Construction as a sector was hit harder than most  by the recession. Estimates suggest that around a  quarter of a million people left the industry, voluntarily  or otherwise. But, with the last year or so showing  moderate but consistent growth, optimism is growing. However, before rushing blindly into new work in an  attempt to put the pain of the past few years behind  them, those managing the construction industry would  do well to remember a few hard won lessons.

While there is a general increase in construction work,  the real surges are confined to a few specific sectors,  with residential property leading the pack. Civil  engineering and infrastructure are lagging behind at  delivery stage, but the pipeline is active. The industry  in general is also experiencing materials and labour  cost increases.

There are concerns that there is an imminent  shortage of new recruits with the correct skills to allow  businesses to take advantage of swelling order books. This is perhaps an inevitable result of the people who  left the industry when the recession began to bite and  a lack of recruitment and training in the meantime.

Lean businesses, reorganised to best survive the  recession, limits supply chain capacity now that work  has started to pick up again. Ambitious clients with  a pipeline of projects they wish to develop in order to  meet growth targets may well start to look at booking  supply chain capacity early before their competitors  wake up and start offering contractors and consultants  better terms.

A further brake on the pace of development is the  availability of materials and equipment.This is partly  reflected in increased material prices but is also likely to  lead to delays in delivery and extended periods for long  lead items.  Certain supply contracts may need to be  entered into directly by the client and then novated to  the contractor if the length of lead time is too much for the contractor’s programme to bear.

Other ways in which ambitious clients may try to steal  a march on the competition include:

  • Using preliminary contracts to get projects moving  early and to tie in contractors to a particular  project.  Depending on the wording of the  preliminary contract, the contractor may or may  not be committed to develop the whole of the  project but, even if they are not legally obliged to  do more than preliminary works, it is likely that they  will be commercially incentivised to carry on once a  contract for the full project is offered. As ever, care  should be taken by both parties not to fall into the  common problems associated with using letters of  intent rather than preliminary contracts.
  • Placing specialist contracts early for the initial  phases of the project such as demolition and  sub-structure works. Those phases can start  early while the detailed design of the scheme is  being developed and the main contract is being  tendered. Once a main contractor is appointed the  specialist packages can be novated to the main  contractor.
  • Signing contractors and consultants up to  framework contracts with agreed levels of services and agreed terms for call off contracts.  If there is a work bonanza  in the next few years the client will then have some certainty about  the terms on which he is able to engage his supply chain.
  • Considering using construction management procurement  methods - see article below for further details.
  • Ensuring that contract terms are agreed as part of the tender  process while there is still a competitive element to make sure that  (a) the contract negotiation process is not unduly protracted and (b)  having won the tender competition, the supply chain cannot hold  out for better terms knowing that the client is unlikely to be keen to  restart the process.

Despite the green shoots of recovery and the return of optimism that  creates, all in the industry should not lose sight of the fundamental  principles of procuring construction works and services. From a  legal perspective this means carrying out a detailed and balanced  assessment of the risks involved in a particular project followed  by analysis of which of the parties is best placed, practically and  commercially, to take responsibility for each of those risks. That risk  allocation should then be reflected in written contract documents with  robust terms which should be entered into before the works start.  If  an early start is required then a preliminary contract could be used (see  above) but this is no substitute for a full contract and should only be for  limited time and scope.

All parties should also be aware that the climb out of recession does  not remove the spectre of insolvency.  They should each consider  what risks the intended project is likely to present and use that as a  basis on which to ask the other party to provide security.  This may be  some form of payment security from the client to the supply chain and  performance security (performance bonds, parent company guarantees  etc) from the supply chain in favour of the client.

Finally, while optimism from clients and the supply chain is to be  welcomed, it does not necessarily follow that funders have the  same level of confidence. Parties should always ask themselves the  question, at an early stage of a project’s gestation, “is it likely to be  fundable?” It follows that early funder engagement is crucial. This will  allow un-fundable projects to be identified early and allow modifications to be made to make projects fundable before too much work has been carried out.