The COVID-19 legacy reaches all corners of the industry, but it’s only one among numerous risks facing the sector in 2021
The disruption to global productivity caused by the COVID-19 pandemic is likely to echo through the coming years. The interconnectivity of the global supply chains that service trade markets means few markets are fully inoculated against the primary and secondary effects of the crisis. This could prove particularly fertile ground for disputes in a construction industry reliant on imported goods, migrant labour and the free movement of services.
“Most markets are at risk – even those that have relatively low rates of COVID-19 are experiencing supply chain issues,” says John Jones, Partner at HKA. “There are certain regions that rely heavily on labour influxes, as well as imported materials and equipment – the Middle East being one good example. It will be interesting to see if the availability of resources becomes more of an issue in the future.”
And the COVID-19 hangover won’t be the only factor stressing the sector in 2021. Fears around the US Presidential handover have eased somewhat in recent days. Nonetheless, it remains to be seen whether the relationship between Washington DC and Beijing can be repaired after four years of severe strain. Meanwhile, the UK is bracing for a potentially turbulent period of acclimatisation as it formally exits the European Union. Andrew Bailey, the Governor of the Bank of England, is among those who consider a No-Deal Brexit to be more harmful to the UK’s economic health than COVID-19.
The $50 billion question: Why are construction disputes so common and so costly?
CRUX Insight 2020 released in October by HKA, is the product of investigations into more than 1,100 projects across 88 countries. The report reveals the astonishing cost and most common causes of disputes and delays in the global construction industry. With the COVID-19 pandemic showing little sign of easing, the prospect of further costly project disruption looms large in 2021; the consequences for an already severely stressed global economy could be far reaching. Join this webinar to hear a summary of the key findings of the report, and discuss viable routes forward for an industry in the next year and beyond.
In construction markets already operating on thin net margins, turning any significant profit is a challenge in itself. The added pressure of price increases borne of new border tariffs may require contractors to seek deals with new suppliers domestically. But time constraints set out in existing contractual commitments may limit the ability to get such arrangements in place, thereby further complicating matters.
This, according to Jones, will test preparedness protocols across the sector: “From the 1st of January, there will be new customs and border controls. The EU plans to implement these immediately; are construction firms ready for that?”
Businesses will need to think differently about risk allocation through the supply chain…
“We are entering unknown territory,” warns Lisa Molloy, Commercial Director at Southbay Civil Engineering Ltd. “There’s going to be a squeeze on capital expenditure; we’re facing a skills shortage. The funds that we were going to draw upon to streamline and modernise the industry are going to be diverted into dealing with COVID-19. So, we are going to have to get clever. When we transfer risk, we have to make sure we are transferring it to parties that can manage and mitigate it. If we fail to do that, the problems will filter down the supply chain, cause cashflow issues and, ultimately, lead to more spurious claims.”
This will require a change in mindset across the industry. Stephen Blakey, Commercial Projects Director with Network Rail, one of the UK’s largest construction clients, believes this must be driven from the top down.
“So much of this revolves around culture. We have actively pursued a culture that maintains and sustains the viability of our supply chain. We insulated suppliers against performance indicators that became undeliverable on account of the pandemic and have taken a benign position on extensions of time. We opted not to pass the risk on to our supply chain.”
This has created what Blakey terms a “stable environment”, in which disputes have been kept to a minimum through an otherwise tumultuous year.
…and contractual clauses relating to disputes and delays should reflect the “new normal”
“Contracts weren’t previously drafted with pandemics in mind,” notes Helen Stuart, Senior Associate, Trowers & Hamlins. “Now we’re all aware of the risk, it’s sensible to amend standard form and bespoke contracts to cater for it. To touch on Stephen’s point: what does this new risk factor mean commercially, in terms of both time and money? In the UK, I’ve worked with the Construction Leadership Council on amendments to standard form clauses that should help the industry. Dispute escalation provisions in contracts can also be very useful.”
Preferred routes to conflict resolution seem to be changing; the past year may have helped focus minds on the need for collaboration
HKA’s CRUX Insights report shows in stark terms the extent to which the industry is still hamstrung by fractious and counterproductive practices. However, there are signs that the pattern of disputes is shifting.
Helen Stuart believes that the precedents established by a growing body of case law will allow parties to predict the likely outcome of pursuing litigation in COVID-19 related disputes. Armed with this knowledge, they may opt for different routes to resolution.
Dr Alex Opoku, Associate Professor in Project Management & Quantity Surveying at UCL Bartlett School of Construction and Project Management, agrees. “We have seen a move away from the more adversarial resolution options. Litigation is costly and time consuming. Some parties still prefer the certainty that it provides because the outcomes are enforceable, but in general we are seeing a shift towards mediation and negotiation options,” says Dr Opoku.
And Dr Opoku notes that cost isn’t the only determining factor in this apparent shift: “Another cause may be the local situation. If you take the example of Africa, there is more appetite to negotiate and settle disputes, because there is an issue with the culture of the court system. Cases in Africa and the Middle East can take God knows how long!”
HKA’s John Jones notes an uptick in independent facilitation. This approach, he says, is expeditious, binding and more affordable. It has also been shown to help maintain positive working relationships between parties.
It’s been commonly stated during our discussions this year that the COVID-19 crisis could serve to accelerate already prevailing trends in the built and natural environment. Martin Burns, Head of Alternative Dispute Resolution Research and Development at RICS, believes the evidence suggests a renewed determination across the industry to breakdown silos. The challenge will be to ensure that, as and when the recovery takes root, there is no return to business as usual.
“We are seeing greater collaboration,” he says. “That needs to be underpinned by mechanisms that aid the early resolution of problems. More organisations are establishing dispute avoidance panels, which are very much about identifying potential issues early and addressing them before they become full blown disputes. RICS is on the steering group of the Conflict Avoidance Coalition; we’ve produced a Conflict Avoidance Pledge, which commits signatories to exploring and using non-adversarial methods of managing conflict. What we’ve seen since COVID-19 pandemic began is a 100% increase in signatories.”
“There is great value in identifying problems whilst they are still only glowing embers in the dry grass,” adds Stephen Blakey. “The alternative is letting them flare up into fires that need to be extinguished.”
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