Collaborative contracts make supply chains more resilient to crises

Out-Law Analysis | 16 Dec 2020 | 2:03 pm | 4 min. read

Construction and engineering companies should explore collaborative contracting models to build greater resilience into their supply chains and enable them to adapt more flexibly to crises.

That is one of the core lessons businesses operating in the construction and infrastructure sectors can learn from the challenges encountered during the coronavirus pandemic and as they look to plan for and maintain resilient supply chains capable of withstanding exceptionally disruptive events in the future – from the impact of Brexit, Covid-19 and LIBOR transition to the climate emergency.

There are three important themes in supply chain management which have helped the industry to cope with crises:

  • Comprehensive contractual guidance
  • Flexibility in negotiating bespoke arrangements
  • The role of collaborative contracting

Comprehensive contractual guidance

Construction contracts often attempt to clarify how the impact of disruptive or exceptional events will be allocated and managed between the contracting parties. On the occurrence of such an event, conscientious parties will seek to do the right thing, legally and operationally, to avoid disruption or chaos. In parallel, it is entirely normal for parties to look to the contracts for guidance and answers on what to do and, in particular, to assess and analyse any contractual rights and obligations.

This review will often focus on an assessment of any contractual entitlement to financial recovery and necessary performance relief including rights to recover additional costs, change in law relief, contractual change and force majeure.

The more comprehensive the contract is in its ability to cater for the various potential impacts of an exceptional event, the greater the assurance for the supply chain that they can focus on taking all necessary steps required for the good of the project and the people affected by it, without fear of commercially adverse consequences.

However, even where the contractual solution for dealing with change and crisis is well thought-through, as exceptional events are experienced "in real time" and the optimal solutions emerge, the contract may not provide sufficient detail to deal with all complexities arising from the event. This is inevitably when we see parties to construction contracts looking to negotiate and amend the contracts to deal with the outcome of the event in order to keep the project intact and emerge with minimum adverse consequences, avoiding protracted disputes.

Flexibility in negotiating bespoke arrangements

In the UK public sector during Covid-19, we saw the negotiated approach to supply chain crisis management being endorsed by UK government guidance and the Scottish government procurement practice notes. Other governments, development finance agencies and export credit agencies have adopted similar interventions – see for example the review of the European International Contractors federation in this regard.

The UK approach has been to encourage hardship payments and make generic suggestions for construction contract amendments. In practice, however, we found that there was less appetite for generic approaches to amendment and that, sanctioned by guidance, parties engaged in a series of more bespoke negotiations and amendments to fit the particular circumstances of the project and the solutions agreed between the parties.

When a project is no longer viable as a result of an exceptional event, rather than contractual termination mechanics being triggered, it is common to see agreements reached in order to de-scope or "pause" projects, or reach a negotiated termination and avoid the risk of protracted dispute. The best negotiated solutions will fit the particular needs of the project, in a pragmatic way. Reaching agreements with the supply chain will always be easier when parties are prepared to collaborate and work together in partnership.

Government guidance on Covid-19 was particularly focussed on sustainable value for money agreements being reached which allowed necessary adjustments to be made to critical services in the short term, protecting cash flow and jobs for the medium to long term for which less disrupted conditions would return.

A challenge facing some businesses is that, while they have wanted to find a collaborative solution to act fast in response to almost overnight changes, their contract has not been set-up in a way which enables that to happen.

Internal pressures and the existing contractual mechanics often force a party into a decision, for example, to suspend works for an unknown period of time, and then attempt to negotiate a new more flexible arrangement from a much more difficult bargaining position and without the optimum contractual tools. As construction partners acclimatise to the "new normal" and seek to rebuild and restructure their supply chain, we can see an opportunity in shifting away from traditional contracting models with Covid-19 or Brexit clauses as "sticking plasters" to more holistically collaborative approaches.

The role of collaborative contracting

The role of behavioural and collaborative contracting in crisis management should not be understated. Covid-19 has demonstrated more widely the importance of supply chains communicating and working together.

Despite huge disruption across supply chains across all sectors, not just in construction, initial efforts to manage Covid-19 were generally not combative and we have seen innovation and collaboration across markets. You could say Covid-19 has been a giant "proof of concept" study for collaboration and it will be interesting to see if a similar approach is adopted in relation to Brexit in 2021.

The benefits of collaboration in driving better project outcomes have long been understood in construction and infrastructure but the urgency to do things better is more real than ever. As economies look to, as the UK prime minister has put it, 'Build Back Better' and grapple with the challenge of dealing with decarbonisation during a time of unprecedented financial crisis, we will need to think differently. Some of the advantages of collaborative supply chains when managing exceptional events include:

  • Flexibility, agility and good risk management.
  • willingness to make decisions day to day that will drive the best outcome for the project.
  • contractual reinforcement of aligned best for project behaviours including proactive risk reduction and strong project governance and culture
  • the use of aligned incentivisation arrangements allowing all parties to measure performance against the same project wide goals.

Covid-19 has shown us that it is time to move on from contracting on a transactional basis to working in real enterprise and partnership with supply chains. If the different members of the supply chain have been able to do this in addressing the challenges of the pandemic, then these experiences should be used in meeting the interesting times ahead coming out of Covid-19 and facing up to the exceptional events to be faced in 2021 and beyond.