More than 70% of construction contractors are passing early payments down the supply chain to keep cash flowing, according to a survey.
In a report consultancy Arcadis said enhanced payment terms to improve contractor liquidity and early release of retentions and ex gratia payments were among the strategies firms were adopting to support the supply chain during the Covid-19 crisis.
Arcadis, which interviewed 17 of its key construction partners, said it would be necessary to reconsider how contracts are drafted due to coronavirus risks, but this was an opportunity to look at the “collaborative allocation of risk”.
“Some may not be able to support projects by moving away from agreed contract terms in the same way that we have seen in the public sector and across more resilient private organisations,” said the report.
“This highlights that Covid-19 challenges are likely to be resolved on a project by project basis and that simple mechanisms are needed to resolve differences – ensuring that money gets to the supply chain, not to the lawyers.”
The report said clear communication and transparency were crucial “so everyone understands their accountabilities – whether a client, contractor or supply chain partner, all parties must understand that they are in this together and are responsible for each other’s successes and failures”.
In the context of a recovering economy, the additional costs of construction and delayed delivered will need to be “resolved at all levels of the supply chain at the earliest opportunity”.
“What is clear is that a winner-takes-all approach will neither resolve the situation, nor help to ensure that sufficient capacity exists in the future,” said the report.
“Given that Covid-19 risks will be present for some time, it will be necessary to reconsider the way contracts are drafted throughout the supply chain to enable projects to proceed.
“There will be many difficult conversations, but this should be an opportunity to revisit contractual clauses and reconsider the collaborative allocation of risk. Developing this as a new standard may be easier than going down the route of bespoke amendments.”
Jonathan Harris, senior cost consultant, financial institutions and retail, at Arcadis, said: “The challenges industry is facing in the face of Covid-19 could force the sector to finally address some of its biggest weak points; so that the pain being felt now translates into lasting improvement.”
☛ Want to stay up to date with the news? Sign up to our daily bulletin.