Clients transferring risk: The bullies are back

What is it about construction industry recessions that turns clients’ advisers into Rambo clones? The transformation this time round seems even more hypocritical than the similar behaviour we had to put up with in the early nineties.

It really is only a couple of years ago since these columns were full of articles about the benefit of partnering. In the industry, framework agreements abounded, even in the private sector, and not simply to avoid having to use a formal procurement process compliant with EU directives on every contract. Meanwhile, the NEC was lauded as the contract of trust and fairness and the JCT consistently derided as the flagbearer of the old adversarial system.

But what is happening now?

• Clients’ advisers are promoting single-stage design-and-build tendering. In some of the worst two-stage debacles, the final contract sum exceeded the first-stage cost plan by 50%. As a result, the argument that two-stage tendering allowed the contracting industry properly to understand the risks of design-and-build projects before having to commit to a price is no longer heard.
  Instead, contractors are being asked to bid for complex design-and-build projects during a short tender period with significant risk transfer to them.
• They are ignoring guidance to restrict bid lists to three or four because of the amount of work involved. Now, quantity surveyors are coming up with bid lists of six or seven. How are all those wasted costs to be recouped?
• Instead of looking at who is best placed to manage risk, on the basis of glib assertions that “in this market they’ll accept anything”, risks are being dumped on the contracting industry in a completely incoherent way. So, because the client does not want to novate the design team but does want to offload the risk of errors in their designs, tendering contractors are asked to accept and price the risk of such errors without any redress at all against the consultants. And there is always a contractor that will.
• Similarly, in relation to ground conditions, the contractors are given the site survey and told that all ground conditions are at their risk without any opportunity to check for themselves.
• It cannot be long before someone suggests that contractors should accept the risk of clients’ variations unless they change “the scope” of the project - the favourite abuse of the nineties.
• Contractors, even the biggest, are asked on all projects, even the smallest, for a bond and a parent company guarantee - so that the clients’ advisers cannot be accused of not having ticked all boxes if there is an insolvency.

And who benefits from this unfair risk transfer? Obviously, it’s the design team, since the contractor is taking the risk of their errors, and variations instructed by them.

It is better to sit in the office doing nothing and making a quantifiable loss than to take on work where the potential losses are huge and unquantifiable

But is it in the interest of the industry’s clients? Of course it is not. Any contractor that incurs additional cost because of a design team error - to continue with that example - must look for a way of recovering that cost. It cannot meekly accept that it has made a huge loss because of something that is not its fault. It will have to find something - be it a client variation, disruption by a tenant carrying out fit-out works, interference by other contractors - on which to base a claim. And some of those claims may even be spurious or inflated.

And the contracting industry may pursue them aggressively. Things may get adversarial. What a surprise …

And who are the guilty parties in all of this? As usual, it is the quantity surveyors advising their clients and, I am ashamed to say, lawyers who think that their clients are best served by trying to use commercial advantage and clever contract terms to abuse the construction industry.

And how should the industry respond? It should simply refuse to accept these sorts of provisions just as it would in the good times. It should not indulge in low-ball bidding. It is better to sit in the office doing nothing and making a quantifiable loss than to take on work where the potential losses are huge and unquantifiable.

Ann Minogue is a partner in the law firm Ashurst