Global Vantage: The Perfect Storm – Construction Supply Chains Struggling to Meet DemandJuly 2021
Global construction supply chains are facing unprecedented levels of demand in response to the gradual easing of coronavirus restrictions around the globe. However, shortages in raw materials combined with lingering logistical concerns mean that many suppliers are struggling to stay on-top of their order books. This dwindling availability is driving resource prices upwards and causing some projects to be delayed or even put on hold due to budget constraints. In this post, we consider the factors that have contributed to this ‘perfect storm’ and explain how good contracting principles can help to alleviate some of the potential problems now facing contractors and consultants.
Strong investment in the construction sector is at the heart of post-Covid recovery plans for many of the world’s biggest economies. The UK is no exception to this rule, with the government’s recently published ‘Build Back Better’ plan including proposals for ‘historic levels’ of investment in infrastructure. Similar ambitions look to have been at the forefront of leaders’ minds at the recent G7 Summit, which saw the launch of the ‘Build Back Better World (B3W)’ partnership. Yet, whilst these efforts are an encouraging sign for the sector as it begins to rebound, the pandemic has exposed the fragility of the supply chain.
In this regard, the Construction Leadership Council’s (“CLC”) latest ‘Construction Product Availability Statement’ makes for troubling reading for those with major projects in the pipeline. It warns that predictions as to the availability of products worsening before they improve are now coming to fruition, with “strong demand” expected to continue in the next six months. Products in short supply include timber, cement, steel, paints and more, with Hanson, a leading supplier of building materials to the construction industry, citing an increase of around 30% across all sectors in the cement market since mid-2020.
Supply chains’ inability to cope with this huge demand has no doubt been exacerbated by issues caused by the coronavirus pandemic and the influx of new rules and regulations that have been introduced due to Brexit. Disruption at ports due to Covid has had an impact on global trade, creating issues unloading and distributing goods that arrive by sea, and this has only been compounded by the fall-out from the recent Suez Canal blockage. The price of shipping containers is also reported to have increased in recent months, owing to rising demand.
For contractors and consultants, the supply chain issues currently impacting the industry represent a real ‘wake-up call’ as to the importance of negotiating contractual provisions that deal with adjustments to timetables and project costs. This should include a clear entitlement to additional time and money in circumstances where supply chain troubles are outside the parties’ control. Programme requirements should be realistic. One approach is a mechanism that allows you to use alternative suppliers where the client’s first choice is unavailable, and to recover any excess costs associated with doing so.
As to those with on-going commitments, now is the time to consult your contracts and to consider whether you are entitled to additional time and / or monies to help alleviate the burden caused by the current shortages. Where these mechanisms are provided for, it is vital that they are properly utilised. For issues caused by legislation introduced post-Brexit, consider whether there is a ‘change in law’ clause in your contract (Secondary Option X2 in NEC3 / 4 contracts), which may enable you to claim additional time / monies to off-set the impact that new legislation has had on your ability to procure goods. For problems caused by Covid, the position is slightly more nuanced, but relief may be available through a force majeure clause (particularly in the case of contracts signed pre-Covid), or, if you are using an NEC 3 / 4 contract, through its ‘compensation event’ provisions. If in any doubt as to the operation of these provisions, we recommend that legal advice is sought sooner rather than later, as there may be strict notification and other requirements with which you must comply.