Surviving the recession with NEC3
This article was posted in NEC3 Newsletter 46 April 2009
David Bowen of Lexius says there have been a few negative comments in the media recently about collaborative working from disgruntled construction-industry commentators feeling the pinch. However, the reality is that partnering in tough economic times is only unwelcome
news for lawyers – parties are far less likely to end up with a costly dispute when they decide to collaborate. There are a lot of wise clients out there who, unlike the commentators, have realised the benefits of collaborative working though a recession. They are not ready to throw in the towel just yet. True, these are testing times for everyone, but parties that work collaboratively seem to be weathering the economic downturn better than most. Here are some of the reasons why.
news for lawyers – parties are far less likely to end up with a costly dispute when they decide to collaborate. There are a lot of wise clients out there who, unlike the commentators, have realised the benefits of collaborative working though a recession. They are not ready to throw in the towel just yet. True, these are testing times for everyone, but parties that work collaboratively seem to be weathering the economic downturn better than most. Here are some of the reasons why.
Quicker delivery
Collaborative working supported by accurate targets and robust open-book accounting systems delivers works and or services much quicker than traditional priced contracts – including private-finance-initiative schemes. At times when many public authorities are trying their best to bring forward spending, they would do well to consider collaborative working with target-cost and or cost-reimbursable options, including the NEC3 Engineering and Construction Contract (ECC) and Term Service Contract options C or E. These price options provide a quick route to market and deliver probity for public expenditure.
Managed risk
NEC3 contracts enable clients to identify, allocate and manage risk. When times are tough and there is increasing uncertainty, focusing attention on construction risk and managing it sensibly is a good thing. This is not a time to bury heads in the sand. If there is a risk register in a contract it should be used, not ignored! It is all too easy simply to ‘pass the risk parcel’ and allocate risk 100% to one party or the other.
Now is not the time to start dumping risk as it will be paid for through delays and/or increased costs. This is what happens in a traditional priced contract. Transferring a risk that cannot be managed or mitigated does not make any sense. It might also be the last straw that drives a supplier into bankruptcy and the client will be left to pick up the pieces. Adopting a sensible approach to risk management is even more important in tough times like these.
Cost transparency
In a credit crunch it is good for clients to know what they are paying for and to have better cost predictability, so that clients know how much they are going to end up spending. Why grant a licence to print money when money is in short supply? Cost-reimbursable contracts such as NEC3 ECC options C, D and or E combined with good open-book accounting provide clients with visibility of what they are going to pay and when they are going to pay it. For example, if there is low inflation and even deflation, they will only pay for goods at current market rates.
The same cannot be said for traditional fixed-price contracts. Clients may end up paying a premium and, even if they have price-adjustment indicators (perhaps using the retail price index), these may not reflect construction prices and will probably not compensate them for any loss. With good open-book accounting there will be no nasty surprises with claims appearing out of thin air. No one can try to charge more for something under NEC3 contracts because there is a robust audit trail and clients can rely on provisions in the contract for disallowed cost.
Quality suppliers
Traditionally, construction supply chains were selected by lowest price and this had the tendency to throw up some very bad results. The outcomes were often loss-leading bids leading to disruption, delay, disputes and claims. We should not forget the past: before the advent of partnering, the construction industry was indicted for delivering too little, too late and at too much cost. Let us not return to the bad old days. Users of collaborative NEC3 contracts should continue to
ensure that suppliers are selected on qualitative criteria for overall ‘value’ and not merely the lowest price. This is all the more important as clients develop long-term relationships with their supply chain.
Guaranteed rewards
It is no use if contractors and their supply chains go bankrupt – there will be no winners. But if it does happen and the client is using a target-cost reimbursable contract, it will be better off than if it had used a traditional priced contract. The reason for this is that the client will only pay for legitimate proven defined costs. They will tend to pay less where termination occurs. Other traditional contracts with fixed-rice mechanisms pass more of the risk onto the contractor but in the end it is the client that pays. Collaborative working using NEC3 ECC options C, D and E guarantees a percentage for profit and overhead (direct / subcontract fee). In uncertain times, a guaranteed fee is good for business and good for the economy, helping to maintain a measure of confidence in construction markets.
Construction is a high-risk activity so the last thing suppliers (and their banks) need at times like this is to put their overhead and profit at risk. Target-cost contracts with pain or gain incentives can strike a sensible balance between risk and reward, but the contractors can at least see that they will earn profit provided that they perform.
This article has been written by David Bowen (April 2009), for more information see his website at whichcontract.com.
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