Housebuilder puts future public sector contracts in jeopardy

A construction lawyer has said the building services industry is under no legal obligation to accept the invoice reductions being imposed by main contractors in the wake of the credit crunch.

The advice was issued by Suzanne Reeves, a partner in the construction team at Wedlake Bell, in response to the news that Barratt Developments, which last month won a Government contract to build the UK's first zero-carbon village, is planning to impose a 3 per cent pay cut along its supply chain.

The move puts the housebuilder, which is expected to report a 2007 pre-tax profit of £539 million later this week, in a precarious position. Under the Office of Government Commerce's (OGC) Fair Payment Charter, introduced this month, main contractors who become embroiled in payment disputes weaken their chances of winning future public sector contracts.

Barratt's price cuts follows those of the George Wimpey Group (Wimpey) who earlier this month informed its supply chain that it would be paid 5 per cent below the previously agreed price for outstanding works on existing and future orders. Wimpey said it was taking the action in response to "a difficult year for the house-building industry".

Ms Reeves said sub-contractors were under no legal obligation to accept the new rates. "If there is a concluded or agreed contract between two parties, one party cannot unilaterally change the terms of the contract without the agreement of the other party," she said.

"Unless the sub-contractor has agreed to it, if a housebuilder was to deduct [a percentage] of the agreed price on all outstanding works on existing orders it would be in breach of contract and the subcontractor could take the main contractor to court or adjudication to recover the deducted funds.

"However, if there is a contract in negotiation, the housebuilder can say it needs an extra 5 per cent reduction in the costs. In these circumstances, the sub-contractor has two choices. It can either agree to the new proposals or it can say ‘no deal’ and walk away."

Ms Reeves said a sub-contractor might be prepared to agree to a price reduction even after the contract has been finalised because it did not want to prejudice the ongoing relationship with the contractor. "The main contractor may seek to take advantage of this if he thinks that the sub-contractor is not in a position to stand up to him," she warned.

Defending its new pay rate, Barrat said: "This is normal business practice in a tight market and we are duty-bound to obtain the most competitive price possible. As a result of the Wilson Bowden acquisition last year we initiated talks with all of our suppliers and these discussions are now continuing on a region-by-region basis."

he sector was united in its condemnation of the practices. Rod Pettigrew, HVCA head of legal and commercial, called the reductions "absolutely scandalous", while Suzannah Nichol, chief executive of the National Specialist Contractors Council said they were ‘unacceptable’ and ‘unethical’. "We are currently considering what action we can take in order to get Taylor Wimpey to re-consider its actions," she said.

"We will be making the OGC aware of this behaviour. We are also advising our members not to accept these reductions. If the entire supply chain took collective action and refused to accept the cuts then it's highly unlikely that other housebuilders will continue down this path."

Published in H & V News, 19 January 2008