Arbitration is a contract-based alternative to litigation. The parties present evidence and arguments to a neutral arbitrator (or panel of three on larger cases), who issues a binding decision. Most AIA standard contracts default to arbitration administered by the American Arbitration Association under the Construction Industry Arbitration Rules. Arbitration is generally faster than litigation, more confidential, and decided by someone with construction expertise rather than a generalist judge.
The trade-off: arbitration awards are very hard to appeal. Discovery is more limited. Arbitrator fees are paid by the parties, not the public. Construction-savvy lawyers consider arbitration favorable for technical disputes (delay claims, defective work) and unfavorable for cases that benefit from broad discovery or sympathetic juries. Most modern construction contracts allow the parties to opt out of arbitration in favor of court at the time of contract execution.