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.