The world of construction has long been plagued by weak or absent productivity growth, an issue again highlighted by McKinsey’s recent report on the extent and consequences comparatively poor productivity across the industry. Of the many causes of poor productivity, there are trends in procurement that certainly do not help.
Too often the approach taken by procurers of major works and services in the UK adds unnecessary cost, creates uncertainty and potentially supresses market capacity. This results from a confluence of factors, including constant reinvention using bespoke terms and bidders being asked to accept provisions that are unclear, onerous or inappropriate. Bidders must then decide how far to invest in advocating for a more equitable position, accept what is offered, or withdraw. From the procurers’ perspective, unnecessary complexity and cost reduces competition and ultimately pushes prices up.
Most contractors may survive acceptance of inappropriate terms most of the time, but a number of high-profile insolvencies in recent history underline the risks of this approach for both procurer and contractor. There is also a danger that evolution of market norms is driven by under-investment in acquiring the knowledge to push back against inappropriate terms rather than the sharing of best practice. Procurers may see benefit in contracts that give the appearance of protection and empowerment – but if this results in terms that are unclear and may be applied in an inequitable and arbitrary manner, at best the procurement process will waste effort trying to address those terms. At worst bidders will withdraw or accept terms on trust or in ignorance, which may lead to loss or dispute.
There are many examples where extension or distortion of apparently commonplace terms create difficulty.
In balancing reward against known risk, liability caps will be at or close to the top of any governance list. That balance and certainty may be undermined by caps set on a periodic or rolling basis, with no clarity as to how liabilities are allocated between periods, or extensive lists of uncapped liabilities – to the extent that the cap becomes virtually meaningless. Hidden exceptions using imprecise terms such as wilful or reckless misconduct or gross negligence further undermine certainty, allowing arguments that almost any liability is uncapped. Despite frequent use, those terms have no precise legal meaning. Attempts at definition often make them wider or less clear. Treatment of liability caps and insurance requirements may also result in removal of insured liabilities from the cap (so exposure to the full cap remains after insurance is exhausted), or conversely leave the procurer unable to recover up to the amount of required insurance if the cap is lower.
Circumstances that may create extensive liabilities are often excessively wide or subjective, or may arise from matters that a contractor cannot reasonably be expected to know or control. For example, rights to terminate for default based on an employer’s belief or opinion undermine objectivity, regardless of how reasonably that belief or opinion may be held. Rights to terminate based on a mere threat of insolvency proceedings, or any commencement of insolvency proceedings even if an abuse of process, are inappropriate. Similarly, clauses that deem all breaches to be substantial and incurable or deny the contractor an opportunity to remedy may result in disproportionate consequences.
Provisions relating to prevention of such practices as bribery and modern slavery, whilst necessary and well intentioned, are often presented in such wide and subjective terms that no contractor can ever be certain of compliance despite diligent application of effective policies and checks. Risks are exacerbated by links with termination for default, often with every possible breach of related clauses deemed to be substantial and incurable (including technical breaches whether by the contractor or anywhere in the supply chain), and interpretation expressly a matter for the employer’s discretion. Such extremes detract from the essential protection provided by more balanced drafting.
All this is before we get to the point of what the contract actually requires to be done. Even then, a lack of clarity or generalised obligations to comply with (and not contribute to any breach of) whatever project documents, related contracts or other third-party agreements the employer may later notify, create unquantifiable risk and uncertainty. Adjustments of price and completion dates provide some relief for changes to works and services, but do not adequately address increased risks of liability or default termination created by additional compliance obligations. Where terms do allow relief for changed circumstances and requirements, inappropriate restriction to cost recovery (with no recognition of the need to maintain overhead contribution or profit margins) is inadequate and undermines the balance of the contract.
Excessive restriction of relief for force majeure events (with associated risks of delay liability and default termination) is a further example of risk transfer that contractors simply cannot manage or price. This is particularly stark in public sector contracting, where ultimately the use of restrictive terms that transfer global geopolitical risk to private sector contractors does not benefit either party. Restriction of force majeure events to a closed list or to events in the UK ignores the reality that force majeure type events and their consequences are inherently unpredictable and rarely confined by national boundaries. Transfer of solvency risk in relation to government bodies and other publicly owned and funded entities is also unlikely to be appropriate.
In a mature market, acceptable parameters in many of areas that continue to create unnecessary difficulty and cost should be well established. In the UK at least, this is not yet the case. There is a need for procurers to reflect on whether continued attempts to shift as much owner risk to the contractor as possible may ultimately be detrimental to market capacity and harmful to effective competition.
