Adapting to disruption: contractual approaches need to respond to market change
The pace of disruption to projects and programmes over the last 12 months has been rapid and unrelenting. The COVID-19 pandemic and Brexit both posed significant commercial challenges and these are set to persist well beyond 2021 even as we turn towards economic recovery.
In the face of this ongoing disruption, construction has been given a vital role in driving forward this recovery. While the industry has consistently demonstrated its ability to adapt, ensuring delivering on government plans to “build back better” will require real transformation. This is a significant opportunity to embed new ways of working, processes and technologies that will improve productivity, getting closer to supply chains to make them more resilient and more sustainable, and urgently broadening the talent pool at a time of concerns over insolvencies and uncertainty of overseas labour.
It is against this complex backdrop that clients need to understand and assess the risks, opportunities and impacts to their programmes – putting in place the right mechanisms and contractual terms to manage them effectively now and to deliver them successfully in the future.
The COVID-19 crisis saw a wave of claims and contract disputes ripple through the industry. People’s eyes have been opened to the stark consequences of not getting procurement right from the outset, with confusion and conflicts over contractual terms and liability affecting programmes and client-supplier relationships alike.
Employers have largely been sympathetic and supportive to contractors through this period, and our research shows they have largely borne the brunt of additional costs for site delays too. But more recently there has been growing concern around the potential for suppliers to use COVID-19 disruption to maximise their return and limit liability on other, separate matters.
Clients need to act to protect their commercial interests, but the experience of the pandemic will make it much harder in future to push risk onto an already fragile supply chain. Trust – on all sides – is going to be critical to rebuilding strong, well-structured and fair supply chain relationships as the industry evolves to meet demand and achieve greater productivity. Key to this will be independent, expert advice on developing contract terms, but also navigating such terms when a challenge arises.
Supply chain capacity
With significant investment flowing into the sector from the government to fire up the economic recovery and advance the levelling up agenda, the question construction needs to be asking itself is how to guarantee delivery.
Industry concerns around supply chain capacity and fierce competition for scarce skills have long predated Brexit or the onset of COVID-19.
Yet the pandemic and the shock of Carillion’s collapse before it, have heightened this anxiety. Both events have significantly altered the risk profile in construction, highlighting that contractors and the wider supply chain may no longer be able to withstand the ‘pain’ that was often considered part and parcel of any commercial gain.
It’s still too soon to understand the true fallout from the pandemic on the supply chain, with government support schemes still in place until later this year and serving to prop up business continuity. Yet it is a renewed recognition of the fragility of the construction supply chain that needs to drive a new approach.
Contractors are ultimately going to be more selective on risk share in future. During COVID-19 they have sought recovery options through all available avenues, exposing the extent to which there is no common approach to risk within the industry, and the vast disparity in contract terms around who shoulders the risk.
Also, with Brexit raising the potential for tariffs to be levied on material imports in future and reducing the ability to rely on overseas labour to meet delivery requirements, contractors are generally going to be more risk averse and seeking more collaborative contract terms to protect against exposure to additional costs and delays.
For clients, this means getting closer to the supply chain across all programmes and projects, regardless of scale – and at all levels.
It’s not enough anymore to focus on the relationship with tier 1 suppliers, clients need to increase their engagement and visibility through tiers 2, 3 and 4 and be contracting with them directly and on the same principles.
The recent collective industry experience is naturally going to force a longer-term behavioural transformation across all parties. There are clear lessons to be learnt regarding the impact on live programmes and these will need to inform future planning and procurement models.
After the global financial crash, we witnessed an industry shift towards two stage contracting. Following the COVID-19 recession, we expect to see a recalibration towards more collaborative contracts – with NEC contracts becoming more popular and the trend towards alliancing gathering pace. Clients will increasingly want to engage for the long-term, embed longstanding relationships and consider whole life value across programmes.
As the sector’s biggest client, the government can drive significant change by evolving its procurement models and helping to compel the private sector to follow in turn.
But lessons can also be learnt from the Project 13 delivery model and the infrastructure sector more broadly. Particularly across the water, roads and aviation sectors, we’ve seen significant maturing of contracting models over the past decade to drive a higher performing and transparent approach to supply chain engagement.
An opportunity for change
The past 12 months may have been characterised by contractual disputes and claims as live programmes battled against COVID-19 and Brexit impacts, but as the industry continues to adapt to the new market landscape this is a period of unparalleled opportunity for contracting.
As clients seek to maximise competitive advantage in their response to fast moving global industry trends, they can also reshape and rebuild the supply chain to be more resilient to future change and fitter to deliver the build back better agenda. Contracts will be vital in incentivising higher performance on programmes and in driving the longer-term behavioural change the industry needs to thrive in a post-COVID world.