With the last recession a distant memory for many, perhaps it’s time to remind ourselves of the steps we should be taking in case things get a bit tougher in the coming months
I don’t mean to be gloomy, but with endless reports about the credit crunch and recession, job losses and price rises, things are not looking too promising. It has been almost two decades since the start of the last recession and almost half the industry will never have experienced one before. So let’s remind ourselves what we can expect and what we can do to minimise risk.
The first point to make is that risk will increase. There is more chance of one of the parties going bust, or at least having cash flow difficulties, plus there will be less work around, which means keener prices and increased competition.
So we need to ensure, as far as possible, that we understand the risks when entering into a contract and do what we can to minimise them. The proliferation of new contract forms over the past decade or so has not helped in this regard. Many of these have not been through a recession and have not really been tested. The message here is do what you can to go for unamended standard forms and be extra careful about signing contracts that you are not familiar with.
The other key point is to sign the blessed thing! When times get tough, there is more chance that the contract will actually be used as parties look for wriggle room.
You will be more exposed by not signing your contracts, be it the building contract, consultant appointment or anything else.
Other measures to include in your contracts to reduce the effects of possible insolvency will also take on greater significance. Bonds, either performance or on demand, collateral warranties and parent company guarantees should be insisted on. You should ensure you are clear on who has the copyright should the designer go bust, who owns the materials, and that there is a simple and understood procedure on what to do should one of the parties go down.
Finally, all parties need to check out each other’s finances before embarking on any new work. Again good practice, but how many people have taken this seriously in the past few years?
As tenders are priced more keenly other ways have to
be found to make the margin. One is maximising returns on any changes, the other is claims
As soon as work is under way, vigilance against financial difficulties for any of the parties is vital. Signs such as the non-payment of subcontractors, late delivery of materials, frequent changes of personnel and works lagging behind programme should be monitored closely and taken seriously.
More unscrupulous payers, or those with cash flow difficulties themselves, will be looking for opportunities to delay or avoid payment. This means that complying with the correct procedures under the contract takes on extra significance. Do not give your employer an excuse not to pay. We have all become far too used to getting away with sloppy practices and substandard administration. However hard the times, it is much easier to get paid if you have complied properly with the contract procedures.
The other factor to bear in mind is the increased propensity for claims and disputes. Contractors or subcontractors will be looking to keep turnover up, even with less work around, and so will price tenders more keenly. This means other ways have to be found to make the margin, one of these being maximising returns on any changes, the other being claims. Neither of these can really be made without changes or influences from the employer, therefore it is even more important for the project to be set up properly and, dare I say it, designed in advance.
With less demand, employers may need their buildings less urgently and so some of the time pressures may be off. However, contractors be warned, when the time pressure for employers is off, there is more time for insistence on a top-quality product.
Finally, with less work around, existing relationships become even more important. Employers may just prefer a contractor with whom they have a continuing relationship rather than opening themselves up to the vagaries of open tendering in a difficult market. Of course, resisting the keen tenders may be just too difficult.
As pressure on margins grows, now is the time to minimise your risk with plenty of prudence and good old-fashioned contract administration.
- This article formed the basis of a breakfast seminar on Thursday 8 May in London. For details go to www.cyrilsweett.com
Tim Tapper heads a team of contract and dispute resolution specialists at Cyril Sweett