CONTRACTING FOR NET ZERO

Both purchasers and suppliers of construction services have an important role to play in achieving net zero objectives.

As part of our “Beyond Net Zero” series in the run up to COP26, this article explores the opportunities and challenges for employers and contractors of incorporating provisions designed to promote net zero objectives into construction contracts.

The current position – aspirational targets

There is nothing new about incorporating environmental obligations into construction contracts.

For example, the JCT Design and Build Contract 2016 includes optional provisions which:

1. encourage the contractor to propose amendments to the works to improve environmental performance; and
2. oblige the contractor to provide all information that the employer reasonably requests in relation to the environmental impact of the goods and materials which the contractor will use.

However, even if selected by the parties as applicable, these provisions have often not been engaged with by either party to the construction contract.

Some lesser used contracts, such as the JCT Framework Agreement 2016 go even further and include mandatory provisions.  For example, including objectives for improvements in environmental performance and sustainability.  The contractor is monitored and periodically assessed against these objectives, is required to consult with its supply chain in an effort to meet them and must also assist the employer in exploring ways of how the objectives can be met.

JCT contracts are also frequently amended by solicitors acting for employer clients to require a specified BREEAM rating to be achieved.  If this rating is not achieved and the employer suffers a loss as a result, the employer may be able to claim damages from the contractor.

Furthermore, contractors bidding for certain high value public sector building contracts advertised on or after 30 September 2021 will need to submit a carbon reduction plan as part of their tender (PPN 06/21).  This carbon reduction plan must include a commitment to achieve net zero for UK operations by 2050 and provide certain current emissions details.

The future – facing consequences

Moving forward, more stringent contractual requirements with net zero objectives are likely to become commonplace in construction contracts.  Such clauses are increasingly likely to go further than mere reporting requirements and granting rights to propose greener alternatives.  They are likely to include a range of targets, such as in respect of reductions in energy and water usage, recycling and use of recycled materials, use of sustainable construction methods, protection of the environment, reductions in noise pollution and recruitment from the local vicinity.

Furthermore, it will be much more likely that there will be actual consequences if such targets are missed.  These may include the right for the employer to terminate the contract, the application of general or liquidated damages, a right for the employer to withhold retention and a requirement for the contractor to rectify the position.

Challenges Ahead

The imposition of environmental requirements will not be straightforward and will create a number of challenges from the point of view of both employers and contractors.

From the employer’s perspective, they will need to consider whether environmental requirements will be viewed as reasonable and achievable by a contractor.  If they are not, it may put off tenderers from bidding for the work or cause them to increase their tender sum.  Employers will also need to consider how they can couch these requirements in terms of “collaborative working” so that they are not seen by potential tendering contractors as a stick with which to beat them.  One way of doing this could be to incentivise compliance by way of a “gain/pain share” mechanism in the contract (as per Gross Maximum Price type contracts), rather than simply the imposition of a sanction for failure to comply.  In other words, if a certain target is achieved, an additional payment will be made but if it is not achieved a lesser payment will be made.

From the contractor’s perspective, they may have difficulty in meeting vague and/or overly ambitious targets.  They will then have to face a potentially costly sanction, whether that be a damages claim, termination or otherwise.  Furthermore, where such obligations relate to design, there is a risk that they would be classed as “fitness for purpose” or absolute obligations and may not be covered by the contractor’s professional indemnity insurance.

Cautious but proactive approach

Whilst there will inevitably be, and must be, an increasing will to bring net zero objectives into construction contracts, care will need to be taken by both employers and contractors to ensure that such measures are effective, acceptable to both parties and will not have any unintended consequences.  This will not necessarily be straightforward by any means.

If you have any queries about incorporating net zero objectives into your construction contracts, please contact a member of the Contracts and Projects Advisory team at Beale & Co.