DECISION ANALYSIS IN CONSTRUCTION CLAIMS

Abstract

Claims in construction projects are inevitable and can result in costly litigation. Construction contract ambiguity, overly restrictive terms, and unfairly allocated risks are among the factors increasing the likelihood of conflict between parties in construction claims. The source of conflict is a gap between parties’ beliefs over specifics of a claim. This research introduces a settlement negotiation model that provides methods for disagreeing parties to understand the gaps in their beliefs and possibly to come to an agreement before litigation. The quantitative decision analysis approach identifies a range for the optimal settlement amount in the claim process.

Each party holds private information regarding its belief over the specifics of a claim. The specifics of a claim are classified into Liability, the likelihood of the defendant being found liable at a trial, and Damages, unanticipated expenditures plaintiff incurred due to the defendant’s alleged fault. A Bayesian Network model quantifies parties’ beliefs over Liability and Damages. This model represents parties’ legal arguments and their respective strengths and credibility. These beliefs become inputs to a non-cooperative game theory model. Non-cooperative game theory analyzes interactions between the claim parties at each stage of the claim. The asymmetric information game considers each party’s actions and strategy based on its belief over the expected outcome from litigation, and its belief over the opponent’s expected outcome from litigation. The analysis results in equilibriums that help parties decide how to resolve the claim and avoid costly and timely litigation. The resulting approach reveals predictive outcomes in construction claims using economic theory to analyze construction disputes.