In short supply

By - , Build 183

James MacQueen, Partner and Head of Construction and Real Estate at business and advisory services company BDO, says that, with supply lines under pressure, dealing with the consequent problems requires planning, flexibility and perhaps some change in attitude.

WHEN COVID-19 erupted a year ago, there was a concern that certain products may become unavailable, but instead supply lines showed remarkable resilience for some time.

Supply chain issues need handling

However, these issues are now very real, and solutions must be found to manage this and the attendant risks. The causes include non-availability of raw materials for manufacturers, capacity constraints, lockdowns and the well-publicised worldwide shipping delays.

In many cases, substitution of product from a different supplier has been possible, but where this is not the case, the issues and solutions required are more complex.

Many contracts have specific product specifications, so what happens if those products are simply not available at the required time or at all?

At one extreme, clients could refuse to make final payments because not all contract conditions have been completed. At the other, there should be a sensible discussion between the subcontractor, head contractor/builder and client to agree on a substituted product when possible. However, that leaves open the question of who pays if the substituted product is more expensive or whether there is a price adjustment if it is cheaper.

Significant issue for commercial projects

While this affects both residential homes and commercial projects, the implications for commercial projects are likely to be greater.

Architects and engineers specify particular products or systems, and attempting to substitute some of these is a lot more complex and often not possible. An example is where a particular mechanical system is specified but a key component to that system is not available. The system supplier is unlikely to provide a warranty if there are substituted components inserted, if in fact some are available. Similarly, engineers may be unwilling to sign off on variations, changes in technical specifications or componentry.

Review contract terms

For any new projects, all parties should carefully review the contract terms to identify who is responsible for the non-availability of componentry, who should pay and whether products or systems can be substituted. Be very careful not to contractually commit to something that may be impossible to do.

The financial consequences of delay are significant. Preliminary and general (P&G) costs are usually fixed for a project and based on the expected timeframe. Delays during a project add to the P&G costs and can mean that cranes and scaffolding are up longer or, near the end of the project, there is massive pressure on the finishing trades.

Even if the finishing trades do not have product supply problems, they are impacted due to the pressure to try and make up for lost time. They need to carefully review contracts with this risk in mind.

Most commercial projects have strict timeframes and, in many cases, liquidated damages for delays. This risk is well known, so it will be interesting to see how negotiations around liquidated damages are resolved.

Who bears the consequences?

Who bears the cost and consequences initially depends on the contract terms between the suppliers, subcontractors, head contractors, builder and client. Cooperation and flexibility is ideally needed rather than strict contract interpretation – a change from current attitudes of transfer of risk and responsibility.

When substitution is possible, the sub-contractor usually picks up the extra cost, which erodes their margin.

If missing componentry delays sign-off of practical completion for an extended period, retentions will be unable to be released to any head contractors or subcontractors.

Consider obtaining key items well ahead of the expected installation date. This will require a contract variation to ensure claims can be made and will be accepted for off-site materials.

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