In the current financial climate, development projects are commencing under increasingly tight budgets, with contractors typically accepting less risk under much more restrictive scopes.
In this article, we provide some top tips on how to protect against unexpected financial claims during development projects, and how to minimise the impact of such claims if they are made.
In the current financial climate, development projects are commencing under increasingly tight budgets, with contractors typically accepting less risk under much more restrictive scopes. On hotel development projects, this adds further pressure to projects already experiencing issues such as material and labour shortages, rising operational costs, difficulties obtaining funding, and evolving guest expectations.
In this article, we provide some top tips on how to protect against unexpected financial claims during development projects, and how to minimise the impact of such claims if they are made.
Good contractual hygiene
The most obvious (but often overlooked) way to prevent unexpected claims is just good contractual administration. One of the biggest risks to cashflow in a hotel development project is having to pay out money earlier than anticipated or required. If a payment notice or certificate is missed by the employer or contract administrator/project manager, the amount applied for by the contractor is due and payable, regardless of whether it reflects the work done or any of the sums disputed. If the sum is not paid, the contractor can commence an adjudication to force payment. There are very few defences available to such claims, and courts are very reluctant to delay or prevent enforcement of these adjudication decisions.
Although any inflated payment applications paid by the employer will eventually be rectified through future payment cycles and at the final account stage, poor contractual administration can result in employers being forced to pay out significant sums very quickly, which can stunt cashflow to a hotel development project, or even stop it completely. Making sure that all payment applications are properly assessed and responded to is therefore essential, particularly around holiday periods, when the risk of missing a payment notice or certificate increases.
Good contractual hygiene not only prevents payment applications from being missed. Construction contracts often have prescriptive notice requirements for applications for time and variations or compensation events, which must be followed by both the contractor and the employer or their contract administrator/project manager. Project teams should be adequately trained on the contractual mechanisms as early as possible, with particular care taken around any amended clauses which deviate from standard form construction contracts.
Control the programme
On the subject of time claims, keeping on top of the programme throughout a hotel development project can prevent any issues from spiralling out of control. Although most construction contracts require contractors to submit regular updated programmes as the project progresses, often these deadlines can be missed, and before long, a project can end up in considerable delay with a complicated delay history to unravel. This can make it impossible for responsibility for delays to be properly allocated between parties, often resulting in contractors being entitled to more time (and money) than they should.
Make sure a baseline programme is agreed and incorporated into the contract at the commencement of the project, and that the contractor meets all requirements to submit updated programmes. Consider the provisions for accepting a programme carefully, and ensure tools such as progress meetings are used regularly to discuss and manage any potential delays to the project as early as possible.
Records, records, records
If the programme does slip out of control and a delay dispute arises, or if parties find themselves in a disagreement over matters such as variations, then accurate records can be the key to unlocking such a disagreement (or can protect the employer if the disagreement escalates into a dispute). Make sure all contract notices and communications are properly stored and organised.
Photographs of the progress of the works can also be an extremely useful tool if parties later dispute the progress of the works, and the responsibility for any delays. If appropriate, taking progress photographs at regular intervals and at key parts of the development is encouraged.
Assess variations carefully
If contractors do claim for any variations or compensation events, for matters they consider to be outside of the scope of their works and entitling them to more money, these claims should be considered very carefully. If parties have been clear about the allocation of responsibility and the scope of the development works at the outset of the project, then such provisions should be interpreted closely at the point any variations or compensation events are applied for.
We often see employers or contract administrators/project managers accepting initial claims in order to keep a contractor happy and keep a project moving. But deviating from the contractual entitlement can later escalate into greater entitlements to time and money, so such an approach is best avoided.
Usually, construction contracts will provide for ‘early warning' notices to be submitted by the contractor and risk to be discussed. It is important that such provisions are enforced and a good and open approach to discussing risk is established from the beginning of a project.
Work with contract administration team
Finally, working closely with the project team managing the hotel development can ensure all of the above steps are taken properly. Establishing a clear line of communication means any problems can be discussed and addressed early, and it is always important to ensure the project team are clear on the key timescales and requirements of the hotel development, ensuring the project is delivered on time to the required standard.
Key takeaways
- Keep on top of all contractual notices and deadlines – one misstep can have big consequences
- Ensure regular programme updates are being prepared, with regular progress meetings
- Make sure adequate records are kept of all notices and communications
- Assess any variation claims carefully and critically
- Work closely with your contract administrators or project managers.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
