Contracting post pandemic: inflation and collaboration
The COVID-19 pandemic has both directly and indirectly, via increased inflation, profoundly changed the contracting landscape and has accelerated a move towards more collaborative contract terms.
As the pandemic was completely unexpected, contract terms did not specifically cater for the disruption experienced to the supply of labour and domestic and international materials caused by repeated lockdowns, nor the restricted working practices required by regulations relating to social distancing. While, in England, construction sites were not instructed to shut by the government, more extensive restrictions were put in place by the devolved administrations. Often, parties to construction contracts were required or chose to share the risks of the disruption caused. Where there was delay to construction works, 'force majeure' or 'exercise of statutory powers' provisions in contracts offered liquidated damages relief to contractors but required them to bear their own increased costs in relation to such delay. Government guidance strongly 'encouraged' public bodies to collaborate with contractors in a fair and responsible way to ensure that construction work continued. It also encouraged public bodies not only to provide extensions of time to contractors facing delays due to the pandemic but also to compensate them for such delays and increased costs of working, irrespective of whether the contract being used would ordinarily require the payment of such costs. Many private sector clients took a similar view and offered financial support to their contractors to help with the increased cost of working even where they had no legal obligation to do so.
The largely collaborative way in which the industry navigated its way through the pandemic was at odds with the common perception of construction being an industry at war with itself. Indeed, the relative lack of disputes stemming from disruption caused by the pandemic is noticeable. Reflecting that collaborative approach, parties to contracts let during the pandemic amended their contracts to share the risk of tightening restrictions as the pandemic ebbed and flowed. As we 'learn to live with the virus', we expect contracts (including the industry standard forms) to specifically address the risk of future pandemics.
The injection of billions of pounds into the UK economy during the pandemic, supply chain disruption caused by continuing lockdowns in China, resurgent demand as the economy opened up again and war in Ukraine have led to UK inflation reaching levels not seen since the 1970s. The price of building materials - in particular those that are energy-intensive to produce (i.e. bricks, concrete, steel) - has been subject to double-digit inflation. The Bank of England predicts that inflation will peak at 11% by the end of the year and then gradually decline. It is, however, possible that inflation will remain stubbornly high for a considerable period.
Inflation at the levels currently being experienced makes it difficult for contractors to price work accurately. Employers wishing to procure construction work in the current inflationary environment are therefore finding that they need to move away from simple single-stage lump sum contracting if they want to receive tender returns in line with their budgets.
Two-stage contracting has become the procurement route of choice for major building projects. It is seen to deliver the advantages of early contractor involvement and transparency when it comes to pricing subcontract work. A main contractor does not need to commit to a price without first having tendered the subcontract works. It does not, however, avoid the risks of rapidly rising inflation impacting on subcontract prices in excess of the cost plan.
