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  7. Contractors and Principals: consult professionals to manage uncertainty
29 Nov 2021


Property Lawyers | Construction Law

The reported 3.8% surge in home building and renovation costs in 2021’s third quarter stands in clear contrast to the 0.8% increase in the prior quarter. Indeed, it represents the single biggest contributor to the overall 7.1% year-to-date increase: the biggest since GST was introduced in 2000.

The statistics look no better in other sectors of construction, where 5%-10% increases in the average cost of material supplies are recorded and certain materials mainly used in civil and construction works (e.g. steel, concrete and copper) are up to 40% more expensive than at the year’s commencement.

With current pricing trends forecast to continue – indeed, worsen – across the next 12 to 18 months, this hardly constitutes a temporary blip that builders and contractors can simply afford to ride out.

Whilst the resulting strain on profit margins are felt across all sectors, they seem to be most visible in housing. We have seen home builders seek out ever more creative ways to use contract clauses designed for other purposes, to preserve already tight margins.

Sadly, many of these strategies are ineffective, as even the relatively builder-friendly Housing Industry Association standard form of contract does not allow a builder to vary the contract price in the one circumstance that contractors in all sectors of civil, building and construction works are presently facing: inflated labour and material costs.

Nothing so far said would surprise anyone involved in civil, commercial or residential building and construction. The solutions, however, appear less obvious. To overcome the current crisis, much has been said about the importance of effective, regular and early communication between contractors and their principals, suppliers, subcontractors and labour force. What appears to have been largely overlooked, however, is the importance of engaging and retaining a skilled team of professional consultants throughout the course of a civil, residential or commercial project.

To understand the importance of professional services, particularly in times of crisis, consider this:

  • Where, as is increasingly the case, cost-plus payment terms or allowances for unilateral price increases are unavailable, a skilled quantity surveyor will:
  1. Guide you on what supply and work items should be subject to Provisional Sum or Prime Cost adjustment;
  2. Advise you on the percentage margins to be applied to those adjustments;
  3. Advise you on the premiums/allowances to be incorporated into your fixed-price offering for contingencies and pricing forecasts; and
  4. Help you justify those adjustments, premiums and margins when negotiating with your principal.
  • Where, as is increasingly the case, your ability to deliver your works on time and on budget are affected by disruptions in the availability and supply of both labour and materials, a skilled project manager and/or contract administrator will:
  1. Help you maintain proper focus on planning and programming;
  2.  Set up (before you even mobilise), the templates and systems needed for the smooth, orderly and, most importantly (given the ubiquitous use of time-bars), timely, administration of your contract;
  3. Certify the completion of each stage or milestone of your scope of works and make associated progress payment claims, strictly as and when your contract requires; and
  4. Give to your principal the notifications and claims that these days, civil, building and construction contracts almost always require contractors to give within tight timeframes, in order to avoid liability for delay, get paid for work scope variations and delay-related costs and dispute the decision of a principal or superintendent.
  • How, in the 3rd decade of the 21st Century, can any business hope to operate efficiently without the help of computers and other electronic devices? Good IT is of particular importance in the civil and construction industry, where contracts, drawings, plans, specifications, bills of quantity and materials, site logs, timesheets, delivery dockets, accounts and the many other documents and records generated and used in modern construction projects are ever-increasing in size and complexity. The civil and construction industry’s intimate dependence on technology, combined with the intensifying risk of cyber-attacks and data disruptions that go hand-in-hand with such dependence, speak unequivocally to the need and value of a skilled IT consultant’s services.
  • In these times of increased cost and uncertainty, what civil and construction business can afford to operate without the assistance of a skilled accountant? From corporate structuring to financial reporting, auditing and analysis, to preparation and lodgment of tax returns and (lawful) tax minimisation, to succession and general financial planning, a skilled accountant can be a civil and construction contractor’s best friend.
  • What is the one professional service needed to give proper effect to all other professional services? The answer is: legal service. Consider this:
  1. Once your quantity surveyor has advised you on the numbers, a skilled lawyer is needed to transform that advice into clear, consistent and accurate contract terms.
  2. In order for your project manager and/or contract administrator to negotiate and put the necessary processes and systems in place to comply with, and give effect to, the contract’s programming, payment, reporting, claims and payment regimes, a skilled lawyer will need to help draft the relevant contract terms and advise on their legal effect.
  3. As circumstances are constantly changing on a dynamic construction site, ongoing legal advice will be essential to the continuing, smooth and efficient management of the project.
  4. It is well and good to have the right software and hardware for generating, storing and retrieving the many documents and records associated with a modern construction project. But what use are those records if you don’t know how and when to use them? A skilled lawyer will help you realise your best return on investment in managing paperwork by helping you use the right paperwork, at the right time and in the right way, to ensure that, wherever possible, you get paid what your work is worth, on time, every time.
  5. The same applies to accountancy services: once all the advice has been given about corporate and tax and trust and self-managed super fund structuring, it is your lawyer who will:
  1. work out a legally compliant way to achieve what your accountant has recommended; and
  2. draft the deeds and instruments and other legal documents that are needed to give effect to those recommendations.

As we have counseled in previous articles here, uncritical reliance on unamended, standard-form contracts is grossly inadequate to addressing the myriad complexities of the modern construction project. By all means, take the benefits of certainty and reliability that the standard forms provide, but do not fall into the trap of believing that one size of contract fits all civil or construction projects. Be guided by your professional consulting team, lawyer included in carefully tailoring the terms of each contract to suit the individual demands, risks, and circumstances of each project in your portfolio.

Our team is highly skilled and experienced in advising on all aspects of Commercial Law. Contact us today if you need advice or representation in this area. 

*This is general information only, and does not constitute specific legal advice. Please consult one of our experienced Legal Team for specific advice relevant to your situation.

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