Most UK construction projects are carried out on standard form contracts which set out specific events which can entitle one or other of the contracting parties to a range of remedies:
- an adjustment or extension to the planned completion date
- more money either for carrying out additional works or for being delayed in completing the original scope
- deducting compensation due to defects which are not rectified, late completion or poor performance
- interest on overdue payments (or a right to suspend on notice)
- ending the contract for breaches and other events.
- Events which can only produce negative deviations or consequences from the desired plan or objective (sometimes called pure risk);
- Events which can produce both positive and negative deviations, i.e. a danger of both loss or gain (sometimes called speculative risk);
- Events which can only produce positive deviations and a chance of gains (these are often not identified as ‘risk’ events).
For any project, the supply network should identify risk events, analyse their likelihood and impact, respond to those events in the contract (eg by asking one party to insure against their consequences) and review risks as the project progresses. These are the four core stages of risk management [read more in my slideshare].
Your contract should deal with the consequences and procedures related to common risk events such as:
- late payment by the client – the contractor should have a right to interest and/or to suspend (as required by English statutes)
- late completion by the contractor – the client will want to deduct delay damages and in some cases, terminate the contractor’s involvement
- insolvency – typically this results in immediate termination without need for any action [read more]
- serious persistent breaches by either party – these often give a right to terminate if not corrected within a specific period, say 14 days
- tight or unrealistic project schedule – the contractor may want lower delay damages or wider rights to extend the programme or completion date(s)
- design variations and other changes to the project by the client – the contractor will want to be paid the cost of the extra design services/works, more time to complete the revised scope, as well as costs due to the extra time on site
- poor performance – the client will want the contractor to remedy defects and may also ask for low performance damages
- insufficient or inaccurate site information – the contract should clarify if the contractor can rely on site data provided; under a lump sum contract the contractor impliedly takes the risk of ground conditions
- acts of client – the contractor should be entitled to more time and/or money otherwise the prevention principle could apply
- concurrent risk events – these should be left to be analysed by the contract administrator or a delay expert; the contractor cannot take all the risks for its own and client delays merely because they overlap [read more].
The consequences of many other risk events, such as insufficient labour, energy price hikes, economic meltdowns, bureaucratic nightmares, cultural clashes, climatic events, riots or war, and even Brexit are hard to predict. The contract can explain which party bears the consequences, leave it open to discussion and direction if it happens, or (implicitly or explicitly) require the contractor to bear the risk.
What should you do?
Your contract should explain the remedies related to each risk event. Risks arising from incompetence are always borne by the incompetent party.
As a contractor, if a risk event is not listed, you should assume and price for the consequences of that risk (as they are often borne by you).
As a client, you should consider whether the contractor is the best person to manage those risks or if it would be more efficient to insure them or retain them.