Sector - Legal
Shortages Causing ‘Adversarial Atmosphere’
Materials shortages across the construction industry are leading to contractors and developers becoming ‘increasingly entrenched in their views and adversarial’, lawyers at Womble Bond Dickinson have warned.
The shortage of key materials – especially steel – is proving so damaging that WBD says it could change the way contracts are negotiated in the UK.
It was recently revealed that construction disputes have more than doubled in value in the space of just one year, with three quarters of those surveyed saying that their projects had been affected by the pandemic.
Jessica Tresham, construction partner at Womble Bond Dickinson, said a return to the ‘dark days of the 80s’ could be on the cards if materials shortages aren’t resolved soon.
“Contractors and developers alike are being left in completely untenable positions because the cost of developments is varying so greatly. Steel alone is subject to price fluctuations of up to 30% – and the cost of steel is a major proportion of many modern projects,” she added.
“Delivering a project for the agreed cost is becoming difficult – and in some cases, where materials can’t be sourced, completely impossible. We’ve come a long way since the 80s, when it felt as if everyone was sparring all the time, but this feels like the closest we’ve ever come to returning to that kind of environment.
“We talk about collaboration and flexibility when it comes to contractual negotiations, but we are seeing businesses being forced to dig their heels in, becoming increasingly entrenched and adversarial, because their very existence is being threatened by the complete unpredictability of these market forces.
“At the start of this year we were warning people to prepare for the unexpected, and here we are. I doubt anybody could have predicted the scale of materials shortages we are now faced with.”
Jessica said the shortage was undermining what should be a boom time for the construction sector in the UK.
“It’s especially bittersweet right now, because Government strategy is centred around building our way to an economic recovery. There is real, pent-up ambition to invest in major developments, in housing, in eye-catching capital projects, but that determination is being undermined by the supply crisis,” she commented.
“You can’t rebuild Britain on good intentions alone: the sector needs materials and needs them urgently.”
According to Jessica, a US-style model, in which contracts are agreed with built-in cost flexibility, could be a viable option.
“In the US, projects will be tendered for, and contracts signed, prior to costs being decided based on factors such as market forces. Perhaps this is the way we will need to go in the UK if the market is to get moving again,” she said.
Jessica has also warned that co-operation and flexibility from all parties remains the best way to progress smoothly.
“In January we were recommending that businesses don’t panic, that they attempt to diversify their supply chains, review their subcontractor pool and undertake a thorough assessment of forthcoming work, to include cash flow, project timeframes, quality, profit margins and contracts.”
“All that advice still stands, for now. Risk management will be a major topic of conversation for the foreseeable future.
“Gather as much data as you can to create a supplier dashboard of UK suppliers and imported materials. Continuously watch out for potential disruption and risk and assess how your project controls, risk management and governance processes could handle any changes to suppliers.
“Think about vulnerabilities in your supply chain and how they could impact you financially and legally – consider cashflow, loan repayments, terms and contracts. How would you overcome or mitigate this?
“Work with suppliers to agree fair payment terms to ensure sustainability of UK supply chain and to futureproof needs.”
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