Let's get it right this time: Construction Act changes

About 45 minutes was all it took the House of Lords to debate the intended changes to the Construction Act at the latest stage of their parliamentary passage. Or, to be precise, to debate suggested amendments to the government’s proposals.

Labour peer, Lord Borrie, on behalf of the Specialist Engineering Contractors’ Group, tabled the amendments. They replicated those withdrawn by Lord O’Neill in the wake of the “cash for amendments” kerfuffle (even though he was always upfront about being the SEC Group’s president). The government resisted them all.

There are still opportunities for amendments to be made, but the impression from last Tuesday’s debate is that the government is sticking with its proposals. On one level this is understandable, given that they are distilled from more than three years of consulting with the industry. Also, while SMEs comprise 99.9% of firms in the construction contracting sector, SEC Group represents only 60,000 out of 250,000 of them. Not enough, said the government, to alter course now.

However, the government seems to accept that its changes do not perfectly balance the industry’s competing interests, which do not comprise simply those of payers and payees. This is a recipe for trouble.

The government’s changes fall into four categories: First, there are those that correct mistakes in the Construction Act. These include removing the requirement that, to obtain the act’s protection, the parties’ entire contract (save for trivial terms) must be in writing and – ironically – empowering adjudicators to correct their decisions. Few appear to argue with these.

Second, there are changes to combat provisions that deter parties from exercising their right to adjudicate. Even fewer argue with these (publicly at least). Curiously, though, the government intends to ban only one abuse – that requiring referring parties to pay responding parties’ costs, win or lose (although the ban is broader than this).

The construction act is not perfect, but we risk replacing it with a defective hotchpotch

Its reticence principally arises from a fear about interfering too much in freedom of contract, but this is hard to justify given how far it already interferes in the act and would do so further by its changes. Lord Borrie’s (rejected) proposal of one set of mandatory adjudication rules would prevent at a stroke an array of adjudication-avoidance devices.

Third, there is the overhaul of the payment regime. The issue is familiar: how much should parliament remove the parties’ freedom to agree their own payment provisions? While the government goes so far, it felt that Lord Borrie went overboard with his more prescriptive approach for payments where only payees trigger the payment process and all deductions should be notified nine-14 days thereafter. We are still creeping towards a prescribed “one size fits all” payment regime, and until we have one there will invariably be ways for payers to defer paying (even when they have funds from up the contractual chain).

The joker in Lord Borrie’s pack was his proposal to empower payees to require payers to give “adequate security” for payments at any time after a construction contract is concluded (even if it does not envisage security being given). Otherwise the payee may suspend (after a seven-day warning notice) until the security is given – whatever the reason the payer was unable to obtain it. Such a change would impose significant costs on payers to obtain security (and administer requests).

There remains debate over whether certain payment provisions abuse the act or are justifiable in the context of the parties’ chosen procurement route. This leads into my fourth category of changes: those that will ban practices that nobody would call abuses. Why ban negative certificates? Why ban management contracting? Why continue to include PFI/PPP subcontracts under the act’s umbrella when it only gets in the way of bona fide arrangements?

The Construction Act is not perfect, but we risk replacing it with a defective hotchpotch. The government has admirably tried to cost the impact of its changes, but its figures do not withstand scrutiny. Nor do they reflect the worsened economic conditions since the consultation concluded and the true cost to the industry of changing wholesale its standard forms and payment practices. It will cost the industry even more as we cope with its collateral damage.

While there is the opportunity to legislate, we should focus on addressing the mistakes in the act and abuses of it once and for all so that we do not find ourselves discussing how to deal with them in a few years’ time.