In today’s Scotsman (26 September 2022) Andrew Boccoli explains why construction businesses should consider protecting themselves by breaking with conventional contracts.
For the past 20 years, convention in the construction trade has been that contractors take on much of the financial risk of the projects they tender successfully for. But, as the whole world attempts to manage rising costs, that can no longer be considered a given.
The extreme market volatility we continue to experience means that many construction contractors may need to consider deploying greater legal safeguards in order to protect their own businesses.
A sensible starting point is ensuring contractors and developers are properly aware of the fine detail in their existing contracts. The next step is to consider enhancing contractual terms on future projects so that potential risks can be managed and mitigated.
Advising those involved in development projects across Scotland, I am seeing increasing evidence of that happening, with a steep increase in the inclusion of fluctuation provisions in Scottish Building Contracts Committee (SBCC) contracts.
It is an understandable step for companies to consider. After all, increasing material costs - impacted upon by factors including rapidly rising energy costs, supply shortages and the war in Ukraine - on top of ongoing labour challenges and inflation, have added to pricing pressures on the building trade at all levels.
None of us really knows what the impact of rising energy costs will be this winter. The one certainty is that, whatever support the UK Government announces for businesses, the burden will still be greater than last winter.
Given all of this, it can be of little surprise to anyone that contractors are genuinely struggling to price jobs. That’s a position which benefits no-one involved.
In recent times, building contracts have, for the most part, been fixed price - subject, of course, to certain limited events that would allow a contractor to claim additional time and / or money.
With the increasing financial pressures we have seen in recent months, a question mark hangs over whether that can continue to any great extent, considering that businesses of all kinds - and in every sector - are trying to limit their exposure to additional costs.
While it will be harder to change the risk profile of existing contracts - as employer engagement and contract amendment would be required - contractors may now want to consider including provision within future contracts which allow them greater flexibility to recover time and money if there are increases to the cost of labour and/or materials.
The addition of fluctuation provisions within SBCC agreements is one such way of doing that.
This is a mechanism for dealing with the effects of inflation and changes in costs, allowing the contractor to potentially claim additional sums. Until recently, these provisions were rarely utilised, but more contractors are pushing for their inclusion as they try to protect their position.
The inclusion of fluctuation provisions, as one measure, can benefit both employer and contractor. Their inclusion will give contractors comfort that they will be reimbursed for spiralling costs but also give employers comfort that tender prices are reasonable and are not artificially inflated to factor in the risk of potential future cost increases.
All of this makes robust legal advice, tailored to each development, more important than ever - especially as our highly competitive building industry typically operates on tight margins.
There is no doubt that this is a tricky situation for anyone involved in a building development of almost any kind. We should be under no illusion about the importance of construction to Scotland’s economy, with the sector employing in excess of 100,000 people.
That’s why I am encouraging all parties to be open, honest and realistic when planning developments, however challenging those conversations may be.
The simple fact is that most employers do not want contractors to take on excessive risk because, in doing so, contractors open themselves up to potential insolvency which has obvious knock-on effects for developments. I would urge both employers and contractors to be open from the outset and to ensure that contracts include the appropriate provisions.