Mitigating risk in the predictably unpredictable economic climate

Communicate, communicate, communicate

Whilst in the past, parties to a project may have kept communication with each other on a need-to-know basis, the industry has reportedly noticed a shift in this behaviour as more and more frank and open commercial discussions are taking place (positive progress). Such commercial discussions are in the interest of all parties and can prove to be one of the most effective methods of ensuring the project meets its targets.

Some key examples of discussions which we have seen that benefit projects are:

• In return for agreeing to stomach some of the up-front expenditure on a project, employers have requested contractors to expedite the process and/or contain costs.
• If a contractor is struggling with the price adjustment on a contract, an employer may be willing to compromise in certain areas the achieve the common goal – minimise risk and attain project completion.
• Maintaining good communication throughout the entire length of a project.
• Construction managers highlighting risks as early as possible and managing those risks proactively.
• Contractors communicating cost changes and fluctuations in material delivery dates as soon as they become aware of such issues.

Most importantly, remember that trust is key.

Steer clear of poorly drafted contracts – every single word matters

All parties will be affected by the economic climate in some way. They should therefore ensure they have a clear understanding of what the contractual terms are, the strength of their bargaining position and their legal standpoint before the works even commence – seeking legal advice is an invaluable step in that process. Often once a contract has been signed there is very little room for re-negotiations. Therefore, it is imperative to get things right before execution stage and below are just a few examples of how this can be achieved:

• Insurance – Insurance should be reasonable and proportionate. If this isn’t the case, there should be a push back especially on contracts that overstate the assumption of liability. Professional indemnity insurance continues to become increasingly expensive, so high levels of insurance are expensive both for the policy holder and for the employer as the cost will be passed on.  The level of cover requested should therefore be set proportionately.  Parties should be aware that insurers of new policies or on renewals will have discussions with them on their level of claims, contracts and the like, so good record keeping is essential.
• Consistency – From contracts with the employer all the way through to agreements entered with subcontractors, consistency throughout is critical. Clear details highlighting the responsibility of each party is paramount and failure to do so could result in losses going forward. For example, it would be unfortunate if a fixed price was agreed with the employer, yet a price adjustment option was provided to subcontractors. These could ultimately compromise the position of the project.  Seeking legal advice at an early stage will help with this.
• Extension of time rights – Once again maintaining communication between parties is key for this to be achievable. You should also keep good records of increases in price and/or shortages of materials, and any knock-on effects these cause to the budget and agreed timings.
• Flexibility – Changes inevitably do happen, so allowing contracts to be flexible can allow for the project to continue to move forward, preventing costly delays. Having this approach should inspire logical solutions which can save valuable resources. But again, this approach will need to be taken with caution and legal advice should be sought where necessary.

Plan for the unexpected

Finally, there is no denying that risks of delays and shortages are becoming more and more prominent in the market now and changes in a construction project will inevitably occur even with first-class preparation and project-management. Therefore, co-operation and effective communication should be treated with the utmost priority to ensure all parties are on the same page and there is an understanding of how every cog in the wheel is functioning.

Our Construction team is highly praised for its ability to “give the right solution, in the right time”.  We empathise with all these challenges, and we want to help ensure projects continue successfully to support the construction sector and keep businesses afloat. From pre-contract negotiations to advice on particular points or issues, let us help you.