Get your excess clauses out

I wonder what percentage of costs wasted on projects is generated by the industry rather than by the actions of clients (such as inappropriate procurement strategies or onerous contracts)?

Some years ago I was involved in an arbitration in which the main contractor’s defence was that he was simply a post-box for everything that the client did; he was completely reactive and therefore not responsible for anything.

The truth is very different. The industry - much more than its clients - is responsible for generating needless costs in the process of project delivery. In fact, some clients have taken measures to address this. Tesco, for example, pays its subcontractors directly to ensure that their payment times are the same as for the main contractor.
Building has reported the scandal of the widespread use of rebates, pre-bates and discounts in facilities management and maintenance contracts. Companies such
as Serco and Carillion had to rethink their demands for these payments that had nothing to do with acceptable commercial behaviour (such as the giving of discounts on receiving large volumes of business).

But I continue to be deluged with examples of contractual practices that generate unnecessary overheads in the supply chain and have nothing to do with the client. Take this little gem from a Z clause in an NEC subcontract (emphasis added):”Disallowed costs are an important and integral part of the contractor’s commercial arrangement with the subcontractor.”

The Z clauses for this particular subcontract added 56 pages (not prompted by the client) to the original NEC document. Incidentally, it is becoming common for amendments to be made, not via Z clauses, but through manipulation of the digital versions of the NEC subcontract.

The industry - much more than its clients - is responsible for generating needless costs in the process of project delivery

On many projects under the (abandoned) Building Schools for the Future programme there were no main contract retentions. But, lo and behold, retentions were being deducted in supply chain contracts. This undermines the argument that we only deduct retentions because the client does.

Defence Estates’ regional prime contracting arrangements are usually for five years; such a period allows for better cohesion of delivery teams and, as a result, greater efficiencies. But one top 10 contractor has taken it upon himself to insert a clause in his subcontracts that gives him the option to terminate the arrangement after one year!

Another high profile contractor insists that “category A subcontractors” pay a fee for his “management services”. But it seems that the services are actually provided by the subcontractor who is given an “opportunity” to “influence design and key decisions” during the pre-construction process.

Oh! Here is another “management service”:“Valuation, certification and payment in accordance with [the main contractor’s] fair payment charter.”

If I were a subcontractor I would charge a fee for the following “management service”: “Assembly of endless documentation as required by the main contractor to support interim payment applications.”

Pre-qualification also generates waste. The Safety Schemes in Procurement Forum has achieved much success in persuading different pre-qualification scheme providers to recognise each other’s requirements. The government has now made mandatory the use of PAS 91 - a new pre-qualification standard - across all central government procurement. But, again, such standardisation is unlikely to spread along the supply chain.

Moreover, there are some organisations that appear to be extremely reluctant to become part of mutual recognition arrangements. Prominent among these is Achilles, which audits firms under its Building Confidence scheme for major contractors such as Lend Lease and Skanska. Firms have to pay a fee of £3,500 and be annually audited to qualify for this scheme. Many firms complain that, after going to all the trouble and expense of being audited, jobs have been let to firms that are not part of the scheme.

Sir Michael Latham has often made the point that the greatest potential for cost reduction, through the elimination of waste, lies within the supply chain. Unless the industry can clean up its own act, its complaints about clients will - rightly - fall on deaf ears. Neither should the industry complain if, not having put its own house in order, clients now seek to do so.

Rudi Klein is a barrister and chief executive of the SEC Group