Legal

Legal: Time to get your nose into the books

7 January 2010

Many firms have taken the obvious steps to reduce costs in the past year, but there are other ways to save cash. Elaine Knutt reports

A year after the credit crunch officially became a recession, most contractors have adapted to the new realities of lower margins, increased competition and enforced redundancies. But some specialist consultants are claiming that construction firms are missing out on the savings that can be made from another core area – the purchase ledger.

 

Contractors’ expenses typically fall into two categories: non-staff overheads such as insurance, telecoms, IT and office supplies; and core spend on raw materials, sub-contractors and plant hire.

But according to a survey of 104 construction companies carried out by Expense Reduction Analysts, a franchised consultancy, 36% had not carried out contract negotiations with suppliers since September 2008, and 30% had not put in place a cost reduction programme.

ERA believes that any company reviewing its own internal purchasing policies can reduce expenditure by an average of 6%, but that appointing a consultant can release additional savings.

“The range among construction clients is huge – from 8% to 52% for one particular project,” says consultant Ian Morrison, whose background is in the lighting sector.

The figures come as no surprise to John Bermingham, former head of procurement at contractor MJ Gleeson. Bermingham recently set up Procurement Specialists Group, a consultancy offering a “no save, no fee” service to construction firms.

“A lot of companies fail to understand the importance of purchasing, even though it can account for 70-80% of sales,” says Bermingham. “Companies put a lot of effort into marketing strategies, but if you ask about their procurement strategy, they just don’t have one. If you don’t have a database, or performance monitoring, it’s hard to put a cost reduction plan in place.”

In his experience, a contractor’s buying department might not take responsibility for non-staff overheads, leaving this to non-trained staff. “A purchasing department may be highly focused on delivering projects, and may not have the capacity or market knowledge across the board,” he says.

But an experienced eye can spot substantial procurement savings. For instance, Bermingham reduced MJ Gleeson’s mobile phone bills from £500,000 to £200,000 within a year, and when working in-house at William Verry costs were cut from £80,000 to £35,000.

As for core spend on products and materials, Bermingham says buyers can become pre-occupied with daily ordering and deliveries, and forget to focus on the big-ticket items, such as cladding. 

Contractors can also make significant savings by negotiating yearly contracts for day-to-day items such as personal protective equipment, sand, cement and mastic. Bermingham also suggests that companies can reduce costs by inter-linking sub-contractor procurement with materials buying – advising sub-contractors to buy from its regular suppliers, to take advantage of the contractors’ superior buying power.

When working for a new client, ERA first benchmarks what the company is paying against an industry average. “In many cases contractors practise good procurement, but sometimes the right questions just aren’t asked, or buying habits are based on what has been done in the past,” says Morrison.

McCann Homes, a £70m turnover housebuilder and social housing contractor based in Milton Keynes, invited ERA to look at its non-staff overheads a year ago, on a “no save, no fee” basis. Finance director Bob Green estimates that this segment of expenditure accounts for 5% of turnover.

“They looked at utilities, stationery and mobile communications, and achieved savings of 25-35%,” says Green. “I was expecting some savings, as it was an area we hadn’t looked at in detail, but I didn’t expect such high percentages.” 

An ERA consultant is continuing to monitor the company’s purchasing, earning a fee according to how much it can slice off McCann Homes’ invoices.

Back to basics: Sustainability in JCT contracts

Just under half of all CO2 emissions in this country are linked to the built environment, and more than 70% of all building contracts are JCT contracts. In response, the JCT contracts were republished in May 2009 to include new sustainability provisions. 

The JCT decided not to impose rigid rules, but to encourage the parties to the contract to embrace sustainability within their project through a range of contractual options.
The most important new clause is that the contractor is now “encouraged” to suggest amendments, which have to be economically viable, to improve the environmental performance of both the process of building the project and the building itself. If the employer agrees with the suggestions, then they are implemented as a “change” with the normal contract effects.

In addition, the contractor has an obligation to provide information “reasonably” requested concerning the environmental impact of the materials selected for use by the contractor.
The menu of detailed provisions that are available to client and contractor for selection within the contract include: the requirement on the contractor to reduce, reuse and recycle materials; the encouragement of design efficiency; the saving of energy and water; the reduction of emissions and the use of sustainable materials and products.

These measures, although not new, may now be included as contractual terms, with the possibility of monies being withheld for non-compliance. Achieving a specific BREEAM rating or score can also be included as a contractual provision.

Contractors can be obliged to report back to the client using relevant performance indicators, such as those published by Constructing Excellence.

By Stephen Clarke, head of construction at solicitor Clarke Willmott T: 0845 209 1303

Anna Wright

Ann Wright’s Case notes

Corus tort a lesson

Corus UK v Cavendish UK and Woods Building Services. Queen’s Bench, August 2009

The consequences of bad work or negligent misstatements can take years to become apparent. So it was in this case, which dates to 1997 when Corus wanted to replace the ceiling and rewire the lighting and renew the alarms at its 1960s office building in Corby, Northants.

The existing plaster suspended ceilings had been spray-coated with asbestos containing material (ACM) for fire protection. Overspray from the ACM had penetrated the lightwells and the concrete soffit of the floor above.

An internal report dated 19 February 1997 noted the office ceiling would be easily damaged and release asbestos fibres if disturbed. Therefore the renewal work could not start until the asbestos issue had been resolved.

In May 1997, Corus put the asbestos removal and rewiring out to tender with the aim of removing the asbestos completely.

Cavendish submitted its proposal on 17 June and Corus placed its purchase order in July for the “total removal of asbestos-containing ceiling with encapsulation of and labelling of overspray”. Encapsulation meant the asbestos would be sealed and enclosed. Thus Corus was aware that it could not expect total removal of all the ACM.

When work started in August, Cavendish’s subcontractor, Woods Building Services, found the ceiling was actually composed of slabs that were difficult to remove. Woods tried a wet strip method to remove the ACM, which proved successful and was discussed with Corus at a meeting on 28 August, 1997.

Unfortunately, there were two versions of what was discussed. Cavendish’s Stephen Allen wrote to Corus the following day, saying all the ACM would be removed but some would remain in inaccessible areas and would be sealed with encapsulating material.

However, according to Corus’s minutes from the meeting, the client wanted confirmation that the new method was as good as the original and would leave an asbestos-free structure.

In March 2007, a worker installing a fire alarm system noticed debris and a subsequent survey found traces of ACM. Quotes for its removal and decontamination ranged from £1.1m to £2.4m.

Corus tried to recover costs from Cavendish and Woods. After 10 years it was too late to sue in contract, but it sued in tort for damage to the building due to faulty workmanship and/or inaccurate/misleading advice from Woods.

The court said it was clear that Corus had allowed work to take place in the voids which may well have released the ACM, and that Corus had neither inspected nor managed the asbestos in the voids as it was obliged to do under the Control of Asbestos at Work Regulations of 1987 and 2002.

Also, although the Limitation Act 1980 allowed for an action to be pursued in tort if the defect was unknown, subsection (10) of section 14A of the Act states that a person must take all reasonable steps to acquire that knowledge.

If Corus had complied with its duties under the asbestos control acts it would have been aware of any deficiencies in the work years earlier.

Analysis

You can be sued in tort as well as in contract. With a claim under contract, you need to show a term in the contract was breached and that losses result.

For tort you need to show a duty of care and a breach of that duty resulting in damage. If a negligent misstatement is involved, the damage does not need to be physical.

The court held that although Woods had a duty of care in tort, the building had not been damaged. In addition, the court held that Corus should have known of any defects much earlier and before time had expired under the Limitation Act.

There are two lessons to be learned from this case.

First, disputes can arise at any time, even years after the project has finished, so never destroy those old files, notebooks or diaries, in whatever form.

Second, reply to all correspondence with which you disagree. If the parties had done that, the case may well have settled out of court, saving most of their legal fees.

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