Construction contracts in a competitive marketplace
Mike Jenkins discusses the importance of construction contracts during this post-recession recovery period.
UK construction activity fell at the slowest rate for almost two years in January, according to figures from the Chartered Institute of Purchasing & Supply (CIPS). The CIPS/Markit construction purchasing managers’ index stood at 48.6 during January, up from 47.1 in the previous month — signalling the smallest fall in activity during the current 23month period of contraction. There was recorded growth in house building in January, but continued decline in commercial and civil engineering activity.
Despite this glimmer of hope, according to the Construction Skills Network (CSN), the UK construction industry is facing a long and slow recovery and will not emerge from the recession until 2011. The CSN said that employment in the sector had dropped by around 375 000 workers from 2008 to 2010, and numbers were expected to recoup by less than 100 000 by 2014.
The CSN said this year would see the beginning of a slow return to growth but added that, even by 2014, output was still likely to be well below 2008’s level. Over the whole of the 2010 to 2014 period, construction output is expected to average 1.7% growth each year.
According to David Noble, chief executive officer at the CIPS, the construction industry continues to be the worst performing sector of the UK economy, struggling in the face of credit-supply shortages and overall economic uncertainty. Competition is tough for those surviving firms.
HVCA Business Plus has published a series of four ‘Better business guides’ to help businesses through the recession and compete successfully for lucrative contracts. Now, more than ever, is the time to brush up on basic business skills, starting with the all encompassing construction contracts. Even in the very best of times, building services engineering contracting is an extremely demanding business. HVCA Business Plus’s ‘Ten things you need to know about construction contracts’ focuses on some crucial points to bear in mind when negotiating and operating under a UK construction contract. Here are the first five points to adhere to.
1. Payment periods. Payment due dates usually occur one month after the date on which works commenced on-site and at monthly intervals thereafter. The final due date for payment falls 17 days after as any increase on this exposes you to cash-flow problems. Be clear on the length of payment periods you can afford to accept.
2. Cross-contract set-off. This is when a client withholds a payment due to you under one contract on the basis of money he alleges you owe him under another contract. Think carefully before accepting contract clauses that allow this; the adverse affect on your cash flow will be considerable.
3. Discounts. When offering a discount on your tender price to secure a contract, make sure it is linked to prompt payment.
4. Retentions. Where retention arrangements are in place, ensure the contractual mechanisms that release the retention monies are conditional upon events within your control.
5.Interest on late payment. You have a legal right to claim interest on any late payments due under a contract with another business. Interest accrues from a date agreed between the payer and payee, or from 30 days after the date of the invoice, at a simple specified rate. If no rate is specified, the statutory default rate is 8% above the Bank of England’s official dealing rate.
Construction faces a difficult period, but there are proactive steps that can be taken to help your business survive. HVCA Business Plus, together with all its subsidiary companies, helps businesses of all sizes in the heating, ventilating, air conditioning and refrigeration (HVACR) industries with advice and guidance, presenting reliable and affordable ways of improving a business’ efficiency and profitability.
For more details, visit the link below or freephone 0800 9171541.
Mike Jenkins is business development manager of Welplan and Group Coordinator of HVCA Business Plus.
