Posted by Catherine Welch, Partner
GCs: time to get your construction contracts in order!
After Carillion’s downfall, the Grenfell Tower fire, and now Covid-19: do you need to rethink your construction security and insurance requirements?
Our world continues to change and adapt to the impacts of the on-going Covid-19 crisis. Many companies are having to reconsider how best to manage their property portfolios, including whether to continue with planned investment in building new premises, or to redevelop or repurpose the use of their existing properties. As part of this process, many GCs and in-house lawyers may need to advise on appointing professional design consultants (such as architects and structural engineers), as well as engaging contractors to design and/or construct either new build works or fit out works to adapt existing premises.
There are a few key commercial aspects of any construction procurement that parties sometimes fail to give sufficient attention to early enough in this process. GCs and in-house lawyers should pro-actively discuss their preferred contract risk allocation with the consultants and contractors at the very start of a project, especially in the current economic climate. Any delays to these discussions can have significant and detrimental effects on the successful delivery of a construction project within the company’s cost budget and timescales.
What companies need to do?
Companies need to allow within their property development plans for the inclusion of adequate construction security measures for mitigating their project risk. In the last few years, for example, the insolvency of high profile construction companies like Carillion have triggered a domino of supply chain insolvencies, and halted/suspended projects throughout the UK. With the added and continuing impact of Covid-19, any GCs embarking on construction works need to carry out sufficient forensic financial due diligence on the consultants and contractors they are engaging. GCs also need to have a realistic commercial expectation of the level of security contractors and consultants can obtain, as this is sometimes outside of their control.
The type of construction security you should consider will vary depending on whether you are looking to protect against a key member of the construction supply chain becoming insolvent before the works have been completed, or afterwards when a latent defect arises. The associated cost implications will also differ. Now the UK has left the EU, the location of where construction materials are made and need to be shipped from adds even more risk. Consultants and contractors should expect to provide some forms of security without any increased project cost implications, but you may also need to pay for some of these via an uplift in the consultant’s fees or the contractor’s price. Typical examples to explore include:
- Parent company guarantees
- Performance bonds
- Advance payment bonds
- Retention bonds
- Restructuring the timing of payments, and withholding retention
- Project bank accounts
- Vesting certificates
- Collateral warranties
- Product and manufacturing guarantees
- Latent defects insurance
What GCs need to do?
At the outset of a project, GCs should also carefully consider the availability of sufficient insurance for each consultant and contractor, as well as the overall insurance arrangements for the project. The commercial reality of the professional indemnity insurance market has vastly changed since the downfall of Carillon, and the horrific consequences of the catastrophic cladding failure at Grenfell Tower. The fire at Grenfell Tower highlighted certain weaknesses in the construction industry, and the industry is still feeling the effects. The construction industry has been categorised by some as unstable and risky, meaning premiums for professional indemnity insurance cover have rocketed, and sureties of performance bonds, for example, have taken a much more robust and selective approach to providing security. Some insurers have pulled out of providing professional indemnity insurance altogether.
GCs should evaluate the professional indemnity insurance cover provided across a project, but you need to bear in mind the commercial reality that many construction companies are now struggling to obtain comprehensive cover. Construction companies may be able to obtain reinsurance from more than one provider for increased premiums. Policies often now have significant exclusions and/or restrictions imposed around fire risks, particularly excluding combustible aluminium cladding and claims arising from a failure to meet fire regulations. To avoid difficult and costly delays once construction works have started, GCs should be clear with consultants and contractors from the outset what degree of construction security and insurance they expect consultants and contractors to provide. GCs will also need to be prepared to have sensible commercial discussions about what levels of protection can be provided at what cost to the project.
If you are affected by any of these issues please contact a member of the Grey Matters team
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