Chris Horsley: Construction Resource Crisis – Scottish Government Guidelines

Chris Horsley

Chris Horsley deals with measures that public buyers can take to try to alleviate the current resource pressures of the market.

The ongoing bottleneck in building materials supplies hit the headlines in the industry.

On July 28, 2021, the Scottish Government responded to the situation by issuing guidelines – Resources for Construction Projects: CPN 3/2021 – with suggestions for actions that contracting authorities can take to try to address current market pressures on resources cope with and mitigate.

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The guide recognizes that there are differences in challenges related to projects that are currently in the process of being contracted and those that are either already on-site or about to be.

In the case of contracts that have already been concluded, the parties are bound by these agreed terms, so the focus must be on solving difficulties through careful ongoing contract and relationship management.

Given this focus, the main suggestions in the guidelines are reversed:

  1. reviewing and reviewing the terms of the contract and available evidence to demonstrate the impact on the project; and
  2. honest and open discussions with contractors about mitigation.

On the one hand, it recommends obtaining legal advice so that the contracting authority is aware of its contractual rights.

On the other hand, it also suggests that the most effective solutions are likely to be found in working closely with contractors to determine how best to mitigate risks to the execution of projects.

It’s a balancing act between knowing your rights and accepting that a negotiated solution could be more effective in producing a positive outcome.

Projects in development

If contracts have not yet been fully agreed, the guide recommends contracting authorities to carry out an urgent review of the feasibility and profitability of the project.

If this review reveals significant problems, it is recommended that contracting authorities reconsider whether some projects should be brought to market at this stage. It is widely believed that the current market disruption will have subsided by the first quarter of 2022.

Again, an open discussion is recommended in order to achieve better results. It is crucial that these discussions took place before the contract was signed.

When preparing offers, it is recommended that price fluctuation clauses be included in tender documents and contracts, as opposed to strict adherence to the fixed price tenders typical of the public sector.

Price fluctuation clauses have been around for many years but have rarely been used in practice. Are we seeing a change now?

In order to achieve the desired effect of reducing the base offer price, careful elaboration is required, while at the same time reliable ongoing evaluation measures are taken to keep track of the actual costs incurred during the implementation of the project.

collaboration

The core of the guide is collaboration.

It is strongly recommended that contractors do not have to assume an unreasonable distribution of risk with regard to the current volatility and that a price-performance ratio for the contracting authority can be achieved with reasonable recognition of a valid market situation.

This was a consistent message from the Scottish Government’s recent guidelines. It echoes the tone of the government’s Covid-19 advice to contracting authorities.

Interestingly, we haven’t seen these guidelines lead to a consistent approach to Covid-19 aid, with public agencies offering their contractors a number of different levels of assistance.

What now?

We assume that strategies will continue to vary from case to case.

In practice we have seen a wide range of positions from contracting authorities lately. These have included program extensions; and primary material procurement by the contractor, which is taken over by the client.

It is important to consider the legal implications of any action taken to address the material shortage. The best of intentions can lead to unintended consequences from a legal perspective.

However, working together on the basis of mutual assessment of a risk to which neither party is to blame appears to be a pragmatic approach.

Chris Horsley is a director at Burnes Paull LLP