Construction in Texas has boomed over the past few years, driven by population expansion and the consequent investments in infrastructure, office and retail to support the ever-growing body of residents. Texas has approximately 1,000 new residents moving to the state daily. Housing growth has come a long way to meeting demand — a drastic shift from the oversupply we saw back in 2008-2010. And you only have to look outside a window in any Texas city to see the cranes, scaffolding and other signs of persistent development in infrastructure, retail and office buildings to support the economic activity driven by population expansion.
Commercial and institutional building construction in Texas was projected to reach approximately $58.4 billion in 2024. The 2023 Unified Transportation Program adopted in August 2022 allocated approximately $85.1 billion over the next decade, marking a $10 billion increase from the previous year. This unprecedented funding aims to enhance the state’s transportation infrastructure, including highways, bridges and transit systems. Recently, heavy civil construction in Texas was projected to grow by over 10 percent, Texas Contractor reports, with segments like highway and street, sewage and waste disposal, water supply, and conservation and development expected to see double-digit expansion. One of the largest sectors in growth is driven by proximity to energy: data centers.
Naturally, with more construction comes more construction litigation. However, the word is out that there is likely a shortage of construction litigators. Many, if not most, construction-related litigation goes to arbitration, and the AAA and JAMS haven’t released any data. However, anecdotally, construction disputes filed with AAA are taking longer and longer to get kicked off, which suggests a substantial glut is building on the side of the arbitral houses as well.
With this backdrop, this article takes a look at the three trends in construction litigation.
Construction Defect Claims
Outside of worker safety, the largest area of construction litigation is construction defects. According to several insurers’ reports, the average commercial construction defect claim in Texas is around $10.1 million. Commercial defect claims are rarer than in other arenas, and they tend to be tied to the degree of construction management and oversight exercised, the availability of skilled labor and the timelines that contractors — and in particular, design professionals — are asked to meet.
Over the past several years, as luxury residential and municipal and infrastructure construction has increased precipitously, so have construction defect claims in both of these areas. It is interesting how these compare to commercial construction defect trends where owners are typically more sophisticated and able to protect themselves.
One species of construction defect claims on the rise we’ve observed, which have been reported in several public sources, relates to claims based upon unforeseen site conditions and environmental risks. These include things like subsurface elements, poor soil quality, hazardous materials and/or structural deficiencies. These unexpected challenges can lead to significant completion delays, increased costs and potentially requiring changes to project designs or construction methods. Naturally, the risks these pose increase the more construction occurs. And how the risks of these unforeseen challenges are allocated is an issue of contract in the first instance and will only become more prevalent.
These trends promise to continue into the next decade as the Texas population continues its upward trajectory.
Delay Damages Due to Rising Costs and Shortages
As we always say: “A GC is only as good as their weakest sub or supplier.” Delays in delivering construction projects already make up an enormous part of construction litigation in Texas, and their role may even expand if predictions about tariffs and mass deportations materialize. In 2024, the Associated General Contractors of America reported that 53 percent of projects experienced project delays or abandonments due to rising costs, while more than one-third faced postponements or cancellations caused by ballooning interest rates and unforeseen supply chain issues, as well as a shortage in skilled laborers and tradesmen.
Construction labor is a huge X factor. The Texas Workforce Commission projects an average annual increase of 1 percent in construction employment from 2024 to 2032, equating to demand for an additional 81,976 jobs, roughly, over the decade. The TWC also expects that the Specialty Trade Contractors industry will experience the most significant growth, adding 47,042 jobs during this period.
Data from the American Community Survey along with publicly available data also suggests that, should the government deport a population of roughly 11 million people who as of 2022 lacked permanent legal status, it would come at remarkable costs, including exacerbating the current labor shortage. “In 2022, nearly 90 percent of undocumented immigrants were of working age, compared to 61.3 percent of the U.S.-born population aged between 16 and 64, making undocumented immigrants more likely to actively participate in the labor force,” according to the American Immigration Council. “Losing these working-age undocumented immigrants would worsen the severe workforce challenges that many industries have already been struggling with in the past few years.”
More specifically, a recent study co-authored by a University of Utah business professor concludes that the mass-deportation strategy adopted by the federal government threatens to drain the construction workforce in particular, which would significantly impede construction nationwide. The study was able to show a strong correlation between increased immigration enforcement and a reduction in the supply of labor force for the construction industry.
Already, litigation over failure to meet completion dates and delay damages is a large part of the body of current construction matters. One should expect to see this become an ever-expanding issue as labor shortages potentially contribute to further delays. The question will turn, primarily, on how the agreements shift the risk of various causes of delays.
Additionally, proposed tariffs threaten to increase costs for imported materials, such as steel and aluminum, which could lead to higher overall project expenses and/or delays. Projects relying heavily on international supply chains or foreign materials might experience extended wait times, ultimately affecting construction schedules and delivery deadlines. However, the extent of these impacts depends on the specific materials involved and the adaptability of industry stakeholders. One expects that over time production will either shift stateside (which would inhibit the revenue-generating goal of the tariffs) or will remain offshore at substantially higher costs, leading to cost and time breaches for many contractors.
One outstanding question to resolve is whether supply chain shortages and mass deportation orders fall under “force majeure” or other safe harbor exculpations in the relevant contracts. One should expect to litigate these both as fact questions,–such as whether the delay was indeed caused by the labor shortage, whether the shortage was properly hedged and whether the increased cost is relevant—as well as legal questions.
First-Party Insurance Claims
There has been a palpable increase in insurance denials of construction-related claims and a concomitant rise in first-party litigation against insurers. In 2024, despite the rise in claim denials, construction insurance premiums saw a significant increase. Engineering News-Record reports that premiums climbed an average of 10.1 percent in the first quarter last year for commercial construction.
One of the bases for claims denials appears to be the increasing size of damages in construction litigation. Larger projects combined with rapid inflation has created unexpected exposure for insurers, according to PropertyCasualty360.com.
And a specific area of increased insurance disputes we’ve been seeing also comes from the cryptocurrency arena. Delays and interruptions in crypto mining due to construction delays or defects (or both) can cause hyperbolic damages exposure because, as Bitcoin approaches $120,000. But losses in mining due to delays or shutdowns are rather predictable. While such losses tend to be foreclosed by waivers of consequential damages, those waivers are not always negotiated and not always enforced if they can be shown to be unconscionable.
For a substantial enough claim, there is definitely a strategic gain to be had from (1) challenging claim denials, especially for lack of coverage, and (2) pursuing litigation for a substantial enough claim. The Texas Supreme Court has actually been relatively insured-friendly as of late. But reading the Texas Supreme Court’s tea leaves is often fraught with folly.
One More to Watch For: AI
The increasing reliance on artificial intelligence and digital tools in construction has introduced new challenges in dispute resolution. While AI can enhance efficiency, it also raises concerns about data accuracy and decision-making processes, potentially leading to more disputes and litigation. The integration of AI into construction planning and management threatens to be a significant factor in litigation to come. Will a designer, manager or general counsel be allowed to simply “blame the machine”? And how will folks be able to parse whether the machine got it wrong to begin with?
AI is also being increasingly used in forensic analysis of construction projects to identify things like overcharging, undue delays and the like. These are typically deployed by experts. Combating these models will soon be a tricky issue as they become more prevalent and accepted.
Conclusion
As we all navigate the current landscape, construction litigation in Texas will continue to be challenging to owners, contractors and insurers alike.
Mazin Sbaiti is a trial lawyer and the founding member of Sbaiti & Company PLLC, a litigation boutique based in Dallas. Mr. Sbaiti’s practice includes construction litigation matters on behalf of developers, owners, and contractors and litigating against insurers in coverage disputes.