Right now in the construction industry, the only certainty is uncertainty.
Political and market conditions mean it is more important than ever to be diligent in understanding a project’s potential risks and negotiating contractual responsibilities.
In our experience, the root cause of many disputes is contractors not identifying and dealing with a risk sufficiently early, making it much more difficult and costly to recover entitlements.
The dust is still settling on the myriad ways Brexit could affect the sector, with experts seemingly unable to agree on the long-term impacts. While contract negotiations usually focus on the likelihood of a risk occurring, it is difficult to predict the outcome of Brexit with any certainty and hard to adequately cater for these risks in pricing.
In recent weeks we have started to see fluctuating exchange rates affect contractors and the current skills shortage in the industry might be significantly worsened by any loss of access to EU labour.
These factors might have a considerable effect on costs, and contractors need to be sure to discuss how increases and additional risks can be dealt with in the contract sum.
“Don’t be afraid to pass risks downstream, but don’t pass risks on to a party which does not have the capacity to deal with them”
So how can a contractor protect itself? This is especially important in a competitive market where the cheapest contractor is usually the riskiest bet. In our view, there are seven crucial steps:
- Accept uncertainty. The construction industry is more uncertain as a result of Brexit – don’t be afraid to discuss it.
- Understand proposed contract terms. At the end of the day, you can only protect yourself if you know the rules.
- Get advice early. Risks are often clearly signposted to those in the know. Spotting them early and dealing with them appropriately as a team is crucial. Ignoring them doesn’t make them go away.
- Many contracts provide for certain risks to be defined as ‘neutral’ – a contractor does not always need to take on every risk.
- Liability for risks does not have to be unlimited – it is possible to negotiate limited liability.
- Use your supply chain. You can’t see into the future, but you can leverage good relationships with suppliers to be forewarned of likely threats and price hikes.
- The ultimate responsibility for risks should rest with the party best placed to identify and respond to them when they arise. This principle extends to subcontractors. Don’t be afraid to pass risks downstream, but don’t pass risks on to a party which does not have the capacity to deal with them. This does not get rid of the risk. A risk that sends a subcontractor bust will only come back to haunt you.
Duncan Hughes-Phillips is chief executive officer at Base Quantum