Legal

Contractors beware: clients are hungry for cost certainty

10 June 2018 | By Mike Wing

Image: Igor Zakharevich/Dreamstime.com

In an uncertain economic climate, and with tighter statutory regulations looming post Grenfell and Carillion, construction clients are demanding much greater cost certainty. Contractors need to be careful, writes Mike Wing. 

Mike Wing

Contractor risks are on the increase. Future migration controls may restrict access to labour for the construction sector – currently estimated as needing 50,000 new people per year – while in a post-Carillion and Grenfell world, statutory regulations are likely to get much tighter.

Meanwhile, as investors pump increasing amounts of money into the property sector – £2bn into the UK’s build-to-rent market, for instance – the large pension and insurance funds which stump up this cash are focused on reducing risk and protecting shareholder returns, meaning they want certainty of price. 

With this combination of factors, it’s no surprise that clients are now increasingly requesting bespoke contractual agreements which tightly manage risk around cost, not limited to guaranteed maximum price contracts. These focus on cost and time risks related to employer-instructed changes and employer delays.

Where the client is seeking cost certainty, what challenges does this pose for the contractor? Clients are making determined efforts to exert tighter control over the contract sum, reducing wherever possible the number of scenarios where the contract sum or target cost (where relevant) might change.

A typical starting point is to remove opportunities for the contractor to claim for changes, including the more conventional grounds for which the contract sum may change.

For example, an employer request to “open up” the works on completion for inspection is typically a cost recoverable by the contractor when no defects are found – but increasingly clients are insisting that the contractor bears this cost regardless.

Another example is where antiquities are discovered on the site – here again employers are trying to pass all associated costs on to the contractor.

Faced with such propositions, contractors should carefully consider whether it is possible or even reasonable to attempt to calculate the risk premium. A more prudent approach may be to return to the negotiating table and revise the problematic clauses. 

The drafting of bespoke clauses aimed at preventing the contractor’s entitlement to additional time in the event of an employer-culpable change event is another area of concern.

This follows the ruling in North Midland Building Ltd v Cyden Homes Ltd where a bespoke amendment to a JCT Design and Build Contract (2005) in effect relieved the employer of any risk associated. The amendment read: “Any delay caused by a relevant event which is concurrent with another delay for which the contractor is responsible shall not be taken into account.”

This in effect prevents the contractor from any entitlement to an extension of time in the event his own delays are concurrent with employer delays. Clearly, this places a significant risk burden on the contractor, which would have to be reflected in his pricing of the works.

Other bespoke clauses have sought to reduce costs that can be recovered as “defined costs” under the NEC3 form. 

Balance of risks

At what price do these efforts to minimise the employer’s risks come? The balance of risk shifts quite considerably on inclusion of these bespoke clauses.

That risk, combined with the risks of the current environment, is likely to result in two outcomes: a significantly increased premium to carry out the works, or failure by the contractor to achieve the agreed price for the works.  Worse, there is the probability of further time and cost spent resolving the inevitable dispute.

It is understandable that with the current backdrop, the employer will seek opportunities to manage their risks and increase cost certainty. However, this will come at a price, and therein lies the issue. It seems very unlikely indeed that a contractor may be able to price with any certainty some of the bespoke amendments we’re starting to see requested.

Mike Wing is a senior consultant at law firm Quigg Golden 

Comments

Historically, the construction industry always topped the company bankruptcies list.
Invariably this was due to incorrect tenders on contract work!

A Builder is in business to make a profit otherwise they Fold leaving a trail of debt and hardship for lots of others.

A Client has a contract out to tender and they want best value for their money
and no contractual risks of time delays, ,cost increases or quality issues.

The Builders dilemma is that they know if they price it correctly they will not secure the contract, but the order book is low and they need turnover!!!!

What do you do ?????

John Anthony, 12 June 2018

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