Construction and Covid-19: Keeping contracts simple

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construction contracts,

Covid-19 sent many construction companies rushing to check their contracts, only to find them complex and confusing. Sarah Fox, construction lawyer and author of Small Works Contracts in Just 500 Words, believes the time is right for simpler contracts and a more collaborative approach to projects

I have yet to find a single business in construction that has been delighted with the clarity of their contracts when negotiating the pitfalls of Covid-19. Far from acting as a roadmap for success, construction contracts have exacerbated an already awkward situation.

How can this possibly be? JCT tell us that their contracts are comprehensive; NEC was specifically designed to help parties collaborate and manage their projects. And at 150 pages surely FIDIC has the situation under control?

Legal tools

The single biggest issue with contracts is not the suite, the contract conditions or the users. It is the basis on which they are written. Instead of being tools to help you manage a project, most contracts are written as tools for legal enforcement – either in their original unamended form or once the lawyers have butchered them.

Once the pandemic hit and the UK government encouraged lockdown, the parties had to dig out their construction contracts, blow the dust off them and delve deep into the clauses to see if there was an answer… or, ideally, THE answer. Many of those who managed to grab a copy and read them found their contracts hard to understand – it is almost as if they are only written for lawyers to interpret, not for mere mortals, aka site staff. Most users who understood the clauses, or their lawyers’ translation, were surprised, frustrated or confused by what they found.

Impact of Covid-19

The contractual impact of Covid-19 has been characterised as force majeure, an epidemic, an act of prevention, an illegal or impossible act, government intervention, or sometimes (depending on your home nation) a change in law. Many of these are trigger events which can entitle the contractor to more time to complete the works, but few contracts allow the contractor to recover its additional costs.

Surely this new normal is ‘not what we contracted for’?

Although the initial response was focused on a short period of lockdown and a swift return to work, the real long-term impact for construction projects is a mixture of extended working hours, new health and safety regulations, travel restrictions, supply issues, local restrictions, unforeseen changes in working practices and a significant loss of productivity. No contract had all this in mind in their time and cost procedures.

And yet… all those contracts contain wide-ranging change mechanisms. We need every project partner to renegotiate the future of the project so that the client gets an asset that someone wants to pay for, and the supply network gets a fair reward for the value they are undoubtedly providing. The parties should (guided by the UK government, if not by their contract or conscience) be acting responsibly and collaboratively to resolve the impact of Covid-19 in the fairest possible way and that requires the parties to use the change mechanism to renegotiate the original deal.

It would be a form of madness to expect that the original contract either envisaged or fully provided for what has actually happened in 2020.

Simple procedures

JCT 2016 DB lists more than a dozen separate events which trigger the contractor’s entitlement to an adjustment to the completion date. NEC4 lists 20 compensation events. Invariably, the parties’ lawyers fiddle with this list, deleting some and adding others. But despite all those amendments, global pandemic was not on the lists.

If that wasn’t complex enough, under NEC and FIDIC, the contractor has to notify the contract administrator within a specific time period if it wants to retain its right to extra time and get relief from delay damages. So contractors creatively gave notice as soon as lockdown happened, despite the fact that it wasn’t yet clear what the trigger event was and that no contract administrator could possibly determine an appropriate extension in March 2020.

Perhaps if we’d had simpler and more flexible procedures, the parties could have mutually notified (and acknowledged) that the project deliverables needed to be reviewed and agreed a process that would work given the massive uncertainties we were facing. The problem with prescriptive procedures is that there is no room for manoeuvre – some contractors will get a nod of sympathy from their employer, but little else.

Collaboration

UK government reports have called for more collaboration for decades with no real impact on our dog-eat-dog culture. Perhaps the winds of change are beginning to blow… the International Association for Contract & Commercial Management found that 88% of business owners want to see more collaboration and trust in the future. It seems to me that the construction businesses most likely to succeed after Covid-19 are those that were working WITH their supply network and clients, not those who were working FOR them. They were able to see beyond the strict terms of a contract and focus on the goals of both the parties and the project.

Lack of collaboration and trust is exactly why the procedures in construction contracts are so tightly written – but those procedures result in the client believing it is somehow being duped and the contractor gaming them just to make a decent profit. Does it really benefit the project if we micro-manage everything? Surely more trust would have encouraged a more grown-up, joined-up solution to the thorny question of how everyone on the project was going to get out of it solvent and relatively unscathed?

The future of construction contracts

My research into global contracting shows that fear is a major barrier to change. Change usually happens slowly, especially in construction, but in this case it happened overnight. We became digital, we changed our ways of working and we adapted. Perhaps having faced massive uncertainty and fear head-on, businesses will realise that significant change is possible. That is a welcome side-benefit to this crisis.

At the same time, we also learned a costly lesson: that the contracts we thought would help us move through the unknown together are actually designed to drive us apart.

My hope is that the construction industry wakes up to the dysfunctional nature of its contracts and seeks to move towards contracts that really help the parties to manage a project – contracts that are simple (to allow flexibility), digital (to facilitate remote working) and collaborative (to build sustainable supply networks).

Or would you rather continue to pour your hard-earned money into the existing contract publishing-and-amending industry that didn’t even serve you when you needed it most? You decide.

 

 

Sarah Foxconstruction contracts,

Author, speaker and consultant

500 Words

+44 (0)7767 342747

sarah@500words.co.uk

www.500words.co.uk

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