Supply chain management issues that triggered project delays and contract disputes during the COVID-19 pandemic are likely part of the new reality for construction. They need to be recognized and dealt with early by means of proactive and collaborative risk management. That was the key message at the Gowling WLG Spring Construction Law Forum held in late June.
“We are just settling into the new normal,” said Kimberley Valliere, vice-president of development construction for RioCan Real Estate Investment Trust. “The construction industry is heavily reliant on global supply chains that are particularly sensitive to external events such as extreme weather. Materials that used to be off-the-shelf became a question of what we actually had access to. That is now part of our day-to-day conversation.”
Material supply chain or labour disruption can cause contract disputes related to price escalations and delays if not properly dealt with early in the project.
Early conversations before any construction begins involving all project parties was emphasized by the three panel participants, particularly regarding the assignment of risk to the most appropriate party.
It’s a process of increasing importance in the industry, said Valliere.
“Having these conversations at the front end is going to be really important. They need to be very purposeful. Previously our industry hasn’t really focused on that.”
In contract terms, it comes down to determining which contractor can take the risk and should take the risk, said Sahil Shoor, partner and litigation and dispute specialist at Gowling WLG.
“Is that risk taken on by the owner or somebody else? It’s very important to have a discussion that involves other parties and other entities that are going to have a role to play. Parties need to understand the risks they are taking on and understand the obligations that arise from that risk.
“There are basically three words: avoid, mitigate and resolve,” he added. “The projects that have been most successful, and have been able to move ahead with fewer issues that resulted in resolutions, are where the key members have been adaptable to the issues they have encountered and who have been strategically prepared to deal with the challenges while keeping the best interests of the project in mind.”
Shoor also emphasized the key role played by design at the outset of a project, given today’s reality of supply chain and labour challenges.
“The design documents should be developed appropriately for a clear understanding between the project parties as to what is required in the contract.”
Risk obviously plays into project and construction insurance as well, said Mert Guler, partner at insurance broker Purves Redmond Limited.
“What starts out as a risk can soon become a claim.”
Critically, labour and supply chain risks can manifest themselves as delays that run past the expiry date of the original insurance coverage, he explained. That can be costly from an insurance perspective.
Guler has seen examples of multi-year policies with a relatively modest premium that have expired and then had premiums for a 12 or 18-month extension triple in price.
All the more reason to include insurance partners in today’s early conversations.
“The trend we’re seeing is baking in extra time and uncertainty as a contingency, and better forecasting in terms of the length of the project, and building that in upfront,” he said. “It might cost a little bit more, but you are significantly hedging the downside.”
“To me the projects that yield great results on an investment are the ones where positive risk management has been implemented to identify risks early on and explored the opportunities that can then lead to continuous performance improvement,” said Shoor.
He recommended each project appoint a contract administrator who understands the obligations of the parties under contract and is not afraid to call out “bad behaviour.”
“It’s about early conversations,” said Valliere. “We’re not a business of a one-and-done mentality. No one ever wants to walk away from a project and say they never want to work together again.”
John Bleasby is a Coldwater, Ont.-based freelance writer. Send comments and Legal Notes column ideas to firstname.lastname@example.org.