Posted: 21st July
How might Contractors seek to recover their losses and what can we do to protect against it?
This is one of the most frequently asked questions that our clients across the UK have been asking us in recent weeks.
RLF Partner, Sean Clemons discusses the issues and the guiding principles.
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Covid-19 has had a profound commercial impact for all Contractors. Every single one of their construction projects will have been impacted by site closures, loss of productivity, supply chain problems and adapting to suit new operational practices. Contractors will be looking for opportunities to recover their losses.
Under JCT contracts, Contractors are entitled to claim for time under the relevant events of force majeure or enactment of government statutory powers, but critically this does not entitle them to claim for the cost of that delay (unless the Employer instructed the works to be suspended). This differs from the NEC contract which is more likely to grant time and cost through a compensation event.
If a Contractor cannot claim for the delay costs caused by Covid-19, how else can they seek to recover losses? There are three key areas to consider:
- Seeking recovery through contract variations and instructions
- Claims against the Employer where their actions have caused delay
- Reducing the quality of works and materials.
Changes to the Works
Changes (variations/instructions) are a Relevant Matter under the JCT contracts or a Compensation Event in the NEC. Where a Contractor can demonstrate that changes have caused delay, costs can be recovered. Contractors may also seek to inflate the cost of a change to recoup some losses. If there are a large number of instructions issued during construction, the Contractor will be in a much stronger position to submit claims for loss and expense.
In simple terms, the best way to protect yourself from claims of this nature is avoid varying the works while on site. However, this is not always viable, especially when some works are still to be defined or cost certainty is not high (typically evidenced through large quantum of provisional sums). If you are in this predicament then you need to carefully consider both the practical and commercial approaches to dealing with the risk.
From a practical perspective, change control processes should be utilised. This is standard practice for most projects but, given the current environment, it is critical that the process is robust.
Change control is used to agree the impact of a change before it is instructed. When administering the process, you should ensure:
- The early identification and resolution of change
There should be plenty of time between agreeing a change and the works needing to be carried out. Beware the impacts of the invariable negotiations, design development and supply chain challenges which will quickly eat into programme.
- Both cost and time impacts are considered and agreed up-front
As well as providing a quote for the cost impact the Contractor should confirm whether the change will cause a delay to the project. This safeguards you against future claims for loss and expense.
- Strict timescales agreed for the change control process
Both parties need to commit to clear timescales for the review of change. It may take several iterations of the process to reach agreement, and timescales need to be tight. If these are not set out within the original terms of the contract, then you should seek agreement to formalise this.
- Acknowledge the need for design work to resolve
Often a change is put forward with minimal design in place. The change control process identifies a price and time impact and often, the client believes all is agreed. The risk is that the design is then undertaken and either not aligned with your expectations, or the Contractor considers it to constitute further change. It is generally better to obtain a quick estimate of a change and then instruct the design work prior to any change being instructed.
Delays caused by you, as the Employer
This is a greater risk on projects where the client retains responsibility for the design, but even with design and build you are at risk if you are late in providing information. On a design and build project, typical matters you will be responsible for could include:
- Late approval of design and materials
- Late supply of client purchased equipment / materials
- Delay caused by named Sub Contractors
- Delay caused by utility connections, where the responsibility lies with the Employer.
The first step to mitigating this risk is to ensure that there is clear agreement is in place on when Employer-led activities need to be completed. This should be set out in writing and confirmed by both parties. Before agreeing to the dates, you should liaise with the appropriate stakeholders and supply chain to ensure they are achievable.
In terms of design and material approvals, an Information Required Schedule (IRS) should be established, setting out the timescales for issuing of information by the Contractor and when comments need to come back. Most contracts will set out the timescales for response, however the review process is often iterative which means there will be some discussion prior to sign-off which can slow the process down. In establishing the IRS, the Contractor should be challenged to set as early a date as possible for the release of information, providing sufficient time for review and agreement. For example, it is not reasonable for a Contractor to issue design information and expect it to be reviewed and agreed within two weeks.
While these practical steps will help mitigate the risk the onus will remain with you to manage the various activities and ensure the team is keeping to the agreed timescales for response.
Reducing the Quality of Works & Materials
The focus for the Contractor might be to reduce the cost base on which they have priced the works. While the works are defined by the contract, there are invariably gaps, and where a Contractor is under commercial pressure, they may well seek to take advantage of this by opting for an approach which will not ultimately meet your expectations . In some instances, a Contractor may decide to substitute products for a lower quality option whilst not making this clear to you.
Another risk is that a Contractor goes back out to market and selects Sub Contractors that are offering a lower price. The need to mitigate their losses means they may select questionable Sub- Contractors, which could impact upon the quality of the building.
To protect against this risk, it is important that you have a good inspection regime in place, both in terms of design review, but also site inspections.
Even where you and your team are on top of your responsibilities, have instigated a good inspection regime and established a robust change control process, Contractors are likely to push hard in seeking opportunities to recover their losses. You may end up in the position of having to accept a change with a higher than acceptable cost/time impact, or potentially end up in dispute over the matter at a later point.
In a scenario where you anticipate little change during the works then this could be an acceptable position. Where you are likely to be facing a large amount of change on a contract, then you should consider a more commercial approach to mitigate the risk of dispute later.
It is unlikely to be in your best interests to quibble over every single variation and claim. This will result in excessive resource spent on managing the claims and is likely lead to dispute proceedings. The biggest winners in this situation will be the lawyers. The best option, for both parties is to recognise the commercial realities of the situation, namely the Contractors need to recover some of their losses incurred through the Covid-19 impact and seek some form of remedy.
We have seen the success of this commercial approach on several projects, where early agreement has been reached to share some of the pain suffered by the Contractor from the Covid-19 event. The agreement sets out how the parties are to deal with the impact in terms of both time and cost and that there will be no subsequent dispute on the matter. By sharing some of the pain, the risk of an adversarial relationship for the remainder of the contract is reduced. The practical steps described above will still need to be maintained, but the process should be less fraught as the underlying problem has been resolved.
The reality is that every construction contract is unique, and the position of each party will vary. What is important when considering your approach is to take positive action rather than waiting for events to unfold. We strongly recommend that you get on the front foot and take the actions that will enable the best outcomes for the project and reduce the risk of dispute, which so often results in increased costs and programme delay.