NCE/Marsh’s survey on risk in the construction industry has revealed an environment where litigation is on the up and risk management is ever important.
It’s clear that after quite a period of boom, UK construction is entering a very difficult time – our survey of 56 of the UK’s leading consultants and contractors found that 56% of the respondents were reporting an increase in litigation, or a threat of litigation or client complaints against them. Globally, the situation is no different. Last month NCE reported from the Arabian World Construction Summit where 95% of delegates said that they were seeing threats of litigation or payments being withheld.
To establish if that genuinely is the case, and to shed some light on how to manage it if it is, NCE and Marsh last month convened a select group of survey respondents and had a frank round table discussion on the issues facing the industry.
And the message was clear – litigation, or threat of it, is on the up.
“It’s my perception and the limited outlook I’ve got on life, that clients, whether they be contractor clients or infrastructure clients, are using the threat of litigation to withhold payment or to delay making a decision on payment,” said one consultant.
“We are seeing clients who are under extreme pressure from their funders and from the people who have put money into the project, so that any overspend is analysed to the extreme and somebody is looked at to pay for that overspend – where in any normal circumstances I think people would take it as part of the project contingency,” agreed one cost consultant. “The question asked is: ‘who can we blame and who can we recover it from.’”
Clearly, there are clients out there that are paying late because they are simply running out of cash, a particular issue in the Middle East. Last week NCE revealed how UK consultants are owed up to £200M by a leading Dubai client (News last week).
“I think specifically in Dubai, which we mentioned, clients just don’t have the money,” said one consultant. “I think what we find in withholding payment is that clients are not simply saying ‘we’re going to threaten litigation to withhold payment’, they’re just saying ‘we can’t pay you.’
“They’re not even threatening with litigation so the litigation could be coming in the other direction because they simply can’t pay.” But the view is that litigation is more often than not the excuse for non-payment: “We’re finding that you only find out they haven’t got the money to pay when you start pushing for payment and then they start to use every excuse not to pay and they start to question your service. The sort of arguments that are put forward are quite spurious, but you still have to go through the process of recovery.”
One difference between this recession and last is the advances in dispute resolution. Now, for example, 2012 Olympic contracts feature a independent dispute avoidance panel. The NEC contract form– now widely used – was primarily set up to help contracts be completed without a need to go to litigation.
Despite this, round table guests were admitted the industry has been “caught napping” with clients that it thought were pretty good clients and turned out to not have got the funds.
“We all thought we had bona fide clients that had plenty of funds and it turns out that they’ve had it lent to them by the banks so at the end of the day are probably in as desperate a situation as anybody else. Going forward we are far too lax in this country about signing up to contracts and working for free before we even start raising invoices. We ought to get into a European mentality where you’re looking for a down-payment of 30% as an up-payment and start invoicing over a period of time from then.”
“I think the days of people working without a contract are gone. They should never have been there in the first place,” agreed another. Litigation, then, is clearly on the up. And anything that causes overspend or delay is the chief excuse. The question is, what can be done about it?
“My business’ defence against this is to keep closer to our friends and reduce the number of clients we deal with,” said one. “We’ll deal only with those clients that we have enjoyed an excellent relationship with, whose objectives and commercial stance against their professional advisors we understand. That’s the point at which we reduce our risk.
“Stepping into a pure commercial tendering situation with the client we don’t know is the point at which we enter a minefield of potential dispute and litigation.”
“You have to be choosy about the projects and choosy about the people you work with,” agreed another. “But that does mean you face some difficult decisions – if close clients are reducing the amount of work that they’re doing and you’re having to reduce the size of your business to match as well.”
“Some businesses may need to get smaller to cope with this.”
More care in winning work in the first place is also a good way to reduce risk.
“I believe everybody can win work but not everybody can make profit,” said one. “The thing that needs to change is the enthusiasm when somebody says ‘I’ve got on a shortlist’. The enthusiasm of that success is so euphoric, we’ve find we’ve put the bid in and haven’t actually stopped just for that one second to say ‘do we know where we are?’
“We’ve spent a bit of time trying to unravel some of our projects, to see why we got into a mess and we can trace it back to there being no formal thinking about whether or not to go with that particular customer.”
And at the end of a day having a client that can’t pay is not an insurable risk. “If we do £3M for a client who subsequently can’t pay us, we can’t turn to insurers and say “please can we have £3M from you”. It’s totally down to the consultants’ own risk control procedures, credit control procedures to deal with that business risk.
In February and March NCE surveyed 56 of the UK’s leading consultants, contractors, clients and suppliers to get a view on risk in the construction industry
Q1. What best describes your firm?
Q2. How many people does your business employ?
37% employ more then 1000
27% employ 500-1000
25% employ 10-100
20% employ 100-500
11% employ less than 10
46% of firms have grown by 50% or more in the last three years. Firms are also facing more competition for public sector work
Q3. What do you see as the most challenging geographical region?
66% of firms see the UK as their most challenging market
17% of firms see the Middle East as their most challenging market
17% of firms see Europe as their most challenging market
Q4. What proportion of your work is publicly funded?
Three years ago:
55% mostly private
45% mostly public
25% mostly private
73% mostly public
Three years time
28% Mostly private
72% Mostly public
Q5. As a percentage, how much have your revenues grown in the last three years?
33% of firms say 75-100%
13% of firms say 50-75%
33% of firms say 25-50%
20% of firms say 0-25%
Q6. How much do you expect revenues to grow in the next three years?
8% of firms say 0-25%
62% of firms say 0-25%
31% of firms say 25-50%
0% of fimrs say 50-75%
0% of firms say 75-100%
Q7. What is the average construction value of your projects?
2006 - £7.2m
2009 - £8.8m
Q8. What is the average fee value of your projects to you?
2006 - £0.22m
2009 - £0.33m
Q9. What is the construction value of your largest project?
2006 - £153m
2009 - £162m
Q10. What is the fee value to you of your largest project?
2006 - £3.86m
2009 - £4.25m
Q11. In the current econimic climate do you see further market consolidation in your area?
Yes - 69%
No - 31%
In our survey 56% of respondents said they had seen increased litigation, threat of litigation or complaints against them. And overall, 25% said the size of demands is getting larger
Q12. Are you seeing an increase in litigation, threat of litigation or client complaints agains you?
44% - No
56% - Yes
Q13. Are individual demands for some form of professional failure made agains you getting larger?
75% - No
25% - Yes
Q14. Are you seeing an increase in costs associated with increased litigation/complaints made by other parties/clients agains you?
50% - No
50% - Yes
Q15. What are the five most common areas of professional failure that are alleged against you by others, leading to claims?
Quote 1 “Our view is that unsubstantiated claims are bein gmade as a means of avoiding paying”
Quote 2 “Slow delivery and poor quality”
Quote 3 “Any reason to avoid payment”
Quote 4 “Lateness; inadequate design; failure to design to budget; negligence an dbreach of terms and conditions”
A third of firms don’ thave written risk management procedures, and two-thirds don’ thave a risk manager
Q16. Do you have:
An in house legal team?
62% - No
38% - Yes
A dedicated risk manager
67% - No
33% - Yes
Written risk management procedures?
33% - No
67% - Yes
Q17. How oftne do you meet with your key professional indemnity insurance underwriters?
Twice a year 29%
Not at all 29%
Q18. What were the three most significant challenges faced in renewing your professional indemnity insurance?
Quote 1 “Special insurance requirements of clients, flexible levels dependant upon business area overall fee”
Quote 2 “Most recently the market has hardened significantly”
Quote 3 “Unsettled claims”
Quote 4 “Insurers pushing to increase our excess”
Quote 5 “Finding an economic way to insure above 5m”
Q19. As a percentage of your turnover, how much professional indemnity insurance do you buy>
38% say more than 25%
6% say 11-15%
19% say 6-10%
38% say 0-5%
Q20. As a proportion of your revenue, in the last three years your limit of insurance:
60% stayed the same