Battling the headwinds: Navigating construction industry storms and building resilience for the future

All projects carry risks and if not addressed effectively disputes and claims between owners and contractors can lead to delays, disruption and cost escalation. The fifth annual CRUX Insight report examines these damaging factors against a background of global headwinds. The report provides ongoing analysis of projects HKA have provided services on up to the end of July 2022, covering 1602 construction and engineering projects in 100 countries. The combined capital expenditure of projects analysed was $2.13 trillion, an amount greater than the GDP of Italy. The total value of claims was $80.8bn and the cumulative extension of time was 840 years. The report states that on average, costs claimed in disputes amounted to $98.7 million per project and claimed time extensions averaged 16.5 months. A copy of the report can be downloaded here.

Global uncertainty, disputes and risk

The war in Ukraine, which is affecting raw material and energy supplies, rising interest rates and higher energy costs have significantly increased global uncertainty. “Wherever there is uncertainty around projects, there are very real risks that disputes could arise,” says Julia Humpidge, Principal, Forensic Technical Services, at HKA.  She expects to see an increase in disputes where contracts have failed to take account of the current global conditions. In this harsh economic climate, both owners and contractors are striving to maintain their bottom lines, which is not always conducive to focusing on the project outcome and the delivery of the project itself, she says. There has also been a tendency to allocate the risk to either the project owner or contractor, rather than the party that is best placed to manage or mitigate the risk. For example, in engineering, procurement and construction contracts, effectively all the risks for cost increases sit with the contractor. “While a degree of hedging takes place, this is something that more projects need to look at going forward”, she says.

Contract uncertainty and additional pressures

Contract interpretation, as owners and contractors seek to sustain pipelines in new geographies or technology sectors, are also a potential growth area for disputes, notes Julia Humpidge. “Things that are assumed or inherent in the understanding of how contracts are delivered in one area of the globe can be very different from other areas of the globe,” she says.

“The expectation on construction to help drive economic recovery places additional pressure on organisations and their people, causing them to challenge custom, practice and assumptions that previously may have been viewed in a benign way”, explains Stephen Blakey FRICS, Commercial Projects Director, Rail Investment Centre of Excellence, at Network Rail. “I can see how this shift could lead to further causes of disputes.”

Taking the long-term view and collaborative working

There are examples that give credence to the soundbite around a focus on price driving a race to the bottom, acknowledges Stephen Blakey. However, progressive clients are deploying initiatives that are making ground in establishing a value proposition despite current economic conditions, which are a headwind that make it a harder proposition to sell. Taking the long-term view (e.g. Whole Life Cost) over short-termism (e.g. Capital Cost), is increasingly difficult due to constraints over funding and the inflationary impact on cost of capital.

Picking up a point made in the CRUX Insight report, Bola Abisogun OBE FRICS, Founder & Chairman of DiverseCity Surveyors and Digital Director at the BIM Academy, stresses that cultural working practices are also a major factor in terms of how the sector and market are behaving. “The ability to deliver projects in a fair and reasonable manner for a fair price becomes even more challenging set against the current economic climate and supply chain issues”, he says. “To build fairness, we need to think about what behaviours project owners are manifesting through their supply chains and design teams”, he emphasises.

Progressive clients are moving away from transaction-based models to more collaborative enterprise-based models, notes Stephen Blakey. These clients are owner operators who need to make significant investment, either for the renewal of their assets or to enhance that asset to increase its overall capability.  “Part of the sustainable proposition for working collaboratively is a commitment that it is good for your suppliers to make a profit as long as that profit is reasonable and commensurate with the risks they have undertaken and the achievements they are making,” comments Stephen Blakey.

The bottom line and the need to satisfy shareholders, along with tighter delivery times, do not always make collaboration easy. “What is needed is a change in mindset by both parties to make a collaborative work environment truly function and deliver the project effectively,” says Julia Humpidge.

A digital strategy

“The consequence of not having a good digital strategy equates to the core of the CRUX Insight report, which is the value of the high water number of claims,” says Bola Abisogun. “The role of technology is not about removing the person, it is more about upskilling and enabling the person to participate in the project for the benefit of the client and society,” he emphases.

At the procurement stage, the client and advisory team, need to, in granular detail, check the credentials of the contractor(s) to determine if they can deliver the desired outcome for the project, says Bola Abisogun. Clients should start with the end in mind as they begin to walk into a project, and to do that work you need to establish a common data environment.

Solving skill shortages – attracting new entrants

Concerning challenges associated with skills shortages, Stephen Blakey reiterates the view expressed in the CRUX Insight Report that construction should be repositioned as part of the environmental solution, and not as part of the environmental sustainability problem. “Construction can change the world for the better”, he says, and believes that this is a powerful message for engaging with environmentally conscious young people. Companies should be less constrained by academic entry points. Doing so will remove barriers to talent acquisition and change preconceptions among poorly represented communities that a career in construction is something that is open to them, he explains.