Out-Law / Your Daily Need-To-Know
The Confederation of British Industry (CBI) has issued a call to the construction industry to improve its risk management practices in order to move towards a financially sustainable future.
The CBI Construction Council examined the role that risk allocation plays in the fortunes of UK construction as part of an investigation into the industry’s “precarious” operating environment.
In its resulting report (68 page / 4MB PDF) the CBI said poor risk allocation between clients and contractors prevented construction projects from being procured and delivered successfully, and the prevailing industry structure left major contractors and their subcontractors especially vulnerable to risk.
The report said the onus was on both construction firms and their clients to bring about behavioural change. Its authors suggested that intelligent procurement, putting contractors on a stable footing and unlocking investment throughout the supply chain would speed up the transformation of the industry.
The CBI added that in order to “jumpstart” a client-led change, the government’s Outsourcing Playbook, which is currently being updated, should be embedded across central government departments and applied to all large building and civil engineering works contracts. To mirror this in the private sector, standard construction contracts should be updated to reflect the expected behaviour of intelligent clients.
Construction law expert Jonathan Hart of Pinsent Masons, the law firm behind Out-Law, said that the report was “very timely” and constituted an important contribution to the ongoing debate as to how contracting practices can and should be improved.
“The CBI report is a useful reminder of the importance that public sector procurements have for the industry in driving best practice. What is the value of the Outsourcing Playbook if it is left to gather dust on the shelf?” Hart said.
“Better contracts, incorporating collaborative processes can create a virtuous circle, to strengthen the sector improve productivity and address the infrastructure deficit which the country continues to face,” Hart said.
Research by Oxford Economics which was commissioned by the CBI for the report estimated that if productivity – measured as output per worker – grew just two percentage points per year above the baseline forecast, the potential annual value of UK construction industry output could be £30 billion higher by the end of the next decade. That represents an increase of more than a fifth on current figures, without increasing costs.
The CBI made a number of recommendations in the report. It said a body, such as the CBI itself or the Construction Industry Council, should track the relationship between margin and revenue within the construction industry.
Businesses needed to be prepared to challenge or walk away from contracts during the bidding process and think about the long-term planning required for doing this.
The CBI said both public and private sector clients should refrain from amending standard risk clauses in construction contracts, and design and build procurements needed to engage contractors early enough to influence project design before it is signed off.
It also recommended that single-stage procurements should be discouraged in major construction projects. The CBI plans to consult with industry on this recommendation and is suggesting a value of £10 million as the threshold.
Clients and contractors unable to agree on a risk sharing position should use a gain or pain share approach to incentivise the appropriate allocation of risk. The report suggested that clients should produce an evaluation of the whole-life benefits of a project in advance of tendering to enable contractors to price risk management costs transparently against the asset’s value.
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