Using contracts to weather the construction storm

30/06/2021 - 17:34

Bookmark

Save articles for future reference.

In last month’s feature on WA’s civil construction industry, Jesinta Burton identified a “perfect storm” of challenges facing civil and construction contractors.

These challenges included border closures, record-high material costs (including steel and timber), skills shortages and billions of dollars in pipeline works.

As labour shortages continue to intensify and profit margins become tighter, there has never been a better time, in our view, for civil and construction contractors to return to the fundamentals.

These include:

  • proper and efficient contract administration with particular attention to contractual time-bars;
  • excellent communication flow, internally and up and down the contracting chain; and
  • informed negotiation of contract terms by contractors who have the confidence and experience not to buy into these longstanding myths:

“Everyone else is signing up to the same thing and they all seem to get by.”

“If I don’t take what I’m given, there are 100 other people lining up for the same job.”

As for the “100 other people”, we are consistently and pleasantly surprised by how often contractors who are skilled and in demand come away from negotiating unfair contract terms saying how easy it was for them to secure substantial concessions. Indeed, it is fairly typical for a head contractor confronted with such terms to comment that they did not even know the offending clauses were in their contracts and they were only there because their lawyers had put them there.

Such well-informed and careful negotiations can help contractors avoid the feeding-frenzy that often occurs in times like these where there is more work to be done than there are those with the skills to do it. This almost inevitably results in the dreaded “race to the bottom”, driving increasingly less profitable bids and ultimately, contractor insolvencies.

Equally damaging to the commercial interests of subcontractors are ill-informed or misdirected demands that are sometimes made of head contractors or governments, which can often undermine a subcontractor’s credibility and hasten their financial distress.

Yet the industry seems to be no stranger to irresponsible representation. It was disappointing, for example, to see that at the recent Pindan creditors’ meeting, there were those who purported to represent the interests of civil and construction contractors, blaming poor payment recovery on liquidators for paying out employees first and on the McGowan government for not rushing through security of payment reforms.

The truth of the matter is: employees were paid first because the Corporations Act 2001 required it; and the Security of Payment Bill, whilst important to the industry, does not specifically deal with the consequences of civil and construction contractor insolvency, beyond requiring retention monies to be held in separate trust accounts. 

Specific insolvency protections such as cascading statutory trust accounts were ultimately scrapped in favour of laws focused on improving rapid pay dispute determination and avenues for subcontractors to recover payment against solvent head contractors and principals. Even if these new laws had been in place before Pindan’s collapse, they would have meant little to Pindan’s subcontractors.

Civil and construction contractors looking to survive need to develop contract negotiation and management skills in order to look after themselves.

So, where do they start? Start by taking advice from a trusted legal advisor whose approach is practical, commercially-minded and grounded in the present-day realities of civil and construction contracting.

Ideally, that advice should help subcontractors distinguish between:

  • contract clauses that can be managed through improved contract administration or margins (e.g. where exposure to liability is increased, but still manageable);
  • contract clauses that are ill-suited to the project as a whole and therefore, in everyone’s best interests to renegotiate (such as those that would increase the likelihood or complexity of disputes); and
  • deal-breakers that have no commercial solution at all (e.g. time-bars that start running from the date of a trigger-event, rather than when the subcontractor should reasonably have found out about that event, or final payment claims under subcontracts that cannot be made until a trigger event under the head contract that is unknowable to the subcontractor).

HHG Legal Group has consistently delivered these and many other practical, commercially-minded services to Western Australia’s civil and construction industries, with resounding success, over many years. If you need advice in this area, please contact Murray Thornhill or Daniel Morris.

 

 

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

Subscription Options