Analysis of Critical Parameters in the ADR Implementation Insurance Model

Abstract

In construction projects the implementation of Alternative Dispute Resolution (ADR) techniques requires capital expenditures to cover related costs such as fees and expenses paid to the owner’s/contractor’s employees, lawyers, claims consultants, third party neutrals, and other experts associated with the resolution process. Since most projects today operate on tight budgets, one way to ease the potential for variations from an already financially stressed project budget is to price ADR techniques as an insurance product. However, since the premium charged by insurance company is designed to cover its underwriting expenses and profit target, the benefits of purchasing ADR implementation insurance for a specific project must outweigh its cost for the investment to be worthwhile. A number of factors in the ADR implementation insurance model combine to determine whether it is financially advantageous for project participants to invest in ADR implementation insurance, and the purpose of this paper is to identify and analyze the critical parameters in the model. Sensitivity analysis is conducted on the effectiveness of each ADR technique chosen for the project, average ADR implementation cost on each stage of dispute resolution, and distribution of possible disputes. These results will help determine the most critical factors related to the pricing of ADR as an insurance product.