Contractual factors to be aware of
Over the last 24 months the CIF has continually warned of the financial stress that construction contractors were under and the impact of Brexit, Covid and the Ukraine war on their cashflow.
The simple fact of the matter is that the Public Works Contract and some amended forms of private contracts were incapable of dealing with the cumulative global inflationary and supply chain disruption caused by these factors.
Despite the innovative and ex-gratia (outside of the contract) measures taken by the Office of Government Procurement (OGP) to support industry cashflow, many contracting authorities have been either slow or reluctant to adopt them, resulting in continued financial stress down the supply chain.
Unfortunately, we are now starting to witness the tail end of these impacts manifest in the industry, often in the form of pay disputes, which ultimately boil down to a contractual issue.
There are three specific contractual factors, which clients and contractors should be aware of in order to effectively manage cashflow on projects and comply with their statutory and commercial obligations.
Firstly, all parties should be aware of their rights and duties under the Construction Contracts Act (CCA) (2013).
This act provides for strict processes and procedures for all parties to the contract regarding payment. It sets out what each party must do in order to get paid under its provisions and what rights they have to enforce payment.
While the CIF would like to see further improvements to the CCA, the CIF fully supports it and recognises its value in protecting the supply chain and prohibiting “paid when paid clauses”.
Secondly, there is the construction contract itself. All standard forms of contract contain payment and cost recovery mechanisms on how to get paid.
Clients, contractors and subcontractors should familiarise themselves with their contractual obligations related to payments under the contract be used.
These relate to normal scheduled payment certs, but also to variations, omissions, risk events, partial completion, substantial completion and release of retention.
We encourage our members, and indeed clients generally, to use the standard forms of contracts. Again, while there are deficiencies in them, they are generally understood within the industry as opposed to pursuing heavily bespoke contracts that present uncertainty and increased risk to both the client and contractor; beyond what standard forms do.
Thirdly, members need to consider the commercial nature of the contract they are entering into and the financial standing of the
client.
The recent Idiro Analytics report 2022 shows that the average level of risk included in public projects was as low as 2.2 per cent; contrasted against inflation on some materials being above 15 per cent, this is simply not adequate to address this risk.
Contractors and subcontractors should consider not only the cost of delivering the project, but also the risk inherent in it and the overheads to administer it.
But in tandem with this, clients and public contracting authorities must focus on quality in award of contracts, effective risk management, reform of the PWC and the avoidance of awarding project based on lowest price.
The impact of climate action, digital technology and modern methods of construction will require a greater focus on creating value over the whole life cycle of a construction project.
This in turn will require a healthy and vibrant industry built on sustainable profits and not just turnover growth.
Like the Pharma, ICT and Manufacturing industries, these factors along with a clear capital pipeline of work under the NDP will support contractors so that they can invest in their people, systems and technology.
