We start the year in a very different environment for construction than we had in 2008.
Looking hard for a brighter side, at least there are a whole range of problems we no longer have to lose sleep over. Last year the market was so hot you couldn’t find labour, plant or materials, and schemes were backed up in the planning office. Specifications had to be changed to accommodate alternative ‘available’ materials, and even poorly performing companies won high-value jobs that inevitably stretched their management capability.
In some cases, the emergency stop caused by the credit crisis is something of a blessing, as the OFT investigation into construction price fixing slips into the background. It would not be a surprise if the anticipated multi-million pound fines turned into a session on the naughty chair, as the government treads softly softly in an effort to prevent more contractors going bust.
In 2009, bread and butter public sector work will provide cash flow and will be the focus of tendering activity. Over the past decade, public sector clients have been toeing the central government lines and setting up framework agreements at every opportunity. For many contractors that have won places on frameworks – and for those left outside with noses pressed against the glass – there could be ample scope for challenging these public procurement exercises.
This was the case in Northern Ireland last year when the Department of Education was found to have breached rules over a framework agreement that allocated £650m for modernising schools. This shows you should not bet on your public sector employer either knowing the public procurement rules or following them if they do. Such challenges will happen more often in the coming year, as firms eagerly chase the public sector spend.
Mini-auctions under framework agreements are now becoming more prevalent as public sector clients try to take advantage of the dead market and low prices. In essence, the selection of a supplier under a framework should either be on the criteria set out in the agreement, or the employer can re-open competition between suppliers later. The latter now appears to be the favoured option, meaning that framework suppliers will not experience the anticipated reduction in tendering.
My prediction is that the NEC contract will be seen more frequently in the dock
One thing that has been noticeable in the caseload coming through the door is that what were ‘partnering contracts’ are also unravelling as contractors pore over the gain/pain share mechanisms of target cost, and clients attempt cost-freezing tactics such as arguing over what a ‘fixed price’ contract actually means.
Given that central government has told all public sector clients to use the New Engineering Contract, anticipate far more NEC-related disputes, as full and timely cost recovery becomes vital to contractors’ survival. To my mind, the government promoting a private sector product such as the NEC is dubious enough, a bit like the Queen advertising toothpaste. But its enthusiasm has now led the private sector to believe this contract works well and is easy to use.
This is not the case. What we actually see on NEC disputes is that parties do not understand its provisions, and instead have adopted their own ad-hoc approach to contract administration. While that’s barely acceptable in normal circumstances, it could be a disaster when accurate cost control or cash flow are significant, as will be the case in this year’s market.
In essence, I anticipate that there will be a return to a more commercial environment this year, some way from the cloud-filled dream the industry has been living in over the past decade. My prediction is that public procurement exercises will come under closer scrutiny and the NEC contract will be seen more frequently in the dock where its ‘clear and simple’ approach can be given the judicial consideration it really needs. So it’s out with the old year and old problems – and in with the new.
Peter Gracia is managing director of procurement, contract and legal specialist Gracia Consult www.graciaconsult.com