5 hidden contract risks in demolition projects that can kill your profit

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Every demolition or recycling contract contains clauses that we assume – or hope – will never be used in earnest.

But if they are, those clauses can derail the project or obliterate any profit margins. We often overlook these ‘known unknowns’ to win the work or keep the peace.

The risks demolition contractors pretend not to see

At the tender stage, contractors tend to approach pricing on a mathematical basis. They price the scope, the project risks, add some contingency, overheads and profit and then tailor that figure to what they think the client is willing to pay.

However, this approach underprices the job because it fails to take account of contractual risks.

It is critical to price the risk of those events occurring: whether it is the client deducting a high level of liquidated damages for delays or missing documents, missing strict process requirements or reduced cashflow as a result of wide rights to set-off.

In this article we consider 5 significant contractual risks that you should be considering when negotiating your contract.

Suspension: How work stops could stop your cashflow

Your contract may specifically allow the project to be suspended in vague circumstances, on the flimsiest of pretenses or ‘at will’ ie without any reason.

Even where contractual or statutory rights allow both parties to suspend, those rights are more often used by clients.

If a client can invoke suspension on very short notice, this leaves the contractor bearing unlimited prelim costs, with resources it cannot quickly re-allocate, and facing significant uncertainty.

Given what happened in 2020, we can hardly pretend that we don’t understand the risk of suspension, or that it isn’t sometimes needed… but we feel powerless to challenge the principle or how it shows up in contracts.

Most of us can recall the use of stop-work clauses during COVID-19, especially on public projects, to halt work often before official government policy had been finalized.

But projects can also be paused mid-programme for all sorts of reasons – like the Jordan Gate project which was suspended for more than ten years. Can you afford to wait 10 years for a restart?

Strict clauses you can’t ignore

Pretty much no-one goes into demolition for the paperwork. If process is not your strong point, beware.

Some of the process requirements for contractors in demolition contracts come with a big stick.

These are called conditions precedent or time bar clauses. Essentially, the process clauses say ‘do it this way or lose it’.

Even if you have worked together on previous projects, with no quibbles over how or when the contractor submits its payment applications, it only takes one change of personnel at the client, who reads precisely what is meant to happen, for payments to dry up.

These strict clauses can also cover claims for extra money arising from changes or disruption, resolving disputes, providing documents and determining when the demolition works are finished. Never either assume they will not be enforced, or believe an individual who says ‘we never rely on them’.

The risk of uncompensated project changes

When it comes to scope, it’s also worth asking how fixed that scope really is. Most contractual change mechanisms give the client wide rights to add, swap or remove work.

Whilst we need flexibility to cope with the unexpected, contractors need to check that their pricing will still works if the client decides to omit 50% of your scope mid-project.

Rights for the client to omit works allow it to cut scope, change programme priorities or repackage parts of the job – leaving contractors exposed to loss of profit or rework risk.

In a surprising move, the FIDIC Green Book 2021 inserted pre-agreed compensation for omitted works (at 10% of its value), so the parties would know the impact of descoping on profits from the start.

This could reduce frivolous or vexatious changes, or the client shopping around after the contract was signed.

Whilst demolition examples are hard to find, the Aberdeen Harbour expansion project ended up in the Scottish courts when the contractor moved works packages between its subcontractors, without a clear contractual right to do so. It proved a costly mis-step.

Permit problems: Environmental and regulatory delays that stop construction projects

I’m sure you are aware that ostriches don’t actually bury their heads in the sand, they lean their heads against the sand to listen more carefully.

But which of these approaches do you take when permits or environmental consents look like they might be delayed?

Do you listen carefully, or do you bury your energy in the project and ignore the contractual reality?

Contracts may assume the permits are (or will be) in place. It is important that you discover who takes the risk if they aren’t.

In Nairobi, delays on the Railway City redevelopment exposed contractors to long periods of inactivity due to mismatched permit timing and unclear funding flows.

Suspension clauses became very real, even though the project had political backing.

The cost of ignoring contractual unknowns

Sometimes the biggest risk is silence. We make assumptions and hope they pan out. We see a crowded or unrealistic programme, we note the items marked ‘to be advised or agreed’ and shrug safe in the knowledge they will probably be resolved, or we spot a missing community plan — and in each case we hope for the best.

Although nearly a decade ago, the ripples from the mishandling of the Gezi Park Project in Istanbul continue – a failure to liaise with the community resulted in huge protests, global headlines, delays to the project and massive reputational damage.

How to spot and manage contract risks

You don’t need to renegotiate every element of your contracts – but you do need to start using a responsible no and raise these issues.

Get into the habit of flagging these “unknown knowns” early. And if contractors don’t see the contract until the last minute, don’t be surprised if they only start work on the basis that they need time to assess if the contract really does reflect the legal and commercial deal you’ve been discussing.

Spot the risk early – 5 questions to ask

· What clauses are we pretending won’t be used?

· Do our payment and change processes rely on goodwill or clear terms?

· What happens if permits or community support doesn’t come?

· Can the client stop or repackage the work at will?

· Are we protected if scope shifts dramatically?

A great question to ask your team is what clauses are you pretending won’t be used? If you’ve got a no-blame culture in your business, your team should be able to raise their concerns before it causes you too much harm.

Because it’s the risks you assumed would not happen, that can take your company down.

About the author

Based in the UK, Sarah Fox is a contract expert with over 30 years’ experience in the construction and engineering sectors.

A former lawyer, she works with both UK and international clients and is an associate lecturer at the University of Salford.

Sarah specialises in creating concise, user-friendly contracts that promote clarity and reduce disputes. She is also the author of several books on construction law, including the ground-breaking industry title Small Works Contracts in Just 500 Words.