Ahead of Conflict Avoidance Week, construction leaders are calling on clients to stop placing more risk on contractors by amending standard contracts.  An article featuring in Construction News it is clear that the tide is changing and rethinking this practice is vital.

In a world where amendments to construction contracts to run to the same 100-page length as the original contract, FIS Member Anthony Armitage, general counsel at fit-out contractor Thirdway has been asking the question why?

“Standard form contracts were designed to be a balanced and fair, oven-ready document [where] you could just fill in the contract particulars, sign and start on site.

“But some clients’ lawyers appear to make it as onerous as possible for the contractor and as beneficial as possible for the client. The schedule of amendments become massive, and it’s not actually in the best interests of either party, or in the best interests of getting the best outcome for the project,” he says.

Armitage (who also made these points at the recent FIS Conference) believes the amendments – which can take a day or more to examine – are introduced by lawyers to impress, rather than protect, their clients.

In October last year, the Construction Leadership Council (CLC) released a statement condemning clients and their solicitors for introducing contract terms that “are onerous and/or difficult to ensure”.  It warned that onerous terms “make contracts unviable, reduce competition, increase risk and lead to unnecessary legal costs”.

The organisation called for standard contracts issued by contract-producing bodies to be used by clients with no amendments, except “where necessary in the context of project-specific risks and relationships”.

Such a change, Armitage says, “would be better for us, the clients and the project as a whole. The only party that might feel aggrieved could be the lawyers because they would lose fees.”

Roger Flaxman, Flaxmans reiterated this point stating.

“The mere fact that there’s an infinite variety of contract variations cannot do anything but confound and complicate the outcome of indemnities intended in good faith by the insurer,”

Similar to views expressed in the FIS Blueprint for Better Construction.  Flaxman believes that one insurance policy covering an entire project would be ideal, rather than each individual party taking out its own, but adds that this concept is currently too complicated for the fragmented construction industry.

Commenting in the article Iain McIlwee of FIS points out that the new responsibilities taken up by the industry due to the BSA make it more important than ever that contract terms are fair. “We’ve got a new set of regulations that focus on competence and on duty, and then we’ve got a contract process that tries to do the exact opposite,” he says.

A contrart point was made in the CN article with a client (who did not want to be named) noting that amendments are usually made for good reason.

“Contracts have typically been written by consultants for the benefit of consultants and contractors. After the JCT and NEC contracts were drafted and put into use, clients started to realise that they were taking on a lot of risk, and therefore evolved the use of schedules of amendments,” says a Chartered Institute of Building (CIOB) fellow, who works with the body on good practice policy. The source asked for their name not to be used in this article as they now work in the public sector, having previously led developments for private companies.

“People working in the private sector have to make a return on their investments and it’s important for them at the start of the project to understand exactly what their financial exposure is, to make sure that a return on investment actually takes place. Otherwise there’s no point embarking on the project. A lot of the schedule of amendments are there because the contractor is probably best placed to de-risk a particular issue,” the source says.

One example the CIOB fellow gives of a risk that should be shared between the parties is the condition of an existing building. “Otherwise, what tends to happen is you have a two-year project and as you come to the end of the second year the contractor says, ‘Actually, when I was doing the first floor, I found some items on there I was not expecting, now I want to claim for it’.”

The source agrees that lawyers are not always best to lead on the schedule of amendments and says they are better drafted by technical experts, adding that clients are too often left out of conversations on contract practices.

The CIOB fellow adds that contractors often do not feel confident enough to be honest with clients about their margins, meaning the client may not understand how far they can attempt to de-risk a project before the contract becomes unviable. “As long as we continue to have that then the industry is going to continue to have problems,” they say.

In concluding comments McIlwee referenced a “cancerous culture” of contractors on low margins taking on too much risk. “We’ve allowed [the practice] to become acceptable and normal, even though in 1866 [when the first standard terms fee schedule was drawn up in the US] we said that was unreasonable,”

The article references the FIS Responible No campaign and our wider work campaigning the industry to identify, challenge and wherever possible reject onerous contract terms.

The practice of passing risk down the supply chain is detrimental as it reduces margins and compromises project viability. Smaller contractors are often pressured into accepting these terms, which can include provisions that extend payment dates or impose penalties for not meeting certain requirements.