In a very active real estate market, meeting growing private sector demand, as well as public sector pressure for housing and infrastructure projects, will require exponential growth in construction industry output.
However, issues exist as to whether or not contractors will accept existing standard construction contracts in both. private and public sectors – or should they be modified to reflect the new realities?
This is one of the points recently raised to me by Jarleth Heneghan, partner at William Fry, both a lawyer and an expert surveyor, specializing in construction and project law.
For many years tthe standard form of private sector construction contract is that recommended by the Royal Institute of the Architects of Ireland (RIAI). In the public sector, this is the Public Works Contract (PWC, designed by the employer).
Last year, a new form of private sector contract was launched with the support of organizations such as the Construction Industry Federation (CIF), Engineers Ireland and SCSI.
Mr. Heneghan told me that the objective of the contract is to achieve an equitable distribution of risks between the parties and to promote sustainability and efficiency in the industry. The balance of responsibilities historically rests with the contractor in the RIAI standard contract and the customer in a PWC contract.
However, Mr Heneghan says that the new form of contract – although it has advantages for dealing with subcontractors, insurance companies, force majeure and changes in the law – is not yet widely used.
The slow adoption of the new form of contract is an issue for the industry, and he suggests that this may be due to familiarity with the RIAI contract.
The problems stem from the rapid rise in the cost of materials and labor, and the supply of materials, exacerbated by the pandemic and Brexit.
In a fixed price contract, the entrepreneur runs the risk of cost overruns. Although the standard RIAI contract takes into account price changes, many contracts are modified to shift the risk to the entrepreneur for cost increases.
Therefore, entrepreneurs find contracts potentially unprofitable and seek opportunities to challenge them, especially in the public sector.
The main problems are that PWC contracts are strict about delay, do not have force majeure clauses, do not anticipate the pandemic and offer limited capacity to recover costs.
Some contractors, who have achieved “preferred bidder status”, insist on renegotiating contracts. According to Heneghan, PWC contracts pose a high risk to contractors, sometimes forcing them to withdraw from public tenders or seize opportunities for claims – with the aim of restoring the balance of risk.
There is currently no contractual capacity in Ireland in PWC contracts to better share risk between parties and engage in collaboration, as is the case with UK public sector contracts.
Problems also arise when building completion is delayed due to late delivery of key building components, as factory production has been slowed down by the pandemic and Brexit. Again, the entrepreneur, in both private and public markets, risks bearing the additional costs.
Mr. Heneghan will present a workshop to members of the SCSI on “Current trends in contracting” on September 29, which all surveyors should attend, and not just those in the development sector, as this topic is high in the minds of clients.