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Legal challenges in construction law
A new survey by Maddocks has revealed how construction projects can be managed through uncertainty as skills availability declines and costs escalate.
Lauren Croft
A new approach to flexibility and collaboration between developers and contractors is required to help the construction industry manage the impact of material and labour shortages, and escalating building costs, new research from Maddocks has revealed.
Approximately 50 per cent of the respondents said they were considering “alternative procurement options, such as early contractor involvement, construction management or other forms of relationship contracting”.
Sefton Warner, Maddocks construction and projects partner, said that there have been a number of impacts.
“There has been an immediate impact on construction projects already in delivery, with a spike in contractual claims for time and cost relief being made across all projects,” he said.
“For the pipeline of future projects, we’ve seen that the better prepared and more flexible a principal is, the better the outcome they are achieving. Early contractor involvement in the design development and collaboration in the contracting model is back in fashion.”
Furthermore, the report showed that the “hyper-escalation” of building material costs is the greatest cause of concern for both principals and contractors, with one-third of them adding that labour shortages and supply shortfalls were just as troubling.
Majority (97 per cent) of the respondents said they were concerned that ongoing challenges will cause the number of head contractor and subcontractor insolvencies to rise, further impacting industry capacity; and one-third expressed a low level, or no level, of confidence in budgeting for current projects.
The research also revealed project delays of between three and five months on active projects resulting from cost escalation and supply chain issues. And whilst many respondents said that material costs would eventually stabilise, 90 per cent said they had no choice but to continue with projects as planned.
Many respondents also said the knock-on effects of the construction sector’s challenges saw some contractors taking on too much work and compounding the scarcity of labour.
Just over 50 per cent of survey participants said they were now considering additional contingency amounts and extra duration being added to project budgets and building programs to mitigate supply chain risks.
In terms of the legal solutions for product uncertainty, the report recommends a range of approaches, including early engagement, principals placing orders themselves for long-lead items and alternative contract structures.
“For projects already committed to, a majority of principals are renegotiating contract timelines (30 per cent) or contract prices (22 per cent) — or both. Some contractor respondents mentioned that they had been approached by Principals who were willing to renegotiate the terms of the contract on an open-book basis to help facilitate completion of the project without ‘sending anyone broke’,” the report states.
“Where they can, principals are endeavouring to work collaboratively with contractors to support them but without taking on additional risk beyond their capacity on committed projects. Despite the risks associated with cost escalation, 90 per cent of our survey respondents said they were proceeding with their projects, while only 10 per cent had projects on hold until there was more stability.”
Maddocks construction and projects partner, Anna Scannell, added that a more collaborative approach would benefit both parties long term.
“Financial pressures on contractors are causing some to walk away from projects mid-stream or, worse, enter into insolvency [sic],” she said.
“Although most standard-form contracts do not entitle contractors to relief in these circumstances, a collaborative approach in which the principal shares in the financial pain will typically pay dividends for both parties and the project in the longer run.”
Lauren Croft
Lauren is a journalist at Lawyers Weekly and graduated with a Bachelor of Journalism from Macleay College. Prior to joining Lawyers Weekly, she worked as a trade journalist for media and travel industry publications and Travel Weekly. Originally born in England, Lauren enjoys trying new bars and restaurants, attending music festivals and travelling. She is also a keen snowboarder and pre-pandemic, spent a season living in a French ski resort.
