Back-to-back basics

But I recall one conversation I had some months ago with Brian Moone, director of the Construction Best Practice Programme and Corrina King at the Chartered Institute of Building. The topic was: do contracts add value? I can't remember whether we reached any conclusions, but I reflected upon this question for some time after.

We expect the construction process to consist only of activities that add value – and this includes contracts. The history of litigation is littered with the corpses of contracts that have not worked. This, together with disputes about whether or not there was a contract in the first place, has dominated construction litigation. Even so, some standard forms of contract, such as the JCT forms, have managed to survive in spite of severe judicial maulings.

So what are the tests for determining whether contracts add value? Well, there are the blindingly obvious ones: have all the relevant documents been properly incorporated? Is there consistency within the contractual documentation? Then there are three slightly subtler ones: is the contract brief and concise? Does the contract define the scope of the works and the responsibilities of the parties? Does it clearly and fairly allocate risk?

Consider the first of these. The contract for a nuclear submarine covers a tiny number of pages. Those for a £20,000 job in construction can easily fill more than 100. Well, some say, so what? The contract is put in a drawer and not looked at until there is a problem. I find this view utterly daft. If the contractual documentation is riddled with ambiguities and inconsistencies, how can it be effective, even to address problems?

Now consider the second. According to research carried out in the US in the 1980s, the failure to define the scope of the works and the responsibilities of those carrying them out was the cause of most disputes.

Building contracts in the construction industry will also add value when they properly address risk issues

The fact is that contracts do not address this matter adequately because everybody prefers to use weasel words and leave responsibilities open-ended: this is what defensive contracting is all about. I have occasionally seen the following catch-all provision in specifications: "And the subcontractor shall design the subcontract works according to the engineer's intent." Mind-readers sign up here.

Contracts will also add value when they properly address risk issues. It is often said that contracts are supposed to allocate risk. In construction, it is allocated to those further down the food chain. As a result, contracts do not identify or quantify risks or determine how they should be shared, so it is little wonder that the industry wastes billions of pounds, including contingencies in tenders, because nobody (including clients) wants to discuss risk.

What matters is whether or not contracts are "back-to-back" – meaning that all risk is cascaded down the supply chain. Worse still, the back-to-back philosophy has generated extensive litigation in this and other common law jurisdictions. Unfortunately these arrangements create a great deal of uncertainty – especially downstream – with regard to matters such as payment entitlement, obligations relating to time, and disputes.

Perhaps we should seek to establish key performance indicators for contracts to track whether they add value. I am not suggesting that contracts will make a difference to the abilities of the parties to perform; rather, we should be able to assess the extent to which the contract in question has added value by addressing the matters discussed.