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Does Contract-management need a re-think after the Covid-19 crisis?

July 14, 2020

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The Covid-19 pandemic has been a disaster for the construction industry, particularly in the GCC region, where the knock-on effects of depressed oil prices will lead to more layoffs and project cancellations.   

Contractors are being badly affected in current circumstances: migrant workers have returned to their home countries and may not come back any time soon. For the workers who remain in country where the projects are located, new health and safety requirements for PPE and social distancing will mean work will be more expensive to carry out and fewer workers may be permitted on site. The knock-on effects will lead to cost escalation and project delays. In addition, supply chains for materials may be broken, leading to shortages and further price rises.

In the circumstances how should contract owners respond to the plight of the contractors? Should they adopt the usual contract management approach? This would mean pointing to the fixed price in a lump sum agreement and reminding the contractor that the risk of cost escalation falls on him, not on the contract owner. Should they trigger the default clauses in their contracts, such as an entitlement to liquidated damages or penalties for late performance, withhold payments where specifications have not been strictly followed or resist claims for price escalation? Contract owners may feel that they are entitled to exercise these rights, but the question is – should they do so?

Instead, should contract owners adopt a more collaborative, partnership-focused, way of working? After all, this pandemic has touched everyone, although some have been more badly affected than others. 

And what is the role of government in all of this? In many cases governments themselves will be contract holders through the majority ownership of national oil companies and utilities. But governments can also set policies and create new laws that could foster a more collaborative way of working with the contractor community.  

The UK government, for example, issued in May 2020 its Guidance on Responsible Contractual Behaviour Guidance in the Performance and Enforcement of Contracts Impacted by the Covid-19 Emergency,  https://bit.ly/ukgovRCB  in an attempt to protect and sustain the British contracting industry. In this document the UK government is “strongly encouraging all individuals, businesses (including funders) and public authorities to act responsibly and fairly in the national interest in performing and enforcing their contracts, to support the response to Covid 19 and protect jobs and the economy.”

The guidance goes on to “recognise that parties to some contracts may find it difficult or impossible to perform those contracts in accordance with the agreed terms as a result of the impact of Covid 19 – including through illness in the workforce, the effects of restrictions on movement of people and goods, revised ways of working necessary to protect health and safety, the closure of businesses or the reduction in a party’s financial resources available to make payments otherwise due under the contractual arrangements”.

Contract owners will recall what happens when large building contractors get into difficulties. The collapse in early 2018 of Carillion, the British contractor, demonstrated very clearly to its customers and sub-contractors how painful it is when a major construction player is unable to continue with its contract obligations. The UK Government was heavily criticised for giving new work to that company when it was already in financial trouble. Those contract awards led to significant losses of public money when Carillion eventually went bust.

With a global recession forecast, it seems very likely that public sector contract owners will have to face up to this question – do we support our contractors with advance payments and new contracts, knowing that this may be “throwing good money after bad”- or do we exercise our contractual rights and protect ourselves – even if that means signing the death warrant on companies that in the past have been good contractors?

These problems will not just be a feature of developed countries like the UK. We can already see signs of financial strain in the GCC region.  

The contracting industry is in for a very torrid time over the coming months. How contract management professionals view their roles and exercise their judgements will play an important part in determining what kind of shape the world of construction is in when the crisis is finally over.

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