Out-Law Analysis | 19 Jun 2020 | 3:20 pm | 2 min. read
Following the market crash of 2008, what had been a market dominated by two-stage contracting and some forms of collaborative frameworks reverted to single stage, multiple contractor tender lists, with some contractors engaged in a ‘race to the bottom’ in order to secure work.
As a new recession, triggered by the economic impact of the coronavirus pandemic, looms, there are early signs of procuring authorities being encouraged to put to one side existing frameworks - which contractors have often spent significant sums of money to bid for - and instead launching new restrictive single stage processes as a way of taking advantage of the desperate need for cash flow in the contracting supply chain. This is despite some of the guidance coming from the government; and general business organisations such as the CBI and industry bodies such as the CLC calling for more ‘responsible’ contracting coming out of lockdown.
A focus of collaboration is on what is “best for project”.
We don’t yet know how clients will react, but initial signs are of there being probably more liquidity in the market than in 2008. There is, however, a different set of challenges, meaning that the procurement of projects has to be looked at carefully to avoid subsequent project failures.
As we emerge from lockdown, supply chain stability is the biggest issue. What will be the impact on prices? When will prices recover? Contractors will be at risk if they have to bid low, and there is then an upturn in supply chain costs. Above all, will the materials be available to meet programme demand and completion dates?
There will also be a continuing health and safety element to working on site and ensuring safe distancing between the workforce, which will have a potential impact on construction programmes. The possibility of not reaching a trade deal with the EU brings further risks in relation to tariffs, and also potential delays and shortages of materials and labour.
In the housing sector, the new Building Safety Bill will impose greater regulation of fire safety - initially in relation to tall buildings - and the need for greater cooperation around design, digital modelling, construction and building management.
Faced with those issues, does it make sense for any client to insist on a fixed price and a fixed or challenging programme? If not, what alternatives can generate value?
Moving to a collaborative approach is a potential answer. To adapt a phrase from 2008, the construction industry is in this together and should cooperate.
A focus of collaboration is on what is “best for project”. This requires parties to work together for the project to succeed, knowing that if it does they will share in the rewards. Elements of ‘target cost’ contracting or well thought out, positive KPIs should be considered.
On some projects, this lends itself to the type of ‘enterprise’ model envisaged by the ICE in its Project 13 model, or alliance arrangements. In both these models, the strategic management of the project is devolved to a project board made up of key stakeholders. Decisions must be made unanimously, and for the benefit of the project. Effectively, the project team acts as a single entity that stands or falls together.
Of course, if risks can be insured, then everyone feels comfortable. Since the publication in 2014 by the Cabinet Office of the Integrated Project Insurance model of contracting, there is an insurance-backed alliancing model available. The insurers undertake significant due diligence on the costings behind the target cost and the technical model before underwriting. Cost overrun above the excess - which is equal to the alliance members’ overhead and profit fee - is insured, as well as latent defects.
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