Lens Blog – Don’t sign your life / company away

Our consultancy has never been busier dealing with so many commercial and contractual issues for clients. I’m afraid it’s just a sign of the times as financial pressures continue to mount within our construction industry in the UK.

A consistent problem that I see, is the price that so many contractors are now paying for entering into contractual terms some time ago, with the problems coming home to roost now because sadly they’ve entered into contracts that have significant amendments and onerous and unfair provisions, and they are now having to fight their way out of a difficult situation, because of this.

The purpose of this article is to get some advice to readers to try to ensure that they don’t get into a contractual mess, as they chase work opportunities.

So, the first message, and some of you may feel this blindingly obvious, is that when a contract comes in for tendering, then read the contractual provisions to establish if these are too onerous for you even to consider putting a bid in. I had a phone call last week from a construction organisation who said they were going to send me a contract over to review, and in response to my question they said that they were starting the project on site a few days later and quite frankly that is hopeless. So, you need to understand from the outset exactly what it is that you are going to be getting into, to ensure that you don’t sign your company away at a future date.

The Finishes and Interiors Sector has now set up for its members a Contract Review Service and member organisations can contact one of the specialist consultants about a contract which can be reviewed relatively quickly, and any high risk clauses can be identified. So, you then have a number of options once this has been established – you can decide not to tender, or you can approach the client’s /main contractor and discuss with them these contractual provisions to see if they can either be removed or watered down to an acceptable level.

This has become for me at least a regular feature of contract negotiation and I must say that we have had an encouraging response from the other parties involved and we have been successful in managing to negotiate onerous risk clauses out of the contract.

Whilst these Reviews are being carried out by outside consultants, in my opinion senior commercial managers in contracting organisations are more than capable of reading these contracts and highlighting for themselves any problem clauses that they can discuss with their estimators and senior management, and it really is not necessary for contractors to face the costs of going out with their organisations. During the course of some of my recent podcasts I have said quite forcefully that a number of commercial managers and construction organisations really need to get themselves up to speed in relation to fully understanding the various contracts that are used. They need to be aware of and to understand the provisions of JCT 2024 and NEC 4.

Readers will or should be aware that JCT are in the process of publishing amendments to the previous contracts and a number of these had been released and there is plenty of available information that will allow you to understand what these recent amendments are, and what their implications are, and in my opinion most of the changes are helpful and are to be welcomed.

NEC4 takes a lot of study and understanding, and many organisations will require them to send their commercial managers and project managers on some of the excellent training courses that are run by NEC and other organisations. Again, there is a host of information available on understanding this contract clause by clause. CECA has published an excellent set of bulletins that take you through clause by clause.

So, what do I see as the problems that are emerging? First, as I say, you need to understand the standard forms and the different contracts and subcontracts that go with these. There is a mounting campaign now to challenge why standard contracts are being amended and this is something that I have spoken about vociferously for the last 15 or so years, because I completely oppose any amendments to these standard contracts. Rest assured that these amendments are not there to help the contractor, or the contracting supply chain and they are in my experience an attempt to transfer greater risk than is necessary to the contractor and the contracting supply chain.

In my view, a large number of clients in the UK seem to fail to understand that if you transfer risk to the contractor then that will come at a price which at the end of the day the client will have to pay so the whole exercise is completely pointless, and I continue to challenge clients and lawyers who continue to amend the standard forms.

The other bad, and completely unacceptable practice is to provide you with page after page of amendments of clauses and this can take a number of days to analyse these and establish exactly what the implications of these amendments are, and if people are going to continue to amend contracts, then they should do so by way of tracked changes, so the contractors can see at first glance what it is that they are getting into.

So, what are some of the amendments that are appearing? Amending payment terms is a regular occurrence, as is extending the notice period, the contractor has to give in relation to suspension for non-payment from 7 to 14 days, and also linking retention release to the date of completion of the main contract and not the work of the subcontractor. I see also ridiculous attempts to impose liquidated and ascertain damages on subcontractors and as an example I was advising a client recently where the liquidate damages provision was £50,000 a week and my client’s package had a value of about £250,000 so the damages provision were completely disproportionate. The contractor unfortunately was unable to budge on this, so my clients just returned the tender documents.

Difficult though it may be, particularly in present times, where many contractors are desperate for work, but on occasion you simply have to say NO, this sub- contract is not for me. Interestingly another colleague who I work with mentioned to me recently that one of his clients received a heavily amended contract, and they had to reflect the risk implications into their price, and they said to the employer I will give you two prices one based on your amended contract and one with these amendments taken out and needless to say there was substantial and significant difference.

Subcontractors also need to be aware of the fact that many contractors have developed their own terms and conditions and again these need to be read very carefully just to establish where the high risk clauses are and again issues like payment, retention, instructions, variations and in particular termination provisions all feature heavily. We are definitely seeing termination provisions that allow the clint/contractor to terminate for any reason and one set of words that has plagued this industry for ever has been the term “failure to proceed regularly and diligently”.

I think it is highly unlikely that you will ever be able to persuade a client or a contractor to remove that provision, so what it means in effect to protect your own company, is to make sure that you are communicating regularly with the client and the contractor to notify them of any delays to your progress or any disruption or any other circumstances that are preventing you from failing to proceed “regularly and diligently”.

So, in summary the answer is that you must review contracts that are coming in for tender, to identify any amendments and risk transfer clauses and to establish any onerous provisions that could have an impact on your tender price. Don’t leave it too late. Don’t be put off by trying to negotiate and improve contractual provisions, and if necessary, don’t be afraid that you will just have to walk away from the contract, and I know that is easy for me to say, that but that is often the advice that I have to give to clients.

I did so recently and one of my client said, “Len I hear what you say, and I agree with what you say, but we badly need the work therefore I’m going to go to take a chance and if issues arise then I will worry about them in six months’ time”, and my fingers are crossed that I don’t get a call from this client in six months’ time.

Before I finish, please sign the Conflict Avoidance Pledge!!

For more information about the Pledge, see who has signed it to date and to sign up, go to www.rics.org/capledge

len@buntonconsulting.co.uk

07769 670089

FIS publishes short blogs by its Consultant Len Bunton on contractual and commercial issues he experiences when supporting FIS members and the wider community – it is designed to help FIS Members avoid common traps and build on the FIS focus on collective experience. The blogs are published fortnightly as FIS member only content and released to SpecFinish two weeks after publication.

Len provides an initial free one hour consultation to FIS members to discuss and review specific issues and to help develop a strategy to address. Should further advice and support be necessary, thereafter then Len will agree the necessary fee levels with each FIS member.

You can find out more about FIS membership here.