While there is cautious optimism in the construction and infrastructure industry in Australia about the market in 2015, stubbornly low coal and iron ore prices, and the unprecedented uncertainty at State and Federal levels of government are inclining some commentators to think business may continue to be tough this year for the industry.
Add to the equation the pending election result in Queensland, and it seems likely that competition for work in Queensland in particular will be tougher than ever.
The resulting stiff competition for the projects that do come to market means businesses need to be more efficient than ever. Much of the easy cost reduction has already been done, so how do you get that extra efficiency in your contracting practices that will make you stand out from the crowd?
How about a simple New Year legal health check that could give you the competitive edge you need?
Improvements do not have to be drastic or cost much. Just making a few simple changes can lay the foundations for a trouble-free year, allowing you to focus on building your business, rather than dealing with problems.
Here are a few simple suggestions.
Tendering practices sometimes need a revamp to make sure they are keeping pace with the market. This is more than just a question of getting the price right. It also includes revisiting issues such as:
- have you got the right people on the right jobs?
- what projects should you tender for (everything going, or just the ones you are really good at)?
- have the key risks changed (eg are there legislative changes that need managed or priced)?
- does your system process addenda to the tender effectively and in time?and
- have you done enough appropriate due diligence on the counter party (ie will they be able to perform their end of the bargain?).
The thrill of winning work can disappear quickly if you end up with a contract that costs you more than you make out of it.
However, an attempt at cutting tendering costs by merely cutting and pasting from previous tenders may be a false economy. You may be repeating things that have caused you not to win tenders in the past or it could result in your tender not properly responding to the requirements for information set out in the request for tender. Getting the right people on the right job with the right systems and processes can help to avoid this.
Contract terms and conditions
Do you have standard terms and conditions? When did you last review them? Are they still current and effective? Are they being effectively included or incorporated into your contracts? If not, even the best terms and conditions are useless to you.
Businesses should review the content and method of incorporation of their terms and conditions regularly. Those terms must be current and must deal with any changes in law (eg the recent security of payment legislation), case law (eg the Regional Power Corporation case) or industry practice. You should also review your statements of incorporation and/or check that copies of standard terms are being sent out and signed or acknowledged. Where they are not, you should know why.
If you have a standard set of exclusions that you normally submit with tenders, they should be reviewed to determine if they still accurately reflect your risk management policies. They should also be reviewed for each tender to determine how they fit with the tender requirements – particularly in cases where a fully conforming tender is required for a valid tender submission.
Credit risk management
The construction and infrastructure industry has had a few tough years recently, and this has resulted in some entities restructuring or merging and others unfortunately failing. This can leave their contractual partners with substantial unpaid invoices and claims, and/or with an incomplete project that is not generating revenue. Have you conducted proper due diligence on your primary customers, clients, head contractors, sub-contractors and suppliers? If that due diligence was done some time ago, is it time to revisit it?
To cover any substantial exposure, at a minimum you should review your security arrangements, credit agreements and payment terms, and consider whether additional financial safeguards are necessary eg parent company guarantees. If ignored, bad debts usually only become bigger and worse, so businesses need to commence recovery action and consider exercising any security as soon as signs of trouble emerge.
Back-to-back (or better) contracting
Most construction and infrastructure projects involve a contractual chain or network. It is a vital contract risk management tool that your contracts with sub-contractors or suppliers of goods or services are on back-to-back (or better) terms with your contracts with your customer/client/head contractor wherever this is commercially achievable. If there is any mis-match, you may find yourself liable to your customer/client/head contractor and unable to recover any such liability from those below you in the contract chain.
Back to back contractual liability provisions need to be the subject of negotiations from the outset and not left to the last minute, and they should be prepared on a case by case basis. A standard form agreement for sub-contractors and suppliers can be a good starting point for managing such risks, and can be ready to roll out when any tender or request for proposal is sought. However, such standard forms should generally only be a starting point for negotiations and may need to be amended to reflect any specific risks that may be imposed on your company by the head contract if you wish to pass them down the contractual chain. These should be drawn to your subcontractor / supplier’s attention early to reduce the risk of a mis-match in risk profiles up and down the contractual chain as far as possible.
Proactive Contract Management
Signing a badly prepared contract can be as bad as not signing a contract at all, and the same applies when it comes to managing contracts. Once the contract signed, it needs to be managed through until final completion, especially if it is a services contract that may include performance standards. Administering a contract properly can make the job go more smoothly, help to preserve your rights and even head off potential problems (usually through early identification).
Is your team set up to administer the contract properly? Are your team members familiar with the contract? Have you got all the relevant notices and forms in place ready to use? Do you have a calendar of dates for this project, ideally mapped across into a central calendar showing critical dates for all of your projects? Is your team appropriately staffed and resourced? Is your IT system still supporting your team efficiently? Can documents such as variation orders or extension of time claims be located when necessary? The best contract in the world is little use if you do not know what rights you have under it, and have the ability to rely on those rights when appropriate.
The above matters are each fairly simple to consider and implement, can help ensure that the new year starts off on the right foot and positions you to have a more successful 2015.
If you would like further assistance with any of the issues mentioned in this article, we would be happy to help.
Author: Suzy Cairney
Stephen Natoli, Partner
T: +61 3 9321 9796
Tony Britt, Partner
T: +61 2 8083 0497
Troy Lewis, Partner
T: +61 7 3135 0614
Stephen Burton, Partner
T: +61 7 3135 0604
Suzy Cairney, Partner
T: T: +61 7 3135 0684
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