CIC Blog: contracts
Speaker, contract strategist, lawyer
500 Words Ltd
Ever since corporations decided to reduce the costs of procuring construction projects, there has been a trend towards standardisation of processes, contracts, laws and regulations. The first industry standard form (heads of conditions for a builder’s contract) appeared in 1870 and the first engineering contract (the model form for electrical works) followed in 1903.
Fast forward nearly 150 years and the construction industry is unrecognisable from its 19th century predecessor. We are ‘blessed’ with a cornucopia brimming with standard form contracts, designed (allegedly) to meet the needs of the UK construction industry.
But do the cross-industry boards, drafting committees of professional bodies, or sponsoring law firms publish contracts that actually meet the needs of 21st century businesses? Do we have contracts that are fit for today’s purposes? Do they reflect human-to-human selling, fast global procurement methods, electronic information sharing and storage, and collaborative project strategies based on trust? Or are we just stuck in the dark ages?
Familiarity Breeds Laziness
Although our standard forms are regularly updated, and new forms heralded with fanfares (before struggling to gain market share), we rarely see fundamental shifts in drafting philosophy, style and tone of voice, or usability. The only thing we can be sure of is that each new edition will be longer than the last!
With over 140 standard forms of construction contract, the market is dominated by contracts of staggering complexity, sprinkled with legal phrases and jargon, and a veritable plethora of options, annexes and supplementary sections. Together these create an almost impenetrable barrier to new users. Many organisations stick with their favourite contract - lazily clinging to the familiar, rather than adopting a coherent contract strategy that meets their business’ needs and values.
Contracts or Trust?
Refusing to budge from the contract with which you are most familiar is not the same as actively choosing a contract based on trust. Users tend to justify this ‘strategy’ by saying “well, the contract hasn’t gone wrong so far”, which is hardly a ringing endorsement. One reason for avoiding change is mistrust of other standard forms. If you’ve never used a contract, then with up to 100 pages and 50,000 words, the learning curve for knowing how to use it properly is too steep. Frankly, unless it’s a deal-breaker, why would you even contemplate it when the other contract provides no guarantees of being more effective?
20 years ago, a whopping 58% of the construction industry said standard forms encouraged conflict and 38% said they created mistrust (Latham Report 1995). My 2015 Survey showed that a pitiful 14% of contract users said current UK standard form contracts create trust.
This does not bode well for the Government’s Construction Strategy 2025 with its aim of a strong, integrated supply chain thriving on productive long-term relationships while simultaneously lacking trust in each other!
It is self-evident that you should not enter into a contract with a company you don’t trust. So should you demonstrate your trust in your project team through adopting complex or simplified contracts?
There are essentially two opposing approaches to how to create contracts: one is characterised by low trust where the contract acts as a safety-net. This sort of relationship requires the standard form to comprehensively cover every possible angle, tie up every loophole and create a knot of clauses to ‘save the parties’ in the event of a dispute. The project team trusts the contracts to provide the answer.
The other approach is characterised by high trust where there is a simplified framework of terms, on which the parties hang project specifics
2. The contract does not have all the answers, enabling and encouraging the project team to trust each other and to solve issues which arise, within a clear framework.
Supporting Long-Term Relationships
The best ways to create long-term relationships is to adopt a collaborative ethos (reflected in processes and contracts) and to avoid disputes which damage those relationships.
Despite years of toying with terms to refine and improve them, each Annual ARCADIS Global Disputes Survey demonstrates that the most common cause of construction disputes is a failure to administer the contract. The other causes listed – incomplete contract, failure to operate specific procedures, incomplete claims – also arise from the users being unable to use the contract effectively.
To use a contract (and its procedures) accurately and effectively, it is critical that you can read and understand the standard form. However, our current standard forms positively discourage you from reading them, dissuade you from understanding them, and make it impractical (if not impossible) to use them.
Surely developing processes and contracts that help avoid disputes should be on everyone’s urgent and important to-do list?
Perhaps the solution is to tear up the rule books and the lengthy standard form contracts, and start with a large dose of trust. We can then decide the strategies, processes and contracts we need for a 21st century industry.
Constributor: Sarah is a professional speaker, trainer and contract strategist. She helps construction professionals to write simpler contracts, so they can build trusting relationships and avoid disputes. www.500Words.co.uk
Sarah will also be speaking at the Construction Industry Summit as part of the 'Working with the Enemy – Sharing, Collaboration & Trust' Session.
1 - 10% of respondents said the same contracts create mistrust!
2 - This is how the engineering model forms in engineering were intended to be used as the publishers recognised the huge array of project differentiators could not be accommodated in one standard contract.