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

The COVID-19 pandemic has significantly disrupted the construction industry worldwide, with pronounced impacts in the GCC region. The dual blows of the health crisis and depressed oil prices have led to project cancellations and layoffs, creating an urgent need to reevaluate contract management practices.

The Challenges Facing Contractors

Contractors are grappling with a multitude of challenges:

• Labor Shortages: Many migrant workers have returned to their home countries and may not return soon. Those who remain face new health and safety protocols, including mandatory PPE and social distancing, increasing labor costs and limiting workforce availability on site.
• Supply Chain Disruptions: Broken supply chains have resulted in material shortages and escalating prices, further complicating project timelines and budgets.

Contract Owners’ Dilemma

In these challenging circumstances, contract owners must decide how to best support their contractors. Traditionally, they might rely on strict contract enforcement, holding contractors to fixed prices in lump-sum agreements and activating default clauses for late performance or cost escalation. However, this approach could exacerbate financial strains on contractors already struggling due to the pandemic.

Instead, a more collaborative approach could foster resilience in the industry. The pandemic has affected all stakeholders, and cooperation may be key to navigating these unprecedented times.

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The Role of Government

Governments can play a pivotal role in promoting collaborative contract management. In many cases, governments are major contract holders through national corporations. They also have the power to set policies that encourage fair and responsible contract enforcement.

The UK government’s Guidance on Responsible Contractual Behavior during the COVID-19 crisis serves as a valuable model. It encourages all parties involved in contracts to act responsibly and fairly in the national interest, acknowledging the challenges businesses face in fulfilling contracts due to workforce illness, movement restrictions, and revised health and safety protocols.

Learning from the Past

The collapse of Carillion in 2018 illustrated the repercussions of a major contractor’s failure to meet obligations. It highlighted the pain experienced by customers, subcontractors, and the public sector when a large player exits the market. The UK government’s decision to award contracts to Carillion despite its financial troubles resulted in significant public money losses.

Looking Ahead

With a looming global recession, public sector contract owners face a difficult decision. Should they support contractors with advance payments and new contracts, risking “throwing good money after bad”? Or should they exercise their contractual rights to protect themselves, potentially dooming companies that have historically been reliable partners?

These challenges are not confined to developed nations. In the GCC region, signs of financial strain are already apparent. The construction industry’s future depends on how contract management professionals view their roles and make critical decisions during this crisis.

Moving forward, fostering a collaborative approach and learning from past experiences could strengthen the construction industry, paving the way for recovery and growth once the crisis subsides.