Business

It's a material issue: how to best manage the wait

Aine McGuinness
Aine McGuinness

IT'S been a tumultuous two years for the north's construction sector with the global pandemic and the ongoing repercussions of Brexit heightening uncertainty.

A recent Construction News report highlighted a marked dip in the number of orders placed by Northern Ireland contractors, largely due to both the shortage, and increased cost of materials. This, coupled with long delivery delays and issues with labour availability, has created a sense of negativity across the sector.

A key concern is the lack of certainty in contract pricing and costs.

Those already tied into fixed-price contracts are facing the significant difficulty of managing cost increases particularly when materials are also delayed.

But there are risk management options, both commercial and contractual, that are worth exploring.

First and foremost, maintain amicable relationships. Insolvency and bankruptcy matters are all too familiar to the construction industry.

Maintaining open relationships and conducting transparent cost dialogue with all parties is the first step to finding an effective and manageable solution.

Secondly, consider contract mechanism options:

:: Agree a Variation (Joint Contracts Tribunal (JCT)) or Compensation Event (New Engineering Contract (NEC)): If materials are unavailable, it would be prudent for a contractor to discuss options with the Employer. Under the JCT, agreeing a variation to the contract to use replacement materials or applying value engineering could be an alternative. This in turn would allow a contractor to agree an adjustment to the price through the variation process. Under NEC, such a variation would constitute a Compensation Event and enable the contractor to agree an extension to the completion date and/or a change to the prices. The new NEC4 Clause 16 value engineering provision also allows a contractor to propose changes which could reduce the cost of the works.

:: Relevant Events (JCT) or Early Warning Notice (NEC): If material delivery delays are likely to impact the Completion Date, it is necessary to give notice of the event. Failure to do so could expose a contractor to liquidated damages, so contractual processes must be maintained, particularly in times of uncertainty. NEC contracts provide for an early warning process whereby parties are required to notify one another of any matter which could affect cost, completion, or progress of the work. To maintain amicable relationships, early warning notices are essential.

:: Fluctuation (JCT) / Provision for Inflation (NEC): During the formation of both JCT and NEC contracts, parties can agree to include an option for labour and material fluctuations which allows for an adjustment to the Contract Sum where the market prices for materials and goods changes.

What about future contracts?

Going forward both contractors and developers need to be alive to the market and industry circumstances which are likely to impact the cost and time taken on projects.

Ensuring that contract terms are carefully considered and negotiated is key:

:: Construction parties should consider the benefits of the NEC forms of contract which are founded on the premise that parties should work together collaboratively and in the spirit of the contract.

:: Consideration should also be given to risk allocation under the contract particularly for costs and delay;

::: Clear and unambiguous drafting of amendments to contracts can also help deal with the ongoing time and cost impact of material shortages / cost increases;

:: Fluctuation provisions should also be included in the contract terms to deal with changes in costs.

Ultimately, in a challenging market, awareness of contract mechanisms, careful planning and drafting in future contracts, must be prioritised to avoiding construction pitfalls.

:: Aine McGuinness (aine.mcguinness@dwf.law) is senior associate (construction & infrastructure) at DWF Belfast (www.dwf.law)

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