At last a draft Construction Bill, but at what cost?

So - the draft Construction Bill has arrived. The only surprise is that there is no surprise. As expected, the Bill mirrors the proposals in the last consultation paper of June 2007.

None of the responses to that paper have, it seems, altered the government's views on any of their proposals. The proposed areas of action and inaction were summarised in my article in Building last year and the accompanying in table. I have two concerns – one short term and one longer term.

In the short term I fear that the process by which the draft Bill has been arrived at may be torn apart. It appears to be based on the following three pillars:

The consultation process

The government’s admirable aim is to “work on the basis of consensus”. This goes beyond the 71 responses to the June 2007 consultation paper, which are now helpfully analysed.

Only 10% of the total of 71 respondents were classified as main contractors and clients. A third of responses were from “subcontractors”. The balance comprised adjudicators (20%), solicitors (24%) and industry bodies (13%). Input from the payer community is, like the original Act, thin on the ground. The difference, this time, is that there has been a greater opportunity for them to comment – although they might query whether they have been heard.

The analysis relied upon to support the government’s proposals (as now set out in the draft Bill) generally refers only to the level of support among those 71 responses - apparently giving them equal weight. So, the response I submitted on behalf of my firm is given the same weight as each of those provided by more representative bodies such as Constructing Excellence, RICS, RIBA and CIC.

As an example of how this works: we are told that 76% of respondents supported banning pay when certified clauses. Is this anything approaching consensus if (as one might expect) all, or the vast majority, of the main contractors who responded opposed the ban on pay when certified clauses?

This is before one even grapples with the consequences for PFI/PPP of a ban. In PFI/PPP transactions pay-when-certified clauses are a common feature but cannot be described as a payment abuse. Unfortunately early on in the review process (in October 2004) the government ruled out taking action with regard to how the Construction Act applies to PFI/PPP transactions.

Guesstimates as to how common the problems that the draft Bill seeks to address are

As these seem to be based exclusively on the views of the 71 respondents, some might question how authoritative the results really are. To compound matters, I suspect (or perhaps, hope) that among respondents I was not alone in finding it impossible to estimate the prevalence of some of the problems that the government proposes addressing.

A cost/benefit analysis

In many cases the estimates provided just do not withstand scrutiny. For instance, we are told that improving the adjudication regime as proposed should save the industry £1m a year. Over half of that £1m saving supposedly comes from banning clauses that require the referring party in an adjudication to pay his own and his opponent’s costs, win or lose. There is no recognition that all this means is that the responding party will pay its own costs instead. Therefore, there is not a saving to the industry at all – but just a reallocation of costs between parties.

The estimates are presented in a manner that only seems designed to support the chosen approach. That is described as the Targeted Regulation (“TR”) approach: a “light touch and proportionate amendments to the existing framework” and “to intervene where the legislation has shown to not have delivered its original objective”.

Sounds fine, but the Extensive Regulatory Intervention (“ERI”) is rejected because it would impose “considerable transitional burdens on the industry and its customers”. These appear to be costed to be less favourable to the industry – to the tune of a total of merely £8,000 – than the TR approach. However, on a closer examination one sees that it depends upon which cost-saving proposals are allocated to one approach over the other.

In fact, the government’s preference for the TR approach seems to be based on an assumption – for which not even guesstimates are provided – that “the Construction Act has had a large role to play in improving the efficiency of construction supply chains since it came into force”. Many would contest this.

The government also suggests that the Construction Act has improved cash flow, one of its two principal aims (the other being to improve dispute resolution), but again this is debatable and no evidence is provided to support this assertion.

Despite this, the risks of doing nothing are said to include:

• “increased litigation” and “large numbers of small/micro companies – the lifeblood of the industry going out of business”.

• “uncertainty over the industry’s ability to deliver projects on time and on budget (e.g. Wembley, Cross Rail, etc.)”.

• “disputes under construction contracts were threatening the viability of individual businesses and eventually would undermine the long-term health of the construction industry”.

The evidence relied upon for these assertions is not stated. Nor is it clear how the proposed “fine tuning” of the Act will prevent such dramatic occurrences. Nine out of 10 of Act-avoidance devices that I identified in my article would survive. The one that does not survive would fall within the draft Bill’s ban on pay-what-certified clauses.

Ironically enough this prohibits another practice that is not a payment abuse that is used in management contracting. For many this only emphasises why a more flexible legislative approach (like the Unfair Contract Terms Act) is needed to defeat subversion of the Construction Act’s aims while preserving acceptable practices.

What happens next

However, the government’s views now seem set in concrete. It appears only to be concerned to have feedback on the niceties of its drafting of the new Bill, responses for which are due by 12 September. But for the various industry interest groups memories will still be fresh of the two major U-turns the government made during the review process last June (on contracts in writing and payment notices). This will no doubt spur them on as the Bill incurs the slings and arrows of lobbying and parliament.

The changes could be enacted by autumn 2009 within the Community Empowerment, Housing and Economic Regeneration Bill. They will only apply to construction contracts entered into if and when the Bill comes into force. As the House of Commons’ report last week pointed out though, one significant risk for the passage of the Bill is that the Department for Communities and Local Government rather than BERR is sponsoring it.

Interestingly the government suggests reviewing the proposed changes, once they are enacted, in about three years’ time – “to judge whether the expected benefits have been realised”. So – there might be only a short respite after the new Act comes into force before we are again talking about amending it.

But to end on a positive note – the Act has been successful (certainly as far as adjudication is concerned) and at least the government remains sufficiently interested in the industry to give it parliamentary time.