Chris HorsleyExamines the options available to contracting authorities to reduce current market pressures on resource resources.

Construction material supplies are in constant decline. This has been the headline story of the sector.

On 28 July 2021, the Scottish government responded to the situation by issuing guidance – Resources for construction projects: CPN 3/2021 – setting out suggested measures which contracting authorities may take in order to try to manage and mitigate the current market pressures on resources.

Current or imminent projects

This guidance recognizes the differences in the challenges that are presented by projects currently in procurement and those already on-site, or very close to becoming so.

Contracts that have been signed are binding. Therefore, parties must resolve any problems by practicing good contract management and ongoing contract enforcement.

This is the focus of the guidance.

  1. The review and examination des contrats and evidence supporting the project’s impact;
  2. Contractors should have open and honest discussions about mitigation.

It recommends that the contracting authority seek legal advice to ensure they are fully informed about their contractual rights.

It also suggests that the best solutions can be found by working closely with contractors to determine how risks to project delivery might be minimized.

It’s a delicate balance between knowing your rights, and accepting that a negotiation might be better in achieving a positive result.

Projects in development

The guidance suggests that contracting authorities conduct an urgent review of the feasibility and commercial viability of projects if they have not been agreed to in writing.

Contracting authorities should reconsider if there are material issues. The general consensus is that market disruptions will recede by Q1 2022.

Open discussion is a way to achieve better results. It is important to ensure that these discussions take place before signing any contract.

As an alternative to strictly adhering to the public sector’s stance that requires fixed price tendering, it is recommended to include price fluctuation clauses in tender documents and contracts when drafting proposals.

Although price fluctuation clauses are known for years, they were seldom used in practice. Are we about to see a shift?

To achieve the desired effect of reducing base tender price, it is important to carefully draft the contract. In addition to ensuring that ongoing assessments are reliable and accurate to track actual costs during project implementation, this is also necessary.

Collaboration

Collaboration is the essence of guidance.

It is strongly recommended that contractors not be required to assume an unreasonable amount of risk in relation the current volatility. Value for money can still be achieved by the contracting authority while appropriately recognising the market situation.

This message has been consistent in recent guidance from the Scottish government. This echos the tone of Covid-19 government advice to contracting authorities.

We have yet to see that the guidance results in a uniform approach to Covid-19 relief. Public sector bodies provide a variety of relief levels to contractors.

Now what?

We expect that strategies will continue to differ from one case to the next.

We have seen contracting authorities adopt a variety of positions in practice. They include program extensions and contractors procuring advance materials that are underwritten by clients.

It is important that you consider the legal consequences of any actions taken to address the shortage. Even the best intentions can have unintended consequences.

However, it is clear that collaboration that is based on mutual appreciation of risk – which is not the fault of either party – is a pragmatic approach.

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