We are in unprecedented times which is subjecting the UK economy to a sequence of shocks (as the Bank of England Governor Andrew Bailey reported on 16 May).
The latest 'shock', as a result of the invasion of Ukraine, has highlighted the prevalence of both Russia and Ukraine in the supply of metals, raw materials, chemical products, machinery, and equipment vital to the construction industry and has potentially far-reaching consequences on the industry as a whole.
We have previously reported on materials and labour shortages as a result of the pandemic and Brexit throughout 2021, and on the implications on material and labour prices while looking at drafting for price inflation from a UK and German perspective (including the impact of the Ukraine invasion), as well as reviewing fluctuation clauses in more detail.
But what about the position now - what are the key points to note as a result of the invasion of Ukraine from a construction disputes perspective? Will we see collaboration in these challenging times? How can risk be managed in the current climate?
Material availability and prices
Both Ukraine and Russia play a prominent role in the supply of key materials used in construction, such as timber, copper, bitumen, aluminium, and iron ore used to make iron and steel. Supply chains stemming from Ukraine have been severely disrupted with some coming to a halt altogether as a result of the conflict. Russia is one of the world's largest oil producers and as a result of current sanctions combined with pressure on countries to source alternate oil suppliers, oil prices are surging. The ongoing war (coupled with the sanctions implemented) has increased pressure on already strained supply chains resulting in shortages which has impacted just-in-time availability as well as prices.
Many in the construction supply chain are finding themselves in an increasingly difficult situation in terms of material availability and price increases on existing projects. For some, the current climate is already unsustainable.
Jessica Tresham, WBD construction disputes partner, advises:
"Forewarned is forearmed. Gather the data you need to actively manage the risk. Do this early on to work towards a palatable solution. Do not delay, otherwise it may be too late".
Our construction disputes team has also set out some pointers to help your organisation manage the risk:
1. Run through your projects and supply chain to prioritise your review
Speak to your project teams and find out which projects may have the most exposure in terms of material availability and prices. Who are the suppliers? Are they the only supplier for that particular material? Are there any other options available? Prioritise. List the projects in a table so you can categorise them and have a quick overview of important contractual provisions (see more below).
2. Collate your contracts and start reviewing now
It sounds obvious but too often contracts are left to gather dust in a drawer. Pull together the contractual documents for your current projects and review them, and categorise them in a table. Below are some key points to think about when reviewing your contracts, which you can add to that table also.
3. Consider key terms to look out for in your contracts to understand your options
Review the following:
- Are your contracts lump sum, fixed price, cost plus, target cost, or something else?
- Check what your contract states about cost increases. If your contract is a lump sum or fixed price contract, usually this does not allow for price inflation.
- What stage is your contract at? Is it about to complete or is it early on (and therefore a potentially much higher exposure)?
- Are provisional sums included in your contract and is there scope in the way the provisions have been drafted to allow for an increase or are there any terms that are also applicable or assumptions that have been made to the Contract Sum?
- Are there fluctuation provisions?
- What are the mechanisms to allow you extra time or extra money. Consider for example, what amounts to a variation or change? What is the definition of "Relevant Matter" (or its equivalent)? Consider the force majeure provisions, and whether certain materials may have become difficult or even impossible to procure. Also, look at whether the sanctions could fall within the change in law provisions
- Consider your right to terminate under contract and at common law
- Flexibility: does your contract specify certain suppliers for particular materials or is there scope to change this?
4. Check whether the right notices have been issued to protect your position
Following your contract review, if there is scope to claim additional time or money, have the requisite notices been issued under the contract, in the right form and within the time required?
5. Assess the exposure throughout your supply chain
Look up and down the supply chain to assess potential exposure:
- Are you on different terms for dealing with price and availability?
- How long are prices being guaranteed for?
- Do you have alternative sources?
- Are there certain materials which can no longer be part of a 'just-in-time' supply? Do you need to consider increasing storage space so you can hold more of certain key materials required on a project? Has the cost / risk benefit been assessed for this option?
- Are there any concerns as to the solvency of those in your supply chain? If so, do you need to run checks and place a watch on any entities?
6. Check for vulnerabilities: cash is king
Consider cash flow and loan repayments to gain a full picture of the impact on your organisation.
7. Communicate and ensure decisions are made by the right people
Communication is essential both within your business and externally.
Ensure that points of concern are raised to the appropriate person(s) at the earliest opportunity so that risks can be evaluated and decisions made accordingly.
External communication with companies you work with should also begin as soon as possible. As we have said previously, a key lesson in 2021 in terms of dealing with shortages was the need for collaboration. However, in these difficult times, co-operation and flexibility is not always guaranteed. As with the shortages being experienced during that time, this is an industry-wide, global, dilemma. It is unsustainable for contractors to bear the full risk and, consequently, the losses associated with the Ukraine invasion alone. This has the potential to have a devastating impact on the construction industry as a whole. Regular discussions are needed with parties coming up with sensible solutions. If you feel you are facing a brick wall, can you or anyone else within your organisation escalate the issue to someone who may help progress things to achieve a more collaborative approach with the key contract personnel?
8. Prepare for the worst, hope for the best
Collate the project records and organise them. Understand who the key individuals are on each project and work with them. Having accurate records and the right people at hand, really does make a difference in the event of an issue escalating. If there are any issues you are unsure of during your review, seek legal advice early on to ensure risks can be managed in the right way.
9. Know your options for dispute resolution
In parallel with the above, it is important to understand the options available to you if a dispute escalates as parties may become entrenched in their opposing views. Other dispute resolution options, such as mediation or a meeting between senior representatives under a tiered dispute clause for example, may assist the parties in finding a sensible solution which both sides can work with.
For more information on understanding your options under dispute resolution clauses in common construction contracts and for a closer look at adjudication and mediation options, join us for our next re:build construction webinar - Resolving disputes: when contracts go wrong on 14 June.
For further guidance on record-keeping and being prepared for disputes, see our article here.