Can standard-issue building contracts cope with today’s changing realities?

Paul McNeive

Construction costs are rising at a rate that leaves contractors exposed to great risk after winning tenders for work

September 23 2021 02:30 AM

In the busy property market, meeting increasing demand from the private sector, together with public-sector pressure for housing and infrastructure projects, will require exponential growth in output from the construction industry.

However, issues exist as to whether or not contractors will accept the existing standard building contracts in both private and public sectors – or must they be amended to reflect new realities?

That was one of the points recently put to me by Jarleth Heneghan, a partner at William Fry, who is both a lawyer and a chartered surveyor, specialising in construction and project law.

For many years the standard form of private sector building contract is that recommended by the Royal Institute of the Architects of Ireland (RIAI). In the public sector it is the Public Works Contract (PWC, employer-designed).

Last year a new private sector form of contract was launched with support from bodies such as the Construction Industry Federation (CIF), Engineers Ireland, and the SCSI.

Mr Heneghan told me that the objective of the contract is to achieve a fair allocation of risk between the parties, and promote sustainability and efficiency in the industry. The balance of responsibility historically sits with the contractor in the RIAI standard form contract, and with the client in a PWC contract.

However Mr Heneghan says the new form of contract – though it has advantages in dealing with sub-contractors, insurances, force majeure and changes in the law – is not yet widely used.

The slow adoption of the new form of contract is a question for the industry, and he suggests it may be due to familiarity with the RIAI contract.

Problems are emanating from the rapid increase in the cost of materials and labour, and in the supply of materials, exacerbated by the pandemic and Brexit.

In a fixed-price contract, the contractor is at risk where costs overrun. Although the standard RIAI contract makes allowance for price variations, many contracts are amended to shift risk to the contractor for cost increases.

Hence, contractors are finding contracts potentially uneconomical, and are looking for opportunities to challenge them – especially in the public sector.

The main issues are that PWC contracts are strict on delay, do not have force majeure clauses, do not provide for the pandemic, and offer limited ability to recover costs.

Some contractors, who have reached ‘preferred tenderer status’ are insisting on renegotiating contracts. According to Mr Heneghan, PWC contracts place high risk on contractors, sometimes causing them to withdraw from public tender competitions, or to progress claims opportunities – in an attempt to redress the balance of risk.

There is currently no contractual ability in Ireland in PWC contracts to better share risk between the parties and engage in collaboration, as is the case with UK public-sector contracts.

Problems also arise where the completion of buildings is delayed due to the late delivery of key building components, as factory production has been slowed by the pandemic and Brexit. Again, the contractor, in both private and public contracts, is at risk of bearing the additional costs.

Mr Heneghan will present a workshop to members of the SCSI on ‘Current Trends in Contracting’ on September 29, which all surveyors should attend, not just those in the development sector, as this topic is foremost in clients’ minds.