It’s time to get real on construction project risk. The industry urgently needs a more mature approach to risk sharing says Soben Managing Director Consultancy, UK & Europe, Derek McFarlane.
The latest insolvency statistics for the UK construction sector make stark reading. In the 12 months ending September 2022, there were 3,949 insolvencies, almost double the number in the previous 12 months.
Construction’s supply chains have been battered and buffeted by the Covid pandemic, suffering multiple losses that they cannot recover. With costs of materials, labour and energy continuing to be extremely volatile and demand beginning to slow, there are fears that we could lose even more contractors over the coming months.
If we continue to approach construction projects in the way that we always have, then there is trouble ahead. As an industry, we need to take a more mature approach to risk sharing. The cost of recovering a distressed project is exponentially greater than the cost of getting risk allocation right at the start of a project.
Who takes the risk?
Historically risk has been transferred to main contractors and then on down the supply chain. But how can a contractor hold a risk if that contractor doesn’t exist anymore?
There’s another issue here too: the current unprecedented geopolitical situation means that anyone claiming to accurately forecast construction price inflation is probably deceiving themselves. Asking any contractor and its supply chain to take on such a risk will surely make many projects unaffordable and unviable.
A better way?
We need to switch to forms of contract and ways of working that allow contractors and consultants to work together much earlier in the process to properly interrogate all the potential construction project risks and allocate them to the parties which can best deal with them. Too often, we see immature designs where issues of constructability, logistics and interfaces have not been considered, introducing risks that can be ‘hidden’ until a project is under construction months down the line – at which point it is far too late to make changes that would remove or reduce those risks.
There are forms of contract that enable more equitable risk sharing. In my experience, schemes delivered under risk sharing arrangement such as, NEC Option C have produced some of the best outcomes. The pain-gain share device provides real incentive for all parties to solve problems together. Frameworks can also be effective. What these approaches do is promote building trusted relationships with common goal and well-defined outcomes
Without change, some contractors will walk away from tenders as risks are too great to accept. Other contractors may take on unreasonable or unknown risks, through a need for turnover. The result – claims, escalation, disputes and more insolvencies.