicated and discussed
(Marcus 1988).
6. Political risks: When dealing with political risks such as policy
inconsistencies in the host country, it is recommended to
employ a DRM clause that yields decisions enforceable
through the courts of any jurisdiction such as arbitration. In
arbitration, the decision is binding but not necessarily through
the jurisdiction in which the arbitration was held. However,
employing litigation, which yields final binding decisions, is
not recommended as political risks and policy inconsistencies
will have a dramatic effect on the legal system of the country.
Employing less binding and formal DRMs such as mediation
may also cause severe problems for firms who may be
unable to reach any final binding decisions in such a volatile
environment.
7. Legal risks: When dealing with legal risks such as changes in
law and regulations of the host country, it is recommended
to employ DRM clauses such as mediation or conciliation,
adjudication, DAB, and expert determination that are not
connected to the country’s legal system. Litigation and
arbitration are not recommended in this case because the de-
cision reached is binding through the legal system. If the host
country’s legal system is weak, it becomes very hard to
regulate the management of claims, disagreements, conflicts,
disputes, and contract-related problems as the strength of
the legal system becomes important in enforcing international
contracts (Ozorhon et al. 2007).
8. Economic risks: If economic risks such as price fluctuations,
inflation, and foreign exchange rates are expected, it is recom-
mended to employ DRM clauses that involve a third party to
moderate reaching a decision such as mediation or concilia-
tion, adjudication, DAB, and arbitration.
9. Social risks: Cultural issues are expected to contribute to con-
flicts among parties and increase difficulties in the manage-
ment of the project. In a study conducted by Chan and Tse
(2003), cultural clashes were one of the most important factors
contributing to disputes in international projects. When dealing
with social risks, it becomes difficult to generalize a recom-
mendation to a particular DRM, primarily because preferences
of different cultures vary significantly.
The survey conducted by Chan and Suen (2005) by interviewing
40 DRM experts is an example of the proposed framework. Arbi-
tration was revealed as the most popular DRM in China, followed
by mediation. This was attributed to the Chinese preference of
resolving disputes in private; arbitration is formal enough to bind
the contracting parties and flexible enough to respect privacy.

84 / JOURNAL OF LEGAL AFFAIRS AND DISPUTE RESOLUTION IN ENGINEERING AND CONSTRUCTION © ASCE / MAY 2011

J. Leg. Aff. Dispute Resolut. Eng. Constr., 2011, 3(2): 79-85

 According to the study, mediation was revealed as the second most
popular ADR method preferred in China primarily because of its
private setting (Chan and Suen 2005). Thus, social risks are shown
to affect the dispute resolution contract language. In practice, the
framework is also conceptualized at international companies such
as Bechtel, which mitigates anticipated legal risks by avoiding
regional, local, or country-specific dispute resolution rules and re-
sorts to dispute resolution contract language with which they are
familiar.
Conclusion and Recommendations
In this study, individual or organizational risk attitudes have not
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been taken into consideration as one of the factors that may affect
the DRM choice. For example, if one or both parties are risk averse
and an immediate settlement is offered, it becomes an attractive
offer because it reduces risk compared with going to trial or engag-
ing in ADR. If settlement is not reached in the presence of risk
aversion, then ADR may offer a more attractive option. Thus,
the question of which ADR to choose (binding versus nonbinding)
will be influenced by individual and organizational differences in
risk tolerance.
In conclusion, every construction activity in international proj-
ects attracts risk of some kind. Risk in construction projects is con-
trolled by a number of well-known methods and the most important
is careful formation of contract documents. Careful planning and
choice of a dispute resolution method clause in the contract is one
of the key factors in controlling project risks during the contract
formation stage. In this paper, the different dispute resolution meth-
ods employed in international construction contracts and the risk
factors involved with the different methods were discussed. A
proposed analytical framework (DRM-Risk Matrix) suggests the
use of specific dispute resolution methods depending on the risk
factors involved in the project. In general, the matrix shows that
litigation and arbitration are the least preferred DRMs when dealing
with almost all types of risks listed in the matrix. All other DRMs
are of equal preference to help reduce the adverse relationship that
may exist among parties with cultural differences. Further testing
and validation of the proposed matrix is recommended in future
research.
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