Contract Risk Sharing – Are we being fair?

By Victoria Tomlinson · 25 January 2023

There is so much pressure on everyone’s budgets, with price rises across materials and labour continuing to have a huge impact on housing organisations and local authorities nationwide. Many are having to consider reducing the number of new homes in their development pipelines to ensure that what they build is high quality.

Housing organisations and local authorities are being forced to reduce costs where possible and this is having an impact on the way they are drafting tenders and contracts. Identifying cost savings and efficiencies has never been more important and it is easy for partnerships or long-term relationships with contractors to become strained when these topics are discussed.

Many of us are aware of the difficulties that main contractors are having securing labour. Sensibly they don’t want to over-commit their pipelines, therefore many have had to reconsider the number of tenders they can submit. On top of this, contract terms that require contractors to bear more risk are being included, and organisations are finding that as a result, only one or two contractors will submit tenders for their work, whereas a few years ago they may have had five or six. 

Contractors being asked to take on more cost risk is currently a hot topic in the sector. We have anecdotally heard of organisations removing inclement weather clauses, so even if a site was covered in six feet of snow, the contractor cannot claim any delays. Clauses preventing inflationary rises for materials are being removed from long-term contracts and contractors are therefore declining tender opportunities. 

So, what are the practical solutions to these problems?

  • Identifying risks – really understanding what they will cost, if they can’t be mitigated, will enable you to set aside adequate contingencies.
  • Highlighting risks and their potential costs to Executive Teams and Boards – It is important risks are highlighted for governance transparency but including them in decision-making can take the pressure off Development Teams.
  • Identifying risk mitigations – spending time focusing on how you can reduce or mitigate the risk’s impact may enable you to remove the risk completely.
  • Involve your contractor in your risk reviews – they may have solutions you weren’t aware of or ways to reduce the impact of the risk. 
  • Talk to your partner contractors – understand their challenges and the issues they are facing in the current market. Talk about risk sharing, what appears to be a major issue for you may not be for them, but what appears to be a minor issue to you may be a major issue when they are pricing work. You will also ensure your partnerships maintain their strong footings.
  • Talk to your Employers Agents and Cost Consultants – they know how contractors are responding to tenders and will be happy to share their experience with you.
  • Consider different risk-sharing approaches – can you ring fence risk items and agree on open book-sharing mechanisms? Whilst you will still need a contingency in place, this approach embeds true partnership working.  

While things seem very challenging from a budget perspective, we hope this gives you some practical ideas to relieve some of the pressure. 

To get value for all your procurement needs, please click: Our Members – CHIC Ltd. to join CHIC, a full-service not-for-profit asset management procurement company.

ARK is committed to helping the social housing sector deliver sustainable high-quality homes that make the lives of residents and wider communities better. If you would like

support with your development and regeneration schemes, then please just get in touch. Contact Victoria Tomlinson at vtomlinson@arkconsultancy.co.uk or call 0121 5153831.

Victoria Tomlinson

Development Director

Victoria has worked at executive and senior level with a number of RPs over the last twenty years, having strategic and operational responsibilities for Development, Asset Management, Compliance and Corporate Health and Safety.

Victoria also has extensive experience of delivering regeneration projects, S106 acquisitions, land led and package deals plus commercial sale developments. She also has experience of leading and managing sales and leasehold management teams

 

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