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Operating in uncertain times: How can the construction industry adapt to a ‘new normal’?

The world is striving to resume normal service following the depths of the COVID-19 crisis. What measures can the industry take when operating in these uncertain times? How can it move away from damaging and divisive practices?

Steven Matz, Thought Leadership Coordinator, World Built Environment Forum
15 December 2021

Headwinds

The COVID-19 pandemic had wide-ranging and negative impacts on the construction industry, causing shutdowns and severe delays. Charles Wilsoncroft, partner at HKA explains: ‘Some supply chains that were significantly impacted in the initial stages have since bounced back. However, knock-on effects have tempered this recovery. The movement of labour has been a key issue for international projects, where restrictions on travel affected labour mobility and availability. Off-shore projects have also suffered, with restrictions on crew changes and vessel movements.’

COVID has rewritten the risk rulebook

‘COVID-19 has almost rewritten the rulebook when it comes to understanding risk’, says Charles.  ‘Before the pandemic, experienced project managers, project management companies and contractors would have a good understanding of the risks involved in a contract. The pandemic changed this dramatically. The industry will have to adapt to a new normal. Over the longer term, this should lead to more effective project management structures, a greater ability to spot issues as they arise, greater contract flexibility to respond to changing conditions and a more resilient supply chain’

Limitation periods are a factor in driving disputes

‘In difficult economic conditions, adjudication numbers typically start to rise quickly,’ comments Martin Burns, Head of Alternative Dispute Resolution Research and Development at RICS. ‘As the economy moves into a recession, there is a peak in adjudication numbers. But as the recession hits, adjudication numbers drop off considerably’.

Justin Sullivan FRICS, Chair of the Construction Industry Council, believes UK disputes are not being driven directly by the pandemic. Rather, it is due to recession and shock. Concerned with approaching limitation periods, people look at their balance sheets, and decide to ‘go after the money’. ‘We’re seeing lots of disputes, claims, and much more litigation than adjudication. More litigation because it provides more certainly: you’re not paying the dispute resolver.’ However, where project teams have been involved there has been settlement because the finances around the project have changed. Projects have been refunded, refinanced, and reset, rather than run the risk of contractors disappearing or bonds being called on.

There has been increased recourse to the use of professional indemnity insurance driven by fire safety and cladding related claims. This, coupled with solvency issues amongst contractors across the supply chain, has led to increased reliance on professional teams’ insurance. By turn, this has caused insurance premiums to spike.

COVID-19 has almost rewritten the rulebook when it comes to understanding risk

Charles Wilsoncroft
partner at HKA

Low margins, friction and fragmentation

Construction is a low margin industry. Where tier one contractors win contracts and then attempt to drive down sub-contractor prices to improve margins this creates friction and leads to disputes. Collaboration and flexibility are the solutions. There are an increasing number of initiatives to help foster collaboration, the Construction Leadership Council is one example, says Justin.

In the past few months RICS has been seeing more small and medium-sized enterprises using adjudication and more than once, painting a picture of an industry rife with disputes, notes Martin. The industry desperately needs a culture change and to move away from its historical combative, adversarial nature. In the UK, for example, the government is promoting conflict avoidance and early intervention, encouraging parties through guidance and through policy notes to try and work to resolve issues before they turn into disputes.

Banking disputes and breathing space

‘When the pandemic started, there was lots of goodwill and willingness to compromise, as the situation was so unprecedented. Parties were willing to delay entering into disputes to see if issues could be resolved. But now it’s back to normal' says Laura Lintott, Senior Associate at Trowers & Hamlins. ‘Changes in economic conditions can lead to an increase in disputes. This can be because companies have the funds to afford the legal fees, but it can also be because they are desperate to get everything they feel is owed to them.’

‘Mediation can give parties in a dispute breathing space, especially when litigation has commenced, and they are highly emotionally charged. It is also very cost effective’ explains Laura. However, parties will come under different pressures and will have different agendas. ‘How amenable they are to mediation can depend on circumstances, such as their comparative sizes and financial targets.’

When the pandemic started, there was lots of goodwill and willingness to compromise, as the situation was so unprecedented. Parties were willing to delay entering into disputes to see if issues could be resolved. But now it’s back to normal

Laura Lintott
Senior Associate at Trowers & Hamlins

Catalyst, concerns, catch-22, and collaboration

‘Technology has the capacity to help reduce construction disputes, particularly in difficult situations which tend to spur innovation’ says Helen Collie, Technical Director at HKA.  ‘However, new technology potentially has a role in increasing disputes as well’. COVID-19 has been a catalyst for digitalisation in the industry, but some changes may have come around too fast, Helen explains. Construction has been a technologically conservative industry, but the past 18 months have forced a reliance on technology. This reliance, combined with inexperience and skills shortages, has given people some cause for concern. However, technologies such as BIM, and Digital Twins are both extremely powerful tools. ‘In short, a BIM model allows you to test ideas quickly and efficiently – such as with clash detection. Digital Twins promise to be extremely effective in identifying problems several years down the line. Physical technologies like drones, and Augmented Reality (AR) are also important. AR can be used when sites are down or unsafe to walk around.’

The construction industry faces a catch-22 situation when it comes to adopting new technology. ‘Small projects, while seemingly perfect for technology trials, are too small to justify the cost. Large projects offer the economies of scale, but their size makes the use of new technology too risky. Better collaboration and sharing of best practice would help lead to greater adoption of new technology on bigger projects,’ says Helen. ‘When that information is not available, there is a tendency for project managers or for engineers to continue with the same, old methods. It works, it doesn't always lead to the best result, but it's at least predictable – whereas the outcome with using new technology is unpredictable. And construction doesn't like unpredictability, because you're spending a lot of money and you want a fixed result at the end.’

Operating in uncertain times

The last HKA CRUX Insight Report revealed the eye-watering sums of money and time lost to avoidable disputes across the construction industry in 2020. CRUX Insight returns for 2021 covering in excess of 1,400 projects in 94 countries with a combined CAPEX of over US$2 trillion, and cataloguing cumulative claimed financial losses of close to US$73 billion, with claimed extensions of time totalling nearly 751 years. In this webinar we discuss what measures the construction industry can take when operating in these uncertain times by moving away from damaging and divisive practices.